Follow this and you will have a sound financial life!

Multiple-choice Question:

Income – ____________ = _____________

(a) Savings, Expenses
(b) Expenses, Savings

The answer for prudent financial management is (a). However, many people follow option (b) in their daily lives as it’s “easier”. If one wants to take control of their financial life, one should always save part of their income first when you get it and spend the rest and not the other way around. This is called “paying yourself first” and is espoused by many self-made millionaires!

“Paying yourself first” works as such: You channel a certain percentage of your income to another bank account every month without fail and this money should not be used unless it’s for investment or emergency. This bank account should not have a credit card, ATM card or cheque book linked to it. This deters you from spending the money.  It’s wise to save 10% of your income every month. The more, the better (DUH!). If 10% is a lot for a start, you can start with 1% for 3 months, then raise it to 4% for the next 4 months, then 6% for the next 5 months and finally to 10% from there onwards.

Let’s say you earn $3,000 per month. You save $300 or 10% of your income. Your expenses should fall within the rest, which is $2,700. If your expenses are rising, you should look to curb it by cutting down on unnecessary spending. For example, you can always do without daily dose of Starbucks coffee. 3-in-1 coffee will do the same wonders since it’s all in the mind (reminds you of NS days, eh?). For added effect, you can always purchase a Starbucks mug and drink your 3-in-1 coffee out of it. It also helps if you keep track of your daily expenditures in an Excel spreadsheet or using an iphone app so that you can know where you can cut down your unnecessary expenditures on. Always spend within what you have left after savings.

If you need to buy something that will overshoot your budget, always think if you really need it. Can you do without the latest gadget? Delaying gratification can do wonders in the long run! I read a very informative article in Newsweek magazine two weeks ago about a new research on why people spend excessively and how to reduce this tendency. It’s a highly recommended read and fortunately for you readers, I found the full article online at the Daily Beast website. I also did a post on delaying gratification previously.

Thus, by “paying yourself first”, by cutting your unnecessary expenditures and by delaying gratification, you can at least sleep peacefully every night with a sound financial life!

How a salaried employee became a millionaire?

A few days ago, I went for a talk on “Path to Financial Freedom” by Dennis Ng. It was actually a free preview for his workshops but one could learn a thing or two from the preview. He has been featured in many local newspapers and TV shows and writes for MyPaper every alternate Wednesday. What connects him to the layman is that he was once a salaried employee like most Singaporeans and he became financially free after several years of saving and investing prudently.

Dennis Ng shared how he became a millionaire. He was earning an average of $6,000 per month for 15 years. He saved 20% of his salary per month and that works out to $14,400 per year. What he did with his savings over the years was that he invested in stocks and properties. He did not reveal things like what stocks he invests in, which year he started investing, if he lost huge amounts of money during his investments and if he has buffer cash to cushion him from loses and to cover his basic needs. From his preview, I could gleam that he looks at the financial statements of companies and invests in fundamentally strong companies ala Warren Buffett style. I think a major reason why Dennis became a millionaire was that he timed the market. When the stock market was getting exuberant, he exited from the market like in 2007. He entered again after the prices crashed. He uses technical analysis by looking at 100 days simple moving average and 200 days simple moving average crossovers.

He also is very prudent in his expenses. He shared his experience on how he curbs his expenses. When he was working, his fellow colleague always bought a $5 Spinelli coffee everyday whereas he made his own 3-in-1 coffee. To commute between places, he uses BMW (bus, MRT, walk).

Furthermore, he explained that not all debt is bad. There’s good debt and bad debt. Bad debt is car loan, credit card debt, among others. Good debt is your housing loan and investment property mortgage loan.

The preview reinforced my beliefs and the idea that becoming financially free is not difficult. One has to save a substantial amount every month consistently. Use part of the savings to invest prudently in stocks for the long-term. The other part can become your “safety net” or emergency fund to be used to cover your daily expenses when you lose your job. Your expenses should also be kept low and not be spent on unnecessary stuff. Also, the earlier you start investing, the faster you can start compounding your money since time is on your side.

Only invest with surplus cash

Investing should always be done with cash that we can afford to lose. We should always take care of our immediate expenses and only then should we invest with the rest. If we do so otherwise, our emotions will get in the way. When we invest with cash that we need urgently within the year, we would most probably brood over it and would not be able to sleep well when the stock dips.

Speaking from personal experience, to sleep well at night, always invest with surplus cash!

Pay yourself first

How many of you pay your bills, household expenses and daily expenses first and save the rest? Or should you save first and use the rest of the money to pay your bills, etc? Most of us work 42 hours each week and that amounts to 168 hours each month. You have slogged so much and doesn’t it make sense to pay yourself first instead of others? Why pay your phone bills or car loan first when you should take care of yourself first?

