Post by oldman on Oct 19, 2013 7:20:46 GMT 7
Your First Million, 2nd Edition
Chapter 7 - Money & Life
As I grow older, I begin to think more about what life is all about and realise that at the end of the day, what we all really want is financial independence. When we work for others, we may have a false sense of financial independence, as we do not realise that this may fall apart if we are no longer employable. Hence, many go through a period of mid-career crisis, as they then realise that their current financial independence is conditional on their being employable. But with increasing age, it begins to dawn on us that we are more likely to be the ones retrenched first. Hence, many will start getting concerned about whether they can then support their kids through university and have enough food on the table and a shelter over their heads.
Very few of my friends who are employees of companies are financially independent. They owe their financial standing to the fact that they are still employed. In the past when there was lifelong employment, being employed was a logical choice to make. Now, very few companies can offer lifelong employment, as the nature of business is so fluid that no one business can be certain it will be around in the next 5 to 10 years.
As for insurance policies, I doubt what is accumulated is enough to see the average Joe through retirement. Remember that for every policy we take, the insurance company and agent already take a good cut. Hence, like Unit Trusts, what you put in initially is already smaller before it gets to work. Having said that, I must confess that I do have several insurance policies, but I am certainly not dependent on them for my future. I look at these as insurance policies for my family against early death and illness rather than for investments.
You may think that an entrepreneur is better off. Not really. In business, nothing is certain. The entrepreneur is equally, or even more, exposed to business risk. The only difference really is that he is in control of his own business destiny. If he makes it, he will be financially independent for the rest of his life. But if he does not, he may fall further behind than a salaried peer.
Hence, whether one is employed or an entrepreneur, it is equally important for him to know how to invest. If he is 40 years old and has $100,000 in cash in the bank that provides 5% return a year, then his capital would have grown to $163,000 only when one turns 50, and assuming no top-up in capital. When he is 50 and near retirement, he needs his capital to live on. This means that while in the past he can view his capital as risk money, he would need to pay his daily expenses out of the capital, now that he is retired. Ideally, this capital should not be in stocks and shares anymore. After all, like it or, anything in stocks and shares is risky. That is a fact.
Assuming he puts $163,000 in the bank and let’s say he gets a high 3% return, this will only equate to $5,000 a year in interests. If he cannot survive on this, then he has to eat into his capital, in which case the interests in the following years will decline.
Assuming that he needs $3,000 a month to live on, he will then need a total of $36,000 a year. Even at a high 3% return – compared to the 1.5-2.5% per annum for Singapore’s bank interest rates – that will mean he needs a capital of $1.2 million to retire on. The best financial plan is one in which your capital remains intact throughout your life expectancy. Remember, you have not yet even factored in currency fluctuations, inflation and contingencies that will eat into your capital base. When you retire, you will have no income, so you should at least try to preserve your capital base.
If you don’t preserve your capital base and you are 20 years into your retirement, reaching, say, 80 years old, you will see your retirement fund dwindle so significantly every year that I am sure you will get increasingly worried you may live longer than what you had planned. You will then spend the rest of your life worrying about money and whether you have enough to survive on. By then, it is too late to blame your financial planner, as he too may be on his way to his maker! The way I plan my retirement is that minimally, I must preserve my capital.
When I first started working, I was told that I should immediately take up a housing loan as this was my entitlement. Before having a job, the bank would not have granted me a loan. Hence, I was told not to ‘waste’ my entitlement and I then started on my journey as most people would – I took up a loan to buy a house.
As the years went by, I realised that having a housing loan forces one to be constantly employed because failing that, one cannot pay off the monthly loan amounts and when one defaults, the bank can repossess the house. In many ways, the age-old logic of getting a housing loan actually strangulates one’s ability to start any new businesses because the housing loan requires a steady monthly income which one can only get when one is under the employment of others.
When we start off a new family, the original house that we bought is likely to be inadequate for our needs. We then upgrade and commit to a further 30-year loan. This process of upgrading eventually forces us to be employed for the rest of our lives. Hence, having a housing loan is like having a jail term where one is beholden to the bank for the life of the housing loan. To pay for this loan, one has to have full employment till the end of his housing loan.
