Your money, your life!
by Rajen Devadason
Taking care of the money you earn should be one of your most important activities says financial planning author and expert Rajen Devadason who shows you some simple steps to get started on the road to financial freedom.
Congratulations! After years of sacrifice and striving, you've graduated.
What you accomplish in the decades ahead is largely dependent upon how hard and how smart you work. Since I graduated more than 15 years ago, I've made every conceivable mistake under the sun. So, perhaps I can save you some grief – if you let me!
What I hope to leave with you is a simple road map that reveals the hidden dangers and awesome possibilities that lie ahead. Regardless of what career path you choose, the one common denominator of modern living is our need for money.
How well you manage the trickle, stream or flood of money that flows into your pockets will determine whether you keep slaving away throughout the next three or four decades! If you manage your money well, you will be able to stop working for it relatively early in life because your money will work hard for you.
Please consider the story below as a true account of negative beliefs can blind you to life's possibilities: Back in 1870, there was a bishop who told the president of an American college that he believed nothing was left for Man to invent! The college president disagreed: “Why, I believe it may even be possible for men in the future to fly through the air like birds.”
The bishop was shocked. He warned the far-sighted educator, “Flying is reserved for the angels. I beg you not to mention that again lest you be guilty of blasphemy!” The bishop's name was Milton Wright. He couldn't have been more wrong.
You see, he was the father of Wilbur and Orville, who 33 years after that conversation became the first humans to fly!
GIVE ME LIBERTY!
I don't know your background. But there have probably been people in your life who've made negative comments about your big dreams. Well, if those dreams include significant financial success, I have good news for you.
There is a powerful seven-step process I have developed called the L-I-B-E-R-T-Y Plan, which can save you a lot of grief and maybe allow you one day to soar further than anyone else in your family ever has.
Step 1: Liability Eradication
Step 2: Investing Inclination
Step 3: Buy Low, Sell High
Step 4: Emergency Buffer Establishment
Step 5: Rajen's Reading List
Step 6: Teach Others
Step 7: Yearn, learn and earn your way to financial freedom!
Step 1: Liability Eradication
Your past, present and future wealth is measured by one financial document, your net worth statement. Here is a simple example:
NET WORTH STATEMENT
Assets minus liabilities equal net worth. Assets fall into two categories, consumption assets like a car to drive or a house to live in, and productive assets like savings, investments and businesses. Sadly, liabilities normally carry with them higher interest charges than most assets yield!
In simple terms, this means it is pointless having RM10, 000 in a fixed deposit account earning 3.2% interest, while carrying RM10, 000 of credit card debt costing you a nominal interest rate of 18% a year, which actually works out to an annualised percentage rate of 19.7%!
So, get rid of your consumer liabilities. (Specific strategies are covered in my book Liberty! From Debt Slave to Money Master; 2002).
Step 2: Investing Inclination
Develop your understanding of the investment market by reading diligently (see Step 5) and by talking to those who save and invest intelligently.
Step 3: Buy Low, Sell High
Whether it's chicken rice, pharmaceuticals or paper assets like stocks and bonds, the only way to grow rich is to buy low and sell high. In the investment world, you can employ excellent strategies like dollar-cost averaging and value-cost averaging to effectively buy low and sell high. In the case of dollar-cost averaging, you invest equal amounts of money, at equal intervals, regardless of market conditions.
The net result over many years is that you end up doing most of your buying at the lower end of the price fluctuation band. You end up buying low. You then can wait for a time of market strength to sell high! Value-cost averaging is similar in concept to dollar-cost averaging, but instead of investing equal amounts, you invest variable amounts that are essentially inversely proportional to the market level.
So the higher the market is, the less you invest, and the lower it is, the more you invest. (A free article explaining this in greater detail will be available at www.rajendevadason.com) So, if you have a small amount of money to start with, then
I would urge you each month to save a bit in the bank and invest the rest in a proven unit trust fund. (In case you didn't know, a unit trust fund is an investment vehicle that pools or collects together relatively small contributions from many investors with similar financial aims.)
Step 4: Emergency Buffer Establishment
Open a savings account where you build up to and keep between 3 and 12 months' expenses. Keep this money safe in the bank for emergencies.
Warning: It may take as long as three years to build this buffer. So, keep at it and save diligently.
Your emergency buffer is for emergencies, not for exciting ‘opportunities' like Parkson sale! And having your buffer will give you financial stability.
This stability will help you weather the ups and downs of the investment markets.
Step 5: Rajen's Reading List
For those who are serious about learning, I've put together a list of 26 titles – ranked not alphabetically, but by complexity and depth.
The simpler titles are at the top and the more challenging ones at the bottom.
If you consider yourself a novice, begin with some of the first titles suggested and work your way down the list. If, on the other hand, you have a solid foundation in finance, you might want to begin in the middle or near the end of the list.
