Postpone Your Investing Plan !

Do you know your monthly expense ?

In other words, do you have budget? Maybe you ask, “Why do I need to know this?” Well, this is something to do with the very fundamental of investing. Investing is basically to make your spare money making more mpney. The keyword is spare.

For example: if you earn regular salary of $50,000 per year. You need to know how much exactly you take the money home after tax. Say if your income tax is 30%, then your “take home pay” is only $35.000 per year or $2916 per month. How much you need for mortgage? How much for grocery shopping? How much for credit card repayment? Electricity or Gas bill? Phone Bill? Car Insurance? School Fee?, etc.. The bottom line is,  you need to know exactly whether or not the “take home pay” that your have will be enough to cover everything. Only then you will know how much the “leftover” for your “investing” account.

If your pay is not enough, then you need to do some actions to reduce your expense or increase your pay. Budgeting will definitely can help you in this matter. If you have never make a budget, you might be surprise that it doesn’t have to be fancy – just like this will do.

Investing Carry Some Risk

Emergency Fund Before Invest

Then, as you probably know already, investing has some risk. Some risk higher than the other, some can be mitigated or even eliminated, but small or big there is risk involve.

For example: if you “invest” your next month homeloan/mortgage money to buy some stocks in stockmarket and “hoping” that it will produce extra profit, then this is not investing. This is more “gambling” than anything else. What if the stockmarket crash? — happened several times already and make you cannot pay your mortgage? Will it be a start of a disaster? You betcha….

So, as hard rule, any money that you are willing to use for investing, you need to be able to (of course, you don’t want and should not) lose it all without affecting your life. If the result of your “investing” activity is very crucial for your day to day life, then it’s very risky activity – definitely not investing as it is.

Emergency Fund /Money – A Must Without Question: The Financial Protection

One more aspect of investing , sooner or later, everyone of us will experience something bad happen in our life. When it comes to financial matter, having an emergency fund can be very important to overcome the problem without ruining your long-term life. For example: what happen if suddenly the economy collapses and you got no job anymore. How do you survive ?

Therefore as rule of thumb, before doing any investing, you need to save money first to get this “emergency fund”. How much ? It should be at least 6 months worth of your living cost. If your living cost is $2500 per month, you need to have at least 6 months x $2500 = $15,000 in your hand. Cold hard cash of $15,000 should be in your pocket or your saving account all the time to weather any problem. Of course, the assumption is , if something abd happened, you should be able to recover or improve the situation within 6 months.

This financial protection is actually the first level of what so called “financial freedom” – read more here.

What You Will Do

So, what you will need to do is:

1. Have a budget to know exactly your living cost and potential saving
2. Collect dollar by dollar until you have 6 months worth of living cost in the bank! This is your emergency fund – once you get it do not touch this – only for emergency.
3. Collect dollar by dollar until you have good capital to start your investing (maybe at least $10,000)
4. Start doing your investing strategy
5. Review budget and add more emergency funds once you start earn more money from investing
6. Build your investing portfolio to earn more passive income

Investing Become More Enjoyable

Once you do the above, investing will become more enjoyable. The money from your salary will keep supporting your living cost. But you have other “investing money” that worst case , if the investment tanks, it will not disrupt your life. And more importantly, your “investing” is no longer “gambling” where you force the result to be always good. Remember in investing, sometimes you win sometimes you loss, but you need to make sure you win more than lose.

So, postpone your investing desire as yet ! Do the above !

Investing is like Planting Money

Prerequisite of Investing

1. Clear Up Your Bad Debt first.
   When you start investing, although depending of the strategy you use, expect a good year to be the one with 10%-15% of return. Maybe more when you become experienced. But those credit card , store card or personal loan can easily charge interest rate at around 20% level. So, if you have this kind of debt, doing investing to produce 10%-15% will not make sense as by just paying off these debts, you can consider yourself achieving result of 20% return as you don’t have to pay that interest money.
2. Achieve Your Level of Financial Protection second.
   After clear up your bad debt, before doing investing, you need to get yourself to Financial Protection stage. Financial Protection is a situation where you can have emergency money in the bank to cover 6 months of your living cost without doing any work.  Emergency funds has more priority than investing as it will provide you with peace of mind and more importantly to make sure every investment decision decided not in rush or desperate condition.
   Having enough emergency fund for you and your direct family will give you solid foundation of making good financial decision. So, before aiming to do any investing, a step before is to concentrate to accumulate enough emergency fund for a rainy day by achieving financial protection stage.
3. Have sufficient capital. Don’t start investing with too small capital.
   While investing doesn’t really need too much money to give you handsome return, there is certain threshold that you need to pass before even considering it. Depending on the strategy, generally you will need at least maybe around $10,000 to start simple investing of buying stock/share for example. Any amount less than that, the profit that you will get will be significantly less to cover the cost of investing. This will send a wrong message to your subconscious: that investing is not doing that much and the risk is then you decide not to do any investing at all.
4. You need to know what you are doing.
   Investing although sounds easy can be very tricky. You can ask those victims of scam investment scheme. Most of them didn’t really have a clue what they were investing on. This is really the problem. People fall by the good sales pitch of marketing people of some scheme of managed investment without really knowing the gist of the investment itself, in particular the real risk and potential reward. I don’t say managed investment is bad, but my point is you need to know exactly what it is. Ask a friend who knows and can be trusted (who doesn’t have any financial interest on the investment – neutral view) or just learn it yourself. Internet should provide you with adequate material. Do check the discussion forum and scam-fighting website to double check the intended managed investment scheme. But the best kind of investment, in my opinion,  is if you can do it yourself independently and you know what you are doing. Not only save you the fee, you can outperform the return and have the invaluable gift: the expertise of investing.

