How much money does one need to reach financial freedom?

In my earlier post "So you want to retire in Singapore?" under the label "Financial Planning", I did an estimation of the amount of money needed to retire in Singapore. The estimation of the retirement amount varies depending on the current age of the person. However, a conservative estimate runs in the likes of retirement funds of at least one million Singapore dollars to retire comfortably. Not many people will be able to reach this amount upon their retirement. I see around me many retirees who are on family retirement support meaning they are supported financially by their children. It comes as no surprise as not many people can have a decent amount of savings upon retirement to depend upon. Thus, the burden of retirement will have to rest upon their children.

It is good and well for children to support their parents financially in their retirement years since their parents have put in their sweat and toil to raise up their children. This is the tradition of many Asian families having their children support their parents' financial needs during their retirement years. However, wouldn't it be great if the parents do not require any financial support from their children in their retirement years? It will mean that parents have no financial worries since they are self-supporting and their children will have no financial burden to support their parents. I am not saying this to mean that children do not have the responsibility to care for their parents, but rather that it will be truly beneficial to everyone if there is no financial worry to both parents and their children if elderly parents have no need for any financial support.

Therefore, it is important for everyone to work towards becoming financially free. One will no longer have the worry of earning the next paycheck in order to survive another day of living. Working can then become a matter of choice and perhaps enjoyment, and not just one of necessity for the income that work brings. One can live a life of choices having the time to do the things that one likes to do when one becomes financially free. One can choose to engage in a work out of passion rather than necessity for the earned income. Aside from the choice to continue to work, one can also engage in meaningful activities that are beneficial for oneself as well as others. Afterall, one has only one life to live and our time is limited. Live a meaningful life. 

For me, living a meaningful life means living a life for God. One does not need to be financially free in order to live a meaningful life. Financial freedom is just a platform to allow one to have extra time on one's side to make the choice to live a meaningful life.   

After knowing the objective of becoming financially free is to have the choice to use one's freed up time to engage in meaningful activities for meaningful living, the golden question to ask is "How much money does one need to reach financial freedom?". In my reading, I found out a guideline that one can use. The amount of money to reach financial freedom can be estimated to be around twenty times the annual expenses of a person.

For example, if Albert lives in Singapore and spends a total of SGD$24000 in annual expenses, he will need an estimated sum of SGD$480000 to become financially free. One may raise the question of how this is possible. Afterall, if one requires a total sum in savings of at least one million Singapore dollars to retire in Singapore, how can half the amount at SGD$480000 make one financially free?

This is where the difference in having investment knowledge kicks in. The estimated sum of SGD$480000 is not going to work miracles if it is not invested and providing passive income. Due to inflation and spending, this amount is not going to last very long. However, if this amount can be invested at an annual yield of 8%, it will provide a passive income for Albert that will fight inflation and allow him to be perpeptually financially free if he maintains his current lifestyle in annual expenses without increasing his financial expenditure.

How does the SGD$480000 work out in terms of fighting inflation and still providing enough passive income for Albert? For a yield of 8%, Albert will receive $38400 annually in passive income. He must not spend all these money or else inflation will erode away his subsequent years' spending power since the price of goods and services has increased due to inflation. Instead, if Albert is financially wise and disciplined, he will set aside 3% out of total 8% annual yield religiously every year for reinvestment into his original capital sum. This reinvested amount will keep growing his original capital sum in order to receive more passive income in every subsequent year to fight the effects of inflation (assuming long term annual inflation rate at average of 3%). 

The remaining 5% out of total 8% annual yield then works out to be exactly what Albert requires to meet his annual expenses. So, the magic numbers are a capital sum of twenty times one's annual expenses to be invested at an annual yield of at least 8% and 3% out of 8% annual yield is to be reinvested every year leaving only 5% out of 8% annual yield in any year to meet the annual expenses. Thus, financially freedom can be met if the magic numbers are observed. However, this is just a theory which may not work out in real life as the annual yield on one's investment may vary every year. If one can truly invest at a constant yield of at least 8% per annum, one is not very far away from the realities of financial freedom should one be able to accumulate a capital sum of twenty times one's annual expenses to be invested at such annual yield. 

Of course, it does not take an intelligent mind to appreciate that if one requires less annual expenses to meet his lifestyle needs, one can become financially free faster. A person with an annual expenses of $12000 only needs a capital sum of SGD$240000 to become financially free in Singapore if the above magic numbers are observed. There again, is it possible to survive in Singapore with an annual expense of $12000 which works out to be approximately $1000 monthly expense? This is probably wishful thinking if not impossible to survive with such meagre monthly expense in a state of financial freedom. Who knows? Maybe there are already people who are financially free on a low living expense?

There are two choices. 

Control money to reach financial freedom 

or let money control oneself never to reach financial freedom.

Reflections on my investing journey so far - "It is still cash flow that triumphs".

