By Dennis Ng (guest contributor)
Our desires and wants are unlimited but our financial resources are limited. As such, we need to differentiate our needs and wants. In the course of learning how to better manage and grow my money, I read countless books on personal finance. Among all the books that I read, the book that stood out most was The Richest Man in Babylon, written by George Samuel Clason.
The Richest Man in Babylon
Quite unlike other books on personal finance, this book approaches this subject through the story of Arkad, the richest man in Babylon. In this book, Arkad delves into personal finance as he shares with his childhood friends practical and useful tips on how to grow one’s wealth.
Despite being poor when he was a child, Arkad grew up to become the richest man in Babylon by learning how to effectively plan, manage and grow his money. Much like Arkad, I was born into a poor family. As a child, I grew up in a 1-bedroom HDB rental flat together with seven other family members. But in the course of the last 18 years, I acquired knowledge on managing and growing my money and finally achieved financial freedom by 2008.
But what does it mean to be financially free or financially independent? In this case, financial freedom or financial independence refers to a financial situation that if I so decide to stop working now, I would still have the financial means to maintain the current standard of living for my family and myself for the rest of our lives.
Needless to say, being financially free or independent is desired by all. But do you sometimes feel that there is insufficient money to go around? Instead of fretting over financial woes, I have come up with seven cures for a lean purse, to help you fatten your purse and beat the financial blues.
First Cure—Save at least 10% of your income
In the book The Richest Man in Babylon, Arkad shared that when an individual’s income increases, his or her expenses would also typically increase. As a result, this individual would fail to accumulate any savings or wealth. In light of this, Arkad says that the first step to riches is to cultivate the good habit of saving. And by this, I suggest that the simplest way is to save at least 10% of your income.
Such is the importance of cultivating this habit that when I started working in 1993, I have been following Arkad’s recommendation to save money religiously. In which case, I saved 20% of my income monthly then. To make this saving process more effortless, you can arrange for your bank to automatically channel a specified percentage of your income into a separate savings account using GIRO. By doing so, you separate your savings from the bank account meant for your day-to-day expenses and better set the perimeter for what can be spent and what cannot be spent for the nitty gritty.
If you can save 10% of your monthly income, you would have saved more than a year’s worth of income after a decade!
Second Cure—Control your expenses
Our desires and wants are unlimited but our financial resources are limited. As such, we need to differentiate our needs and wants. When learning how to manage your money wisely, you have to first prioritize what needs to be bought versus what you would want to buy. Only after you have purchased what you need, should you contemplate buying things that you want with the leftover. In which case, your total expenditure should not exceed 90% of your income. By doing so, you can satisfy your desires and wants without exhausting the amount that you earn.
Third Cure—Learn how to grow your money
Most people only know how to save, but do not know how to grow their money. If the interest that you earn from bank deposits is only 1%, while inflation rate is at 3%, you are effectively losing 2% every year! Instead of becoming richer, you are in actual fact, become poorer and poorer over time.
As a result of inflation, where the value of a dollar drops over time, we need to do more than just save—we need to learn how to grow our money. Metaphorically speaking, we need to learn how to convert our ‘golden eggs’ into a ‘golden goose’, so as to help lay us more golden eggs (money making money). Over time, when the income from your golden goose, or various investments, exceeds your expenses, you would have achieved financial freedom. By then, you can choose to stop working and yet upkeep your current lifestyle.
Fourth Cure—Protect your capital from losses
Warren Buffett, the richest investor in the world, said that the first rule of investing is that we do not lose our money. By that, he means that when investing, we should always protect our capital from losses. But how do we protect our capital in an investment?
Before you place your money into any investment, you need to work out the worst case scenario—the amount that you can stand to lose from the investment. To safeguard your capital, do not place all your eggs into one basket. Instead, you should diversify your savings into different investments. This way, even if some of the investments incur losses, you might still be able to keep your capital intact when you make gains in other investments.
Fifth Cure—Buy a house instead of renting one
Everyone needs a roof above their head. If you are to rent a house, the incurred monthly rental snowballs into a significant amount over time. On the other hand, if you are to buy a house, you would have to pay monthly housing loan installments, but have a house to keep when you eventually pay off the loan.
The thought of owning your house outright might also be the source of impetus that drives you towards working harder so as to finance the loan accrued.
In 1995, I bought a HDB resale flat when property prices were high. Despite weathering a couple of economic downturns in 1998’s Asian Financial Crisis and 2003’s SARS Crisis, the market value of this HDB flat is still 50% higher than the transacted amount paid for nearly two decades ago. Today, this HDB flat is very much a valuable asset.
Sixth Cure—Transfer risks through insurance
In life, there could be the occurrence of accidents and events that could potentially wipe out our accumulated assets and income, therein putting an abrupt stop to all our financial aspirations.
By obtaining suitable insurance plans, we can transfer this risk to insurance companies. Such plans include term insurance, comprehensive medical insurance plans, critical illness plans or accident plans, just to name a few. By acquiring such plans, you ensure that no matter what happens, the financial well-being of your family and yourself is being taken care of.
Seventh Cure—Increase your earning capacity
If your income is limited, your savings is also naturally limited. Thus, in order to increase your savings, you can either cut down on our expenses, or increase your income. And since there is a limit to how much you can cut down on your expenses, you should really aim towards increasing your income to better grow your wealth.
But how can one go about increasing his or her income? You can do so when you expand your earning capacity by upgrading yourself through courses and further training. With more knowledge or greater skills, you put yourself in a better position to increase your income.
As it is, you should strive towards lifelong learning and continuous growth. With the world moving at a quick pace, you need to be constantly learning and improving so that you do not fall behind others. By adding more value to the work that you do, you can most definitely increase your income and fatten your purse in due time.
By guest contributor Dennis Ng, Director of Leverage Holding and Master Your Finance.