Managing Money Part 1: FFA

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This time, I would like to share an idea by T Harve Eker on managing money.

According to Mr Eker, in order to have great wealth, one has to know how to manage whatever wealth one has right now before greater wealth could come. Based on his observation and experience, he said that people who possesses poor money management skill would not be rich as they are capable of losing everything within a short period of time.

What he has said reminded me of the Felda settlers' case of many years who were paid millions of ringgit by the government for taking over their land for development purposes. Most of these land owners became millionaires overnight but did not maintained their rich status for long as they used whatever they had to settle their existing debts AND incurred further debts as they purchased more material possessions that do not increase their Networth Value.

Mr Eker, author of The Secrets of the Millionaire Mind is of the opinion that money should be used to generate more money so that it is able to produce passive income to support the lifestyle that we desire for a long period of time.

Being a practical person, he has shared with us his method of managing money...

Create 6 jars or accounts. This week, I'll elaborate on the first jar ie the Financial Freedom jar.

This jar is our Golden Goose (hope you remembered the Golden Goose story otherwise click below video). The objective of this account is (yup) give us our financial freedom. We could only deposit money into this account and withdraw it only to invest, buy a business, or any ideas that could help to generate more money/income. This account is to be left as a legacy. It is important for the next generations to be taught the same method of managing money. The amount to be placed into this account is 10% of your net income.



The income generated from this account could be used to support your lifestyle but in no circumstances should the principal be used/spent. If you recalled the Golden Goose story, the principal is the bird itself and its egg is the income. It is advisable for us to use the eggs initially to produce more birds so that there will be more eggs to be enjoyed later. Spending the principal placed in this account is liken to killing the goose that lays the egg.

If we are able to use the eggs wisely and protect the goose/geese, we need not have to worry about our future as there will be adequate eggs to enjoy for a long period of time.

So, save and invest now so that it could multiply (the effects of compounding) and become big enough to acquire more goose to produce eggs for you daily. One way to achieve this is to live a simple life so that your objective for a comfortable life in future is achievable for a long period of time.

Start managing what you have now, no matter how little it is, and you'll be rewarded in due time.

Spending Now Can Be Fun But........

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Spending money now can be fun, but it can hurt your future financial well-being if you don't save enough.

I was at a seminar on financial planning organised by SIDC yesterday. An enlightening and full of insight seminar which has reinforced what we've read, taught and learnt on the importance of budgeting and financial planning. This is oh-so-true especially in our current high inflation!

Higher gas and fuel prices are making it harder for us to do something that most of us are not too keen on anyway—saving for the future. Now that economic times are tough, many of us are looking for ways to cut back spending.

To permanently cut spending and increase our savings requires a shift in attitude. However, by cutting back, you're not really giving up anything. The money you saved will still be available for future needs. Plus, if given enough time to compound, those savings double and triple in value when invested properly—giving you even more to spend later.

At the seminar we were reminded that overspending today makes it impossible to achieve dreams tomorrow—whether the goal is a major purchase, an early retirement, or an adequate income in retirement. Save enough now so you can maintain the same standard of living throughout your life

One of the ways to reduce expenses is to analyze exactly how the money is being spent. Retain and record your purchase receipts. At the end of the month, analyse them. Identify which is your need and want. Am sure you'll note that the items in "want" list is recommended to be reduced or eliminated.

Match your spending to your goals and values in life. Align your spending with what you think is really important to you. The process of cutting spending would really makes you look at what you want to get out of your life and assist you in setting your priorities. Coincidently, I have also sent an email on The Secret of Wealthy Living which I hope is helpful to you.

With this perspective—thinking long-term and focused on what really matters to you—cutting expenses can be easier.

Controlling spending requires extra thought every time you open your wallet—being an educated, responsible consumer. It can take some time to adjust to a tighter budget. Extra measures are usually needed to help people stick to a new spending regime eg hiding or cutting your credit card? You may liken it to a diet. If you don't focus on it, it won't happen. Just as dieters need to step on the scale and tally up their calories and exercise each day, spenders must track expenses carefully.

However, does cutting back means depriving yourself? I've also noted that T Harv Ekar, author of The Secrets of the Millionaire Mind, advocates his readers the essential of setting aside 10% of our net income as our "play fund". According to him, it is important for us to satisfy the child in us otherwise the deprived feeling may cause us to blow our hard earned money thru irrational purchases whenever we have a windfall. Makes sense especially for those who are used to spending! Therefore, set aside a little bit of money each week, perhaps $10 or $20, for small luxuries or just for fun! ;)

And that's the whole point of cutting spending: The goal is to save money now so you can continue enjoying your money—on both essential and frivolous expenses—for decades to come.

