Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Business (and investment) opportunities arise when technology meets and improves on an old business practice

Tuesday, January 29th, 2008

I have written about our goat farm. The land is being developed now and our target date for “opening” the farm is 5th April 08. 

In some lesser developed countries like India, people with extra funds would buy goats and hand them to goatherds to tend. The goatherd would take care of the herd, feed them, give them medicine if needed etc. The offspring were shared 50:50. 

It was a win-win situation for both the investor and the goatherd. The difficulty was in matching goatherds with investors. This was done by word of mouth as trust was a very important factor in this equation. 

In Malaysia, a group of people have brought technology to this age old practice. 

They have set up a website, offering matchmaking services for the investors and the goat farms. (The website is in Bahasa Malaysia.) They have prepared a “prospectus” showing the indicated rate of returns on investment, risks involved, minimum investment required etc. 

This is a great idea, as it takes away the nitty gritties of running the farm for the investors interested in goat rearing and provides capital for others who are keen to physically embark on goat rearing. 

As in any other investment, there are risks. The returns quoted  of almost 1300% per annum over 6.75 years appears to place the risk level at a high level. 

This is a great example of creating a business opportunity. Using technology to improve or facilitate an age old business practice.  

My wife and I will be registering our farm with e-pawah.com.my and offer to act the role of the traditional goatherd for the investor. Let’s see how this works out.

It would be interesting to hear the views of readers on this investment.

  

The costly PF mistakes and blunders I have made, and why you should not repeat my mistakes – Part 4

Monday, January 28th, 2008

The five mistakes we have talked about so far are:- 

-         Not paying myself first  

-         Not forming or joining a correct peer group

-         Not having a written budget  

-         Not managing my career properly and

-         Not getting the best deals on my mortgages 

There is more.

The next one is “foolishly selling my long term investments without proper evaluation and soul searching”. 

Ever since I realized that I should start savings for retirement and for our children’s education, I have made monthly contributions to a unit trust or mutual fund as some people call them. My wife and I chose the UT reasonably carefully. We did not delve into diversification and asset allocations and such. 

In Malaysia, we have something called the Employee Provident Fund, where all employees and employers are required by law to contribute 11% and 12% respectively of gross salaries. This EPF is administered by a body set up under the Ministry of Finance and the Fund pays yearly dividends. 

You are allowed to withdraw a part of your EPF savings and invest them in approved UT’s. I also withdrew from my EPF account and invested in UT’s. (When we sell these UT’s then the money has to be reinvested back with the EPF). 

So over the years we had built up a reasonable nest egg.  

The mistake I made 

We had what can only be called a mind blowing bull-run in equities in 1992/1993 which as per text book rules ended in a spectacular collapse. The market then drifted slowly upwards and downwards.  

In 1997/1998 there was another equally mind blowing collapse due to internal political uncertainties followed by the famous Asian currency crisis. 

Against this backdrop, you may have guessed that my UT did not perform particularly well. There were years when no returns were paid and there were also years of losses. 

In 2003, I did something that I still regret. I sold off the bulk of the UT’s. 

The balance UT’s that I still held have performed as follows:-

As at:-

31 December 04 -       Taken as base 

31 December 05  -       Increased by 21%

31 December 06  -       Increased by 40%

31 December 07  -       Increased by 54%

The above returns include my monthly contributions (which I continued, thankfully). I am still astonished at the returns after even accounting for my contributions. Even though the last few years have been spectacularly good years for equities, the returns are nothing to be ashamed of.

What I should have done

Equities have their cycles of ups and downs. I was well aware of this, having been through a number of them. I also knew that these cycles could take years but just like clockwork, sooner or later the markets would move up again. And the time to turn around was not too far off.

UT’s offered a great way to diversify amongst a number of stocks.

In addition the UT company managing the fund we had selected was one of the better operated ones.

Since we were using the “dollar averaging method”, we had been bulking up on cheaper units as the markets languished.

