Many people invest but only some become wealthy. Why?

The mistake many people make when investing is that they treat their investment as saving.

So what is the difference between saving and investing? Saving is what you do to build up funds for something, like a holiday, and when you have the amount saved you withdraw your capital from your investment and spend it on the holiday. After the holiday you have nothing left, and start the process all over again.

But building wealth is different. People who want to build wealth invest their money for the long term in 'growth assets' such as shares and property.

Their strategy is to spend the income that the investment produces, but to leave the capital invested. They don't withdraw the capital, so it stays there growing and compounding, and producing more and more income each year.

If you do this it will take you quite a while longer initially to get to your investment goal , but in the long run you will find that the extra wait has been worth it. As the years go by, you will have an increasing additional income stream from your investments and your standard of living can rise accordingly!

Investment Goals

Through out the time, we keep on mentioning about investment goals and our investment vehicles must be tailored to suit our investment goals. But then do we really know how to draw out our own investment goals and the quantum of each goals ranging from short, medium to long term.

And here is some examples of Investment Goals :

Short term (1-3 years)

• Overseas holiday
• Car
• Taking time off work to care for a baby

Medium term (3-7 years)

• Deposit on a house
• Boat
• A sabbatical or extended break from work

Long term (7+ years)

• Childrens' education
• Holiday house
• Retirement/early retirement

There is one thing we need to take note of is the key to successful investing which include identifying your investment goals, and the time frame over which you will invest. When you already have an investment goal well drawn out, you are in a head start for a successful investment. :)

8th Wonder of the World- Compond Interest

It was just an ordinary weekend where all of us have a small piece of relief and peace from our routine war in the office, Jason's niece came over to Jason's house together with her parents. 

The very moment she saw Jason, she immediately cried out loud which shocked everyone in the house. After a few minutes of comforting her to cool down, she said to Jason :"uncle, u told me the world has a total of eight wonders and during last Friday's classroom small quiz, there is a question asking there are how many wonders in this world and i wrote 8, ended up Jessie that was sitting beside me got it correct and teacher gave him a present. I hate you!  i hate u!" 

Out of the blue she kicked Jason's knee and hide behind her parents. At that very moment, Jason and her niece's parents all laugh out loud. Do you know why? 

Well not to be misleading, this world does only has SEVEN wanders. The 8th wonder was labelled by the late Albert Einstein. That is why Jason's niece got that quiz wrong.

Well what is so special with Compound interest till our late Einstein admit it must be the 8th wonder of the world. This is becauce we cannot underestimate the power that compound interest has. Without it, our savings, investments, credit cards debts wont grow. However if you are not mentally prepared , all that i am going to show you it will just be a myth or hype.

Let's see what compound interest means. Interest that accured when earnings for a specific period are added to principal; thus interest for the following period is computed on the principal plus the accumulated interest. Meaning that if you doesn't spend on the interest accured from your principal and just leave it there thus the next interest will be calculated based of your total capital (principle+interest).

For instant, i save RM10000 into a 12-months Fixed Deposit which gives me an interest of 2.5% p.a. i will receive an interest of RM250 after a year. Given that i doesnt withdraw anything for this fixed deposit and leave it for 5 years, my savings be RM11371.

Year 1- RM10250 (10000+2.5%)

Year 2- RM10506 (10250+2.5%)

Year 3- RM10769 (10506+2.5%)

Year 4- RM11038 (10769+2.5%)

Year 5- RM11314  (11038+2.5%)

 

But if every year i spent the interest from the Fixed Deposit, in the end i only got RM1250 (250 x 5). Compounding interest from the Fixed deposit manage to get me an extra of RM64 to spend at the end of year 5.

Plot these numbers into graph, you can noticed the growth is exponential. Meaning the interest earned is more significant towards the end. Compare the interest gain for year 1 and year 5, you can see the interest gain on year 1 is only 250 while the interest gain on year 5 is 276.

Compound interest never stop working for you, just like Citibank motto's "The Citi never sleeps". All you need to do is not to distub him at work, let him concentrate on doing what he is good in thus in the end he will definitely deliver the magnificent results for your hard earned money.

But how are we going to take full advatange on compound interest? In order to fully utilize the power of coumpound interest, do make sure you provide the ideal working environment for him.

Rule #1- Start saving and investing as soon as possible. Any amount will do.

Rule #2- Let them to be compounded as long as possible. eg, 10yrs, 15yrs, 20yrs.....

Rule #3- DONT FORGET RULE #1 AND #2

To be continued.....

Time Value of Money

Before i start to share about what really financial planning is about, i would like to ask you all 1 simple scenario question.

What if i give you RM2400 as your pocket money for the year but i need you to choose 1 of the payment methods i offer below:

i. Receive the RM2400 right now.

ii. Receive the RM2400 after 12months from now.

Well, it seems like these 2 options are the same however what RM2400 can buy now and what RM2400 can buy after 1 year?

So what will you choose? Receive the money now or later?

Cant get the idea i am trying to say? Remember back when good old primary school days where 1 bowl of mee soup only cost around 50cents then gone up to secondary time, the same bowl of mee become RM1.50 and when working time now it is RM3.00

So you see now the money that you have present time is worth more than the same amount in the future. There is 2 things that you need to know about value of money: as long saving money can net you interest, any amount is worth more the sooner you receive it; Another thing is Compound interest- The Double-Edged Sword.

Taking the 1st question as example, if you choose to receive the money now and decided to put in a Fixed-Deposit of 12months which is 2.5%pa, your RM2400 will become RM2460 (2400 x 1.025). But then if you choose to receive the money a year later, your RM2400 only worth RM2341.46 (2400/1.025).

I will go more on the compound interest next time because i dont want to make my entry so long till can bore you all :) So basically save whatever we can now instead of i will start saving when my acc got a certain amount of money. 

Arigato and Sayonara, see ya next time ^^V