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Do you want to be richer?

Saturday, October 2, 2010

The original title of this blog post was "Do you want to be rich?".  Then, I decided to change the last word as it would be more inclusive.  Almost everything is relative in this world, after all.  Few things are absolutes, such as death.  Even then, there could be debates on the different degrees of death. 

Oh well, modern society does complicate things.

This blog post was inspired by a recent late night chat in LP's infamous cbox. I was just sharing my ideas on how we could generate passive income from the stock market when a person mentioned that not everyone has $500k to begin with. 

Well, unless we are very lucky, I doubt anyone would have that kind of money from day one.  Then, a long discussion ensued in which I felt there wasn't any real engagement. 

Anyway, if someone feels that way, it could be possible that there are others who feel the same way.  Hence, the genesis of this post.

Let's go back in time. In an earlier blog post, I mentioned a personal aim for a minimum of $50k passive income from the stock market. I said that we just need $500k invested with a 10% yield.  I gave examples of REITs which I was vested in which I felt could help deliver this passive income target.  These are REITs which I blog about quite a lot and readers who are considering my strategy could be kept updated.

Question: How on Earth could an average worker amass $500k in capital through working and by being frugal? The operative word being "average". 

An example was given on how a Diploma holder making $2k a month would find it hard to achieve this. 

Well, if we were making $2k a month, we would have to make more money more quickly towards this end. 

However, if we did not do anything to change the status quo, we would continue making only $2k month. 

We cannot logically expect an improvement in our circumstances if we do not make an effort to change for the better. 

So, stop being "average".


For example, a certain full time private tutor I know managed to save $50k per annum! That's inspirational, if I do say so myself. He probably took on more students and worked harder. He should perhaps up his fees but that's just me. All of us could make incremental changes to our lives to be more productive.

What is the first step towards passive income generation? 

Find a job that pays us as much as we are worth or more than we are worth. Do not shortchange ourselves.  

If we are worth more than $2k a month, find people who are willing to pay us more.  If we are only worth $2k a month, find ways of increasing our value. Upgrade ourselves.

I would like to share another example here. I had a fellow soldier for a student when I was in the Army.  I gave him free English classes because he was not from a well to do family and the evenings in camp were pretty free anyway.  He took his 'O' Levels English paper twice before and he could not make the grade but he did not give up. 

I was then 24 years old and had just graduated from university but I was quite a bit older than he.

After a few months of lessons, I advised the student that perhaps there was another route that he could take. He should spend some time thinking of what he was really interested in and what he was good at.  Doing English was an uphill task for him.  

When I met him again a few years ago, he told me he was doing some IT stuff which involved laying cables and networking workstations. It was all Greek to me but he was doing very well with a pay of more than $6k a month! This is a success story which I still share with my students today.

Find your strengths and build on them.

Unless we are physically or mentally disadvantaged, if we would like to be richer, we could find ways of doing it.  

If we thought that making $2k a month was what we were supposed to make and that it was our fate, then, it would become a self-fulfilling prophecy. 

If we wallow in self-pity, the only people who would show us sympathy would be people with the same mindset. It becomes a reinforcing vicious cycle! 

We build our own traps!

If we want to be richer, make it happen. How? The will must exist and it must be strong. Where there is a will, there is a way! This rings true.

When we make money, we must know how to save money. Recognise what are our needs and what are our wants. Fulfill the needs and delay gratification of the wants. Save as much as we can. 

Once we have an amount of money which could cover a year or two worth of routine expenses, we can start thinking of investing the rest.

Must all that $500k capital be from working hard and being frugal? 

Going back to an earlier blog post, I mentioned that when we invest in income generating assets, the passive income generated could be re-invested or it could be spent. If we re-invest, our targets (be it $500k or $100k) could be achieved sooner.  

This is the power of compounding.



To illustrate the power of compounding, let me use an institution in Singapore that we are all familiar with: the CPF.  When I first started working, I was thinking of how probable it was for me to meet the CPF minimum sum set by the Singapore government by the time I retire. 

Most of our contribution goes into the Ordinary Account (OA) while a much smaller sum goes into the Special Account (SA). 

At the face of it, 2.5% interest for the OA and 4.0% for the SA have only a 1.5% difference per annum but think of it a bit more and we realise that that the SA pays 60% more in interest compared to the OA!  Furthermore, if we compound 4% per annum, it becomes a very powerful force!

So, I voluntarily transferred my OA money into my SA for the first few years of my working life. Then, I let the government and time help me meet the minimum sum required through compounding 4% interest per annum.  Every 10 years, the SA money would grow 50% even if the monthly contributions should stop.