I should have weighed all these factors and made an unemotional decision on whether to stay invested or to sell out.

Instead, I got influenced by the fact that there were no returns, without objectively analyzing the reasons why. I also never revisited the reasons why I had invested in UT’s in the first place.

Don’t repeat my mistake, please

Long term investments are just that….long term. They should not be influenced by the market fluctuations that happen daily, monthly or even the bigger swings (like what we are going through now) every once in a while. 

Investments in UT’s have the advantage of professional management and diversification amongst a wide array of stocks. Dollar cost averaging does give us an advantage in down markets, as we end up buying more units.  

Had we maintained our investments, my wife and I would be very, very much further ahead in our quest for retirement savings.  

Though I am not losing any sleep over it now, this selling off decision is something that I have regretted and will regret for a long time.  

And it is something I’ll keep repeating to my children never to make! 

How can we nurture and reap the fullest dividends from our greatest asset

Monday, January 21st, 2008

Patrick at Cash Money Life wrote that our greatest asset is an intangible, i.e. our ability to generate income. I am in complete agreement with this view. 

In fact, almost all the methods of valuation of businesses are tied, in one way or another, to the ability of the business to generate income.  Even if we do have an asset that generates income by the busloads, it was “our ability to generate income” that resulted in us owning the asset in the first place. 

Pinyo over at Moolanomy has also given his views on how to protect this “greatest asset” of ours. 

How then should we nurture this asset so as to reap its fullest dividends?

Our ability to generate income is largely dependent on :- 

Our educational levels 

This is pretty much self explanatory. Having said that, we have to take proactive steps to ensure that our education is in tune with current day market requirements. This does not just apply to those of us in careers, but also to our ability to generate income from investments, trading, arbitraging etc. The informal part refers to knowledge gathered from books, blogs, trade shows etc. 

And of course, our continuing education. Many Internet entrepreneurs are products of this.

Our Past Experiences 

Our past experiences will have a direct impact on our ability to generate income. Almost all higher level jobs require “experience”.  And we all value the advice of experienced experts in the fields of investing, money management, real estate etc., over the inexperienced ones.  

Mistakes made and the lessons earned hone our skills and ability to generate income. 

Our network of Friends and Family 

Our ability to generate income would be almost directly proportionate to the strength, depth and coverage of our network. A person who has a network of close and trustworthy friends in the banking, real estate, stock broking and investment banking fields would most probably have a far better success rate in investing than one who starts out alone.  

Our travels 

Travel broadens the mind. Even though globalization has made the world a smaller place, not all parts of the world are the same. For example, certain parts of Asia may be comparable to that of the UK, say, 25 years ago. So if someone from the UK visits that particular part of Asia, he / she may think about how the UK has progressed and bring those changes to Asia.  

Let us think MacDonalds in Kuala Lumpur, Starbucks in Jakarta, etc. 

To nurture our greatest asset, we have to nurture these four areas continuously.

Where should we focus our reviews 

When we draw up this list for our personal individual situation and seek to identify a unique opportunity, we should remember the following.   Business opportunities are created when we have a service or product that :- 

a)    makes people money, 

b)    saves people money, 

c)     makes people feel more secure, physically or emotionally,  

d)    makes people feel better, physically or emotionally,  

e)    saves people time.

I am sure, there are others, but these broad areas should be good enough. When you put these two together, we should be able to see that a job or a career need not be our only option.  

Whether we take a job and work on the other options part time is not the issue. The fact is that the door is now open wider, and we should be in a better position to, at least see, how we can generate more income.

For me, this exercise has given me ideas on two book projects.

2008 – the year for earning more

Thursday, January 17th, 2008

I have acknowledged that 2007 was a year of a paradigm shift for me. 

With this has come the drive to be a lot more frugal, a lot more organized in managing our finances, and a stronger drive to earn more money. 

Two plans have been set in motion in 2008. 

Launch our goat farm 

My wife and I have long wanted to start this. Procrastination came naturally as we consoled each other that we had not found the “right piece of land”. In late 2007 all the pieces fell in place. 

