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.

Investing: money work for money

1. You will enjoy additional income as passive income.
   Usually you exchange your time with money. At your specific level, the more time spent to work, the more money you earn. With passive income, your money works for you. Your effort (read: time) is not proportional with the income.
2. The pension from government will never be enough and you don’t want miserable retirement.
   Remember the life expectancy is increasing due to advancement in health technology, population is exploding, hence no government will be able to fund all pensioner.
3. You make sure that your family and all the love ones will never ever be struggling ever again financially.
4. You may sack your boss. You don’t need any job anymore.
   If you still work, that’s because you want it, not because you need to
5. You can make a lot of traveling and holiday around the world whenever you want.
6. You can help your favorite charity or even start your own charity and make a significant contribution to community.
   Work up your legacy in whatever your cause is…
7. Live the lifestyle beyond your imagination

Unless you win a lottery or your parent (or somebody else) are filthy rich and you inherited all their money, investing is your only way to achieve financial freedom.

Your first step to start your investing journey is to define the level of money you need. Just click here to read more detail.

Yes, it will require money to invest. This is what I call “seed money” or “capital”. How to get this money? Read this article: 8 Ways to Get Money for Investing

Remember, before you embark you investing journey, you need to achieve Level-1- Financial Protection first. With this your investing is accompanied by peace of mind. So, my suggestion, try to do as much saving as possible to get to Level 1 while at the same time you sharpen your investing skill.

Happy Investing!

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.