As I reflect on my past three years plus of investing in stocks and shares, I learnt many lessons, some slightly bitter ones and some are good ones. So far, I am glad to say that I have not made any realised losses from the stock market yet. In fact, I have made steady returns of approximately 13% per annum over the past 3 years plus of investing mainly through recurring cash flows from dividends received from my stocks investments and some gains through selling of shares (a lesser amount though compared to dividends received). This figure of returns may not be exceptionally significant, but it is already better than most other alternative forms of investments. Also, I have not made a single realised loss on my investments so far.

I have learnt through my humble experience in investing so far that it is better to have the mindset of building assets that return stable continuous cash flow than to invest for quick returns. Even if one is going for an accelerated way of investing by investing for appreciation in value of assets (be it paper assets like stocks and shares or physical assets like real estate properties), one must still own an increasing amount of assets through the years that provides recurring and increasing cash flow that can beat inflation over the years.

Getting positive cash flow through owning assets is really everything about successful investing. Appreciation in value of assets is an icing on the cake. Even after one sells off an asset that has appreciated in value and made a gain, he is still faced with the decision to reinvest his gains and original capital into another asset. If he does not reinvest his cash, then cash will depreciate in value over time. By not investing one's cash, one is getting poorer by the days.

Ultimately, I believe the distinction between rich and poor people is just in the mentality of how they view money. The rich becomes financially educated and invests to control or own assets that provide them recurring and increasing cash flow that fights inflation. Of course, any appreciation in value of the assets is also welcomed. The poor views investing as risky or is just ignorant of the merits of doing proper investments. The simple key to successful investing is just to continue learning how to invest and just do it and really learn from mistakes and successes whenever investment decisions are made.

The more learning and experience one gains through own research and learning from mentors, the better it becomes as one matures in his investing journey. As I have already expressed in an earlier post quite sometime ago, my view on successful investing has not changed now. Building up the amount of high quality assets one can have the most control (be it paper assets - this tends to have lesser control for the investor as shares are just meager part-ownership of an invested company unless one is a major shareholder, physical assets or business) over time and getting increasing recurring cash flow which beats inflation will allow one to reach financial freedom sometime in life. Cash flow received from assets is further plough back to reinvest in more quality assets which further increases cash flow. This is a virtuous cycle of increasing cash flow over time (by compounding), cash flow that further feeds more cash flow.

Patience and endurance to resist instant gratification in seeing immediate gains is important. Surprisingly, I learnt through these three years plus of investing that money goes to the one who is not greedy for it. The more one is not greedy for money, the more rational and composed one is when it comes to long term financial planning and constantly making the right investment decisions. It is all about the mindset of the investor. The success and failure of investing is not so much affected by the economy, but often it is the wrong emotions of greed and fear that causes the investor to make unwise investing decisions.

I will continue to look out first and foremost for quality assets (be it in paper or physical assets or business) to invest for good quality cash flow while secondly welcoming the idea of appreciation in value of invested assets. Building cash flow through owning and controlling more and more quality assets over time that beat inflation heads down is the crux of successful investing that will enable one to reach financial freedom. Better yet is that the quality assets one has owned can appreciate in value over time. This simple rule of successful investing has not changed through the ages. I believe it will not in future too.

Are you into building more and more positive cash flow (by owning and controlling more quality assets) or "building" more and more negative cash flow over time (by spending more than one's income, chalking up bad debts or making unwise investment not in cash flow producing assets but in investments that may lose their value in the end resulting in a loss)? If 'cash' thinks that it is really king, 'cash flow' will be laughing his heads off at 'cash'. Perhaps, the mindset of wanting cash flow is probably better than the mindset of wanting cash when it comes to successful investing?

Think of cash flow investing as installing more and more taps that can be opened to provide more and more cash inflows. The choice of the right taps to install is important so that the right taps (quality cash flow positive assets) can continually provide more and more cash inflows over a long period of time to build one's passive income.

So you want to retire in Singapore?

As I was going through my daily activities recently, the thought of retirement came through my mind. Do not get me wrong. I am not thinking of retiring anytime soon. Even if I do reach financial freedom before age 65, I will still find work to do, meaningful work especially. This is because I believe one should contribute his time to meaningful activities (providing a product or service) to help others since he is financially free with available time. Even if such work does not receive remuneration, as long as it is serving a meaningful purpose, I will still work for a meaningful cause.

Financial freedom is a blessing received and not to be taken for granted. I believe one who is in this special status of life should start living for others to commit his freed up time (since he is no longer financially burdened and need to restrict his time to working for a paid salary) to help others in need (in whichever meaningful ways).

Leaving financial freedom aside (which not many people eventually reach due to one reason or another), the more important issue of concern is retirement planning. Most people will live long enough to reach their retirement age. For Singaporeans, our retirement age is seen to be age 65 (at least by our government since the official age to receive our Central Provident Fund, CPF monies is at age 65). Assuming as a benchmark many people do work until age 65 and thereafter retire from work, how much does it cost to retire in Singapore?

