Recently, i was asked a very interesting question - if US finances are in such a bad shape, why does USD appreciate in times of risk aversion. This to me was a very interesting question and its a question i have to deal with daily in my role as a local markets trader.
My reply to this friend and to some others are attached but the message is the same - Times are a changing.
____
Your question on why USD up was the RIGHT question. No one in KL got that.
Basically, the speculative money now borrows in USD and invests in risky assets - equity, bonds in other currencies. So when there is risk aversions, these guys sell their risky assets and buy back USD to pay their USD borrowing.
Also, there are two types of risk aversion - Perception and Real (my own terms...haha).
Perception Risk Aversion (PRA) - market panics and risky assets get sold off and USD strengthens but then things move back or bounce back because of some positive moves. This is what happened from 2006 to 2008.
Real Risk Aversion (RRA) - is market panics, risky assets get sold off and USD strengthens but then an event happens (2008 was Lehman failure), and the risk aversion actually led to a funding crisis where banks did not want to lend to one another. When the banks stopped lending, importers and exporters could not get Bank lines or Letter of Credits to facilitate trade, and trade crashed. In RRA, everything breaks, Equity does a big selloff, property sells off and USD flies as capital is pulled back.
Risk Positive (RP) - From 2009, market moved back to a risk positive mode and here people borrowed USD all over again, and started selling USD to buy risky assets in other countries. Also, perception of USD changed where players now felt that USD had only one way to go - DOWN!!!. This carried thru to 2010.
Where are we now?
My view is if we try to put whats happening now into context of that 2006 - 2010 period, we are now in mid to late 2008 where we saw a lot of volatility but news of things getting worse and worse was coming out with occasional bouts of positivity until the EVENT happens. What that EVENT will be, i am not sure or it could just be a multiple of Events - France downgrade, Greece default, massive riots in China..who knows. But the strains are there.
What will happen?
In the near term (say next 3-6mths), markets will be generally negative with bouts of positivity ie you will see volatility but negative moves should be bigger than positive moves. USD should see more strength in the near term. If the Event(s) occur, you will see a big Negative move like we saw in 2008 and govts will try to prop things up as much as possible. My view is that they wont be as successful as they were before. There will be a sharp slowdown in business activity across all boards (worst hit will be financials) and then things will pick up but at slower pace to what we saw in the 2009 - 2010 recovery.
Will Malaysia be different?
My main issue with Malaysia is they lack a credible business plan or business focus. They cant compete as a low cost manufacturer as they dont have a large labour pool. They dont have a strong enough educated pool for high skill manufacturing and their services/tourist sector is growing but too slow to make a difference in the next 5 years. Malaysia's main wealth and growth is now commodities. So if i am right and we go through a sharp drop in buisness activity and then a very slow recovery - commodity prices will stabilise and maybe trend lower. In that situation, Malaysia will not benefit. But if commodity prices recover faster than expected, Malaysia will do well. So thats the call - how will oil and commodities do? That will determine how well Malaysia does. I cant say for sure what will happen on commodities but my bet is on a drop in prices by at least 30%-40% and then a stabilisation of prices.
What you should do?
Focus on growing your customer base and business growth. Coz if you get thru this next 2 years, you will be stronger than ever. This is what happend with business that started in 2007. They nearly went under in 2008 but then did extremely well 2009 - 2010 and now have adequate buffers to get thru the next down move.
Keep liquidity near. try to bring your payment terms close or get long term bank lines and borrowing in place once you reach a size to do that. Keep cash ready and invest only in your business.
Near term, USD will see higher prices but post that Event(s), USD is going to weaken considerably so if you receiving income in USD, try to push for a currency closer to your cost ie MYR or IDR. OR, whenever you receive USD only keep a small proportion in USD, keep the rest in your base currency. I would suggest not keeping more tan 20 - 30% of your cash in USD.
Of course, i could be wrong as like trading, everything is based on what you think will happen and the more info you have, the better your chances to be right. Currently i am 70% sure that the outcome will be as i say - so pretty committed to that view. Will let you know if that changes.
For now, getting liquidity and managing your cash to get thru the next two years will be key as you continue to invest in the business. Its a fine line you will have to face - spend money on the business which reduces your liquidity NOW but adds revenue later. Here, only you can make that call but my bet - go ALL IN......survive the next two years, your business is going to be growing from strength to strength.
Good luck
____
what i am convinced about is that if you see the growth in the last two years, its basically been a growth about financial assets - property, equity, bonds etc. Its been very little about real growth - save maybe for Apple but thats not enough - we need new growth areas, new businesses outside of services. I think the slowdown will be good in the long run but capital has to move away from financial assets and into real business - energy efficiency, increasing productivity, alternate energy.
