Friday, October 24, 2008

What is investment?

According to Wikipedia, investment is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Wiki went on to say that investment is the choice by the individual to risk his savings with the hope of gain.

According to dictionary.com, investment is

1. the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.
2. a particular instance or mode of investing.
3. a thing invested in, as a business, a quantity of shares of stock, etc.
4. something that is invested; sum invested.
5. the act or fact of investing or state of being invested, as with a garment.
6. a devoting, using, or giving of time, talent, emotional energy, etc., as for a purpose or to achieve something: His investment in the project included more time than he cared to remember.
7. Biology. any covering, coating, outer layer, or integument, as of an animal or vegetable.
8. the act of investing with a quality, attribute, etc.
9. investiture with an office, dignity, or right.
10. a siege or blockade; the surrounding of a place with military forces or works, as in besieging.
11. Also called investment compound. Metallurgy. a refractory material applied in a plastic state to a pattern to make a mold.
12. Archaic. a garment or vestment.

Clearly, there are many definitions of investment. So what exactly is investment. To some people, investments might be putting money into the stock market. To some others, the unit trusts, bonds, etc. To another person, an education is also an investment. Raising a kid might be an investment to some as well.

To me, investing is the act of sacrificing something in order to gain something else more worthwhile. It does not necessarily need to include money. Example: spending time to read self-improvement books for free from the library is a form of investment; I gain in getting more insights. Spending the effort to build such a blog/website is also investing; I gain in being able to gather, clarify and put together my thoughts.

Indeed, investment is important. To me, the bulk of investments should be on oneself; the returns are far greater than investing in any stocks, bonds, etc. Education, reading, learning on the job, etc, build upon life skills that may likely be used again and again in the future. This is sort of like a form of compounding; the database in you may grow in a constant rate, but if each piece of data gives you some form of returns at a constant rate as well, the total returns increases in an exponential rate. This is because the data that you possess continue to give you some sort of returns as you build up your personal database. Every piece of new data starts to give you rewards the moment you put it in, together with previous data that continue to provide the rewards.

Not sure if I explained the idea properly, but in short, invest in yourself, invest in building up a personal database. This will be on top of investing time on trading on the stock market (stock market plays are not called investing, but trading).

Tuesday, October 14, 2008

Random thoughts about wealth and money

Is this a world where money is scarce?
or is this a world where money is abundant?

Many people live in a world where they see money as a scarce resource, a precious material. But is money really scarce?

Looking at the ease how the recent financial meltdown wipes away trillions of USD, and yet there's still billions and billions of funds pouring in to bailout doomed institutions, we can easily conclude that, there's still an abundance of money in this world.

Yet, why do people still adopt the mindset that money is indeed hard to come about when so much is being thrown around here and there? I have no idea why. But living in a world of money scarcity, one will tend to adopt habits of living and managing money for a money-scarce world. The probability that this becomes a self-fulfilling prophecy thus becomes higher. A tiny mistake, a tiny setback, will then further reinforce the mindset that money indeed scarce. And with the self-justification, one will ....... be forever entrapped in this never-ending cycle.

Thus, I believe, to be wealthy, one have to adopt the mindset that there's an abundance of money around. And with that mindset, one's personal goals to achieve wealth will seem much more meaningful, much simpler, and more straightforward to achieve.

Of course, it doesn't mean it is sufficient to stop at having a personal goal to achieve wealth; hard work, much planning and great effort are still required. Merely having a goal without working towards it is like having a dream; nothing will result from it in the end.

Tuesday, October 7, 2008

What is wealth?

Adapted from Adam Khoo's email newsletter, with some of my own additional views and points.

Is a person's wealth is defined by how much he earns, by the clothes he wears, by the car he drives, by the amount he spends, by the house he lives in and by the way he lives? Obviously not!

Wealth is determined by a few factors.
1) Monthly expenditure
2) Monthly income
3) Liquid assets

Number 1 is pretty standard; it is how much you spend each month.

Number 3 is also pretty standard. Liquid assets is the amount of cash or cash equivalents you have. This can include stocks, bonds, money market fund & fixed deposits.

Number 2 is a bit larger. To me, monthly income consists of 2 portions
(a) Active income
(b) Passive income

(a) Active income is how much you earn by putting your effort into it. This includes your full-time job.

(b) Passive income is the income that you will continue to receive even after you stop working. This could include any advertising revenue from websites, interest, dividends, royalties and profits from a business.

So after all these definitions, what is wealth?

A person's wealth is actually defined by how long a period of time he/she can sustain their lifestyle if they stop working. The longer you can go on living your life without working another day, the wealthier you actually are.

An example. George holds a big post in a multi-national company and earns a $30,000 monthly salary. He lives a lavish
lifestyle that results in personal and household expenses a month of $27,000.

