Distinguish Between a “Want” and a “Need”

During this festive season, many of us indulge in shopping to “spruce” up our lives. Buying the luxurious Louis Vuitton handbag, a luxurious watch or the latest gadget are some ways of how people enhance their lives. However, let’s take a step back and decide if we really need those things. Is the latest watch a “want” or a “need”? What will happen if we did not buy that watch? Will our lives be worst off?

A want is something that is good to have. If you do not have it, it doesn’t make you worst off. A need is something that you have to have. If you do not have it, it might make you worst off. Examples of wants  include a new watch even if you already have a working one, the latest smartphone, a car (yes, this is a want for most people) and many more. Even your daily fix of Starbucks coffee is a want. Examples of needs are the basic human needs like a shelter over your head, water, food, basic health care and hygiene products and clothes (not those fancy type but functional ones).

I mentioned car in the list of wants. In Singapore, with almost all the locations well-connected through public transport, a car can be a superfluous purchase. I think a taxi ride to all locations might cost lesser than servicing the car loan, paying for petrol, parking, etc. However, for those in the delivery business, it might be a need. Taking public transport for them might be a hassle as they need to delivery food or goods.

Once we know the difference between a want and a need, we have to distinguish if the item we long for is a want or a need. By doing so, we can budget our money properly and channel them into things that will provide us for the long-term. An example would be instead of buying the latest expensive watch that will set you back by a thousand grand, you can save up the money and once you have accumulated enough from other wants that you had chosen not to purchase, you can invest the money in a fundamentally strong stock. $5000 compounded for five years at 10% per annum gives u a cool $8000 at the end of five years. Isn’t that more enticing than buying those unwanted wants that will only give you satisfaction for a few weeks, or months at the most?

For myself, before I purchase anything, I distinguish if the purchase is a want or a need. Just today, I wanted to buy a new soccer boots and a vintage Manchester United jersey. After much thought, I decided not to buy them as I do not need them but they are just good to have.

Having said that, I do not mean we should not enjoy the finer things in life. It is alright to buy something that is a want once in a while to reward ourselves. It just should not become the norm and cloud our judgement, making us think that something that is actually a want is a need. In extreme cases, it can put us in a spiraling debt. Making us buy more and more on credit those things we do not need.

In conclusion, before purchasing the latest gadget or anything for the matter, we should identify if the purchase is a want or a need. Remember, a want is something that is nice to have. If you do not have it, it doesn’t make you worst off. A need is something that you have to have. If you do not have it, it might make you worst off. There should always always be a balance between our wants and needs. We can indulge in wants once in a while but we should make sure that we do not over-indulge in them!

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Applying Value Investing Concepts in Everyday Life

Value investing is basically buying a stock for 50 cents when it is worth a dollar. This very concept is not limited to stocks only. It can be expanded to be used in everyday life as well. I recently used this concept to buy a new smartphone.

I was looking to get a new smartphone some time back. I was researching into the various smartphones and narrowed the selection to Samsung Galaxy S3, HTC One X and Motorola Razr Maxx. I eventually settled for the Motorola Razr Maxx after researching thoroughly into the features and contemplating day and night. Razr Maxx cost me only $118 with a two-year plan after trading in my old Nokia E5. Samsung Galaxy S3 would have cost me $398 and HTC One X, $288.

I settled for Razr Maxx not only because it is inexpensive but also because it is a decent smartphone with a dual-core 1.2GHz processor, 4.3″ screen, 8MP camera, Android Ice Cream Sandwich Operating System, a huge 3300mAh battery, among other features. If I were to get Galaxy S3 or One X, I would need to pay so much more for superfluous features and hardware that I will not utilize. I do not need the quad-core of a Galaxy S3 or One X. Even my desktop computer is using a dual core system and buying an expensive quad-core phone is asking for too much! The screens of Galaxy S3 and One X are a little bit bigger than the Razr Maxx but Razr Maxx’s 4.3″ is huge enough for me. Galaxy S3 and One X sport a better camera but I’m not a camera buff.

I believe Razr Maxx is selling at such a low price due to its brand. If only the phone was manufactured by Samsung, HTC or any of the bigger Android boys, it would be selling for a much higher price. Therefore, comparing all the features and considering the price of $118, Razr Maxx is certainly undervalued or in layman’s term, is value-for-money.

Another thing to note is that by buying a cheaper alternative instead of One X, I saved $170. Investing this $170 at in a fund that yields 10% per annum for 10 years will bear $441. This is not something to scream about but I rather invest the difference than splurge on expensive stuff that I will not utilize fully.

You can use the same value investing concept as above to purchase other goods such as clothing, electronics and many more.  For example, instead of going for $6 Starbucks coffee everyday, you could go for the cheaper alternative at a coffee shop. Think of how much you would save over a span of a year. You can invest the difference and lead a better financial life.

Note: I’m not promoting Razr Maxx. I’m just using it as an example to show how to use the concepts of value investing to purchase everyday goods and still enjoy your life

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.