#5 Buy Assets Not Liabilities

This is the #5 posting to the Road to Financial Freedom, a simple 10 step mini-series to get one started on the road to financial freedom.

This is a lesson that I learnt from the Rich Dad Poor Dad series which has helped changed the way I "spend" my money. The lesson is simply this. Buy assets not liabiliities.

To understand this, you first need to understand what is an Asset and what is a Liability as Robert Kiyosaki puts it.

An asset is simply something that puts money into your pocket and a liability is something that takes money out of your pocket.

A house which you stay in is thus a liability as it takes out money from your pocket whereas a house that you are renting out for a profit is an asset as it puts money into your pocket. Simple isn't it?

So the guide here is to always buy assets instead of liabilities.

Thinking of buying that car? Think again unless you are going to use that car to do goods transportation or something to earn a living.

The Road to Financial Freedom
#1 - The Greatest Mistake
#2 - Protect What You Cannot Afford to Lose
#3 - Spend Less Than You Earn
#4 - Spend Less Or Earn More
#5 - Buy Assets Not Liabilities
#6 - Read and Learn More
#7 - The Magic of Part Time
#8 - Health Equals Wealth
#9 - It's a Marathon, Not a Sprint

#4 Spend Less Or Earn More

This is posting #4 on my very own mini 10 part series about the Road to Financial Freedom.

You can read the previous postings here:

#1 - The Greatest Mistake

#2 - Protect what You Cannot Afford to Lose

#3 - Spend Less Than You Earn

This posting is actually a continuation to the previous posting on spending less than you earn.

Okay, so you have made it through thus far...you have created a financial plan, you have insured yourself against the various risks (death, disability, critical illness, hospitalisation bills, personal accident). Now is the time to figure out how you can actually spend less or earn more so that you will be able to set aside a reasonable amount of money each month for savings or investments.

What is a reasonable amount to be saving or investing each month? The answer is actually simple: It Depends.

Yes, it depends on when you plan to retire, what you intend to purchase in the future, etc.

But for an average person who hopes to retire by 60, I would like to think that saving 20% to 30% a month should hopefully suffice. I understand that many people would advocate saving just 10% but I think it might be stretching it a little to assume that by saving just 10% of your monthly income, you would have enough for your retirement years. Unless you put that 10% of savings into something which gives you consistent high returns over a long period of time, I think it is unlikely that 10% of savings while spending our remaining 90% of income will be sufficient.

Think of it this way, a average person works for an average of 40 years and expects to be in retirement for an average of 20 years. So you are working for 40 years to essentially fund your expenses for a total of 60 years.

What one must do then is to learn how to spend less of his income or earn more such that the percentage that he is spending is much smaller than the percentage he is saving.

SPEND LESS

A person can spend less by eating out less, watching less movies, shopping less, etc. There are so many ways to survive and actually enjoy life on a budget. Borrow a book instead of buying one. Rent a dvd instead of catching it in the cinemas. It is possible to be much happier when one spends less and saves more. The converse cannot said to be true. I am sure many people/bloggers have many other innovative ideas to share on how to save money or live on a budget so I will not dwell deep into the topic.

Another way that one can approach this issue of spending less is to list out all your monthly expenditures and see which you can reduce and which you cannot. Identify the necessities and your wants (luxury). Do you really need that high end internet speed? Do you really need the extra sports channel on your television? Do you really need to eat at a restaurant every weekend?

Earn More

Spending less is of course only one side of the equation. As one progresses through the various life stages, it is common for one's expenditure to increase in terms of absolute dollars. Likewise, we should look to increase the amount we earn. This could be attained through either active or passive income.

Active income involves income that you earn through your work or part time work. You should aim to increase your active income either by giving your best at work to get a better promtion opportunity.

Passive income involves income that comes to you without you doing anything actively. This could be through stock dividends, online affiliate programs, book royalty, etc.

CONCLUSION

To spend less or earn more, one will slowly be on the road to financial freedom. If one can spend less AND earn more at the same time, financial freedom should be within grasp.