The risk without them

Why you do need those 4 prerequisites fulfilled first? The short answer will be : to make sure your investment experience is a good investing.

Imagine if you invest your mortgage money to buy some investment, say buying stock. You will put unrealistic expectation to your “investing’ activity” to give you profit before the end of the month, otherwise you cannot pay your mortgage next month. Well, this is not investing..this is called “Gambling“.

The psychology effect is even more devastating by doing that, you will be telling friend that you have done “investing” and “it doesn’t work” and “it cost me money”, etc… And deep down there on your sub-conscious,  you think what you said above is the way ot should be. And the long result, you will never achive a successful investing because of this false premises. So, DON’t DO IT !

So, make sure do 4 items above before starting your investing. Or at least catch up to have it fulfilled while you still do the investing.

Capital For Investing

1. Savings.
   You need to be able to make a saving from your current income. It does not matter how much it is: 10%, 5%, 2% or even 1%. You set yourself the level of saving and stick with it. Once you’re comfortable, increase the percentage. If you cannot save, there is very little hope that you can be successful in investing.
2. Selling.
   Quick easy way to get some extra money is to sell something from your household that no longer needed but still sale-able. For example: those old toys in garage, spare TV in bedroom, that unwanted gift from friend, your stamp collection, etc… You can make a garage sale or simply sell it on online auction such Ebay. It may be not much, but you could easily score some decent amount of money as well.
3. Tax Minimization.
   Claim all benefit, deduction or tax offset that can be legally achieved from your tax system in your country. Usually tax law is very complicated matter and can easily change over time, hence if you usually do your own tax, try to hire a good accountant to make sure a tax minimization.
4. Increasing Income.
   Try to increase your income by creating value to your employer. Hence you can talk to them and negotiate a pay rise. Or maybe change your job to a better paying one. Take a course that can enhance your salary. But once you can increase your salary, do not change your lifestyle as yet, put all the increase to your ‘investing bucket’ first.
5. Other People Money (OPM).
   This refers to bank or other financial institution. Have you ever think about getting personal loan to invest ? Maybe it’s time. Remember for most country if you borrow money to do investing, the interest that you pay might be tax deductible (reducing your tax) – so you’re end up with cheap loan – check with your accountant.
6. Using Equity.
   This is what refer as creating money from thin air, just like a magic. If you have your own house or property, have it re-valued. If the value is higher than the current mortgage, you can take this ‘equity’ and the bank will give you cash as a loan with no additional security.
7. Using Parent’s/Somebody else’s Equity.
   This is basically the same as action 6, but the property belong to your parent or somebody else that trust you and can give you long term ‘loan’ in the form of their equity for you.
8. Manage Superannuation (Australia) / 401k account (U.S.) / retirement saving scheme.
   This action is highly depended with the current law in your country. In Australia, every employer need to contribute 9% of the payment to a retirement saving scheme called ’superannuation’. If you work long enough and your superannuation have substantial money, you can have it managed by yourself. Although there are some legal cost, but you avoid the fee from your superannuation company and you can do better investing that produce better return for your own super.

You can do 1 or 2 or all of the actions above to get you started investing. All is up to you. Remember knowledge is not power, but your action is.

I also really encourage you to obtain the reference book below to get more clear understanding. Especially the fact that it will not cost you any money. There are a lot of content that can be absorbed from the book to kickstart your investing journey. Feel free to proof me wrong once you read the book.

Reference: “What I Didn’t Learn AT School But Wish I Had” by Jamie McIntyre. The digital version of this book can be obtain legally and free of charge by clicking here.

The real danger of information overload is that you become procrastinated and end up doing nothing. This is quite ironic. You want to do something new about a subject. Of course you need to have some knowledge to start your new subject. But after you have too many of that knowledge you become paralyzed and still cannot do something about your new subject.