I did an estimation of the cost of retirement in Singapore. I was shocked by my finding. This made me realise that it is difficult for many people to retire in Singapore, not to mention retire comfortably.

I provide a few case scenarios as follows:-

For a Singaporean aged 20 currently

Depending on individual's needs, let's assume an average comfortable living expense for an individual is around $2000 per month currently. When the individual reaches age 65, he will need around $7563.19 per month in year 2056 upon his retirement to continue living at his same living standards as of today. This is assuming an annual inflation rate of 3% over a period of 45 years until his retirement.

He will continue to live another 20 years of retirement (assuming the average lifespan is around 85 years). Assuming the same annual inflation rate of 3% over his retirement period, his total retirement funds needed is approximately $2,438,708.88. A $2.4 million sum need for retirement! What a staggering amount!

For a Singaporean aged 30 currently

Assuming the same comfortable living expense of $2000 per month currently, the individual will need around $5627.72 per month upon his retirement at age 65 (assuming an annual inflation rate of 3% over 35 years until retirement) for living expense to maintain similar living standards.

Over his retirement period of 20 years, his total retirement funds needed is approximately $1,814,627.21 (assuming an annual inflation rate of 3% over his retirement period). Ok. This is slightly better compared to the younger folk mentioned earlier who needs more in total retirement funds. However, a $1.8 million sum is not a small sum either.

For a Singaporean aged 40 currently

Assuming the same comfortable living expense of $2000 per month currently, the individual will need around $4187.55 per month upon his retirement at age 65 (assuming an annual inflation rate of 3% over 25 years until retirement) for living expense to maintain similar living standards.

Over his retirement period of 20 years, his total retirement funds needed is approximately $1,350,252.36 (assuming an annual inflation rate of 3% over his retirement period). This $1.3 million sum is not a small sum also for a slightly older folk currently to retire at.

Conclusion

As we can see, the older the Singaporean is currently, the lesser the total amount of retirement funds needed for his retirement. However, even at age 40 currently, the total retirement funds (approximately $1.3 million) needed to set aside is by no means a small sum to be overlooked.

I leave the reader to draw your own conclusion whether it is an easy feat to retire in Singapore or not. Are we prepared for the better or worst to come upon our retirement days? It is no wonder why our government keep increasing the retirement age (now already standing at age 65) and encourage Singaporeans to continue working as long as they are able to till they die. This leaves one thinking whether this is just a passing statement for the government to say encouraging older workers to stay active in their golden years by working, or that the harsh realities of retirement living dictates one's neccesity to keep on working until one drops dead.

Downgrade one's living standards during retirement days with whatever limited savings left? "Continue working" during "retirement days" to maintain current living standards or just to meet basic living needs? Be not financially burdened during retirement days by saving up and investing early during younger days? One needs to consider carefully his choice now as the consequence of his choice will unfold definitely in time to come.

Assumptions in my estimation

Please note the following assumptions in my estimation of the total retirement funds needed.

1. An average annual inflation rate of 3% at least over the next 65 years.

2. An average monthly living expense of $2000 currently for decent living standards.
3. Retirement age of Singaporeans at 65 years.
4. Average lifespan of Singaporeans at 85 years.

Wealthy or rich?

This is a follow up post from the last post. The question goes like this:-

Imagine a farmer has bought a goose for $36 that lays one egg each day that one can sell for $0.01. Only a few months after he bought the goose, a second farmer comes along and offers to buy the goose for $54. Should the first farmer sell his goose which can help him derive regular income for the next 15 years (assuming the goose can live another 15 years)? The potential capital gains is 50% for the first farmer if he sells.


What if yet a third farmer comes along and offers to buy the first farmer's goose at $72. The potential capital gains is 100% if the first farmer sells his goose.

Should the first farmer sell his goose, and to the second or third farmer does he sell should he decide to sell?

As I mentioned before, everyone is entitled to their own choice in making decisions, especially investment decisions depending on their personality and financial objectives. However, I believe there is an objective way of looking at things, doing things that really make good sense.

The first farmer in my humble opinion should sell his goose to the third farmer. If no farmers come along to offer him a higher price for his asset (the goose) which is currently generating recurring cashflow for him, he should stick to his asset since it is giving him a consistent 10% yield annually (assuming his yield can be always adjusted to account for inflation maintaining a consistent 10% annual yield). The second farmer offered him a capital gain potential which is much lower than the third farmer.

The third farmer's offer of 100% potential capital gain for the first farmer is attractive enough for him to let go of his cashflow generating asset. By doing so, he will now receive $72 for his goose. Assuming the price of a goose has not increased yet, the first farmer should go back to the market and buy back two geese now with $72. With two gesse in his hand, he can now receive more recurring cashflows, in fact double the amount of recurring cashflows he once received with only one goose.

Of course, one may question is there likely to have such a person as the third farmer who will offer a potential capital gain of 100% to the first farmer. In life, anything can happen. All kinds of people exist. Some are shrewd, some are impulsive, some are careful, some are careless, some are calculative and yet some are generous. So, such a third farmer character may not always come along. The idea here is 'may not' but does not mean 'do not'. There is still a probability for one to capitalise on a substantial capital gain (in magnitude of at least 100%) just that this scenario does not happen easily.