Its interesting times and thats what i said about 2006 - 2010 but maybe the slump in 2008 was just delayed till now and now we are actually heading to real downturn and real changes. Creation from destruction and when people look back - maybe they will look at 2006 - 2014 as one period.
I am not being pessimistic. In fact i am optimistic about the long term but in the near term, be cautious of finances, focus on your business and build multiple streams of income (if you are in business) and if you are a salaried worker, keep expenses down as i think incomes will actually go down or stabilise at these levels and not move up. My whole goal from here is to build a proper business (ie sustainable income) for this bank and am achieveing that BUT i take nothing for granted and am now keeping at least 1yr of cash as a buffer to cover expenses and maybe even 2yrs.
Upon us all a little rain must fall - Led Zeppelin
_________
be prepared, be productive, be relevant
Tuesday, August 9, 2011
Monday, December 6, 2010
The Buying & Selling of Others & WHats your Figure
What's your Figure?
Now that is an interesting question. Recently, i watched Wall Street, the original movie and then i watched the new Wall Street movie. Now, as a trader, both movies struck certain chords with me.
In the original, at the ending, the Charlie Sheen character is heading to the court house where he expects to be put in jail. His father tells him "Maybe this is the wake call you need. Stop living off the buying and selling of others and produce something.". That was a movie released in 1984 and the same conversations in that movie can be had now in 2010 (especially after 2008). In that scene, i remembered a similiar conversation i had with my father. No matter how much i tried, he could never understand what i did for a living or why i enjoy it so much. He could not see what i produce or what i contributed to the world. In his mind, i believe he felt that i lived off the buying and selling of others or as some put it - i use other people's money and skim off the top.
What do i do and what motivates me to do it?
To the first question, i would tell you that i strive to provide a platform for capital (money) to flow into emerging markets and for capital to flow out. I am the bridge or one of the bridges that allows capital to flow from surplus centers to centers that require it. I would tell you that proudly but most people would rather believe i live off the buying and selling of others.
Why? Because i make money as capital flows into countries when they need it. I make money when capital flows out when they dont need it. I make tremendous amount of money when money flows into countries that are having too much capital inflow and i make the most amount of money when capital flows out at points when the country needs it the most. No one complains when they need it but we are easy to blame when the flow hurts. This is only natural.
Especially as its a job that can pay well but in all things, there is no such thing as money for nothing. Your career as a trader can end in so many ways. In 2006, the worst trading year i ever had, if i had not recovered from my losses, i may not have got the transfer to Singapore and my career could have stalled. I have to continuously improve and there is no let up as at some point, you can be made redundant. Recently i heard about 3 or 4 cases of people who have not been performing and have been asked to either leave their banks or are being transferred back to their home countries. Its sad especially when the family is already established here in Singapore. This is what we all face if we become complacent or switch off. There is no off button in this job.
So why do it? It cant be only about the money. Granted there are those that are solely motivated by the money but many of these guys burn out or lose interest or worse they sacrifice their integrity to support lifestyles that require more and more money. In the second wall street movie, the young idealistic banker (in my mind, that could be me...granted i dont look as good in a suit) asks the diabolical and greedy Josh Brolin character - Whats your figure? Everyone has a figure. Their walk away figure. The Josh Brolin character smirks and says MORE.
It cant be about MORE, it has to mean more than that.
To me i love what i do as no job gives you the opportunities to see how each and every one is linked - how for instance, in China, most people save almost 40 - 50% of their income for their child's education and for their own medical expenses. Now China has a slowing manufacturing division and a rising educated degree carrying population (most estimates expect 7m graduates a year will be entering the chinese work force). What can they do? They need to boost the services sector domestically but to do that they need stronger consumption by the people. They see this and now there is a big push to provide education and medical facilities and support for the public. The public then has more to spend to grow consumption. What this means is that there will be a large amount of capital flowing into China in the consumer sectors and in retail and in medical facilities. What should be done - move capital to medical providers, education providers, the CNY must appreciate. Everything is linked and my job gives me a front row seat to how the world is growing for good and bad. Mostly good as i am a optimist.
So i love what i do and it pays but it cant be about MORE.
I have my walk-away figure. The figure that i have in my mind where i am financially free. So many people pluck numbers out of the air saying i want 1m sitting in my account or 1m per child. All good but everyones figure is different and is relative to their income and their spending habits.
My belief which i believe strongly is life is too short for delayed gratification to be your sole motive in life. My motive in life is to provide and to meet long term goals while enjoying and spending the now.
So whats my figure?
Its the amount of money that if i put it in a FD earning 4%, i can comfortably live off the interest earned.
So say you want 20k a month which is 240k a year. Your figure then will be 240k/4% or 6 Million.
My figure - thats a secret but i can tell you this i have only covered 4%, ONLY 96% to go.
What do i do then? Maybe stop living off the buying and selling of others (haha) and Produce, Give it away or build something lasting....i dont know but i am excited at the prospect.