Information Overload

For example: you want to learn “how to invest in stock market”. Then you go research on the internet or library to gain some knowledge about investing in stock market. After reading various articles , books, reviews, forums, testimonials, etc you found out there are practically hundreds and hundreds of strategies how to invest in stock market. Not only that, you also found that “investing in stock market is risky”. But additionally, you also convince that “investing in stock market outperforms all other investment vehicle”. At this point you will see yourself in “information overload” situation where you don’t know what to do next despite the abundance of the information… And the chances are that you just do nothing.

How to Overcome Information Overload

1. Know your goal or objective.
   Set a tangible goal or objective preferably writing (put it on your agenda, diary or PDA). For example: you want to know “how to invest in stock market”, then you need to set your objective such as ‘to get $200 per month extra income’
2. Only get information from reliable sources.
   You need to be sure that the information is trustworthy and relevant. For example: you cannot seek information about investing in stock market from property investor. If you don’t know whether the information is good or not, trust your gut – but stick with it. Or find something else until you feel that it’s good enough for you.
3. Gather your information only up to you are able to take action for your goal/objective.
   Do not over learning. Although you still need to consider wide aspect of your new subject, just gather the information only enough for you to take any real action. For example: just choose 1 strategy among hundreds to invest in stock market then learn what it takes to do it, e.g: what type of account at what broker, how much is the minimum capital, what the maximum risk and maximum reward, what is the cost etc.
4. Take action.
   This is the most important thing: take the real action. For example: open that account and fund it, take the paper trading to practice and then place that real ‘buy order’ to your broker.
5. Only if more information needed, go back to no (3) otherwise just keep the action until you achieve your goal.

In other words…

Use the all the information “as you go”. I call it “task oriented”. So, you just try to complete a task and along that line you find only information relevant to that task. Of course you need to see the ‘big picture’ first, i.e: to have that goal set, know the risk and reward and believe that information you use is trustworthy.

With this way, not only you learn something new, but as soon as you know that new information, you actually have done it. Of course, the result could be good or bad, and some mistakes – small or big – can be made along the way. But that’s part of the learning and you will be much better off compare to the other person who just gather the information without doing anything at all, because knowledge is NOT power, action is!

Why? Because we want to achieve our goal sooner than later – while enjoying the journey. Without applying this concept, our journey to achieve the goal will become very slow or not even started and not too convenient. Slow because your profit is not maximized . Not convenient because this thing will bug you down.

And if these happened, the tendency is people will just loose the spirit, forget the goal and just give up.

Ownership – Owning

Merriam-Webster define “to own” as: to have or hold as property. If something is your own property then you are free to do whatever you want with it (with certain restriction as allowed by law, of course). You may use it, modify it, you may sell it, you may gift it to someone else, etc. And of course, your name will be on the title of ownership.

How to get an ownership? To get an ownership we need to buy it. We either can buy it outright (pay it off upfront) or with debt (pay it off over certain period of time). This is what we call: the cost of ownership.

For example:

• You want to buy $550,000 house. Then you can buy the house outright (if you are rich enough to have $550 grant sitting on your bank account) or get a home loan and pay it over 25 years. Either way, you are toward an ownership of the house.
• You need a car. Then you can buy it outright or take a car loan and pay it off for fixed interest rate over 5 years.

Control – Controlling

Merriam-Webster define “to control” as: to exercise restraining or directing influence over. If you have control over something, you pretty much can fully use it as if you own it, although with certain limitation.

Similar to ownership, we still need to pay some cost to get the control. This is what we will refer as the cost of controlling.

There are 3 important aspects below that can be achieved by taking control (compare to taking ownership). These aspects are where the wealthy and riches really pay attention to and should do we. They are:

1. The cost of controlling can be significantly cheaper than the cost of ownership. So, the general idea between comparing ‘owning’ vs ‘controlling’ is how to get the full benefit of something with the least amount of cost to maximize profit. For example:
   • Instead of paying “principal and interest” loan for your own house (toward ownership), you choose to pay “interest only” loan. Read this property article: Why Not Paying Off Your Mortgage is Better For Investing for further detail. When you take “interest only” loan, your intention is just to control the property, there is no intention of paying it off.
   • Instead of paying your $100k share portfolio upfront, you choose to take 100% loan – capital protected margin lending which only cost you $700 per month instead of $100k upfront.
   • Instead of buying a car for your business, you rent it. Not only you got direct deduction, but also save resources and hassle in maintaining the operational of the car (service, repair, registration, insurance, etc) and concentrate on your core business instead.
2. Controlling can provide additional asset protection. If you own an asset, and something goes wrong and someone initiate a litigation against you (you being sued), then that assets will be safer from that litigation.
   For example: you put the family trust as the owner of your house instead of yourself. Hence is your business is in trouble, your house cannot be seized as it doesn’t belong to you.
3. Controlling can provide additional anonymity. If you own an asset, and you don’t want your competitor or other party knows directly that its belong to you, then you can choose having the asset registered under other entity while have full control over it.