When this happens for the farmer's case, he should grab the chance to realise his capital gains. And, the important thing here is after he has got his capital gains, he went back to buy two geese with his money. For the first farmer, he saw the importance of recurring cashflow income in his business of selling eggs. So, he places his priority on building his cashflow generating assets (his geese). Capital gains is but only an icing on the cake, good to have only if it is really good to have. In his case, the capital gains has allowed him to further his acquiring of more cashflow generating assets.

So, come to the conclusion of the matter. Invest for both cashflows and capital gains. The foundation of investment is on building up and generating good amount of recurring cashflows. To accelerate this purpose, capital gains on any assets must be reinvested to acquire more cashflow generating assets. Then, this makes some good sense to go for capital gains in addition to just collecting cashflows alone from investments.

The problem with many is that one can be blinded by immediate gratification of a capital gains and tip the scale in favour of always going for capital gains in investments. This brings me to the title of this post, "Wealthy or rich?".

To be wealthy, one has to acquire cashflow generating assets. It does not matter how much in total value one's assets is. It is not the total value of assets that matter, but the yield on the assets one is receiving that matters. A person may only have for example $500,000 in total value for all his assets. However, if he is receiving $250,000 annually from all his cashflow generating assets, he is getting a yield of 50% (this is just for illustration - it is not easy to get such high yields).

On the other hand, one who is rich has a lot of money, but no cashflow generating assets. For example, one can be a millionaire with $1,000,000. But he may not be receiving any cashflows at all if all his money is held as money. So, effectively, his yield is 0% annually. No cash flows into his pocket since he does not own any cashflow generating assets. But, cash is constantly flowing out of his pocket. He has to use his money somehow if not for buying luxury items, at least for minimal survival needs.

For such a person, he is rich but not wealthy. The problem with him is that his money will be drained out sooner or later through his expenses. Another invisible force that is slowly draining away his money is inflation. Due to the US free printing of currency, the value of currency will be eroded. More money is flooding the market as time goes by. So, even if this person does not use a single cent of his $1,000,000, the same $1,000,000 will not be worth this amount some years down the road because one has to use more money to buy the same goods and services in future. That is why prices of houses has increased through the years. It is not the houses that have increased in value, but our money that has decreased in it's value due to printing of currency and inflation. We have to use more money to buy the same type of house in future.

So, be wealthy or rich? To be wealthy means deriving good amounts of recurring cashflows from cashflow generating assets. To be rich means having a lot of money, pure money that can potentially erode in value until zero with the passing of time.

Investing for capital gains or cashflows??

I am thinking hard recently as to whether to invest for capital gains or cashflows. I believe everyone should know the meaning for capital gains. Buy a stock at a certain price and then sell at a higher price at a later time. The duration to hold the stocks can be short or long depending on the amount of capital gains one desires. I have also touched on how much capital gains one should preferably aim for (for a trading mindset or long term investing mindset) in an earlier post based on my own research.

As for cashflows, I am referring to the dividends one receives for all his stock holdings in his portfolio. This question is important to ask as we are surely approaching the next bear market anytime in future. Nobody knows when. But, everybody should know the "bear will surely wake up from hibernation" sometime in future. The valuation for most if not all stocks will be send to the depths again during the next bear market. Again, nobody knows how much the extent of the next bear market in terms of duration and damage to valuations of equities globally.

I believe it is always wise to think one step ahead and make preparations for something that is certainly to come. So, this raises the question of whether one should go for capital gains or cashflows. I have heard from a friend who has invested through a few market cycles of bull and bear holding on to his same stocks which were bought many years ago. He told me that the valuation of his stocks now compared to his initial bought in valuations many years back is higher. However, the difference in valuation is not much. He does agree that it would be wiser for him to sell at the height of a bull market locking in his capital gains and buy back again during the depths of a bear market and keep repeating the same process through the few market cycles he had seen. The only problem is even as he knew about this simple possible strategy, he did not commit himself to do it and so left his stock holdings through the years to the mercy of the many market cycles.

However, one thing he commented is that he still receive good amount of dividends from his stock holdings and the total amount of dividends had increased through the years. Of course, he does reinvest his dividends and make further capital investments to buy more stocks through the years so his total amount of dividends received has been growing through the years.

So, back to the same question again. Invest for capital gains or cashflows? My answer is a consolidation of thoughts from all my earlier blog posts based on the summation of all my research so far. I do not count myself as a knowledgeable investor as knowledge is never ending and I am always learning new things about investment everyday. The answer I arrived at is that one should invest for both capital gains as well as cashflows.