A piece of land owned by relatives of my wife came available. This was the only “asset” the family had, so we did not make any attempts to offer to buy. Rather we proposed a joint venture and it was accepted. 

My wife and I provide the capital to start up and operate the farm. Zai, my wife’s cousin brother, (who had been planting mangoes on the land before this), will be handling the work on the ground and manage the farm when completed. 

The farm is taking shape now. The land has been cleared, fenced, access roads improved and the goat sheds are now in progress.  

We have targeted 1st April 08 as the completion date and have marked 5th April 08 as a date where we’ll have a small “kenduri or thanksgiving prayers” to launch the farm. 

A little on Zai and his family.  

His family consists of his grandma, his mother, his 3 sisters (one elder and 2 younger), his nephew and his children(two boys and a girl). His family has always been very close to us. His grandmother stayed with us and helped nurse our son and the little girls when they were born, whilst his mother is one of my wife’s closest confidants. (They have kindly agreed that the farm be named after my mother). 

My wife and I both know that Zai will do his best to make the farm a success. On our part, we have to make sure that there is adequate funding for the farm, and assist in marketing etc. 

Once a week, I drop by (about an hour drive from our home) to see the progress. So far it is looking good. 

The company in which I was literally gifted a 25% stake, has secured a  project in Indonesia. (I am writing this post from Jakarta).

This project is for the building and leasing of common telecommunication towers for the telecommunication operators in Indonesia.  

There are still a number of issues to be resolved, and the prospects look great. God Willing, we should be starting work around the same time as the farm is launched, i.e. beginning April 08.  

We have done our business plans for both these projects and there are some spin offs that can be created once these two take off. There is a lot to be done and 2008 looks like it is going to be a busy one. And also looks good for the wallet.  

You tell me, what is really my greatest investment?

Wednesday, January 9th, 2008

A number of years ago, I was holding a senior level management post in a PLC.

During my tenure, the company I worked for issued out several large tenders. The winners of one of the tenders was a company, we shall call “A”. Though I was not involved in the technical and financial evaluation of the tenders, nor in deciding on the final recommendations leading to the award, by virtue of my position, outsiders would have inferred that I was a major influencing figure. 

I left this PLC before the final recommendations were made to award to “A”. One of the directors and shareholders of this “A” was, shall we say, Mr. B. During the tender period and process, I had interactions with Mr. B and I liked and respected him, but the relationship sort of tapered off after I left. 

About 2 – 3 years later, I received a call from Mr. B. He had sold off his shares in “A” and was about to invest in another small company and wanted me to join him as a fellow director and shareholder. 

Whilst I had faith in the business model and prospects of this company, I had no money to invest.  

And Mr. B offered me an interest free 5 year loan for the full investment. 

This was at that time, the biggest loan I had ever been offered, about 1.5 times my mortgage. This was the biggest monetary amount I would have had in any investment, even bigger than the value of the house my family was living in. And it was the only interest free loan that had ever been offered to me.  

I took him up on his offer. 

And just look at the returns I received from this investment and what I did with that: 

a)    The loan from Mr. B was paid back in full, though I went slightly over the 5 year period, 

b)    My mortgage was paid off, 

c)     This company, in partnership with others, secured a contract in Ghana and this gave rise to my working stint in West Africa. The first time I had ever been to Africa. 

d)    The 3 years in Africa was my best ever working experience.  

e)    The interactions with my Ghanaian colleagues somehow led to me writing a book titled with the long name of “We wish we knew these 20 years ago”. This book was meant to be a guide to my children. Working on this book created changes in me, changes which I consider “paradigmic”, if there’s such a word.   

f)      When that Ghana contract ended, one of our partners offered me a job which took me to India, where I spent 2 and half very eventful years. 

I can go on with quite a few more returns. And it is still ongoing.  