The first step towards retirement is to have a plan in place to pay off your housing loan as this is usually the largest loan that you can take. To achieve this, you must learn to save a significant portion of your salary as your salary is likely to constitute the bulk of your net worth, when you start off in life. As you are unlikely to have much investments early in your life, it is nevertheless important to learn how to invest as early as you can because one day, you will have sufficient capital to invest but without the investment knowledge, your capital is unlikely to grow.
Once you have paid off your housing loan, you will then have the feeling of freedom that you have never experienced before. This is the freedom of not having to pay another monthly instalment. This is the freedom that may initiate you to start off your first business which may then become your ticket to financial freedom. Unless you are a high flying executive, it is unlikely that employment alone can make you financially free.
Once you have settled your home loan to the best of your financial ability, you will have more control over your financial well-being. You will have less pressure to continue working as is and more freedom to plan ahead for your future as you need not worry anymore about meeting the monthly instalments for your home loan.
This is the state of mind that you have to bring yourself to. It is a state of mind that will allow you to plan ahead without all the current restrictions and obligations. With this clear mind, you will then need to take time and think through your 10-year plan to reach your financial goal.
Usually, good things just don’t happen. You have to plan ahead for it. If you are keen to start up a business, you have to think through the business plan thoroughly. The key thing is to be able to convince yourself that your business plan is unique enough and will be able to generate the profits needed. To be able to do this, you must understand the business thoroughly and have a strong business gut feel. If you lack one or the other, it is good to get a partner who has the knowledge that you lack.
Passion alone is usually not sufficient to build a business. Everyone has passion when he opens up his first business. Yet 90% of new businesses fail within the first three years. This tells you that passion alone is not sufficient to build a lasting business. One needs strong business acumen as well. If you do not have this acumen, do look around for others who can guide you. In your business plan, there should be an exit strategy as very few businesses can last forever. One must be clear in one’s mind that one is building a business to reach the goal of financial independence. If there is an offer from outside to buy one’s business, one must be able to look objectively at this offer. Even better if one is already in the frame of mind that one built one’s business to reach financial independence as this will make the decision so much easier when the time comes.
We must all strive to be financial independent as soon as we can. We need to plan our careers carefully and not drift along with our occupations. If our careers are not going to make us financially independent, we owe it to ourselves and our families to look for other ways to allow us to reach this goal in life. This may take the form of savings and investments while we are working for others or it may result in us quitting our jobs to start our own businesses.
We all know that sooner or later, we have to retire. Ideally, we should retire financially independent and not have to burden our children to take care of us as we know that life is likely to be even tougher for our children than it is for us.
I tell my kids that life is a rat race and the earlier one finishes this rat race, the earlier one can do what one really wants to do in life. Finishing the race does not mean the end of one’s life. It means the completion of the phase of one’s life in which one has to be mindful of what others think because one’s livelihood is dependent on others.
As a doctor, if a patient is disrespectful, one still has to show the best of bedside manners. In a multi-national corporation, it means being nice to your boss even though you may know that he may not like you as you are threatening his job. In a private company, it means making friends with all the large corporations even though you know that they are competing with your company. Yes, I have been through the experiences of being a medical doctor, of working in a large corporation and of running my own company.
In life, one has to go through this rat race as this is the way most of us make our money to live our lives. If you are like me, I did not inherit any wealth and hence, I had to use my hands and head to make a living. At the various stages of my life, I really did not know what I wanted to do in life. I could not sit idling around and hence, an occupation was needed to make a living.
However, I knew very early on in life that I needed money to be able to retire comfortably. If I continued as a doctor, I am sure eventually, I would be able to retire comfortably. But my desire was not in medicine and I could not see myself struggling for the rest of my life doing something that I may not enjoy doing every day of my life. Hence, I made the switch to business. As I climbed the corporate structure in IBM, I realised that only a few can make it to the top and only those few can be financially independent on retirement. The rest of my friends working in corporations worry about their jobs regularly and I did not want to see myself in this situation.