Do you want to be richer? 

Obviously, you do, otherwise, you would not have reached this part of the post. How soon do I think we could amass S$500k from the day we start working? 

To give a specific time period is difficult because it would depend on each person's circumstances but my point is that if we have the will to achieve it, and if we are physically and mentally whole, we will find ways to do it.


Related posts:
1. How much to have or how much to use?
2. 7 steps to creating passive income from stocks.
3. Building and preserving our wealth.
4. A minimum of $50k in annual passive income.
5. Money management: Needs and Wants.

22 comments:

la papillion said...

Hi Cinderella,

I really agree with you on this post. There are people who dream and people who achieves their dream, if you don't take incremental steps to achieve, you can whine but essentially nothing will be changed.

When I started work, I was getting like 2k too (at one pt I was earning 90 for a month only), but I felt that was unacceptable. I realised I had a lot of limiting beliefs - among the more ridiculous one is that I must have lunch and dinner at a certain fixed time, I must not work on sat/sun, I cannot teach many people different subjects at the same time, I couldn't teach A'lvls, uni levl etc.. But ridiculous these beliefs might be, they really limit the way I behave. Slowly, I broke every one of these beliefs and managed to earn a very decent income right now.

I think for those who think they are not the privileged ones to save 500k, they should really scrutinize their limiting beliefs and break as many of them as possible. Test the limits of your boundary by taking small steps; you might find that these boundary cannot and will not restrict you if you do not wish them to do so.

The journey will definitely be accompanied by naysayers. People who say it cannot be done should not interrupt those who are doing it.

AK71 said...

Hi LP,

Thank you for sharing your personal experience and words of wisdom. :)

I know a few people who are always complaining but when I offered ideas, they would be very negative about every single suggestion. Niu bu he shui qiang an tou - If a cow does not want to drink, what's the point of pushing its head down into the water?

Ultimately, all of us have to feel motivated to make positive changes in our lives. Motivation could come from friends and family but self-motivation is the only force that is truly lasting. :)

Thanks again for sharing, Fairy Godmother. ;p

Anonymous said...

Hello AK71,

i have learnt through your many blogs that you are a "giving" person in many ways. That touched me. I am truly proud of you as nowadays it is difficult to find people who "give" their knowledge generously & sincerely.

May I ask what is your goal for passive income by the time you retire? 100k per annum ?

KM

AK71 said...

Hi KM,

You think too highly of me but, nonetheless, thank you very much for your nice words. They are very encouraging. :)

I am happy to share my own experience and my beliefs. If anyone could benefit from these, I am glad.

As to how much passive income I would like to generate by the time I retire, yes, $100k per year would be quite comfortable. Well, I can only try. :)

Anonymous said...

I din know reading financial blog can be so thereputic.

sam

AK71 said...

Hi Sam,

This is the first time I am hearing someone say this. Please visit again soon for more therapy. ;-p

Jeremy said...

Hi AK,
I have done some reading and found that the best way to generate good passive income is by owning businesses. I am not talking about buying shares to own only a meagre part of a corporation. I am talking about owning and running one's own private businesses. Businesses offer the most potential for generating good income and the larger one's business can grow, the more the income can scale up.

The only set-back is the high risk of business failure. But, then again, all the successful business owners out there have at least failed many times before succeeding and they are continually learning along the way to better their businesses. So, for me, learning the skills and venturing out to start, run and grow businesses is the best route in terms of generating potentially unlimited scalable income.

The best route is still the route fraught with many obstacles.

AK71 said...

Hi Jeremy,

Yes, I agree with you. This is what people like Robert K. advocates. I summarise this approach into a question and two statements:

1. Why work for people and be paid a fraction of your worth?

2. Work for yourself and be paid your worth.

3. Employ workers to work for you and pay them a fraction of their worth.

Certain businesses are amenable to the franchising model. This would be scaleable and one could be very rich if one succeeds.

My job is mainly in Business Development and I can say that the path of the entrepreneur is indeed fraught with challenges.

Becoming conversant with the chosen business, developing competitive advantages and having strategic alliances are some ways to stay ahead.

Good luck. :)

Anonymous said...

AK,

Very interesting and timely post. In our world of instant gratification, it is an uphill task to convince the younger generation to be patient.

In my opinion, drive, determination and hardwork are traits which must be cultivated to succeed in any ambition or goals. Never be afraid to volunteer to do projects and in fact, the bigger the project the better. Only by getting involved do we learn anything. The more problems there are, the better for the learning curve will be faster. If there are no problems then there is less to learn.

Be the best in your field and the opportunities will come knocking. In this respect, visibility to management and head hunters are especially useful. Always remember, that what you learned is yours to keep and no one can take t away from you.