The point, I am trying to make is, what is really my best investment? 

i)                  Is it the investment in this company? 

ii)                Or is it the investment I had made in myself? The investments that given me certain qualities and values. Qualities and values which had made Mr. B offer the interest free loan to me, so that I could be his fellow shareholder. 

You tell me. 

I have never asked Mr. B, why? Neither has he ever volunteered to tell me. Though I have thanked Mr. B profusely, I guess he may never ever fully realize what a great opportunity and favor he has done me, my family and a host of other people, who have benefited indirectly. 

Thanks a million, again, Mr. B!

“Horrors! Dow Jones dropped 300 points!” or should it be “Hooray, Dow Jones dropped 300 points” – An opportunity to stress test my investment philosophy

Wednesday, December 12th, 2007

My stock investing skills and past record may be classified as a tad better than “losing my pants or taken to the cleaners.”  

The last couple of years, however, I have tried to instill some discipline and have enjoyed better results. However, these last few years have also been exceptionally good years for stock markets in general.  

I do not want to be lulled into the dangerous state of mind that I am a clever investor, and the recent stock market gyrations have given me an opportunity to sort of stress test my investing philosophy.  

The saying that when the DJ sneezes, the world gets a cold is true, at least in our part of the world. As I write this, our Malaysian Composite Index is down almost 1%. The Japanese Nikkei has dropped by 1.85%. 

Some time ago, I had written down my investment philosophy. As usual, this was after reading some book which motivated me, I think it was the Intelligent Investor, with parts from other books. 

I relooked at this, which goes :- 

a)    Value Invest – Buy when values are below intrinsic values, and sell when it is clear that values are overated,  

b)    Do not go against the main trend,  

c)     Always keep 30% cash in hand, 

d)    Never try to time the market and 

e)    Always buy with a margin of safety. 

Notice that I have not written anything about diversifying and all that. Well, like I said, I am a novice. 

Then I refreshed myself with some statistics. CNN listed the DJIA’s 52 week range as being from 11,939.61 – 14,198.10, a spread of 18.9%. Yesterday’s close of 13,432.77 had brought it down 5.39% from the high. Giving up about 30% of your gains, does not seem all that bad to me. 

I went through the history of the DJIA. Its biggest one day losses by points as well as percentages, reactions to world events, reactions during recessions etc. Yes, there are down years, but the long term trend is up. 

Then I read again, the famous reassuring story of Mr. Market, by Warren Buffet. 

What is going on in my mind now? 

1.                The main trend for the US may not be all that great. I cannot fully understand, why the bad mortgages given can result in so many billions written off by so many banks, and the “experts” are saying that it is still not over.  

2.                I do understand that the US is the world’s biggest customer, and the good old US population loves to buy things, even if they have to borrow. They can’t keep on borrowing and buying forever, though. 

3.                China, India and other countries like Vietnam are showing a rise in the growth of their middle class and adding a lot more customers to the equation. 

4.                My stocks whilst they are not amongst the bluest of the blue, were not exactly bought based on tips by my mechanic. I did do some research on the stocks before I bought them and I believe that the companies bought have reasonably sound business models whose revenues should not collapse in the event of a US recession. 

5.                I have no idea how the markets are going to react tomorrow, or next week or next month. Neither do I know if the US is going to go into a recession.  

6.                I do know that markets may rise, markets may fall, but the ultimate trend is up.     

So what should I do? 

1.    Am I losing sleep over my investments? This is a great test. I liked the way the Simple Dollar articulated his thoughts on this. Though there were a busload of comments for and against this, my stand is if it makes me lose sleep then I get out. Right or wrong, time will sure tell me. 

2.    Should I ask someone what to do? No, I have given up on this long ago. I remember vividly one of our local newspaper’s story quoting a Malaysian expert who had said that we should all buy stocks now, as they were “really cheap” or something like that. The next day, which was when the story hit the streets, stocks were given a pummeling like what my generation had never ever seen. 

Secondly, the huge Banks and brokers who are writing off gazillions in losses now, should have had more than their fair share of experts and “tools”. Look at where this got them.  