Both ways of investing, for capital gains or cashflows, have their merits and shortfalls. Capital gains of a substiantial amount (at least 30% for short-term trading and 100% for longer term investing) can help to lift one's net worth in his stocks portfolio at a fast rate. However, one does not always have the good fortune to buy into a stock that can have such magnitude of capital gains (please note that I am discussing based on the Singapore stocks market; other stocks market such as the US stocks markets may have much wider swing in valuations). Even with penny stocks, it is also not a guarantee to see substantial capital gains even after one has bought into a penny stock with a popular theme or fundamentals (whatever you call it). So, investing for substiantial capital gains has a low chance of realisation. Nevertheless, one can still lower his expectations and sell any stocks at a lower capital gains as long as it is still attractive enough for the holding period in consideration. Also, selling stocks for capital gains does make sense when one is trying to escape an impending bear market. Why leave it to chance and let the valuations of one's stock holdings that has increased have the potential to drop back to the original bought in valuations or even lower?

Thus, investing for substantial capital gains though having a low strike chance, is still well worth the effort to do so to accelerate one's rate of return on his investments. The other way of investing for cashflows has it's own merits as well. Cashflows investing is a stable consistent way of deriving recurring income from one's portfolio. Cashflows income is difficult to build in the initial stages but when one's stocks portfolio size is big enough, the amount of regular dividend income one can derive is not to be looked down upon. However, when investing for cashflows, one needs to hold his dividend paying stocks for a long term to keep building and sustaining his dividend income.

The frustrating question comes when his dividend paying stocks have risen so much in valuations to allow him to have the possibility to capitalise on a substantial capital gains by selling off his regular dividend income paying stocks. Imagine a farmer has bought a goose for $36 that lays one egg each day that one can sell for $0.01. Only a few months after he bought the goose, a second farmer comes along and offers to buy the goose for $54. Should the first farmer sell his goose which can help him derive regular income for the next 15 years (assuming the goose can live another 15 years)? The potential capital gains is 50% for the first farmer if he sells.

What if yet a third farmer comes along and offers to buy the first farmer's goose at $72. The potential capital gains is 100% if the first farmer sells his goose. I believe we might have reach a simple conclusion ourselves whether the first farmer should sell or not, and if he sells, to which farmer should he sell.

For those interested to share your ideas as to what action the first farmer should take, you can drop in your thoughts under the comments for this blog post. 

Lastly, my conclusion is that one should invest both ways, for capital gains and cashflows. An analogy for this is that cashflows represents a normal car while capital gains represents a turbo engine that can be fitted to the car. The turbo engine can not be fully utlilised during the entire duration of operations of the car as it will cause the car to overheat and wear out very fast. But, if the car does not have a fitted turbo engine, it cannot achieve another quantum leap in it's maximum speed and torque. So, use both capital gains and cashflow investing to one's advantage. A basal amount of cashflows from recurring dividend income is always welcomed. In addition, some capital gains can also help to accelerate the rate of return on one's investments.

PS: Please note that this post is just a simple discussion and by no means an indepth discourse on both ways of investing. There are certainly more considerations (e.g. investor's individual personality and financial objectives to look at when investing).

Starting a business (let's learn how to become an ultimate investor).

I have been researching on the skills to start and grow a business over the past one year. I am looking forward to consider starting a small business in the coming year. No risk no gain. The aim for me in wanting to own a business is to learn how to start a business, grow it and work towards the business generating sustainable cashflows. So, I will make a small venture out to have my hands wet in doing so. I believe the best way to invest is still to invest as an ultimate investor, that is in owning an entity (a business) that generates returns on my invested capital. The experience that one can get from learning how to start and grow a business is beyond measure. Once a business owner has grasp the art of starting and growing a business, the skills can be applied in future business or investment ventures.

The skills to manage a business can be applied to investments as well. A knowledgeable business owner and entreprenuer can apply his skills in setting up and running a business into analysing investments as well. All road leads to rome. A business owner sees and experiences far more in the frontline to what a business entails than an investor would. So, I hope to learn to become a skillful business owner and apply my future experience in running business also to analysing businesses as investments.

One of my few ambitions was to become an entreprenuer and business owner, so I hope to try it out and make it happen and work. Risk is always present in any businesses. However without risk, there will not be any challenges to make sure one tries to minimise risks and overcome obstacles by continually doing one's best and learning from mistakes and failures along the way.   

This is going to be the best part of my investing journey, to become an ultimate investor investing from the inside of a cashflow generating business. To have a positive cashflow generating business takes time and effort, so I hope to learn how to arrive at it. Everything has to start somewhere just as a child learns to talk and walk. The child will make many falls and finally learn how to walk without giving up. Keep failing by "falling" and learning from the many failures so as to improve on every next "step". It is a natural learning process for a child to be able to walk. It will also be for any new learning in life.

Who is an ultimate investor?

As investors in the stock market, one is conditioned to think and act like a 'normal' investor. One thinks of buying and owning shares of a public listed company. By doing one's due diligence and through buying and selling shares of companies over the market, an investor seeks to maximise his returns from his invested capital. However, no matter what, he can never be as profitable as the founders of a public listed company who have built up and owned the business and got it public listed at a premium price significantly much higher than their initial invested capital in the start-up of the business.