So heres to each and everyone finding their figure and succeeding.
d.
Wednesday, June 16, 2010
In Memoriam....A toast
My father in law passed in November and my father passed March 2006. But it is this June month that makes me look back. It is this June that i start listening to a CD my brother compiled. It is this month that makes me think that as we grow up and grow older, it is sometimes what and who we have lost that defines us. It is this month that i value the gifts i have, the lights that will guide me home - my family and my circle of friends.
It is this month that i think of my friend, Anand.
These words strike me - (Mad World by Gary Jules)
Their tears are filling up their glasses
no expression, no expression
Hide my head, i wanna drown my sorrow
No tomorrow, No tomorrow
I find it kind of funny, i find it kinda of sad,
The dreams in which i'm dying are the best i've ever had
I find it hard to tell you, i find it hard to take
People running in circles its a very, very
Mad world, Mad world
These verses are part of the first song in the Anand CD. As i listen to the song, i marvel at my brother's choice as the song sings of being lost and angry and the song flows with deep sadness. As i listen, i keep asking myself, have i felt that lost, that angry or have i felt such sadness fill me. I can never answer myself. There were times when i think i did, realising for the first time that i had to face failure. Failure that my abilities and aptitude was not enough to coast through life. Failure that i nearly did not make it through university. So when i listen to this song, i try to imagine those feelings again and i can never feel it again.
What i feel is blessed and what i remember is the bonds that were strengthened in that 2006. We, my circle of friends, have formed bonds from our losses. In that June 2006, we came together and we supported, we laughed, we cried but through it all we cared. Thats what i remember. I remember my wife standing by me and supporting me and i remember my friends and i remember my daughter sitting in my lap as we spoke of our friend who had made his sad choice. I remember the lights in my life.
As the sadness of Mad World finishes, the second song sings of these lights. Again, my brother had chosen well. These are some of the words -
Fix You - Coldplay
When you try your best but you don't succeed
When you get what you want but not what you need
When you feel so tired but you can't sleep
Stuck in reverse.
And the tears come streaming down your face
When you lose something you can't replace
Lights will guide you home
And ignite your bones
And I will try to fix you
This second song goes loud and rifts with hope and i am struck by how lucky i am to have my lights, my family and my circle of friends.
So this is my toast - In Memoriam
the first time we saw loss,
we sat as a group as our friends, brothers
stood straight and strong for the many
and remembered their mother
the second time,
we stood with the brothers
as their father passed
the next was my father,
and we had the support needed
then, Anand
and that we formed bonds
strong and filled with laughter
then another mother
in that same year
and then a father,
i considered mine as well
and now a father, a new grandfather
to all those we lost and miss, hear our cries soft but hear our laughter LOUD
It is this month that i think of my friend, Anand.
These words strike me - (Mad World by Gary Jules)
Their tears are filling up their glasses
no expression, no expression
Hide my head, i wanna drown my sorrow
No tomorrow, No tomorrow
I find it kind of funny, i find it kinda of sad,
The dreams in which i'm dying are the best i've ever had
I find it hard to tell you, i find it hard to take
People running in circles its a very, very
Mad world, Mad world
These verses are part of the first song in the Anand CD. As i listen to the song, i marvel at my brother's choice as the song sings of being lost and angry and the song flows with deep sadness. As i listen, i keep asking myself, have i felt that lost, that angry or have i felt such sadness fill me. I can never answer myself. There were times when i think i did, realising for the first time that i had to face failure. Failure that my abilities and aptitude was not enough to coast through life. Failure that i nearly did not make it through university. So when i listen to this song, i try to imagine those feelings again and i can never feel it again.
What i feel is blessed and what i remember is the bonds that were strengthened in that 2006. We, my circle of friends, have formed bonds from our losses. In that June 2006, we came together and we supported, we laughed, we cried but through it all we cared. Thats what i remember. I remember my wife standing by me and supporting me and i remember my friends and i remember my daughter sitting in my lap as we spoke of our friend who had made his sad choice. I remember the lights in my life.
As the sadness of Mad World finishes, the second song sings of these lights. Again, my brother had chosen well. These are some of the words -
Fix You - Coldplay
When you try your best but you don't succeed
When you get what you want but not what you need
When you feel so tired but you can't sleep
Stuck in reverse.
And the tears come streaming down your face
When you lose something you can't replace
Lights will guide you home
And ignite your bones
And I will try to fix you
This second song goes loud and rifts with hope and i am struck by how lucky i am to have my lights, my family and my circle of friends.
