Would you like the money to work for you?

As at Dec 2006, there are RM224 Billion in EPF while average contribution amount for a 55 years old contributor is RM110K. If this EPF contributor expected to live for 75 years old, he can only spend RM475 per month. And he is categorised as ‘poor’ resident so long the monthly income does not exit RM530 in Malaysia. A survey by the EPF found that a contributor on average, exhausted his EPF money within three years of withdrawing the lump sum. Thus we can often see many old folks continue to work even reaching 60 years old. I know what you think; you should have much bigger amount than RM110K when you approaching retirement age, but bear in mind, the amount may not be a lot, say RM500K if we continue to make use of it for housing, education and medical. And who knows, the RM500K after 10-20 years, because of the inflation, could be as valuable as the RM110K today. People forget about the inflation. Things has change generally, from one working father to support 7 kids, to 1 working couple to support 3 kids. The FD rate in Malaysia hit the highest of 9.06% in 1997, and drop ever since that to as low as 3.2% in 2002. And after another 7 years, FD rate drop to 2.5%. Whereas the inflation hit high of 8% in last June and now at more than 6%. As no body can avoid the inflation, there is no other way than investing to overcome the inflation. According to ‘Investopedia’, the definition of ‘investing’ is : you can’t create a dupicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money to work for you. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher paying job.

According to financial planner, as long as there is an emergency fund backed up for 3-6 months of our expenses, one should consider to start investment. Putting too much money in the bank will not help to grow our wealth. It is advised to allocate 10% - 20% of our income for investment. With current expenses of RM32K per annum, which is about RM2.7K per month, assumming no additional expenses during the retirement age, because of 4% inflation, we will have to spend for RM85,307 per annum, which is not less than RM7K per month after 25 years. In other words, if you are spending RM2.7K a month, and you are now 33 years old, please make sure you have RM1.5M when retire at 58 years old with 75 years life expectancy. The number could be more with higher inflation, higher medical expenses and travel expenses. Personally i do not wish to just stay at home in my golden years.

How to make money from smart investing

In any investment instrument, knowledge is important to make sure we are not investing blindly and thus minimizing our risk. According to ‘Personal Investing’, in general there are 4 main factors which impact our investment return; Asset allocation, market timing, individual stock selection and cost. You will be surprise that 93.6% of average total portfolio returns were attributable to asset allocation.

Asset Allocation

Very often people ask about when to invest? Is that the right time to invest? But they forget that if they have not backed up themselves with a 3-6 months emregency fund, there is no any right time for them. Simply because no body will know the intermittent market movement in near term. Adversely, according to asset allocation, for a moderate investor who are looking for long term investment of above 10 years, reasonably they can expect higher return with more aggresive investing portflio, say 60% into high risk investment while cushioning by 20% medium risk and 20% low risk investment. Relatively, for a moderate investor who are looking for medium term investment of 5 years, they would have to expect lower return with 20% in high risk investment, follow by 20% in medium risk while cushioning by 60% in low risk investment. Very obvious, the stock market investment, which is all the way high risk is not suitable to every investor. Fixe Deposit could be an important instrument for stock investor to design their investment portfolio that suit their investing temparament. Alternatively, by having various fund to cover low, medium and high risk investment, unit trust is more attractive for various types of investors.

Dollar Cost Averaging

In any market trend, whether it is trending up or down, dollar cost averaging principle will always help to reduce our investing cost and thus minimizing the investment risk. A study from Schwab, a financial research company, has come out an interesting finding on the research to S&P 500 for the past 20 years from 1987 - 2006. What surprise me is; a poor investor investing 2K every year in the worst timing of the year enjoy double return than an investor who left his money in Treasury bills. That is not all, an investor who is investing consistently every year without timing the market has never rank last among the 5 investing styles in all the 62 rolling 20 years datapoints. Conclusion from this research is; consider dollar cost averaging and try to avoid timing the market that rarely succeed. Furthermore, dollar cost averaging helps you to force yourself to do saving through consistant investing.

Portfolio Rebalancing

A smart investor will always rebalance their investment portfolio according to the change of their commitment, age, investment temparament and of course the dynamic market movement. An important quote from Warren Buffet; be greedy when others are fearful, be fearful when others are greedy. While most of the people realise the importance of ‘buy low, sell high’, however, it is extremely difficult to do that in extreme market situation both in oversold or overbought market. Personally i have experience this common reaction from my investors throughtout this economy crisis. Very often, the emotional control could take up the bigger attribution than knowledge. Through investment in unit trust, say equity fund, which is the high risk investment to invest at least 60% in stocks, fund manager will take the control to rebalance the portfolio with their knowledge and experience.

Learning to be Happy with Less

We live in a world that focuses more and more on material things and hence consumerism. People are encouraged to have and own more things, the more expensive means even better. Consequently, even those who could not afford such a way of life are also caught up unexpectedly. These unfortunate people work hard to earn money so that they can spend that money to buy the latest convenience and to experience the latest thrill.


Is it possible to be happy with less?

Personally, I do find it possible to be happy with less. I was brought up simply during a time when having money to put aside was not easy. Having a TV and a car were considered very lucky during those days.


Since my childhood was very simple, it is very easy to appreciate simple luxuries like eating out. It is also very easy to ignore all the marketing gimmicks that prey on people to spend their hard-earned money. Many new things are created just to cater to men’s every whim and fancy.


Set your priorities

Setting your priorities or goals early in your adult life also helps you to focus on what is meaningful and important. For me, I focus on financial stability and early retirement. I do not wish to be a slave to a housing loan, personal loan, credit card debts, etc.


Focus on other areas

Shifting your focus to other areas in your life like your family, health, hobbies, friends, education, etc. distracts you from always focusing on material things. Being human means there will be times when you want to splurge and just enjoy yourself. Just as long as it is not too often and the money spent is within your means, then there is nothing wrong with it. You do not need to spend money to be happy but it is only fair to reward yourself once in awhile since you worked hard to earn it.


Get support from others

Mixing with like-minded people also helps you to achieve your goals. In return, you are helping them to achieve theirs. Getting the support of your partner and family means you are not easily swayed by temptations to spend needlessly.


Last but not least, having a grateful attitude is good whenever you envy another person’s possessions. Being aware of those who have less or who are more unfortunate means you have more things to be grateful for. I have learned that being surrounded by material things do not necessarily make me happy.


Do you find it possible to be happy with less or do you need to have a lot of possessions to feel happy? Or do you find you have to spend money to be happy?