RAJEN DEVADASON'S GRADED READING LIST FOR D-I-Y LEARNERS OF FINANCIAL PLANNING
1. The Magic Safe, Ellen Tan
2. Richest Man in Babylon, George S. Clason
3. Liberty! From Debt-Slave to Money Master, Rajen Devadason
4. Learn to Earn, Peter Lynch and John Rothchild
5. The Wealthy Barber, David Chilton
6. Millionaires Are From a Different Planet! Azizi Ali with KP Bose Dasan
7. Financial Freedom – Your Guide to Lifetime Financial Planning, Edmond Cheah, Wong Boon Choy, Alex Sito and Rajen Devadason
8. Rich Dad, Poor Dad – What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! Robert T. Kiyosaki with Sharon L. Lechter
9. Wise Moves to Retirement, Nathan Balakrishnan and Geoff Stecyk
10. The Millionaire in Me, Azizi Ali
11. One Up On Wall Street, Peter Lynch and John Rothchild
12. Buffett – The Making of an American Capitalist, Roger Lowenstein
13. The Millionaire Next Door, Thomas J. Stanley and William D. Danko
14. Your A-Z Guide to the Stock Market, Rajen Devadason
15. Economics Explained, Robert Heilbroner and Lester Thurow
16. The Cashflow Quadrant – Rich Dad's Guide to Financial Freedom, Robert T. Kiyosaki with Sharon L. Lechter
17. The Millionaire Mind, Thomas J. Stanley
18. Financial Freedom 2 – Through Malaysian Equities and Unit Trusts, Edmond Cheah, Wong Boon Choy and Rajen Devadason
19. The Return of Depression Economics, Paul Krugman
20. Beating the Street, Peter Lynch and John Rothchild
21. Manias, Panics, and Crashes – A History of Financial Crises, Charles P. Kindleberger 22. Common Sense on Mutual Funds, John C. Bogle
23. Common Stocks and Uncommon Profits – and Other Writings by Philip A. Fisher, Philip A. Fisher
24. The Intelligent Investor, Benjamin Graham
25. Soros on Soros – Staying Ahead of the Curve, George Soros, Byron Wien and Krisztina Koenen
26. Security Analysis, Benjamin Graham and David Dodd
If you want to begin the process of developing a brain that churns out ideas and plans that put money in your pocket, food on the table and significance in your life, then reading regularly on subjects such as those on my list, is very important.
Remember the excellent habits you developed in school and exercised at university – read with pen, marker and notebook by your side!
Step 6: Teach Others
The only way to truly know something is to learn it and apply it well enough to be able to teach others.
So, go through each of the five earlier steps. Think about each, and then identify one friend to teach the material to. (If, for instance, you want to share the reading list above with that friend, you may download my free e-book 26 Books to Take YOU all the Way to the TOP! at www.rajendevadason.com, or have him download it directly.)
As you share with others, you will be enriched – in your heart, head and eventually bank account.
Step 7: Yearn, learn and earn your way to financial freedom!
Never use a low starting salary of perhaps just RM1, 500 or RM2, 000 as an excuse for not beginning. Aim to save and invest up to 40% or 50% of your gross pay!
You probably can't do it straight away, but even if you can only begin with 10% – or if you're truly hard up, 1% – the key is to start low and slow, but to steadily pick up the pace.
CONCLUSION
Never give up on your dreams – keep your yearning alive.
Never stop using your brain – keep learning.
Never remain satisfied with your present income level – keep saving and investing to gradually transform your active income stream (money you work for) into a passive income flood (money working for you, through savings and investments).
Your goal: FINANCIAL FREEDOM – having a passive income flood large enough to take care of all normal expenses.
The day you reach financial freedom is the day you liberate yourself from the tyranny of the rat race. That is a worthy goal.
I believe you can succeed.
© 2003 Rajen Devadason (Rajen Devadason is a Certified Financial Planner and CEO of RD WealthCreation Sdn Bhd and RD Book Projects. He has, at the time of this writing, authored or co-authored seven books (two of which are e-books), and publishes the FREE e-zine GET BETTER! Those wanting to receive this weekly electronic dose of ideas and articles on how to live better lives by optimally managing time, talent and money are invited to sign-up at www.rajendevadason.com.)
WHAT THOSE FINANCIAL TERMS MEAN:
Annualised percentage rate (APR) – the effective interest rate. Because interest rates can be quoted in many different ways, such as daily rest/monthly rest/or yearly rest, or as in the case of the usual hire purchase loans in Malaysia, no rest at all, the APR converts all these different ‘interest rate formats' to one understandable number. This makes for easy comparison between different types of loans.
For instance, if you have two loans, both stated as 18% a year, you might think they are exactly the same. But what if one was a nominal 18% a year with daily compounding and the other was a nominal 18% with monthly compounding? To be able to compare ‘apples with apples', you should convert both to their equivalent APRs and then decide on which one is more expensive. In this simple example, the daily compounding loan has an APR of 19.72% and the monthly one has an APR of 19.56%.
Assets – anything you own or anything someone owes you that either has monetary value today or that will produce money for you tomorrow, for example a house you can let out and collect rent on each month.
Financial freedom – having sufficient passive income gushing out of your portfolio of savings, investments and businesses to cover all expenses.
Financial stability – being financially sound, strong or robust.
Gross salary – your salary before any deductions such as SOCSO, EPF and taxes.
Liability – a debt, something you owe and have to pay for, usually every month, like a house or a car. The asset doesn't totally belong to you until you have paid it off.
Net worth – a measure of your financial strength. It equals the value of your assets on a particular day minus the value of all your liabilities on that same day.
Passive income – money you earn every month without having to work. An example of passive income would be future royalties you earn from writing a book, or rent collected from a tenants. (from Graduan 2004)
Source ;http://www.graduan.com.my/Page/LearningCenter/LearningCenter/Your-money-your-life