This is why I decided to build up my own IT company. It was very tough in the beginning but for those of us who persevered and believed in ourselves, we should eventually find light at the end of the tunnel. Some of us eventually sell our companies and can retire from the proceeds.
But business is unpredictable. Hence, I decided earlier on in my life to pick up a skill that I think can make me financially independent regardless of my occupation. This skill is investing. I taught myself accounting, how to read financial documents as well as picked up text books on business law. What I did not realise was that this skill that I picked up 30 years ago not only made me financially independent but it also gave me a passion in life. Yes, I found out that I enjoyed investing more than I enjoyed running businesses and certainly more than I enjoyed practising medicine.
In the race of life, you too have to look for ways of making yourself financially independent. Ideally, what you are currently doing in life can one day make you financially independent. I call these the lucky guys. Why? Because in real life, everyone is passionate about what they do, but only a select few become financially independent through their passion. Of the many golfers throughout the world, there can only be a few Tiger Woods. If you are not one of them, no matter how hard you try, it may be better to look elsewhere for the pot of gold that will one day make you financially independent.
Passion alone is unlikely to make most of us financially independent. We owe it to ourselves to think, very early on in our lives, how we are going to make money from the passion that we have. If we know that this passion alone is unlikely to make us wealthy, we should look hard for alternative ways to find this pot of gold.
This may sound contrary to the recommendations dished out throughout the centuries that you should be passionate about what you do and the money will then flow in. My experience is that unless you are very lucky, passion alone is unlikely to make most of us financially independent. Somewhere in the passion must lie the business plan to make money in order to retire financially independent.
Once you have completed this race of life, you are now free to really enjoy yourself and do the things that you really like doing. You do not have to worry about your daily bread and more than likely, without this dark cloud hanging over your shoulders, you will excel in what you do. This is why the rich becomes richer as they grow older. They have less worries and do what they do for the fun of it. When you do things for the fun of it, I can assure you that you will do these things exceedingly well – even without trying too hard.
Hence, we should all aim to retire early and you will then be equally amazed that the most productive part of our lives is actually after we have retired. Now I can understand why the best minds of our times, the Michaelangelos of the world, excel after they retire.
Retirement may be the start of the best years of our lives.
Chapter 7 - Money & Life
As I grow older, I begin to think more about what life is all about and realise that at the end of the day, what we all really want is financial independence. When we work for others, we may have a false sense of financial independence, as we do not realise that this may fall apart if we are no longer employable. Hence, many go through a period of mid-career crisis, as they then realise that their current financial independence is conditional on their being employable. But with increasing age, it begins to dawn on us that we are more likely to be the ones retrenched first. Hence, many will start getting concerned about whether they can then support their kids through university and have enough food on the table and a shelter over their heads.
Very few of my friends who are employees of companies are financially independent. They owe their financial standing to the fact that they are still employed. In the past when there was lifelong employment, being employed was a logical choice to make. Now, very few companies can offer lifelong employment, as the nature of business is so fluid that no one business can be certain it will be around in the next 5 to 10 years.
As for insurance policies, I doubt what is accumulated is enough to see the average Joe through retirement. Remember that for every policy we take, the insurance company and agent already take a good cut. Hence, like Unit Trusts, what you put in initially is already smaller before it gets to work. Having said that, I must confess that I do have several insurance policies, but I am certainly not dependent on them for my future. I look at these as insurance policies for my family against early death and illness rather than for investments.
You may think that an entrepreneur is better off. Not really. In business, nothing is certain. The entrepreneur is equally, or even more, exposed to business risk. The only difference really is that he is in control of his own business destiny. If he makes it, he will be financially independent for the rest of his life. But if he does not, he may fall further behind than a salaried peer.
Hence, whether one is employed or an entrepreneur, it is equally important for him to know how to invest. If he is 40 years old and has $100,000 in cash in the bank that provides 5% return a year, then his capital would have grown to $163,000 only when one turns 50, and assuming no top-up in capital. When he is 50 and near retirement, he needs his capital to live on. This means that while in the past he can view his capital as risk money, he would need to pay his daily expenses out of the capital, now that he is retired. Ideally, this capital should not be in stocks and shares anymore. After all, like it or, anything in stocks and shares is risky. That is a fact.
