Is your Finance all about money ?

Sorry for the silence, it seems that I may get tight up for a while recently.  You may have already observed that I no longer have time to find cartoon for my articles :)  I started writting for other publication so I get a bit confused and find it hard to balance the content between this blog and the other responsibility during this transition.  But there are so many more drafts to be released in this blog.  Bad Debt topics have a lot of hanky panky so I need to spend more time before proper release for public reading.  So I hope you guys do enjoy reading and do comment more so that I have better clues what articles to put up during the limited time I have now.

I have shared Gabriel's story, a 68 years old who used to be typical middle income group who sort of make it in his finance planning.  His neighbours don't even know him by name, his ex-colleges don't even remember him when they met on the street, his clients don't remember using his services, but yet he makes it better than many others who are holding high positions in careers, running a much more bigger scale business than him.

But his case doesn't come easy as a matter of fact.  It wasn't easy for him to save money in banks actually.  That were wars all around and everyone kept all their stuff under their own pillow - the safest place to be at that time.  There was only one choice when he invested in mutual fund and even newspaper warn people to be careful because the private mutual fund was ran by someone without linkage to bumiputera.  It was considered as the biggest scam at that time.

Gabriel first kid went to local university.  Gabriel taught well to his kids on finance matters.  Well actually no, he just taught his kids on income matters.  His first kid worked part time since high school and earned half of the expenses during his degree years.  

When the 2nd kid started to hint wanting to get foreign education, Gabriel made an interesting move.  He migrated to Australia.  It costed him MYR 3,000 at that time.  ( It costs more than MYR 10,000 now without a consultant ).  He didn't really like it there but it wasn't a decision for him anyway.  Eventually both of his 2nd and 3rd kids graduated with Australia degrees.  Costed him less than his first kid's degree.  

To him, this migration was the biggest sacrifies he made for his legacy, you can observe his business income was negative during that time, the only year his business runs a lost whole his life.  Because he thinks helping his whole family settling down in Australia was more important.  But this move also brought him some surprising result, that he actually retired earlier than he thought would be.

There are quite a few more interesting stories about Gabriel, but most of them are based on the same principal. 

When you need to achieve something in your finance matter and get stuck with the numbers ie. not enough money.  Try to elevate a little bit and ask yourself, what was it you are trying to achieve again ?  Most often one is pursuing the figures or money too hard that they forgot what the real purpose was.  

When you focus on the real purpose and not the money itself, you may suddenly realize money is not the only way to achieve your purpose.  And sometimes, you may find certain ways to achieve your purpose without money at all.

If the whole purpose of your personal finance is all about money, then you do not need personal finance planning actually.  What you need is to dedicate your whole life to making income.  Perhaps bank teller would be a good start.

So, is your finance all about money now ?

( part 1, part 2 ,part 3)

21st century personal finance trap

Do you know Gabriel ?  'G'abriel actually represent  'god' within MalPF world.

• He worked for less than 10 years
• Then he runs some businesses for about 13 years, some of them making loses
• Yet he retires at 42 and live happily ever after (details)

The trick is . . .

Can 12% return cope with 3% inflation ?

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If you have an investment that consistently gives you a 12% return while you have been controlling your own personal inflation at 3%, would that mean you are financially free forever ?

The first trick you may think off could be the actual amount of money involved. For example, a $100 12% investment will never be able to cope with $200 3% inflation. But in this case, the investment amount starts at $567,803 and the annual living expense is $53,915.

So do you think a 12% return from $567,803 is able to substain 3% inflation on $53,915 ?

This is actually the 3rd part of Gabriel's story. ( part 1, part 2 )

If you are one of those who cann't believe 12% return is still not enough to substain even 3% inflation, then buckle up and stay very close to this blog as you may not believe still how under educate we all are in our personal finances.

As shown in part 1 of the story, this is the projection to the question above.

and these are the first few years of calculation:

$53,915 inflated 3% becomes $55,532 next year. $567,803 with 12% return becomes $635,939. Minus out the $55,532 becomes $580,407. These are the numbers for subsequent years.

Everything seems fine as the total investment capital keeps growing.

However ... things start to change about 15 years later when annual expense reaches $83,997 and capital changes from $692,754 to $691,887; marking the end of capital up trend.

As you can see, the investment capital is rapidly deprecating after that until it completely disappears 30 years later.

So a 12% return on half a million can only substain a 3% inflated $50,000 for 30 years! 30 years is VERY far from eternity at all.

The case is quite ok for Gabriel because he is already 68 years old now and he has another backup fund other than the numbers shown here. But if this is a total retirement plan for a 30 years old person, this will only last him until 60 years old. Not to mention the potential short fall on the 12% return in some years and 3% inflation seems like a very tough target for a 30 years old person in today's environment.

Consistent 12% return is very close to the top performance you can ever get. (imagine Warren Buffect's average return from 1999 to 2007 is 9.23%). And a 3% inflation comes with very little hobby life style and I would consider it far from luxury. So even the best return can only last the most controlled life style for 30 years

Just like how other articles have been emphasizing, put down ALL your numbers on a paper, not just look at the overall concept or just the interest rate. Every case could bring a different result but if you look at the real numbers, you will put all other doubts and tricks away.

