Recently, I have round of drinks with my friend, Terry. Terry works in the FMCG sector. He is single and stays with his parents.
One of the topics we touch base upon is wealth creation.
Terry says "Hey Ken, do you know I have a pay raise of 10%?"
Sounding happy for him with eyes light up, I reply "Great! Now your earned income base rises!"
Terry retorts back "As delighted as I am, strangely I just do not feel satisfied"
My voice chokes back - "Is it you want more? Humans are not easily contented financially"
"It's not that. It seems my personal wealth depends very much on my take-home pay. There is a price to pay when the management gives me a pay raise; that is I have to perform and meet my new responsibilities. I will work hard but the problem is, I am worried about my main source of income being cut should my boss finds me redundant. It's very competitive here. Also, my salary is taxable. I hate taxes!"
"You see Ken, I am also keen to purchase the new home entertainment system for my mum with my new pay raise and I am planning to do that tomorrow. Apart from this, I have a wish list, one of which is a down payment for a new Audi car, using my savings & new found salary" - Terry
Digging into more details, I realize my friend Terry has negligible assets but is good in savings. He does not own any paper assets like stocks, neither any investment vehicles or hard assets like properties. He thinks the instruments are risky and henceforth will cause a dent in his savings. He has the mindset that cold hard cash is the way to go always; this despite I have reminded him savings can't beat the rising inflation. He knows but does not take any actions. Still, as a friend, I do not want to give up on him.
On the contrary, I understand his expenditure patterns runs afoul. Because he belongs to the middle class where the notion goes:
"the more you earn, the more I will buy more things to pamper myself"
Psychologically, Terry thinks his paycheck will substantiate his wants. As part of his financial statement, the income generated will contribute into the expenses and liabilities (credit card bills) section. Terry is chasing the paycheck every month.
Maybe this is why we termed it as a "Rat Race". (I wonder why it is not dog or cat! - meow!)
How can Terry, my friend increase his net worth?
It's hard to change a person's mentality due to the different ways we are brought up with our set of financial values and norms. So I will talk about assets with Terry.
The assets that could help Terry create wealth:
Sipping my cup of "Diao-Yu" (Chinese Tea), I take out a small piece of paper and draw the types of assets Terry is able to consider, explaining to him the importance:
Ken - "Terry, assets are vital. The fact that assets can make money work harder for you than depending on a single source of income. You can build a portfolio of assets to churn out another source of income, apart from your take home pay (i.e. portfolio income). In addition, your assets, for example shares, have the ability to provide dividends (i.e. passive income). The best part is, you buy assets to create assets. In other words, you do not need to use savings. However, in the first instance, you may need to evaluate your personal financial position and assess how much to put aside to purchase the assets, compared to buying the Audi car. Re-affirm your financial priorities"
Ken - "This comes to the point that you can literally afford to dispense your worries of a possible pink slip and financially commit to a plan on buying assets. Slowly, you can make it automated. (like hiring a team of people to manage them - very advanced level!)
Ken - "And I hope you are with me. I am no guru, but I am someone whom will be glad to see you move on financially and yes, dwell into your definition of risky instruments"
Range of assets to churn more $$$$$:
- Unit trusts (mutual funds)
- ADRs (new in SGX)
- Natural resources/commodities
- Precious metals
- Collectibles (e.g. antiques, soft toys)
Business (create/buy an asset):
- Part time business
- Buy & sublet a sub-franchise (if the franchise agreement allows)
Ken - "Terry, lets take shares, Reits and properties as an example". Shares and Reits allow dividend payout and properties give steady cash flow in the form of rental income."
Ken - "To further add on, you have the control to buy and sell shares, compared to unit trusts and this gives capital growth. And this is what I like the most - the total control. For properties, you can expand out your thoughts to include commercial or industrial. Think about the tenant mix, subletting out and gain steady cash flow after deducting mortgage."
My friend, Terry looks at the listings of assets and decides to jot down a few pointers. He likes the fact that buying assets can increase income and henceforth, his wealth accumulation in future. This comes to 5 basic questions to ask himself:
1. What type of assets suit him well?
2. How does he define his own definition of risk?
3. Is his financial beliefs blocked or has he realize certain mistakes made?
4. Is his wish list able to generate income? - since he has one single source of income
5. Need people of similar interests around? To learn how to buy/create assets and be motivated
With that, I leave Terry to self-conclude and formulate his own wealth objective.