LESSONS FROM PERSONAL FINANCE

INTRODUCTION
Personal Finance is an important skill for us to learn in order to sustain and improve our lifes materially, emotionally, spiritually, through the accumulation of wealth. Having enough savings for retirement is also the worry of most people once they reach a certain age. Thus, having the appropriate skills is definitely of utmost importance. Without the proper management of monitoring expenses and growing our wealth, we are unable to achieve our other more important objectives in life - living healthy, fulfilling lives and being able to help others. Financial abundance is the foundation upon which achieving our targets in life is based upon.

Wealth accumulation is carried out primarily via the inflow of income and the successful saving and investment of it.

DEFINITIONS OF INCOME
Firstly, there are two definitions of income - active and passive.

Active income compensates you for the hours and effort you put into work - that is, you have to be physically present at work. the only source of this is your day job.

Passive income is income that flows into your account without you moving a muscle, even as you sleep. The sources include stock/bonds/funds investment, collection from rentals, capital gains, revenue from home based business (done in spare time), e-business, royalties, affiliate marketing commissions and so on.


PSYCHOLOGICAL ATTITUDES TO WEALTH ACCUMULATION
Firstly, one's psychological approach to accumulating wealth is of greatest importance in the journey for financial abundance. The problem with many of us is that we tend not to keep track of our expenditures and spend as and when we want, in search of short term gratification - buying new clothes, shoes, accessories, gadgets, dining out with friends, spending on entertainment, giving gifts to others. However, this is a short term attitude and will not lead to long term accumulation of wealth. What income is flowing in flows out through the other end as it is converted into depreciable assets.

Some others also think that they can worry about wealth accumulation when they 'grow up' or get a job, or perhaps that it is too early to plan for retirement. However, good wealth accumulators start early in life - the earlier you educate yourself about this, the better, since the earlier you can start. Some people postpone this and spend like there's no tomorrow until retirement hits and they are left with meagre savings after a lifetime of material acquisitions.


WHAT IS WEALTH?
Building up wealth is a time concept. It is not the absolute amount of money you have, but the length of time in which you can sustain yourself without any pay. A manager who earns $20k a month but who spends $19k of it monthly is relatively poorer than a teacher who earns $4k a month but saves $2k of it monthly. Thus, to start off, one has to have about 3-6 months of emergency fund to use in case of temporary inability to work, e.g. due to retrenchment. Thereafter, one should, apart from working smart and hard at the day job, continue to build up on the passive side of investment.


HOW TO ACCUMULATE WEALTH
Savings and investment are the main drivers of growing wealth.


REGULAR MONITORING OF EXPENDITURE

Firstly, one has to know how much he or she spends every month - an expenditure record should be in place in order for one to be in control of his or her finances. The impact of a particular purchase, or the savings made, no matter how insignificantly small, will be accounted for in one's monthly and yearly expenditure statement. Expenditure targets should be monitored religiously. Savings should be maximised and utilized for maximum effect in investments later on.


CASE STUDY - why be thrifty? : THE MILLIONAIRE NEXT DOOR
Indeed, a good source of inspiration for being thrifty should come from the book The Millionaire Next Door- a survey of the lifestyles and habits of American millionaires conducted by two American social scientists. Most people would think that millionaires drive nice big cars and wear fancy branded clothes. Surprisingly, it would be impossible to tell apart most millionaires from the common folk. For example, they tend to buy only when necessary, and drive second-hand cars instead of buying brand new ones (because cars are depreciable assets). They are also aware of how much they spend every month, and constantly use discount coupons when making purchases. Professionals such as doctors, lawyers might seem to have an unlimited amount of cash to afford such a lavish lifestyle, but many of them are just a paycheck away from bankruptcy. In their effort to maintain their reputation of being at the highest echelon of society, and also to keep up with the Joneses, they tend to spend most of their income on lavish items to show off. Instead, many other people from humbler professions do not have this requirement, and thus can save their income to invest in other more meaningful and appreciable assets.


WHY SAVING IS NOT ENOUGH
However, it is not good enough just to save. Inflation will erode the value of your savings if it is merely kept in the bank at meagre interest rates.


REMEDY - INVESTING
To quote renowned Singaporean trainer Adam Khoo, many people say that investment is risky- but only if you do not know how to do it. Not investing is riskier, he says, for the reason quoted above. Investing in stocks and bonds is only risky if one does not know the fundamentals behind it, and lacks the technical expertise to do so, much like how it is dangerous to drive a car on public roads without learning the highway code, how to control the car etc.


FIRST, START OFF WITH THE MIND
A good investment is to pour funds into improving one's mind in the intellectual aspect especially. Material goods can be taken away from you or depreciate in value over time, but, to paraphrase my Dad, knowledge that you have learnt and developed over time cannot be taken away from you. Adam Khoo has also inspired me on my quest to gain more knowledge - as I use my spare time to read up on the ideas of great leaders in each of their fields- standing on the shoulders of giants, we can see further, as Isaac Newton used to say.

We have come a long way. Previously, one could be assured of life long employment in a single firm with benefits paid in retirement, a tradition that started off with the Industrial Revolution. But this Revolution was such a long time ago- today we are in a Knowledge-Based economy, where Innovation and Intellectual Property, and not factories and hardware, will be the new buzzwords. Our greatest asset is our mind, for it is with this that we can discover new ideas or create new inventions without spending a single cent. Of course, much effort has to be spent cultivating this through education, experience and reading widely. But with the advent of computers and the Internet, conducting business has become much easier - we do not need to manage cumbersome inventories and can start a home-based business easily with low start up costs (think e-bay.com or many of the other numerous sales portals that have sprung up in recent years). The new breed of entrepreneurs earn their keep with new ideas - software companies, royalties from artistic compositions, competence in investment, e-commerce, so on and so forth. Thus, cultivating the mind has become a priority of utmost importance, as opposed to being content as a cog-in-the-wheel factory worker with assured but meagre benefits. In today's socially and economically mobile economy, and the trend towards outsourcing, the mediocre factory worker will not stand a chance if he does not upgrade himself by learning newer, more relevant skills.


USING THE MIND TO CREATE MULTIPLE STREAMS OF INCOME
We must learn how to accumulate wealth - how? Working harder at your day job is something that most people would do, but this only generates one stream of income. There is only one you - a doctor, for example, can only treat x number of patients in one day as he humanly can, no matter how hard he works. The trick is to cultivate multiple streams of income, as advocated in the New York Times Best Seller of the same title, by renowned personal finance guru Robert G. Allen. The key is the creation of as many sources of income as possible, so that even as you work , sleep, or play, you are earning income. Even if one source stops, there are several others to compensate for it while you rectify or search for new sources. If you only rely on your day job for income, daily sustenance would be a problem in the increasingly plausible scenario of job loss.


HOW TO INCREASE ACTIVE INCOME
This revolves primarily around your job performance. To do well, you must love what you do. The best choice would be to find the career that you wouldn't mind doing even if you did not receive any pay at all. In fact, Warren Buffett loves his job so much that he receives only a nominal salary, and has said that his job is so good that one should pay to have it! Working hard and smart, and having a competence in your field of expertise is of utmost importance. Adam Khoo advocates working hard at your job to value-add, so that your boss will recognize your achievements and give you a raise.