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The Fundamentals

This section aims at giving you the fundamentals of financial management.  Basically, this refers to the mindset of accumulating money.  Interested to find out more?

Before I begin, reflect on the way your finances had evolved over the years.  Have your net worth been increasing, decreasing or remained constant over the last 10 years?  Ever wondered why this is so?  Well, time to let you on to the secret of how to increase your net worth......and how I and my fiancee accumulated $350k in net worth over the past 3 years, from only working at my day job and investing (and she being a student).

Lets drill down to the basics....Under a personal financial statement, there are 2 key components which determines how you grow money (or lose money if your current net worth is decreasing).  They are

1)    Income - all the money generated from your job, from your business and other sources of income

2)    Expenses - the total amount you spend on basic necessities, luxury items, loans and everything else

You might be wondering....of course there are income and expenses....so what does that have to do with accumulation of wealth?  Well look at it this way...What does the below mean to you??

Savings = Income - Expenses

The fundamentals of wealth accumulation is savings.....and savings is the nett amount of money you have left from your income, after you deduct all your expenses.  And it is this savings that you can use to invest and grow your money, thereby increasing your net worth.....Every dollar is a worker who works 24 hours a day to generate more income for you, for free.....

Lets take an example....As a fresh graduate, I had a starting salary of $3,000.  After deducting CPF contributions, I am left with $2,400 - my income.  My monthly expenses is tabulated as follows:-

1)    Transport                    $150

2)    Food                           $200

3)    Phone & Internet        $100

4)    Parental Allowance    $400

5)    Insurance                   $200

6)    Others                        $200

Total Expenses               $1,250

Hence, my Savings  = $2,400 - $1,250

                                = $1,150 (~48% of my salary)

Hence I place $1,150 into my investment account every monthly.  In my first year, I made about 15% per annum by playing unit trusts.  This gave me $15k over the year.

During this period of time, I invested alot of time in building up my financial knowledge, and found that I am ready to move into stocks.  Over the next year, I cashed out on my profits in my unit trusts and carried on with investment in stocks, which gave me approximately 25% a year. 

My salary had increased to $3,175.  This gave me a total of $36k by Sep 07. Together with my fiancee, we had a total of $36k from cash and $48k in CPF, and with the $84k liquidity, $12k investment from a friend and another $3.8k from 3 months salary and $8.6k from bonus, we purchased a condominium for rental in Clementi for $420k.  Our total capital output is $108.4k.  Nett income from the condominium is $350. 

I carried on putting money into the stock market while letting the condominium appreciate.  I've since reached my 10 months of owning the property, and have also accumulated $18k worth of stocks and liquidity, which brings my total net worth to:-

Condominium:    ($700k-$420k+$108k)*96/108 = $344k

Stocks:                $18k

Total:                  $362k

See the power of saving and investing the savings?  Just a point to note....I invested around 30% of my waking hours in financial education over the past 3 years.  That's one of the reason why I managed to get good returns over such a short period of time.  Of course, that I am a small player also helps me achieve good returns ( I'll elaborate on all these in the following sections)  However, one of the most important reason for my huge returns is also the memberships I pay for, of which most notably is www.investors.com which had saved me 3 times in my short investment career.  ( there were 3 downturns which I managed to get out unscathed, you could call it my last line of defense)

There are 3 ways for me to achieve even better returns, of which 2 are relevant in this topic:-

1)    Increasing Income

2)    Decreasing Expenses

Over the past 3 years, I did not increase my expenses, but managed to increase my monthly income through pay increment and the passive income I received from the condominium.  This allowed me to increase my monthly savings. 

I did not go into the alternative of reducing expenses, as to me, i'm already living at my most basic expenses.

However, either way you do it, you can help increase your monthly savings, which will increase the number of "workers" working hard to give you more money.

The third and most efficient way is to increase the rate of returns, which will only come when you build up on your financial education.  To do this, you need to invest your time and money, in the spirit of short term investment in yourself for long term gain in net worth and income, which is what I've been doing over the past 3 years.

Lets have a look at why I say this is the most efficient way to increase your returns.  I'm going to introduce the rule of 72 at this juncture.  The rule of 72 tells you the approximate number of years that is required for your money to double if its invested at a given rate.  Lets take an illustration:-

At a rate of return of 5%, it takes 72 / 5 = 14.4 years for your money to double.

At a rate of return of 20%, it takes only 72/20 = 3.6 years for your money to double.

In short, an investment growing at a rate of returns of 20% for 14.4 years will be worth almost 8 times what it would be worth had it been invested at 5%.  That's the power of increasing your returns.

Lets see it in monetary terms:-

lets say I place $3000 in a USD fixed deposit giving 5% an annum, and another $3000 into very good fundamental stocks.  Lets play the figures out.

Time(years)        value@5%        value@20%

3.6                        $3,576                $5,783

7.2                        $4,262                $11,148

10.8                      $5,081                $21,492

14.4                      $6,056                $41,431

Now that you have seen how powerful a higher rate of return is, read on the vehicles to find out how to achieve higher rates of return for your investments.