So, because of these 3 factors – for smart investor – controlling is a better alternative compare to ownership.

What’s need to taken care of

As with anything else in life, we cannot just blindly applying something without assessing it properly. Some factors that you need in related to ‘Control vs Ownership’:

• By not paying off your asset, you will be constantly in debt (usually large one) which exposed you to additional risk. While eliminating this risk is not difficult, you need to consider this factor carefully. For example: big mortgage debt can be covered by life insurance/income protection insurance which allow you to still serve the loan if something unwanted happened. Another example: Downward movement in your 100% finance share portfolio can be protected by simply take the put option.
• You *have to* carefully optimizing and do your own calculation to determine that cost of controlling is significantly cheaper then cost of ownership that help you to maximize profit. The significant benefit will highly depended on whether negative gearing apply in your taxation law, your tax income bracket, the interest rate, the value of investment, credit history, among other things. Your specific circumstances may prohibit you reaping the maximum benefit. Check this first.
• Additional cost may be involved related to your asset protection structure. The usual way to achieve better asset protection is by creating legal entity as limited liability company or trust with company trustee. Creating this entity will involve setup cost, registration as well as more complex accounting requirement. They all will be translated to significant yearly cost. You need to weigh whether the benefit outweigh the cost based on your current situation. For example: if your business is not prone to litigation (low risk) probably it’s not worth it. Or if you just starting and the total asset in management is very small, maybe you can postpone this until your business/investing grows to certain level.

Conclusion

One of important keys to riches is understanding the concept of Control versus Ownership. By applying this concept to our wealth creation journey, we may be able to reaping the benefits explained above. Although certain consideration and care are needed – in long term – on the way to our success – we will generally better off choosing Control over Ownership.

Let start with 2 simple definitions of investing terms: -ksr_tr-ivbm

• “Investing” is simply activity of buying or selling an asset to produce either income or growth or both.
• “Asset” is good or services that can grow in value.

Buying a brand new car is definitely NOT an investing activities. Why ? Because the moment you drive the car outside the car dealer, probably it loses 20% of the value already. (Just try to sell it back to the dealer a week after). So this car is not an asset, hence not an investment.

But, if you own a very rare car which is classic and antique. This is probably an asset because as the time goes by you can sell it for more money.

Buying property to invest

In fact, usually your home mortgage is the single biggest liability that you ever have. Of course, there are things that we can do to make our home become income producing asset. We’ll discuss this later.

But if we buy other house (that we don;t live in it), then we rent it to somebody else, so that we not only received rent as income but also can enjoy the growth of the house. This is a good investing example.

The same thing with buying share. Although we could just buy and do nothing about it (a.k.a as BHP strategy – Buy-Hold and Pray) , it’s still investing, as the share can grow in value. Beside that, wwhile we are hold on to itm e may have received income from dividend once or twice a year (it’s up to the company)

Or you can buy a business, for example you buy a corner store near your place. That’s also an asset that give you income, hence it’s an investment.

One thing to remember is: although you are buying asset, it is not guaranteed that you always make money of it. As there is always a “risk” attached to any investment. (Share can go down, Property can went bust, etc)  -  What you need do is, to manage that risk low enough to make overall investment producing profit for you.

Income vs Growth

What is the difference between income and growth:

• Growth: is the comparative value of the asset compared to the buying price. We don’t need to sell the asset to enjoy growth value, we just simply to re-value it.
  Example: we buy a house at the price of $300,000. 5 years later the price become $500,000. Then we are getting $200,000 of growth.
• Income: is the additional benefit (usually a cash flow) just by owning the asset.
  Example: just by owning share, you are entitled to received dividend money from the company.

Income producing asset vs Growth asset

Based on its characteristic of producing income or growth, each investment that we make through an asset can be classified as “Income producing asset‘ or ‘Growth asset‘. Each asset usually have a little bit of both, but we need to know what to expect in term of this aspect.

For examples:

• If you own a business, say a corner store or a restaurant, you will want this asset to become income producing asset (give you income on daily) rather than growth asset (expect someone to buy it on higher price)
• If you own a property, you will expect it to be growth asset rather than income producing asset. Because usually the money from the rent usually can only cover most part of the mortgage/ home loan (so you cannot enjoy this as income) but you expect the value of the property is growing so that you can sell it or re-value it at later date.
• If you short term share trading (say only a few days or weeks between buy and sell), you expect the asset to be growth asset. You don’t want to wait until the company distribute dividend before selling it.
• If you long term investor (say hold a share more than 1 year): you expect the share to be income producing asset and also growth asset.

Conclusion

So, we know now that if we want to do investing we need to acquire an asset. Then with that asset we either can get the income or the growth. Each assets will have different characteristic on producing the income or growth.