And thirdly, I must express my thanks to I Paid for this Twice Already, who expressed very succinctly my feelings on this. 

3.    There has been a huge amount of wealth arising from the oil prices boom. All these money should be looking for places to invest and things to buy.  

4.    Will I be able to live with the downside? If the markets plunge tomorrow, what will happen to me? Will it wipe me out? No, I think not. I may be walking around like a bear with a sore head, but I’ll live. 

I’ll wait and watch, and keep reading the blogs for the latest.  

PS:  The unit trusts (or mutual funds as some may call them) are left alone, and regularly invested on a “dollar cost averaging basis”. This post is only about my investment in individual stocks.     

Agricultural investment, is it for you?

Sunday, December 9th, 2007

Most townfolks don’t list agriculture very highly in their list of “investment must haves”.  

We have one such an investment, though it did not happen quite the way we had originally planned. This is our tale.  

My wife and I have been interested in starting a goat and cow farm for a long time.  In line with this goal, we had been looking for relatively cheap agricultural land. And along came this opportunity to buy a 11 acre piece for, let’s just say, RM 1,000.  

(RM is the acronym for Ringgit Malaysia, the official currency of my country, Malaysia. Approximate value now is about RM3.50 to the USD. I am using 1,000 to represent the cost so that other related expenses can be expressed as a % easily. I am also a little shy about disclosing actual figures about my finances). 

We went to see the land (about an hour easy drive away), and it was fully covered with thick secondary undergrowth. The advantage was that it was roadside land. Though it appeared hilly, we decided to go ahead and buy anyway.  

Well, it turned out hilly alright. No way could the land be used as an animal farm.  So we decided to plant it with rubber.

See here and here for some background facts on rubber trees. 

The trees take about 5 – 6 years to mature and should start yielding rubber latex from the 5th year onwards. We got a contractor to clear the land, cut terraces and plant the seedlings. We appointed another contractor, to take care of upkeep and maintenance.  

The final costs from purchase of land to planting came to RM 1,285. Additional costs for maintenance and upkeep for the 5 years, till the trees start yielding would be RM240, bringing the total cost to RM1,525. 

We have estimated our earnings to be approximately RM105 – 220 per annum, net of all expenses, starting from year 6 onwards. (We have assumed that, when the time comes, we’ll appoint a contractor to tap the rubber. The present norm is to share the yield 50:50. The amounts represent our 50%). 

Is this a good investment? Let’s see.

Rate of Return Using the rule of 72.

This investment gives us a compounded annual return of 3.60% - 5.76%, depending on market prices for rubber. (I am taking current prices as the maximum).  

The inflation factor should be taken care off in the appreciation of the land.  

Liquidity – Nope. Land is usually considered as non liquid.  

Do I have any regrets? I have to answer an emphatic no. I would not normally participate in illiquid investments with this rate of returns. 

However, our entry cost was relatively low, and it has been an enjoyable experience overall. I love the countryside, anyway. 

There have been some good lessons learnt. 

i) The principal lesson would have been to make sure the land “was what we had in mind”.  (I need to learn this. Now you know the reason for my dismal investment skills.)

ii) During the course of this exercise of clearing and planting, etc., we found out, (too late for us,though) that there were people who would have done all the work for free, provided we allowed them to grow cash crops such as bananas for a period of 2 -3 years. As this does not bother the rubber trees at all, it is a great win-win situation.  

Now that we have the land planted, we do not intend to just wait. We are looking into inter planting with cash crops. Perhaps we can increase the rate of returns, after all.  

My daughter is attending a property investment course

Wednesday, December 5th, 2007

As many other aspiring billionaires, I have read and been fascinated by the many books that espouse theories on making money on properties. 

However my wife and I have never really tried “property investing”.  

A good family friend, Kalai, has tried and made money. He has been a “fixer upper” and made decent money on 2 properties. He has bought and sold properties. He has been a property agent and sold a number of properties. He has also a dud on his hands now. His stories have always fascinated me.  