We often heard of P/E ratio (price/ earnings ratio) of 10 and above for the shares of a company during it's IPO (initial public offering). At the onset of being public listed, the premium that retail investors would be paying is already 10 to above 10 times of the earnings per share of a company that goes into public listing. So, it is usually the founders and owners of the company who benefit the most to getting their company to be public listed since the net worth of their business has tremendously mulitplied by 10 times or more. This is the reward the founders and owners can receive for spending so much effort to start up and build up a business for public listing.

Thus, who is the ultimate investor over here? It is the ones who have started and built up a successful business that goes into public listing. For such founders and owners of the business, they invest from the inside of their business and sell shares of their business to other investors at premium pricing. So, as much as one is conditioned to think that being a successful retail investor is already a wonderfully side to investing, it is as much a reality to know that it is the ulimate investors who are the really more successful investors since they invest from the inside of their business rather than invest from the outside which retail investors do.

In conclusion, the ultimate investor is one who adopts the risk and learns to start a business and invest from the inside of their business directly to grow their business generating revenue and income for themselves. On the other hand retail investors no matter how successful they are can only be at most average investors since they can only invest from the outside of a business and have no controlling interest in a business. No matter how good retail investors are, it is ultimately the ultimate investors (as business founders and owners) who receives the most from their business since they have the controlling interest and sell shares of their businesses to other retail investors who often pay a much higher premium and have 'almost no say' in the business. So, should one be an ultimate investor who learns to start and grow businesses selling shares of his businesses to other investors at higher premium or be the outside investor who buys shares offered by ultimate investors of businesses at high P/E ratio without any controlling interest and relies entirely on the fate of the business run by ultimate investors?..................

Towards financial independence

I recently went through another audio book, "Rich Dad, Poor Dad by Robert Kiyosaki". I managed to capture some salient financial planning concepts from this audio book. After learning from various sources (e.g. audio books and seminars - see my previous posts on financial planning), I found out that all financial planning concepts point to same thing, that is the goal of reaching financial independence. As such, all concepts on financial planning tie in with one another and there is no contradiction in concepts as all concepts help the person who practise these concepts to arrive at same goal of financial independence.

In this book "Rich Dad, Poor Dad", it explained the reason why most people do not reach financial freedom. This is because of simply one thing - their total monthly passive income do not exceed their total monthly expenses. Most people may know of this cold hard truth already, but how many know of ways in which one can arrive at financial freedom. In reaching financial freedom, it is not just the methods per say that one should practise but the one and most important thing is to have the correct attitude and mindset of financial freedom. Therefore, financial freedom all begins with the correct attitude and mindset of the individual.

According to the book, one can classify his/ her finances using an accounting language. This is not foreign to many trained investors who are adept at assessing financial statements of companies. Similar to the financial statements of a company, an individual's finances can also be classified into his income, expenses, assets, liabilities and cashflows. To arrive at financial freedom, one's cashflow must always be positive. I see an equivalence of this to the importance of having consistent positive cashflows for companies as well. A company that boast of consistent positive cashflows year after year has consistent profitable business model and has use for its cashflows in reinvesting in its business, other growth opportunities or providing dividends to its shareholders.

Is active income from a job a financially stable source of income?

Now, I shall discuss more based on what I learnt from the book on the different categories namely income, expenses, assets, liabilities and cashflows with regards to an individual's finances. Most people survive on paycheck to paycheck in order to have a recurring income. Once they stop working due to any reasons, their income stops as well. This is known as active income that comes only by working. When the person stops working, he becomes financially unstable since there is no more income and he still needs money for basic survival (e.g. food, clothing).

One cannot do without minimal survival needs (e.g. without food, one goes hungry and may lead to death.). Thus, the important question to ponder is whether a person is financially stable with a job afterall? By looking at the above proposition, it may seem not. If a person ceases to be working, his income also ceases. His whole financial state starts to crumble unless he has some emergency funds to tide him and his family over a period of time while he finds another job. Anyway, a person may still due to any possible reasons in his life cease to be working (e.g. due to illnesses, disability or old age), so active income is actually not a stable form of income afterall. If one don't work, sorry - no more income for him......I am not saying that working is a bad thing here. In fact, one should continue working and contributing to people around him. One does not live as a hermit and needs to coexist with other beings and work is an avenue for rich interaction between people. So, work is important. One should work hard and contribute to people around him. However, the reality is that many people do not just work for the meaning of working. People work because they need the renumeration behind the work. They need the paycheck and need it continuously all their life. How many can actually boast that they work only for the fun and enjoyment of working to contribute to peoples' lives?

Of course, there is nothing wrong with working for a living. It is decent to work for a living. The point I am raising here is the need to reexamine how one looks at active income. Active income is not a stable form of income. It is misleading to say that one is financially secure with a job. It is in fact not financially secure at all with a job. Break off the active income source (the income paying job) and there is no more income into a person's finances.