Assuming he puts $163,000 in the bank and let’s say he gets a high 3% return, this will only equate to $5,000 a year in interests. If he cannot survive on this, then he has to eat into his capital, in which case the interests in the following years will decline.
Assuming that he needs $3,000 a month to live on, he will then need a total of $36,000 a year. Even at a high 3% return – compared to the 1.5-2.5% per annum for Singapore’s bank interest rates – that will mean he needs a capital of $1.2 million to retire on. The best financial plan is one in which your capital remains intact throughout your life expectancy. Remember, you have not yet even factored in currency fluctuations, inflation and contingencies that will eat into your capital base. When you retire, you will have no income, so you should at least try to preserve your capital base.
If you don’t preserve your capital base and you are 20 years into your retirement, reaching, say, 80 years old, you will see your retirement fund dwindle so significantly every year that I am sure you will get increasingly worried you may live longer than what you had planned. You will then spend the rest of your life worrying about money and whether you have enough to survive on. By then, it is too late to blame your financial planner, as he too may be on his way to his maker! The way I plan my retirement is that minimally, I must preserve my capital.
When I first started working, I was told that I should immediately take up a housing loan as this was my entitlement. Before having a job, the bank would not have granted me a loan. Hence, I was told not to ‘waste’ my entitlement and I then started on my journey as most people would – I took up a loan to buy a house.
As the years went by, I realised that having a housing loan forces one to be constantly employed because failing that, one cannot pay off the monthly loan amounts and when one defaults, the bank can repossess the house. In many ways, the age-old logic of getting a housing loan actually strangulates one’s ability to start any new businesses because the housing loan requires a steady monthly income which one can only get when one is under the employment of others.
When we start off a new family, the original house that we bought is likely to be inadequate for our needs. We then upgrade and commit to a further 30-year loan. This process of upgrading eventually forces us to be employed for the rest of our lives. Hence, having a housing loan is like having a jail term where one is beholden to the bank for the life of the housing loan. To pay for this loan, one has to have full employment till the end of his housing loan.
The first step towards retirement is to have a plan in place to pay off your housing loan as this is usually the largest loan that you can take. To achieve this, you must learn to save a significant portion of your salary as your salary is likely to constitute the bulk of your net worth, when you start off in life. As you are unlikely to have much investments early in your life, it is nevertheless important to learn how to invest as early as you can because one day, you will have sufficient capital to invest but without the investment knowledge, your capital is unlikely to grow.
Once you have paid off your housing loan, you will then have the feeling of freedom that you have never experienced before. This is the freedom of not having to pay another monthly instalment. This is the freedom that may initiate you to start off your first business which may then become your ticket to financial freedom. Unless you are a high flying executive, it is unlikely that employment alone can make you financially free.
Once you have settled your home loan to the best of your financial ability, you will have more control over your financial well-being. You will have less pressure to continue working as is and more freedom to plan ahead for your future as you need not worry anymore about meeting the monthly instalments for your home loan.
This is the state of mind that you have to bring yourself to. It is a state of mind that will allow you to plan ahead without all the current restrictions and obligations. With this clear mind, you will then need to take time and think through your 10-year plan to reach your financial goal.
Usually, good things just don’t happen. You have to plan ahead for it. If you are keen to start up a business, you have to think through the business plan thoroughly. The key thing is to be able to convince yourself that your business plan is unique enough and will be able to generate the profits needed. To be able to do this, you must understand the business thoroughly and have a strong business gut feel. If you lack one or the other, it is good to get a partner who has the knowledge that you lack.
Passion alone is usually not sufficient to build a business. Everyone has passion when he opens up his first business. Yet 90% of new businesses fail within the first three years. This tells you that passion alone is not sufficient to build a lasting business. One needs strong business acumen as well. If you do not have this acumen, do look around for others who can guide you. In your business plan, there should be an exit strategy as very few businesses can last forever. One must be clear in one’s mind that one is building a business to reach the goal of financial independence. If there is an offer from outside to buy one’s business, one must be able to look objectively at this offer. Even better if one is already in the frame of mind that one built one’s business to reach financial independence as this will make the decision so much easier when the time comes.
