Let’s talk about money

 

 

Let’s talk about money

 

Today we are going to talk about something different – money.

 

Does money equal wealth? Hardly.

 

Money is only a small scope of wealth, although most people think otherwise. It’s only one of the many resources.

 

Wealthy people use many resources, not just money, to create wealth.

 

Wealthy people use money to make more money by putting it into business or investment as capital. It grows and grows bigger (capital appreciation) and creates streams of income (return, profit, rental, interest, dividend etc.). They also apply leverage of money resource by using “other people’s money”, where they get money from banks and other investors to finance their own business or investment without using much money from their own pocket. As their net worth grows, they become wealthier.

 

Wealthy people use time resource for their money to grow. Time is valuable, where we can spend it to create many things (or spend it unwisely and let our life go wasted). They patiently use time for their investment seed to grow into a big tree. With time, Wealthy people’s investment can go through the so called “compounding effect”, where they reinvest the return of investment and let their wealth grow exponentially over the years. Time and money are good friends in creating wealth.

 

Wealthy people use knowledge resource to help them grow wealth. With proper knowledge, such as knowledge in investing, wealthy people are able to grow money in many ways. They diversify their investment in many areas so that they can make use of each investment’s strength and minimize each investment’s weaknesses while gaining advantages in various economic stages of investment. They also apply technical knowledge to gain competence in their businesses so that they can satisfy and keep customers while staying ahead of their competitors. Wealthy people LEARN constantly to gain knowledge power.

 

Wealthy people use human resource as leverage. Yup, they use other people’s energy, effort, and expertise to make themselves wealthy (if you are working for someone else, you are constantly helping him to become richer!). Besides employing people and consulting experts, they also outsource work to other people who can do the job well.

 

That’s how wealthy people create wealth, and that’s why wealthy people are becoming wealthier.

 

The funny thing is that, I think being wealthy is different from being rich, although dictionaries might say they are the same thing. Let me explain the difference between these two based on my own definition.

 

You can become rich by

 

1) Having a rich mommy or daddy

 

2) Marrying a rich man/woman

 

3) Inheriting a lot of money or finding a big fat treasure chest

 

4) Becoming a crime lord (Al Capone), drug lord (Pablo Escobar), or war lord

 

5) Being a corrupted politician

 

6) Creating wealth with resources mentioned above

 

The good news is that being rich is not really difficult because it is just a state of mind. There are two ways to become rich:

 

A) Have a lot of money (or assets)

 

B) Have little wants.

 

I have little wants and I live well within my means. Therefore, I am rich. If you are not convinced that you are rich, watch this video.

 

To a person who has 1 million bucks, the guy who has 4 million bucks is rich. To a guy who has 1000 rupee, a person who has 1000 Euro is rich. To a guy who lives in a slum, a person who lives in a flat is filthy rich! It’s all relativity and a state of mind.

 

.

* * * * *

.

 

I dream to become wealthy. Let me share with you my wealth creation plan (it is like a game strategy of War Craft, really!). I don’t claim my plan to be good or effective since I am not a millionaire yet. It takes time to grow wealth so let’s see what happens after a few years.

 

1) Cash flow

 

The first step is the basic: managing the cash flow – spending less than what we earn. If we fail this step, we become a transit point for money where it flows into our wallet and then vanish instantly. If we spend much more than what we earn, we are in debt. We dig a financial hole deeper and deeper to bury ourselves in debt if this problem persists.

 

2) Savings

 

By having positive cash flow, the extra cash becomes our savings. Now we need to increase savings, which is the financial resource to create wealth. We start a saving plan by forcing ourselves to save a percentage of income every month.

 

Next, we increase our savings by reducing expenses. We cut off unnecessary spending and buy only things that add value to our life.

 

We also increase our income by getting side income, changing job, or better still, working our way up the career ladder so that we get fat promotion with huge pay checks.

 

This is how we increase savings with the formula:

 

Savings = Income – Expenses

 

3) Emergency fund

 

As the savings grow, we keep a portion of it as emergency fund, which will support our life for three to six months in case we lost our job. This is a very important safety net to save our butt when shit hits fan.

 

4) Investment

 

After having sufficient savings and emergency fund, we can now use our savings for investment. This is to grow our money so that is becomes bigger and bigger over many years. You should see investing as planting the seeds of wealth and watch it grow — until it can bear fruits for us to eat (some people see it as goose that lay golden eggs).

 

There are many choices of investment – stock, bond, property (houses, land, swift let farm, graveyard, palm oil plantation etc.), precious metal (gold, silver etc.), collectibles (fine wine, painting, art piece, tea blocks etc.), mutual fund, investment linked products, fixed deposit, option, futures, currency, and many more. We should only invest in things we understand well (yup, we have to learn to invest using knowledge resource). Each investment has strength and weakness, so invest in a few of them to diversify your investment portfolio.

 

 

 

Our pay cheque is active income; and the fruit of investment is passive income, as we don’t have to work actively to milk the money from investment. When our monthly passive income become much more than our monthly expenses, we become financial free – we don’t have to work to support our life. That also means retiring rich and young.

 

5) Multi millionaire club

 

After achieving financial freedom, which can take about one decade of growing wealth, I plan to go further till I become a millionaire. I just need to continue to work, or live frugally off my passive income and let my wealth to grow further. That’s pretty simple, all it takes is patience.

 

6) Preserving wealth

 

After becoming wealthy, it is important to know how to keep the wealth, through diversification. Never put all the eggs in one basket or else we might loose every thing when the basket goes kaput. We spread our wealth around so that it won’t collapse down all in one go. If you are wealthy, you can diversify your wealth by buying annuity or investing in fixed deposit, bond, property, and other investment vehicle.´

 

One more thing about preserving wealth is not to make financial mistakes such as involving in an investment scam or developing gambling habit. It will turn you from a millionaire into a pauper in a blink of eye like magic trick.

 

That’s all for now. Before I log off, I recommend you to read two things related to money.

 

Recently I guest blogged on KCLau’s money tips blog. You can read my post here (regarding how I managed my cash flow in November).

 

Here’s an interesting financial planning article that you should read:

How A Fresh Graduate Plan to Retire in 8 years

 

See you later!

 

Subscribe in a reader