He hasn't really saved much over the years as he has spent any surplus on house improvements and other liabilities. Besides his full time job, he has no other sources of income. His liquid assets are just under $27,000.

On the other hand, Lily, another employee in the same multi-national company, earns a monthly salary of $5,000 a month. For 20 years, Lily saved 20% of her income and invested it in the right stocks and mutual funds that have given her average returns of 15% per year. Her liquid assets slowly build up to $1.3 million as time goes by. In addition, she spent her free time building up a home-based business that sells collectible items over the Internet, earning about $800 a month. She does not drive a fancy car nor spend lots on home improvements.

Let us now compare between Lily and George. Who is wealthier?

For George, if he stops working today, his liquid assets of $27000 can only pay for his current lifestyle for only a month. His wealth is thus one month.

For Lily, if she stops working today, with her $1.3 million in savings, and a monthly expenditure of $4k (80% of $5k), she would be able to survive 325 months (or 27 years)! This excludes her monthly passive income of $800.

Let's say, Lily puts her money into a fixed deposit of a pathetic 1.2% (given a bad recession), along with her monthly passive income of $800, she would be receving an average of $2100 a month. If the economy is good and fixed deposits give an interest of 4%, she would have about $5133 a month! So you can see, Lily can go on living quite comfortably for a very long time without working much again in her lifetime.

Can you see that wealth is not determined by how much you earn, but by how much you saved, how wisely you invested, and how much you spend? It is a factor of time, and not a factor of the absolute amount in dollars and cents.

Conclusion: Even with a middle class income, one can still be a millionaire if one has sufficient financial intelligence, discipline and patience to achieve it.

Four Levels of Wealth

This is an article I received from Adam Khoo which I think it is very informative.

There are basically four levels of wealth you must aim to attain.

Level 1: Financial Stability

The first level of wealth is known as financial stability. This is the most basic level of wealth that you must first attain.

You have achieved Financial Stability when:

1. You have accumulated enough liquid assets to cover your current expenses for a minimum of six months.

2. In addition, you have life and hospitalization insurance to protect you and/or your family's lifestyle should you be permanently disabled, unable to work or if you pass away suddenly.

When you have attained this first level, you will have the peace of mind that should any unexpected challenges befall you (like retrenchment, business failure, pay cut, death or disability), you and your family's lifestyle will not be compromised. Or worse, you
or your family will not slide into debt.

Once you have achieved this, you must then aim to achieve...

Level 2: Financial Security

You have achieved Financial Security when you have through the investment of time, money and ideas, accumulated a critical amount of Positive Cash Flow Assets that generate enough passive income to cover your MOST BASIC expenses.

In other words, when you reach this level, you can stop working and maintain a very basic lifestyle. It also means that if you continue working, all your active income can be channelled towards your investments and this will further compound your assets and increase your in-come streams.

Of course, we shouldn't be satisfied at being at this level. Once accomplished, you must then aim to go for...

Level 3: Financial Freedom

Many of us have heard of the dream of achieving financial freedom but what does it really mean?

Well, Financial Freedom is when you have through the investment of time, money and ideas, accumulated a critical amount of Positive Cash Flow Assets that generate enough passive income to sustain your CURRENT LIFESTYLE.

When you reach this level of Financial Freedom, you can choose to stop working and still maintain your current standard of living... indefinitely!

In reality, most people who achieve financial freedom love their work so much that they continue working not because they have to, but because they choose to.

Obviously, the more expenses you have now, the more luxurious and indulgent your standard of living, the longer it will take for you to achieve financial freedom.

So besides increasing your passive in-come, reducing your unnecessary/frivolous expenses will accelerate your way towards this fourth level. Finally, you must aim to achieve...

Level 4: Financial Abundance

So what is the ultimate level of wealth you can achieve? Financial Abundance is when you have through the investment of time, money and ideas, accumulated a critical amount of Positive Cash Flow Assets that generate enough passive income to sustain your DESIRED LIFESTYLE.

Your desired lifestyle is the amount of monthly expenses it will take for you to live the life of your dreams. This is totally subjective depending on the lifestyle that you desire.

If your desired lifestyle is to live in a 20,000 square-feet bungalow with a swimming pool, send your kids to the best schools and drive a Mercedes Benz S-Class, then you could be looking at a monthly lifestyle that'll cost a cool $50,000.

Of course the more luxurious your desired lifestyle, the longer it will take for you to achieve financial abundance.

The moment you reach the level of Financial Abundance, you will be able to choose to stop working and live your dream lifestyle indefinitely.

Again, most people who do reach this level usually love what they do so much that they keep on working for fun, channeling 100% of their active income towards charitable causes and further compounding their wealth.

With the right strategies and plans in place, you too will be able to achieve this ultimate level of wealth.