I accept that property is a major asset class and learning about investing in them can only be a plus in our journey to financial freedom. 

So when a local financial and property “guru”, Milan Doshi, announced his upcoming class, I was interested got up my daughter and nephew to sign up. 

The course promises a number of things, related to improving our financial IQ and learning about RE investment. 

Of course, neither my wife nor I expect our daughter (the second, the first is studying in Wales) to return from the course with Donald Trump’s skills.

What then do we expect? 

a)    My nephew and daughter will get to understand at least some of the nitty gritty and be given an introduction to the world of RE investing and the related matters, like tenant issues, types of property, pitfalls to look out for, financing, calculating returns etc. 

b)    My nephew and daughter will get to meet other course participants who should have the same interests and maybe, form a peer group with some of them. (See this great article on the advantages of peer groups). 

Besides, my daughters forming a peer group is one of my goals for 2008.  

c)     My daughter is close to my nephew and there is no reason why they should not form a 2 member peer group to start off with. 

d)    My nephew is a very sensible young man and I am sure his presence at the course and as my daughter’s peer group member will be of great help to her. 

e)    My daughter is not out of University yet, but my nephew has been working for a few years now. He works with our country’s Central Bank, and thus has his fair share of friends in the banking industry. This should be a plus for them.

f)      I have read Milan’s books and I think he gives a fair representation of the industry. It is not “just buy property and become rich”. It is also about gain knowledge, study your property carefully and buy. And that making mistakes in RE investment can be a long painful affair to unravel.

I believe that my nephew and daughter will get a balanced view of the positives and negatives of RE investing. 

Ultimately, we hope that my nephew and daughter will learn from this course and be more enlightened about the specifics of RE investment.

We hope that they will look up and study a lot more on RE. And we hope they’ll consider RE investment as one of their vehicles in their journey for financial independence. 

Kalai has also talked to my daughter about his experiences, relating both his good and bad ones. He dwelled upon the need to carefully study the property and suggested that she should start with something “small and manageable.” 

I am bristling with so called ideas on what my nephew and daughter should do. I have to and must restrain myself. This is their journey.  

Maybe I should just ask for their idea of a 5 year plan on their RE investments.  

Keeping accurate investment records and its impact on investment “luck”

Friday, November 30th, 2007

I have been losing money in stocks and shares ever since I started “investing”. However, I never kept track of my investment losses (or the very few and very far in between gains).  

In late 2004, I decided that this was not on and formulated a system to keep track of my investment activities. 

First, I thought about and wrote down my investment strategy. 

Second, I opened a separate bank account (joint account with my wife), for this purpose and deposited the seed money into this account. 

Three, I used an Excel file and created 4 sheets. 

a)    One for my monthly balance sheet and benchmark comparisons. The items in this sheet are:-

Benchmarks   

i)                  Monthly closing of the KLSE Composite Index, 

ii)                Monthly change in the Index (%) 

iii)             Cumulative change in the index for the year to date (%), 

iv)              Monthly % change in my “Investment shareholder funds”, which is (ix) below plus or minus the realized and unrealized gains / (losses)  

v)                Cumulative change of (iv) for the year to date.  

This shows me where I stand every month against the benchmark index as well as against my targeted investment returns goals.    

Balance Sheet 

vi)              My account, which would represent drawings from or extra contributions to the bank account,(excludes the seed capital) 

vii)           Bank account  

viii)         Cost of shares/stocks owned at month end

          a.    Add / Deduct Marking to Market 

ix)              Start up capital (my seed money)

         a.    Add / Deduct Profit / (Loss) – Realised

         b.    Add / Deduct Profit / (Loss) Unrealised, i.e. marked to market. 

b)    Sheet Two shows the details of the bank account, all deposits from sales of shares/stocks as well as additional contributions or withdrawals I make. This also includes dividends and interest received. 

c)     Sheet Three is for the details of my account 

d)    Sheet Four is on monthly stock transactions I make.

