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Tuesday, June 15, 2010

1 million dollars... so what?

This morning, I overheard this in the lift when a colleague was chatting with another over some property price.

"1 million leh! A normal person wouldn't even be able to earn that in one lifetime!"

That set me thinking... that isn't really true! A million dollars over 30 years is about $34k per annum. According to salary.sg, a $34k per annum salary is higher than 18.6% of the population (let's not get started on the distinction between PRs and Citizens).

Just a thought... Sometimes... I wonder why a million dollars is set as a milestone... Supposed a million was defined as 105 or 107 instead of 106, would it still be a milestone? This is financial relativity. But that's beside the point in this post.

Indeed, it appears that most of us do earn the magical million dollar in our lifetime. But so?

As per conventional wisdom, what can set us apart from the rest:
(i) How much is saved from the amount earned.
(ii) How the amount saved is used or invested.
(iii) The rate at which we generate income.

All 3 points above are very important in my opinion. Merely focussing on the first two points will only probably help one live comfortably, but not enough to go very far.

How much is saved from the amount earned
This has been repeated over and over again in many books and blog posts in many blogs. I will not bore you with the same stuffs again. Basically, it's still about delayed gratification, and prudent spending and saving habits.

How the amount saved is used or invested
This is another common wisdom. Again, this is something that has been expounded over and over again.

The rate at which we generate income
This is perhaps something very under-rated. To me, one can save 90% of their income, one can compound their savings at 20% p.a., but if one earns a pittance, ultimately, the amount left would still be little!

The age old formula still applies
Income * Percentage savings * compounding effect of savings

Needless to say, without a moderately high income, one's networth would not grow quick enough. Our time on Earth is limited. What's the point of reaching a respectable networth only to spend it on medical bills or passing it as inheritance to children who might not even treasure it?

The effects of compounding is well known, it's effects well documented. But where's the base capital going to come from? $0 compounded at 50% p.a. for 30 years will still result in grand total of........ drum rolls.......... $0!

Granted, markets traditionally compound at around 10% p.a. Let's say at the age of 25, you have $100k to start compounding with. Excluding any additional savings, and doubling every 7 years, after 28 years at age 53, it would be $1.6mil. Sounds nice? Yeah, numbers are nice sounding. But wait, how many would have $100k at the age of 25? How many would be able to truly achieve 10% compounded for 28 years? At 53, with $1.6 million in your bank account, what would you do? Go for a nice tour and huff and puff with heavy luggage around? Slogged hard for 28 years just to enjoy your golden years?

The irony for most people is, when they are young, they have the energy to do many things, but not the money to do so. But when they are old, they have the money to do things, but not the energy. The sad fact of life is, humans athletic capabilities peak around 25 to 30 years old, and the body could probably last well into the late 40s. After that.... it depends on your genes.

Yet another sad fact of life... many worked for money only to see it fly out fast.

What's my solution? I work for the fun of it. I try to make sure my work is play. For example, I like to interact with students and share my knowledge and insights with them. That's why I'm give tuition on the sideline. I like to solve and analyse things logically. That's why I decided to be an engineer. At the moment, I can say that I'm truly doing things I like. Income is still important no doubt, and fortunately for me, I have a nice income from doing things I like.

Right now, I'm writing an A level physics guide for publication in the future. Do I see any fun in this? You bet! I know I have many interesting and unique insights for different topics, and before I forget them, I want to document them down. At the same time, I try to analyse and gather feedback from students where I can improve my notes. It fits my personality well.

I make sure I enjoy my years while increasing my networth instead of slogging for it. I try to make sure my income is above average so as to grow my networth faster than most. In fact, I'm at a zone so comfortable and happy that I don't mind remaining this way forever. Then again, that's not my personality too. Pretty soon, I will attempt to shake myself out of this comfort zone, but I shall leave that to when I'm more sure of my plans.

9 comments:

  1. Most degree holders will be able to earn a million dollars within their lifetime with many earning more. Anyway, the new benchmark for being considered rich is >USD$10mil. $1mil just don't cut it anymore (in Singapore at least).

    The more relevant question would be what is your networth and how much income can you generate from your networth to sustain your living. No point having $1mil and putting it into a sgd deposit and you keep drawing down from it.

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  2. Hi Wealth Journey,

    Thanks for the new benchmark :)

    My main point is, when people talk so much about the power of compounding, often, they did not mention that to truly make use of compounding, we need a large enough base capital. We need time.

    But how many pple have the necessary base capital to take full advantage of compounding? How much time do we have left after we let compounding do it's magic (if it does successfully)?

    Starting income is still of utmost importance to me.

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  3. Indeed, our time here is very limited, i am already 29.

    Live to your fullest with meaningful memories to recall and to enjoy life at every stage of our life.

    These, to me are more important than chasing after the things that the society push us to, big cars, big houses, big debts - chasing after vanity and wind - take a step and look around, many are working like a machine to make unjustified ends meet.

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  4. Hi Jason,

    Thanks for visiting and leaving a comment.

    You are right :)
    So it's always good to plan well financially while young. Ganbatte!

    ReplyDelete
  5. A million dollars is worth less and less all the time.

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  6. A million dollar is so much easier to earn another million. just park into some good reits and it will snowball.

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