#3 Spend Less Than You Earn

This is post #3 on the topic of the Road to Financial Freedom. It deals with spending less than you earn.

If you have missed out on the earlier postings you can view them here:

#1 The Greatest Mistake - If we fail to plan, we plan to fail. Always begin with the end in mind

#2 Protect What You Cannot Afford to lose - The importance of insurance

SPENDING LESS THAN YOU EARN

This is basically a common sense approach to financial freedom but to many people out there, it just seems that this concept is too basic. Huh? You mean that is it...spend less than I earn...bleah..give me something harder or more sophisticated.

Yet the truth lies that many people are actually spending way above what they earn. Some people are simply spending ALL the money they earn! The problem with spending too much money or all that you earn is this: You will have no money left for savings.

Yes, it is as simple as that. Before swiping your credit card again, think whether you can truly afford it if you were just paying for the item using cash alone.

Another principle that I like to use is to pay yourself first. Always set aside the money that you will like to save first before spending the rest. Never ever spend your money and save the rest!

Chance to Win $200,000?

I received an official looking letter that states that I am one of a few remaining Singaporeans who stands a chance to win $200,000 in a Sweepstake grand prize draw. It says that I will be receiving some important documents in the next few days which I should return by a certain deadline to qualify for the draw.

Anyone received anything similar. It seem's to come from Reader's Digest though there is no official logo and stuff. Is it a scam?

A Millionaire at Age 26

I heard a story from a friend who told me that one of his friends is already a millionaire at the young age of 26. How did he do it?

Basically, I was told that he invested close to $200,000 into a single Hong Kong penny stock and that stock rose by more than 10 times. That was it, just pure guts....and now he is a millionaire!

According to my friend, he is still working his full time job and is basically enjoying life right now as he does not need to worry about money for retirement and stuff already.

So I guess you can say that this guy has already found his financial freedom.

25% Cash Machine

I have been reading this book by Bryan Perry called the 25% Cash Machine.

Basically, this book advocates an investing method called double digit income investing to provide a portfolio that gives both income and capital gains of up to 25%. I enjoyed reading the book except for the fact that some of the stocks recommended in the book are already meeting with some financial difficulties due to the global financial crisis.

In it, the portfolio of stocks to build a 25% cash machine portfolio includes stocks like:

Canadian Royalty TrustsBusiness Development Companies
REITs

I really like the idea of creating a portfolio of 25 stocks that will not only give you income from dividends but also capital gains. Some of the stocks in my current portfolio are also purchased for this reason. They are:

1. ST Engineering
2. First REIT
3. Ascott REIT
4. Suntec REIT
5. PenWest Energy Trust (a Canadian Royalty Trust) - provides me with a monthly distribution.

Hope to find another 20 quality stocks to build my own 25% cash machine portfolio. Perhaps I should call it the Financial Freedom Portfolio =)


See Related Articles:
1. 3 Key Lessons from Rich Dad Poor Dad
2. David Bach - Automatic Millionaire
3. Donald Trump
4. Financial Freedom (Goal 2022)
5. Determine Your Financial Freedom Number

My HDB Flat is Worth Half A Million?

In Singapore, the government provides affordable housing through the Housing Development Board (HDB) which provides flats for people at very cheap rates. I bought my flat from HDB brand new and it cost me slightly over $300,000 for a 90 square metre or 968 sq foot flat. That works out to be around $325 per square foot which is quite alright for Singapore flats.

Yes.. I know that I should never count my HDB flat as an asset since I am essentially living in it.

But just for interest sake, I checked out the HDB website and realised that flats around my area were selling for over half a million!

There were not a lot of transactions but I guess that it should provide a rough gauge of how much my flat is worth now. It's a pity that I am not able to refinance it to unlock some of the cash value in my HDB flat. Otherwise, I would be really rich in cash.

Oh well, guess I will just have to wait for another few more years before I can start hunting for a 2nd property to either live in or rent out..