Invest to Create Wealth

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People work to pay for their bills, save to purchase their dream car/house/holiday, retirement, etc. Some save to invest with the hope that their investment would help them to generate profit, amass wealth for their retirement, enable them to generate fast money to help them to achieve their dream faster, etc.

Those who save/invest for their retirement hope that their retirement fund would be enough to sustain their live for the next 20 to 30 years. In reality, usually their retirement fund is inadequate due to high cost of inflation, high medical fee, etc.

Those who does not even save for their retirement years, will have real problem if they thought their statutory retirement fund is adequate. It's generally not enough especially if we are to take into consideration the net return the fund earned which is even inadequate to cover inflation rate! To put it bluntly, our retirement fund value depreciates as inflation appreciates if the return on the fund is negative!

Therefore, it is important to set aside additional amount of money in vehicles that are able to generate income passively eg interest income, dividen, mutual fund, rental income, etc. Or purchase assets that may appreciate in value eg real estate, gold, collectibles such as antiques, stamps, etc. Another venue is to create or involve in businesses that are able to generate passive income eg network marketing, royalties from books, songs, sales referrals online, etc. Setting up a business with the intention to sell it off in the future is another method to create great wealth.

Passive income is generating enough income to live the lifestyle that we desire without having to work. Of course, to generate such income, initially we would have to work hard in building the chosen vehicle with the hope that in future it is big enough to generate enough income on its own to support our lifestyle and without our involvement.

There are a number of people that I've met that lamented that they do not earn enough to set aside for saving/investment. My advice, reduce your expenses/simplify your lifestyle and work on another source of income! Yet, I am surprised, most of them refuses to change their lifestyle or even work to improve their situation! No wonder, as Harv Ekar said, they are broke!

Invest to create wealth! To be financially free, we must be committed to achieve it, otherwise ....it is just a wish.

Therefore, set aside a portion of your income on any vehicles that has the potential to generate income, appreciate in value or involve/create/buy a business that is able to generate passive income to ensure that your desired lifestyle is able to be sustained for a long time.......

Capital Protected vs Capital Guarantee

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We have just launched a new fund which is our first; capital protected fund. Suitable for risk averse customers who do not want any risk to their investment capital yet want to enjoy a certain rate of return hopefully better than FD.

The duration of this fund is for 3 years only. 85% of the fund is being invested in fixed income such as debentures, money market and zero coupon negotiable instrument of deposit (ZNIDs).

The balance of 15% is being invested in equities, EFTS and equities related to gold and oil and gas sectors.

In layman term, ZNIDs is an instrument whereby loan is given to a company without any interest rate. Of course the company that offered the loan has to earn something in return since no interest is being charged.

To explain the mechanism of this loan instrument; we assume Company A requires $85million and approached Company B. Company B offered to provide the loan to A company who has agreed to pay $100milion for the loan. Therefore, the difference of $15m is the profit B company earned.

In this instance, Company B has to ensure that Company A is reputable and able to honour the loan repayment. Therefore, with this assurance and confidence, Company B is able to offer protected capital fund to its investors.

In addition, since 15% of the fund is being used to invest in equities and equities of companies involved in gold and gas & oil sectors, the possibilities of investors earning from the capital appreciation looks positive as these sectors are rare commodities and act as good hedge against inflation.

This fund eventhough its benchmarks is based on the bank's FD rate which is at 3.5% , investor could expect higher return on their investment if they believe the future outlook for gold and gas&oil look positive.

In addition, their investment capital is fully protected and there is no risk for them especially if the investor prefer to place their excess fund in the bank as FD. Now, there is an avenue where they could place their money "safely" with the hope of getting more than FD return, with the condition that they fulfill the fund's minimum investment period of 3 years.

Some customer may want to know the difference between Capital Protected and Capital Guarantee.

Using the same assumption as mentioned above, a Capital Guarantee fund would require Company B to approach a Banker to act as a Guarantor that Company A will honour the loan. In this case, there will be extra cost involved whereby investors would have to bear. The cost is to pay the banker/guarantor for their services.

Therefore, investment cost for Capital Protected Fund is much, much lower compared to the conventional equity or balance fund and also Capital Guarantee fund. The lowered cost would enable the investor to enjoy better rate of return on their investment.

Final word, this fund is only suitable for those who do not want to take any risk (ignoring inflation risk), usually prefer to keep their money in the bank as FD for many years, able to invest for 3 years and for those who may want to diversify or balance their investment portfolio.

For greater details, discuss with your UTC or drop me a line........ :)