Other than starting your own business, one can also join as a partner in an existing business. This was the route I took.

You guys are lucky because the awareness of FF starts much earlier than our generation. There is more time to plan.

Li

AK71 said...

Hi Li,

Thank you very much for sharing with us your insights and personal experience. I find it very enlightening. :)

There are definitely more options available or readily available information on the options available in our quest for financial freedom these days compared to my parents' era, for example. Taking advantage of this and planning early is the prudent thing to do. :)

Anonymous said...

Hello AK71,

Sometimes reading your blog inspire me as we are about the same age group. Sad to say, sometimes it can be demoralizing as well :'(

Look at what you have achieved compared to me. Nowadays, I "breathe, eat & sleep" with 50K passive income annually in my mind all the time . . . hahahah !!! May I ask how old were you when you first started investing in stocks?

Starting a business need a good business model, intensive research and plenty of luck (similar to stock investing). My entire savings was wiped out due to a failed business a few years ago. So, please be cautious and have a back-up plan.

KM

AK71 said...

Hi KM,

I blogged about my journey as an investor before. You might be interested in reading about my journey here:

http://singaporeanstocksinvestor.blogspot.com/2010/02/excuse-me-are-you-investor.html

I learned through trial and error (and there were many errors). One of my aims for this blog is to share my experience and hope that others could avoid the same mistakes I made.

I am so sorry to hear about how your savings were wiped out a few years ago in business. Sometimes, shit happens.

I have no intention of starting a business. Many years of being a business executive have made me tired of the business world maybe. ;p

KM, continue feeling inspired. Don't feel demoralised. Focus on the positive and good things will happen. Believe it. :)

left_ray said...

Everyone want to get rich. A lot of seminars feed on this. We should all know not everyone can get rich overnight. Even if we won the jackpot or toto, we may also lose it overnight. We should be prudent and learn more about financial planning and tools to sustain the "richness" (include family, friends, and etc.) we have. Our life should be richer.

AK71 said...

Hi left_ray,

Those seminars that promise to make us richer probably enrich the organisers. Few (if any) would share valuable information for free. ;)

Yes, if we think of wealth beyond financial wealth, we probably have much to thank for.

I just had a conversation with a colleague last evening on financial planning. Greed is not a bad thing. However, greed + ignorance is a recipe for disaster.

Cory said...

The best outcome will be we can be richly rewarded for the things we like to do daily in the first place and not because we are after riches.


So look for things you like to do first and then decide the options which gives better rewards.

AK71 said...

Hi Cory,

That is good advice, I am sure. Jim Rogers would agree. :)

Unknown said...

Hello AK71

Just wondering if your advice to transfer funds from OA to SA is still valid today? The 4% interest rate doesn't seem to be guaranteed forever

Great blog btw, learnt a lot just on my first visit tonight!

AK71 said...

Hi Unknown,

I wouldn't say that I am giving advice. I am just sharing what I feel works. It has certainly worked for me.

Of course, there is always a risk that things might change in the future. So, I cannot guarantee that it will continue to work. ;)

Lakota said...

Hi,
Is there a bare minimum that you would advise for someone starting out in the workforce to leave in the OA account?
I understand you transferred most of your savings from OA to SA during your first few working years.
Do you mind sharing when did you stop doing so and how much was your SA when you stopped transferring?
Thnk you =)

AK71 said...

Hi Lakota,

We have to remember that the transfer from OA to SA is a one way street. So, we have to be sure that it is money we will not need for housing.

It was many years ago but if I remember correctly, I transferred money from OA to SA for the first 4 years of my working life. I stopped when my SA had about $40K. That $40K would grow to be $60K within 10 years even if I were to stop contributing to CPF for any reason.

By now, it has been almost 20 years, and that SA money would have grown to be more than $90K if I had been unemployed the whole 20 years! This has not even accounted for the extra 1% the first $40K in our SA earned in recent years.

For anyone thinking of getting married early and buying a HDB flat early, of course, don't transfer too much from OA to SA. Maybe, don't transfer at all.

We have a choice. :)

AK71 said...


John:
i see low to avg income people difficult to save $$.
sweat sia.
u do a posting on this? how to save $$ for low income people.

AK:
For low income people, it is important to increase income.

AK71 said...

Adeline Low:
"Really inspiring and motivating to hear you juggle 3 jobs for 7 days a week, for a few years! You do that coz you want to invest more early so you will reap the benefits soon?"

ASSI AK:
"I wanted to get rich, not drive around in Ferraris…but for the freedom it would give me" Charlie Munger.

;)

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