    This sheet shows:- 

    i)        Date of transaction,

    ii)       Stock Name,

    iii)     Number of shares bought and at what unit price,

    iv)     Total cost,

    v)      Market price as at end of month,

    vi)     Profit / (Loss) for sales done during the month 

At the end of each month, I close off the month’s transactions by inserting a new sheet and naming it by month. The profit/(loss) for the month + the balance as at the end of the previous month is carried into the balance sheet as realized P & L.  

All these may seem cumbersome and complicated, but it takes me only about ten minutes a month to complete the recording for the month. After all I do not have many trades a month.  

My records and benchmark comparisons are based on the month ending closing buying prices. I ignore brokerage and stamp duty for purposes of balance sheet. 

This system has resulted in some changes in my investment management. Seeing the index’s change against the changes in my “investment shareholder’s funds” gives me a clear indication on where I stand for the month. In fact, it is a snap to do this at the end of any day I choose.  

And knowing where we are is clearly the first step to getting to where we want to go.       

At the end of the year, I just close off the year’s results by deciding how much I should use as the opening seed capital for the next year. The difference between the amount of seed money for this year and the decided seed money for the next year is knocked off against my account.

If I have a credit, then I withdraw the amount and it is banked into other accounts, like paying off our mortgage or car loan etc, or a small celebration. 

This is the system I have followed since 1st January 2005 and it has proven very useful. This includes details of every stock transaction that I have done since the above date. 

Though my “funds” were down by 10.91% against the index’s decline of 1.90% for 2005, they were up 95.45% against the index’s 21.83% gain for 2006. Thankfully, 2007 also looks good so far.  

The absolute amounts involved, will not put me amongst the “markets movers and shakers”, anytime soon…..Sigh H

However, this ability to see and gauge my actual performance against benchmarks and against my internal targets has made a difference in my investment “luck”.

What turns you on – Expansion of income vs Reduction of expenses

Tuesday, November 13th, 2007

Many PF blogs explain various methods of saving money and reducing expenses. Some of these posts are really good, showing ways to reduce expenses without affecting quality of life in any way.

See The Simple Dollar’s series on “One Hour Projects.” 

Others need a lot more commitment, things like baking our own bread, cooking for a week and storing them, sewing our own clothes, etc. 

We all can agree that the Number 1 cause for a terrible financial position is “living beyond our means.” So managing expenses and controlling them is a must. 

The debate on “whether we should pay down loans (hence reducing interest expense or invest to increase income” is a hot one. I don’t think there is any one single “right” answer.

We have mathematical arguments, talking about comparing the amounts and % that we expect to save and make, and then making our call.  Others who appear to be more risk adverse take the position that interest savings are clearly determined, while investment income is risky and unknown. This, I call, the “bird in hand vs the bird in the bush theory.” 

The Simple Dollar argues that the answer depends on one’s own goals and lists some of the benefits a debt free life can offer. He also calls the debt payment a psychological investment.  

Yahoo Finance drives home the point that :-

First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn’t have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times. As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There’s nothing magically good about having a paid-off mortgage, but there’s something seriously bad about not having ready liquid assets even if your home is paid for. 

Others comment that women and men have different approaches to this. They take the view that women are more risk averse, so they would more likely than not, chose to get rid of debt as soon as possible.  

Yet another interesting version to this “save or invest” is that presented by KC Lau. He presents the view that we can only save “that much”, whilst investment income is theoretically unlimited. 

So exactly what should we do? Whilst there is no simple answer,

I agree with KC Lau and the Simple Dollar. There has to be alignment to one’s own goals and feelings, i.e. basically doing what we feel most comfortable with.

However, the basic principles would more or less be similar. 

a)    get our basics anchored down first,

       a.    spend less than we earn,

       b.    build up our emergency fund,

       c.     pay off all our high interest rate debt, 

and, after having made our financial foundation solid,   

b)    invest as wisely as we can.  

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