Income producing assets as financially stable sources of income

If active income is not the way to go to become financially stable, how does one gain stable income sources? He does it by passive income sources. Passive income sources are sources of income that do not require the individual's time and effort to produce the income. Such income are generated passively (e.g. rental from real estate, dividends and capital returns from stocks and other forms of investments, royalties from books, business income from businesses not requiring one's attention). According to the book, these types of passive income come from such income producing assets (e.g. real estate, stocks and other forms of investments, businesses). So, if active income is not financially stable at all, the financially stable sources of income would come from income producing assets. To be financially stable, one should thus seek to build up his income producing assets in his management of finances. This is also the way to make money work for oneself and not the other way whereby one works for money. One can see every dollar saved and invested into building income producing assets as accumulating more workers for oneself, so as to make money become one's worker (every dollar held in such income producing assets is like individual worker, so the more money held in such assets, the more workers one have working for himself).

I guess the above illustrations are not unknown to many people. The question is why many are still not able to save and invest in such assets to build their passive income sources. We have to examine the next category of expenses and liabilities.

Expenses and liabilities stem from desires not easy to grapple with

Not all people are alike. Everyone has his own desires and many of an individual's desires can be satisfied by his expenses and liabilities. Imagine the thrill of owning one's car or a condominium. All these big ticket items are a drain to one's finances. Any items that draws away income instead of producing income are considered as liabilities to an individual. Being tied down by monthly instalments for paying car loans and housing loans make such items as car and houses as liabilities instead of assets. Some may argue that houses are assets to an individual. According to the book, as long as the item is not generating any income at all, but instead drawing out income from oneself, it should be conservatively considered as liabilities on one's finances. So, the problem with not being able to reach financial freedom is because the average person keeps tying himself down with lots of liabilities and expenses (e.g. from all loans and incessant spending) and not being able to save and invest in owning income producing assets instead.

It all begins with the attitude

In conclusion, to reach financial freedom, one needs to have the correct attitude and mindset of looking at ways to save and invest to build sources of income producing assets (e.g. rental from real estate, dividends and capital returns from stocks and other forms of investments, royalties from books, business income from businesses not requiring one's attention). Do this and reduce on one's expenses and liabilities at same time. It is a matter of perservering and sooner or later, one will reach financial independence should his income producing assets be able to produce passive income enough to cover all his expenses and liabilities. By then, his monthly cashflows will become consistently positive without his effort in producing active income and he is thus financially free.

To reach this goal, it does not mean that all people should quit their paying jobs. Before one can own substantial income producing assets, he needs an income source from his job to fuel his investment in income producing assets. So, it is time to rethink carefully whether one is really financially stable with a paying job? Most people are caught by greed and fear and so keep to their jobs (fear of no income) and seek improvements in their jobs or keep changing jobs to better their active income source (greed of wanting to increase active income). However, all these may not be comparable to a more financially stable source of passive income from owning income producing assets (yes, the more of such assets the better).

A final word to clarify that I am not proposing that people should not work for a living. One should work diligently and there is nothing wrong with working hard for a living. Even if one is financially free, one should still work and contribute to other peoples' lives. It is a privilege to be able to contribute to other peoples' lives, be it using one's time or money.

The Richest Man in Babylon

I recently borrowed an audio book from the library titled "The Richest Man in Babylon". I am currently expanding my research from investment to include financial planning as well. I am looking into financial planning skills as I believe that investment and financial planning (allocation of one's capital to increase productivity and security) go hand in hand. As such, I will seek to provide more research on these two areas of both investment as well as financial planning in my future posts.

In this audio book, I managed to pick up some important financial planning skills. This book presents an interesting look into old financial planning skills from ancient past of Babylon. Of course, the characters and story being told are fictitious. However, the lessons to be learnt are applicable to modern times. It told of a richest man in Babylon who gave a tablet containing important rules on money management to his son. The man also gave some gold to his son and sent him off to the outside world to test his ability to manage and grow the gold.

In two misadventures, the son nearly lost the entire gold given him by his father. The first misadventure spoke of the son believing in some travellers who told him to put a portion of his gold into a sure win gamble of a horse race. The son lost the gold put into the bet and only in the end found out the travellers were con men who were in cahoots with the few other competitors who bet against this son in the horse race. The son found out this from other travellers only when the travellers who swindled his money had left him.

In another second misadventure, the son heard from a travelling merchant that his merchant friend had a business selling pots and wares which is worth investing in. This travelling merchant managed to convince the son to buy over the business which he persuaded the son that it is a good investment on his gold and he would make many times returns over his invested gold. After the son bought over the business did he realise that pots and wares were difficult to sell and he ended up with lots of junk pots and wares that were of little value and use.

After losing almost his entire gold did the son began to look at the tablet that his rich father had gave him. He began to study carefully the words of wisdom carved on the tablet by his father. It contained five important money management rules.