( part 1, part 2 ,part 3)

You may also be interested in these articles:

January 2009 Inflation Update

Calculate Future Living Cost

Bigget Killer in Malaysian Personal Finance - Car

Inflation vs BLR

Non Money Oriented Personal Finance Style

A few real life stories were told before;

Gabriel is the one who is NOT that RICH but financially quite independent and freedom he has.

Ahmad fights inflation by growing his own needs

Ah Dung is the RICH guy who didn't really get hurt by inflation

Mathew is the typical Average guy who is shocked by an effective inflation of 24% !!

In promotion of successful personal finance without money or at least without MUCH money, here is the story of Ah Yung.

Ah Yung is almost 70 years old now. At first glance, she has been earning her daily income from her morning market stall all her life. She made noddles when she was young and now she is only reselling whatever items she can carry ie. not so heavy. She never went to school. She has no idea what personal finance is. She doesn't have much insurance, no investment and only 1 or 2 saving accounts. She couldn't even tell if her business is earning profit. She just knows she has been surviving fine with what she does so far.

Her daily revenue ranges from $30 to $300. With a profit from $5 to $20, she is able to keep her stomach filled. Sometimes friends drop by and invite her to varies gathering which has a lot of fun and .... food. Sponsored by varies society clubs and semi-political parties, most of these events are FREE.

She lives in a house left by her belated husband, where the $40,000 loan has been fully paid off. The house is worth $160,000 now but she insists the house is the LAST thing the family has so it is there to stay "no matter what".

She traveled to work, the market, with her 30 years old bike. Almost everything she needs are obtained from the market too - cloth, food, drinks, fun stuff, blankets and business materials.

Despite living expenses day to day, she thinks she is quite alright. Although sometimes complain about politics and unfair treatment from the authorities etc. generally she thinks she has what she needs.

She has many friends. She is very generous to all her friends. Whenever friends need help, she is there. Even when money is needed, she lends as much as she could. Sometimes until she has to skip a meal or two. At her age, she has gone through quite a large number of weddings, birthday parties and funerals etc. She always shows up and she always bring present or whatever suits the occasion, by using up whatever money she has at that time. She has many friends, who call her friend as well.

Once she was in finance trouble. She lend all her money out and sales were slow. She had been eating plain buns for days. On the 4th day, her friends knew and they came to cheer her up. They had breakfast together right next to her stall. 2 weeks later, Ah Yung was backed on her feet. All friends were happy too as it was quite a good reunion for a couple of them actually.

Another time, she faced a robbery, fell down and her bike was broken. News spread so the local people and neighborhood found and captured the criminal in less than an hour. A mechanic helped her fix her bike with a very small fee. The Chinese practitioner in the market helped cure her health condition.

When her husband passed away, she didn't know what to do but about 200 good friends showed up and helped. 1000 to 2000 people showed up the funeral and helped her through the financial tough time.

Ah Yung doesn't earn much, doesn't save much, doesn't have a clue about finance planning. But through out her life, she made friends. Her human network is as big as a marketing company out there. When needed, friends will come buy from her stall even if the price is slightly higher than Carrefour. When needed, helping hands are just around the corner. There is no need to ask, people will just come to help. The same way as she has been helping so many others in her past.

Ah Yung is actually financially independent. She doesn't really go to her stall everyday. Now she and her friends always go out to parks to work out, then they go to new places to try out new food. When she is not working at her stall, someone will rent her place automatically paying her a net profit of $10-$20. A very strange passive income, no contract, no agreement, it just happen and it has been happening like that for more than 10 years. From time to time, her friends and her travel locally and overseas. Most of the trips are sponsored, either with some marketing purposes or simply privileges given to golden years people. She has friend who can get the linkage to get all these FREE stuff. Some other times when she feels bored, she visits her friends in another state or even country. She just need to get on a bus or a plane, her friends will settle the rest. Like wise, sometimes her friends come visit her from neighboring countries and she will take very good care of her friends too.

Ah Yung has ONE asset and no liability, a net worth of $160,000 and growing. She doesn't earn much but she doesn't spend any, resulting a long term positive cash flow. The only thing she has ever invested seriously is her time and dedication to the people she knows. And now she is receiving the return.

Ah Yung is a happy old lady. She has been having her financial freedom all this while.

Medium Income Retire Successfully

Gabriel Pang is 68 years old.  He is one of my most favorite personal finance friends.  As much as I am helping with his personal finance, I learn much more from his experience.

He started earning his first $100 at age 12.  That was $100 for the whole year washing cars for neighbours.  At that time he saved all his $100.  At age 16, he got a part time job earning $1,800 that year.  He saved $1,440 that year.  Later he could save less when he went to college.  For example, at age 20 he earned $1,100 but save only $550.

He got a proper job at age 23 earning $29,700 that year.  He managed to save $8.019 that year, about 30% of his income.  Then when he got married, he can only save 20% instead of 30%.

