Wealth – it starts in your mind - NAV

Wealth – it starts in your mind


There’s a line in a recent Andy Lau/Donnie Yen movie that goes: “Riches or poverty, it’s all destined.” Here’s a more practical view: Building wealth is more akin to Renaissance-era philosopher Niccolo Machiavelli’s ideas of the interplay between fortune and virtue. Good fortune without virtue/human endeavour is opportunity wasted.

So, a lot of becoming wealthy is about human endeavour, effort, and a winning mindset. Here are some of the attributes of that mindset to start you off.

Making money is not easy – accept that and start making money. Be suspicious of anybody who tells you making money is easy. The paradox is the sooner one accepts that making money is difficult and requires effort, the easier making money becomes.

Much money and even more time is lost by investors waiting, hoping for that “big one” that will make them overnight riches. The truly long-term average annual returns on stocks is around 10%. That’s history, that’s reality. So how realistic are those “overnight wealth” dreams? Most “get rich quick schemes” are either naïve, fraudulent or illegal. There will always be the hopeful who naively think they have found the secret formula for instant financial success only to discover later they were only on a lucky patch. Then there are frauds who make off with the money of the naïve on promises of extraordinary returns. Then there are illegal schemes – e.g. insider trading and market manipulation. These are serious offences.


Time is money – act now

Procrastination is a thief of time. As the saying goes: “time is money”. Even more so when the time lost relates to planning your finance. Many people put off the more uncomfortable but necessary tasks, focusing first on the easier or more pleasant jobs, only to have those more urgent and necessary priorities constantly nagging at them.

The late Stephen Covey – management and motivational guru and author of the bestseller “Seven Habits of Highly Effective People” – listed as habit #1: “Be proactive”. By that, he meant taking responsibility for improving our lives.

In the context of your financial journey, start by controlling spending and boosting savings. Almost every inspirational story of wealth comes down to this – savings and investment.


Spend less than you earn

Or as Charles Dickens wrote in his novel ‘David Copperfield’, (rephrased to modern English): “Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six pence, result misery.”

Figure out how much tax you have to pay on your income and work only with your after-tax income. What are the absolute necessities? And remember what is a necessity for you may be a luxury for somebody who cannot afford it. So, it is about affordability and priorities. Cut back on the “nice to haves” to the extent that you live well within your means.


Plug those money leakages

Look at your life and identify the money leakages. The multiple online subscriptions, the costly movie channels you rarely watch, the late fees you incur unnecessarily on bill payments, the food that sit in your fridge for weeks and end up in the bin, the clothes and shoes you buy but hardly wear, the $50 a month you could shave off your electricity bill. Go on, let people call you Scrooge. You’ll have the last laugh.


Credit card debts are some of the costliest debts around. Credit cards can be wonderful if you use them correctly – as a convenient mode of payment that usually accrue reward points. Nice. But if you don’t pay off your outstanding balances on time, they are serious wealth destroyers. Banks in Singapore charge between 25% to 28% interest annually for credit card transactions not paid in full on time and on cash advances from credit cards. And that compounds if you don’t pay up.

So, before you can even start building wealth, rid yourself of those credit card debts. The logic is simple. There is no savings account or sensible investment (meaning one that doesn’t involve ridiculous risk) that will pay you anywhere near 25-28% returns per year.


People don’t get seriously rich sitting on savings – start to invest

So now that you have money to work with, use it. Don’t just sit on it. Most inspirational success stories start with hard work and savings. None of them continued and ended with savings. Some measure of risk-taking and investment is usually the cornerstone of success stories.


The three big asset classes that advisors will talk to you about are stocks, bonds, and alternatives.

Stocks, shares and equities mean the same thing. They are literally a “share” of a publicly-listed company, which are traded on a “stock” exchange. So, when you buy a stock, you are literally buying shares in a company. That is, you own a bit of a company.

If a friend asked you to buy a “share” of his business – say a café – you would do your own investigation into the business, wouldn’t you? You would ask for financial information of how the café had been doing in recent years. Is it profitable, can it continue to be profitable, how much debt does it owe, and can the business meet debts as they come due? You should understand the same for any company you are considering investing in.

As in investing in your friend’s café, if the business fails, shareholders (including you) are the last people to be paid after all debts have been repaid. And if there is nothing left after payment of debts, your shares are theoretically worthless. Because of the risk you bear as a “shareholder”, you would expect higher returns for investing in stocks/shares than bonds. Bonds are essentially debt securities. If you like, they are sophisticated and quite legalistic “IOUs”. So, when you buy a bond, you are lending money.

In the case of your friend’s café, the equivalent would be lending him money instead of buying a share of his business. When you buy a bond, you have no ownership rights. You don’t get a share of any profits from the business. Instead, you are paid a fixed rate of interest which is paid periodically.

Bonds usually have fixed terms (or “maturities”). At “maturity”, the owner is legally obliged to repay the “principal” in full. There are secured bonds which are supported by the Issuer’s pledge of specific assets or collateral. But most of the bonds in the market today are unsecured bonds. That is, they are only as good as the ability of the Issuer to repay. In the event of a corporate failure, they would line up behind secured creditors for payment but ahead of shareholders.

Because of the fixed payments, bonds are also called “fixed income” and are useful in diversifying a portfolio of stocks. Where the credit quality is good, bonds are generally much lower risk than stocks. But then their returns are usually also lower than stocks.

“Alternatives” is a broad category of “others”, most usually hedge funds, commodities and gold. They have come into modern investment as a tool of diversification away from the traditional categories of stocks and bonds. Some of them – particularly hedge funds – are more complex than plain vanilla stocks and bonds, and would better suit experienced investors.


Don’t forget to protect while you grow

Call it the arrogance of youth. Many young people ignore insurance because they are still healthy and they reckon “bad stuff” won’t happen to them. And to be fair, the premise of insurance mathematics is that “bad stuff” doesn’t happen to the majority. But it does happen to some.

And the irony of the “arrogance of youth” is that for those very reasons – you are young and apparently healthy – it is cheapest to buy insurance, life and medical, while you are young. It gets more and more expensive with each passing year.

Think of insurance like this – it is transferring risk from the individual to the community. In times of old, whole villages were morally/socially obliged to help an unfortunate fellow member of the community if, say, his/her house was burnt down in a fire, or other ill fortune befell his/her family. The act of communal assistance is an ancient form of “insurance premium” paid by members of the village for the “pay-off” of assistance should misfortune strike them. Of course, insurance works on the basis that “bad stuff” does not happen to everybody at the same time. But while you grow your wealth, be mindful that a single event of misfortune can wipe out all you have built.

So now we are full circle to Machiavelli’s concept of “fortune and virtue”. You can’t control fortune. But you can exercise virtue.

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