Friday, December 18, 2015

Two Ideas That Will Change Your View About Investing Forever

One day, when I was taking a shower (now readers know where all my inspiration comes from!!), I reflected on my years of working, investing, conversations with friends/family/colleague and tried to distill what were the two most important ideas or messages that I should tell anyone who was getting started on investing/retirement planning/personal finance.

You see, in Asia or in Singapore, personal finance is still pretty much a taboo topic.  It isn't the best lunch conversation topic (unless one is talking about the latest stock picks and how who and who made a million bucks from some investment).  But people in general tend not to reveal their own investments, savings, etc, etc. Money is almost like a taboo topic that is not discussed.

I have heard and read about so many ideas but I think these are the two most revolutionary ideas that will perhaps change the perception or philosophy of investors:

Idea #1 - Investing is for Income

I don't really recall when this idea struck me or came into my head.  It might have been a book I read or when I was just thinking about retirement planning in general.  But the key idea to investing is not to "earn a million dollars" or to "buy a big house", etc.  Well, those are the material things that people want and I guess it is easier for people to relate to some kind of physical possession or numerical value to determine that they have reached financial freedom.  However, this is probably misguided.

For most people, becoming a millionaire seems to be the ultimate goal.  However, if you dig deeper and ask them why they want to be a millionaire, it is probably due to the pre-conceived idea that with a million dollars, they no longer have to work and can retire in peace.  That probably explains why many people buy the lottery. The idea of having a big house is also related to the very simplistic idea that "if I own a big house, I must be rich, just like people on TV/movies.  If that is the case, I no longer need to work".  While these physical possessions gives many people a financial goal to strive for, at the end of the day, if you drill down deeper, you know that reaching these arbitrarily set goals probably does not put one in a better stead to achieve financial freedom.

At the end of the day, it boils down to cashflow.  Give a big spender a million dollars and let him retire at age 30.  It is possible that the million dollars can be spent even before his lifetime and he will have to return to work.  And that probably explains why many lottery ticket winners end up becoming bankrupt or broke again.  So the idea is cashflow.  And the idea is that all that you are investing for is not for a big house or for a million dollars, but it is for the sole purpose of income.  It is the common Chinese saying : " qian sheng qian" or "using money to grow more money".

When one invests, the million dollar goal (or two million dollar goal) is actually so that you can start drawing down on that sum of money during your retirement years.  That is how most financial planners will actually work out how much you need for your retirement.  They take the age you intend to retire, and the expected life expectancy, and calculate your monthly expenditure to indicate what is the $X dollar value that you need in retirement funds.  But so many people forget that the $X dollar value is meant to provide them with income when they stop working and stop drawing an income.

So at the end of the day, all investing is for the sake of income.  Nothing more and nothing less.  That is the sole goal of investing.  You are basically trying to build up a stockpile of cash that you can tap upon when you are not drawing any money.  If you have $10million dollars invested in an instrument that gives you a 10% per annum yield, you will have $1million in income to spend every year.  That is as simple as it gets.  If you put that $10million in a bank with 0% interest, what you draw down on that bank account every month is basically income while the original value of your bank account just gets depleted month after month.

This idea is "revolutionary" because not many people I know of think or speak of investing in that sort of way.  They always speak of investing as some sort of arbitrary goal or just about making more money from the stock market.  If you realise that investing is about income, you will realise that building up that income is just one side of the story.  What you as an individual will also need to manage is your monthly expenditure so that it does not exceed your monthly income.  And isn't that all there is to personal finance.  No wonder we hear the frequent maxim: "Spend less than you earn".  Because even when you retire, you also need to spend less that you get in income.

Once this idea is firmly implanted in your head, it will then help you better strategise how you want to go about building up that income stream for your retirement years.  For some people, it could be just a bank account.  For others, it might be bonds or dividend yielding stocks/REITs or businesses or even rental income from property.

Here is where the 2nd idea then comes in a little much easier....

Idea #2 - If You Intend to Work for the Rest of Your Life, You Don't Really Need to Invest

I know that this idea will probably draw a lot of flak from some readers who will still think that it is important to invest.  What I am alluding to is the hypothetical situation of a person who has no intention to retire and whose life expectancy is say at age 80.  Effectively, a financial planner who does his calculation will realise that there is no investment product he can offer this person especially if the person is willing to live within his means.

If one is able to work till death and still draw an income, then you literally will not have the need to set up a retirement fund.  However, there is of course all the unexpected events that life can throw at us.  Illness, retrenchment, disabilities, etc, etc can all potentially strike us even if we intend to work for life.  So at the end of the day, one will still need to prepare for such unforeseen scenarios either through investing/savings/insurance.

I don't intend to retire, but I still invest.  And the reason I invest is just in case there comes a day when I am forced to retire.


  1. Idea #3 Investing is first creating wealth from our limited capital from saving and then manage bigger wealth for cash flow.

    Don't get started with managing wealth when our capital is still small.

  2. "I think you've highligted a very important point - 'What you as an individual will also need to manage is your monthly expenditure so that it does not exceed your monthly income'. Therefore it is important to have financial planning right from the start. Sit down with someone from the bank or something and work out targets. Many people especially the ones who have just started work and have no big financial committments live from paycheck to paycheck in pursuit of an 'ideal' lifestyle. Personally, I think income should be divided into three sections. 1) Expenditure 2) Savings 3) investment fund

  3. Totally agree with Idea #2. Investing in general isn't for everyone. Some people just prefer to work in a 9 - 5 for the rest of their life. They rather take the "safer" route than to seize an opportunity to be financially free. Nothing wrong though, just that sometimes, I feel for them.

  4. Idea #3:
    My idea - If your needs are really basic (the bare minimum for survival only), you don't really need to join the rat race.
    Idea #4:
    Choose the work you enjoy most and you don't have to stop working.

    So actually we worry about our retirement and run the rat race, because our needs are just too many to satisfy - even in retirement. i am guilty. Are you?


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