One should always pay yourself first before paying anybody else. One should set aside at least 10% of the monthly income for savings. The more you set aside, the better it is. The savings can be used as an emergency fund or to invest. You should then pay your bills with the remaining money. No matter how tight it is, you should always pay yourself first and work around with the rest of the money.

To make sure you are following this technique stringently, you can set a standing instruction (or standing order) for your bank to transfer $x to another bank account on your pay-day. Also, it is paramount that you don’t have any debit card/ATM card attached to this savings account. In this way, you will be disciplined enough to save and not use the money unnecessarily.

I first learnt about paying yourself first in Robert Kiyosaki’s book “Rich Dad Poor Dad” back in 2007. I also came across this technique in the book “The Richest Man in Babylon” by George S Clason. This is a technique that I follow strictly till this day. I’m sure it would do wonders for you too if you try this one technique to master your finances.

How to get started in value investing?

Quite a number of my friends have asked me how to get started in value investing. They want to start investing and want their savings to work harder for them instead of just earning a paltry 0.1% from the bank. Inflation is eating money left in the bank daily. Personally, I learnt investing by reading lots of books, going for some free and some paid courses and reading articles from the internet.

Firstly, before investing, you should have a strong enough reason why you want to invest your money. Maybe it’s because you want your money to work harder for you, maybe you want to earn enough dividends (passive income) to pay for your daily expenses or maybe you just want to live comfortably during your retirement age. I wrote an article some time back about having a strong passion for what you are doing. Passion is paramount in anything you do, not only in investing.

Next, always remember this: you must only invest with surplus cash. If you need money for daily expenses and are living paycheck-to-paycheck without much savings, then it’s best to take care of your daily needs first. Then, you have to look for ways to save more money. It can be done by two ways: increase your income or decrease your expenses.

I would also recommend you to keep aside an emergency fund of at least 6x your monthly income or 12x your monthly expenses. This fund should not be touched at all, no matter what. Financial advisors usually recommend socking aside 3x your monthly income or 6x your monthly expenses before investing. I’m just a bit too kiasu. The emergency fund will help when one gets retrenched or when something unexpected happens. So, now you have monthly savings and emergency funds set aside. Use your monthly savings to invest. There’s no minimum amount needed to invest in the stock market.

You also need to open a brokerage account. I mainly use DBS Vickers broker. More information on how to open a brokerage account can be found at http://www.sgx.com/wps/portal/marketplace/mp-en/investor_centre/investor_education/getting_started.

Now comes the crux of the post. How to learn how to invest in good companies? This is the hard part as it involves lots of time, reading and research. I would recommend people to start off by reading a few books. They are in order of difficulty of understanding.

• The Secrets of Millionaire Investors by Adam Khoo (highly recommended for simplicity)
• The Neatest Little Guide to Stock Market Investing by Jason Kelly (highly recommended)
• Buffettology by Mary Buffett and David Clark
• One Up on Wall Street by Peter Lynch
• Common Stocks and Uncommon Profits by Phil Fisher (highly recommended)
• Warren Buffett and the Interpretation of Financial Statements by Mary Buffett and David Clark
• F Wall Street by Joe Ponzio (highly recommended)
• Rule #1 by Phil Town
• The Financial Times Guide to Value Investing by Glen Arnold
• The Five Rules for Successful Stock Investing by Pat Dorsey (more advanced)

You have to read the first book “The Neatest Little Guide to Stock Market Investing” to get a good overview of how the stock market works and how companies make money, among others.

I would also recommend some sites to start off with. They are:

• Investopedia
• https://www.bsp-capital.com/documents/WarrenBuffettmethodology.pdf
• Fool.com
• How to read an annual report
• F Wall Street articles
• http://www.investopedia.com/university/fundamentalanalysis/fundanalysis4.asp
• http://www.sec.gov/investor/pubs/begfinstmtguide.htm
• http://www.investopedia.com/university/ratios/
• http://www.smh.com.au/news/business/money/investment/what-would-warren-buffett-do/2010/02/02/1264876022180.html
• http://stocks.about.com/od/investingphilisophies/a/WarrenB121904_2.htm
• http://www.oldschoolvalue.com/valuation-methods/valuation-methods/competitive-advantage-income-statement/

Investing is not a get-rich-quick thing. It takes lots of time, patience, discipline and determination. If you are looking to make money within a few days and run, then value investing is not for you. If you are willing to learn and invest for the long-term, then investing is one of the best asset classes to accrue wealth.