We must all strive to be financial independent as soon as we can. We need to plan our careers carefully and not drift along with our occupations. If our careers are not going to make us financially independent, we owe it to ourselves and our families to look for other ways to allow us to reach this goal in life. This may take the form of savings and investments while we are working for others or it may result in us quitting our jobs to start our own businesses.
We all know that sooner or later, we have to retire. Ideally, we should retire financially independent and not have to burden our children to take care of us as we know that life is likely to be even tougher for our children than it is for us.
I tell my kids that life is a rat race and the earlier one finishes this rat race, the earlier one can do what one really wants to do in life. Finishing the race does not mean the end of one’s life. It means the completion of the phase of one’s life in which one has to be mindful of what others think because one’s livelihood is dependent on others.
As a doctor, if a patient is disrespectful, one still has to show the best of bedside manners. In a multi-national corporation, it means being nice to your boss even though you may know that he may not like you as you are threatening his job. In a private company, it means making friends with all the large corporations even though you know that they are competing with your company. Yes, I have been through the experiences of being a medical doctor, of working in a large corporation and of running my own company.
In life, one has to go through this rat race as this is the way most of us make our money to live our lives. If you are like me, I did not inherit any wealth and hence, I had to use my hands and head to make a living. At the various stages of my life, I really did not know what I wanted to do in life. I could not sit idling around and hence, an occupation was needed to make a living.
However, I knew very early on in life that I needed money to be able to retire comfortably. If I continued as a doctor, I am sure eventually, I would be able to retire comfortably. But my desire was not in medicine and I could not see myself struggling for the rest of my life doing something that I may not enjoy doing every day of my life. Hence, I made the switch to business. As I climbed the corporate structure in IBM, I realised that only a few can make it to the top and only those few can be financially independent on retirement. The rest of my friends working in corporations worry about their jobs regularly and I did not want to see myself in this situation.
This is why I decided to build up my own IT company. It was very tough in the beginning but for those of us who persevered and believed in ourselves, we should eventually find light at the end of the tunnel. Some of us eventually sell our companies and can retire from the proceeds.
But business is unpredictable. Hence, I decided earlier on in my life to pick up a skill that I think can make me financially independent regardless of my occupation. This skill is investing. I taught myself accounting, how to read financial documents as well as picked up text books on business law. What I did not realise was that this skill that I picked up 30 years ago not only made me financially independent but it also gave me a passion in life. Yes, I found out that I enjoyed investing more than I enjoyed running businesses and certainly more than I enjoyed practising medicine.
In the race of life, you too have to look for ways of making yourself financially independent. Ideally, what you are currently doing in life can one day make you financially independent. I call these the lucky guys. Why? Because in real life, everyone is passionate about what they do, but only a select few become financially independent through their passion. Of the many golfers throughout the world, there can only be a few Tiger Woods. If you are not one of them, no matter how hard you try, it may be better to look elsewhere for the pot of gold that will one day make you financially independent.
Passion alone is unlikely to make most of us financially independent. We owe it to ourselves to think, very early on in our lives, how we are going to make money from the passion that we have. If we know that this passion alone is unlikely to make us wealthy, we should look hard for alternative ways to find this pot of gold.
This may sound contrary to the recommendations dished out throughout the centuries that you should be passionate about what you do and the money will then flow in. My experience is that unless you are very lucky, passion alone is unlikely to make most of us financially independent. Somewhere in the passion must lie the business plan to make money in order to retire financially independent.
Once you have completed this race of life, you are now free to really enjoy yourself and do the things that you really like doing. You do not have to worry about your daily bread and more than likely, without this dark cloud hanging over your shoulders, you will excel in what you do. This is why the rich becomes richer as they grow older. They have less worries and do what they do for the fun of it. When you do things for the fun of it, I can assure you that you will do these things exceedingly well – even without trying too hard.
Hence, we should all aim to retire early and you will then be equally amazed that the most productive part of our lives is actually after we have retired. Now I can understand why the best minds of our times, the Michaelangelos of the world, excel after they retire.
Retirement may be the start of the best years of our lives.