He started his own business at age 28.  At that year, his salary was $87,600 and side income $12,000.  He managed to save $12,312 that year.  Finally he quited his job at age 31 and worked full time on his own.  His total earning is less than his old salary but he also pay less tax so he ended up with similar NET income.

One thing he does consistently is his saving range from 5% to 30% of his income.  According to his past historical results, his saving has been giving him 5% to 12% return yearly.

At age 42, he retired.  But after resting for 3 years, some opportunities showed up and he earned another $30,000 to $80,000 incidentally a couple of times.  Then he retired for good at age 53.  He finished paying all his loan at age 58.

His last year expenses is $53,915, taken out from his $555,105 saving.

Below is his cash flow chart.  It may be a bit confusing but basically it shows his total income, the taxes and loan he has been paying and a cumulative saving with return.  Top part purple color is the one when he made a lost in his own business or when he retired, then he needs to withdraw money out from his saving in order to survive which happened at age 36, 39 for business lost and then since age 42 for retirement.

Some of the high lights of his life are shown in chart below.

It seems like curently he has half a million saving for his retirement.  His personal inflation for the past 20 over years average is 3% and also for the past 20 years his saving has been giving him an average of 12% return consistently.  So using these 2 figures, I helped him projected that he can live on his saving until he is 98 years old.

This calculation excludes the EPF he didn't take out at age 55 which he has left there by itself.  He stopped contributing to EPF at age 30 with about $50,000 insdie.  Right now there are about $928,849 in there.

(correction 25 March 2009 : $50k was his own contribution only, total balance at age 30 was $115,823.11)

So he can safely enjoy his retirement as the way he has been for the last 20 years.

He only worked for less than 10 years and his own business only lasts 13 years with some years making losts.  His average annual income is about $50,000.  

What has he done that he can retire the way he wanted so easily ?

( part 1, part 2 ,part 3)

Financial Freedom with Dependents

It has already been shown that it is not that hard to retire young. If the person you marry is also adopting similar lifestyle then it is also easy for both of you to retire young together. But what if you have people who are financially depending on you ? How would you achieve financial freedom with dependents ?

Before I go on, I have to apologize first I don't have an easy to follow solution for this; not like Wealth Pyramid or Personal Finance in 1 picture. Because the answer was already given before this question is asked. And the ability to achieve financial freedom with dependents is really within you yourself as a person, not really a finance issue to start with. Give me a chance to explain ... because most people will not like this.

Through out the whole personal finance concept promoted in MalPF, it has never questioned you how you spent your money. As a matter of fact, the very first thing is to put aside some money systematically and then its up to you what you want to do; But you can only use up to what you have left. MalPF never question you buying that car, phone, liquor, smoke etc. MalPF just want you to do all those things within your means.

So systematically it doesn't really matter how you use your money, not even if they are for your dependents which is a much better cause than above examples. As long as you stay within your ability ( left over after saving ), your personal finance system should continue to work as is.

There are a few common mistakes we commit in practice ( real life );

1. We treat our dependents as separate entities. While of course we are different people but since financially they depend on us, their expenses are really our expenses. All combined expenses should not exceed what we have left.
   
   
2. We over reach our dependents needs. The fact that we 'allow' them to 'become' our dependents mean there are some emotion connection in between. This 'feeling' always get in to ways affecting our judgement what our dependents real needs are vs their wants.
   
   
3. We ourselves fulfill our own luxury wants before our dependents needs. We can pamper ourself in whatever way we want but we should do it within our means. If there is no money left after settling our expenses ( including your dependents'), then we need to venture into solutions without money. ( There have already been stories shared before how things get done without money )

It was hinted before that young people who has expensive hobby don't get retire early, those who are more creative with their hobbies do. The hobby itself may be the same. Its the way they think about the hobby and what they do about it. Some think they have to BUY, the others try to GET/TRADE/DEAL however way they can come up with. Indirectly, they learn new skills that they can apply in other aspects of their life. Directly they full fill their own wants within their means - and hence did not need to scarify their personal finance system.

Although hobby and dependents are TOTALLY different in all aspects. But our reaction to them are actually similar or relevant. We were 'attracted' to do things beyond our means. If we do that in our early years we will end with less. If we first do it within a control manner (left over money), then perhaps we can do it more often and longer through out the journey.

Its NOT a matter of right or wrong. Its just that you can only choose one. If you decided to go beyond your means NOW for whatever reason, you should also be very satisfy with the price you pay in future. Or else don't BUY it!

Lastly be reminded that income is a pre-requisite in MalPF system. So no matter how you setup your ASS ( Automated Saving System ), increasing your income will increase the chance you can full fill your dependents and your Wants. So instead of letting dependents to push you to go beyond your means, why don't channel those drives into making more income !? Then you may be able to get the best of both worlds.

Ok, I apologized before. Now I have to do it again because I lied earlier. There are actually easy to follow actions you can do to still achieve financial freedom with dependents. But this article is more important than that and further more those easy to follow stuff may only be applicable to some people - and time travel starts to get in MalPF. Yea crazy I know! Thats why I didn't want to tell that story.

Relates stories :

Gabriel had kids yet he retired rather young

Ah Yung has no money Nor is she NOT free from finance issues

if Your finance all about Money ?