Rule number one said that "one should seek to invest wisely not less than one-tenth of his regular income consistently for compound interest to work".
Rule number two said that "one should always seek profitable employment (investment) for his money in order to grow it".
Rule number three said that "one should seek the advice of wise man who manages and invests money prudently in order to learn from them, and one should also be cautious to never place his money in risky wager or gamble ".
Rule number four said that "one should never make investments that he does not understand or is unfamiliar with so as to protect his principal capital." 
Rule number five said that "one should never be caught by greed to make investments that promise returns that are far beyond any logical thought and should beware of tricksters who promise returns on investments that are unbelievable."

After the son has read the rules carefully and given much thought to them, he realised that only a person that has the right attitude towards money management will be able to grow his money prudently. It does not matter whether how much money he began with. To a prudent person, even a small sum of money can compound into a large amount given the right money management attitudes. To a non-prudent person, even a large sum can be lost through his hands resulting in nothing in the end. As such, the son regretted that he should have read the money management rules his rich father gave him first before even venturing his given money into any investments. He realised that it is the right attitudes in money mangement that really matters and not how much money he begans with.

With regards to the above five rules, it can be summarised into simple take home messages. We are not talking about being greedy in terms of accumulating and hoarding wealth. We are taking about managing our finances prudently so as to make meaningful growth in our savings and in turn using our money or money management skills to help others. Of course, helping others may not be restricted to only monetary means. As in one of my earlier post, one needs to look beyond just wealth as it is a perishable item that one cannot bring to the grave anyway.

Simple take home messages:-
(1) Invest as much dispensable income (portion of income one does not need in short-term) and returns from existing investments regularly to make meaningful growth of one's investments by compounding.
(2) Never gamble one's money. There is no basis for a sound foundation of returns by gambling.
(3) Be humble to learn from wise prudent people who manage their investments and finances well. 
(4) To protect one's capital, one should never invest in any investment that one does not understand the workings of the investment.
(5) One should be realistic about the returns one is getting from an investment. If an investment promises a return too good to be true, think carefully for it may really be "fleeting sweet promise". Invest therefore on a sound foundation of investment knowledge and not seek short-cuts.

To listen is always easy, but it is the discipline and perserverance that will allow only the doer instead of listener to reach his financial goals.

What is financial independence?

I attended a seminar recently which speaks about entreprenuership. I attended the seminar because I wanted to find out more about how to set up businesses as I may be interested to set up my own business in future. The speaker spoke passionately about her experiences with helping many people and organisations set up and run businesses effectively. The speaker also questioned the audience about their reasons for wanting to be an entreprenuer. One common reason given by many on why they would want to set up and run businesses is to reach financial independence.

I managed to reach a better understanding of what is financial independence based on the speaker's explanation. The idea of financial independence to me before hearing from the speaker used to be the ability to receive passive income for living without the need to work. However, my idea of financial independence is partially faulty. Financial independence is the ability to receive consistent recurring passive income that is more than able to cover total personal expenses (including all liabilities and loans), thus allowing the individual the luxury not to work anymore. Thus, the person is in a state of being financially free and working becomes an option and not a necessity for him anymore.

Can a person who has reached financial independence return back to the state of being financially burdened again? Yes. If the passive income is no longer able to meet the total personal expenses anymore, the person returns to the original state of needing to work again to meet his personal expenses. Usually, for ease of discussion, one can look at total monthly passive income versus total monthly expenses. As long as one's total monthly passive income is more than total monthly expenses, and this state is able to be maintained indefinitely, the person has reached a state of financial independence. Assuming there is no change to his amount of passive income and amount of expenses, this state of financial independence will be maintained.

So, financial independence simply means:-
Total recurring monthly passive income greater than or equal to Total recurring monthly expenses

It is not difficult to reach financial independence. Two points must be reached and maintained as follows.

1. There must be a stable consistent passive income source(s).

2. The amount of this monthly passive income must be greater than or equal to the total monthly expenses.

Thus, theoretically speaking, if one is a person whose recurring monthly expenses is little and he has stable recurring monthly passive income source(s) able to meet his total monthly expenses, he would have reached financial independence. The longer this state can be maintained, the longer the person need not be burdened with the necessity to work anymore.

Why is it that not many people can enjoy the luxury of consistent financial independence? 

A few reasons could be possible.

1. The passive income source(s) is/are not stable.

2. The amount of passive income keeps fluctuating, sometimes below and not able to meet the expenses.

3. The amount of monthly expenses keep changing and usually is getting larger and larger so that the monthly passive income can no longer fulfil the increased expenses (possibly with changes in lifestyle and commitments).

Final conclusion

It is many peoples' dream to reach financial independence. There is nothing wrong with aspiring towards this state. However, one must be careful that once he reaches financial independence, what will he do with his freed up time that he no longer need to work anymore. Invest his freed up time to enagage in meaningful actvities to help others or just while it away in meaningless pursuits? This is a question to consider carefully since one has only a lifetime to live and spend his life after which all humans must meet death eventually (whether by natural or unnatural death).