So this is my toast - In Memoriam
the first time we saw loss,
we sat as a group as our friends, brothers
stood straight and strong for the many
and remembered their mother
the second time,
we stood with the brothers
as their father passed
the next was my father,
and we had the support needed
then, Anand
and that we formed bonds
strong and filled with laughter
then another mother
in that same year
and then a father,
i considered mine as well
and now a father, a new grandfather
to all those we lost and miss, hear our cries soft but hear our laughter LOUD
Tuesday, February 9, 2010
Take it Like a man and go on
For the last week I have had the amazing positivity that I felt at the start of the year slowly fade. I love the work I do but the management and organisation drains me. I spend more time managing up than growing the business.
And now I have reached a certain point in my career that I crave the independence and empowerment to run and grow my buisness well. I do not like to have to justify my every action nor be second guessed. If I am wrong I want to be held accountable but i want the space to make both right and wrong decisions.
Yesterday things got heated between me and my boss and I rarely get angry or raise my voice but I was very close. Then overnight we again received queries on how we were managing our risk.
My problem is that I get very focused at work (which is very important as a trader) that it's hard to draw a line when I am home. My unfortunate wife has to deal with that but that's a whole different story.
So this morning I wa truly angry and I went to a friend in the office who I respect as a trader and I vented and said I give up. He knew I was upset.
When I went back to my desk he had dropped me a ib message - relax bro TAKE it like a man and go on.
I just started laughing out when I read that an I realized again everyone of us faces difficulties but the true measure of ourselves is not how we act in good times but how we perform in bad times.
So I started pulling together again and I have my issues but this year is gonna be great. Not because of where I work or who I work for but because I have a great family and I am productive.
So on those days that you feel your motivtion slipping, let me pass the best advice I have received this year - take it like a man and go on.
d.
- iPhone post
And now I have reached a certain point in my career that I crave the independence and empowerment to run and grow my buisness well. I do not like to have to justify my every action nor be second guessed. If I am wrong I want to be held accountable but i want the space to make both right and wrong decisions.
Yesterday things got heated between me and my boss and I rarely get angry or raise my voice but I was very close. Then overnight we again received queries on how we were managing our risk.
My problem is that I get very focused at work (which is very important as a trader) that it's hard to draw a line when I am home. My unfortunate wife has to deal with that but that's a whole different story.
So this morning I wa truly angry and I went to a friend in the office who I respect as a trader and I vented and said I give up. He knew I was upset.
When I went back to my desk he had dropped me a ib message - relax bro TAKE it like a man and go on.
I just started laughing out when I read that an I realized again everyone of us faces difficulties but the true measure of ourselves is not how we act in good times but how we perform in bad times.
So I started pulling together again and I have my issues but this year is gonna be great. Not because of where I work or who I work for but because I have a great family and I am productive.
So on those days that you feel your motivtion slipping, let me pass the best advice I have received this year - take it like a man and go on.
d.
- iPhone post
Saturday, February 6, 2010
The Notebook with alcohol
I sat on a plane knowing
that I had no meetings
nor work
A quiet dinner a lonely bed
In taipei, that was my night
that was my expectation
I sat on a plane and
Knowing my night,
I decided to drink
Two white wines, three reds
And two single malt whiskies
The 12 year old highland park
No less
And then as I drank, I
watched the Notebook
A wonderful story, it touched
In that story, the life of two
was of fights and passion
And that love is a gift
But the beauty of it
Is more the story of desire
The desire to be in love
At 20, 30 and 60 to more
For me, it touched as
I have loved at 20
I have fallen in love at 30
And I dream of being in love
Till 60 or more
I am lucky to know
Love at 20, to experience
Love at 30, to anticipate
Love at 60
I know, I experience, I anticipate
My iron rose, my anchor
My life
- iPhone post
that I had no meetings
nor work
A quiet dinner a lonely bed
In taipei, that was my night
that was my expectation
I sat on a plane and
Knowing my night,
I decided to drink
Two white wines, three reds
And two single malt whiskies
The 12 year old highland park
No less
And then as I drank, I
watched the Notebook
A wonderful story, it touched
In that story, the life of two
was of fights and passion
And that love is a gift
But the beauty of it
Is more the story of desire
The desire to be in love
At 20, 30 and 60 to more
For me, it touched as
I have loved at 20
I have fallen in love at 30
And I dream of being in love
Till 60 or more
I am lucky to know
Love at 20, to experience
Love at 30, to anticipate
Love at 60
I know, I experience, I anticipate
My iron rose, my anchor
My life
- iPhone post
Tuesday, February 2, 2010
Live Large with Planning
Tonight i was asked some interesting questions -
Wealth Ratio = Net Worth divided by (Age x Annual Income)/10
Net Worth = Total Assets - Total Liabilities
So if you are age 35 and your net worth is 350,000 and your annual income is 100,000, your wealth ratio will be 1.
This ratio is valuable because it links 3 very important factors in financial freedom - your age, your annual income and your net worth. Breaking this down further as we know that Net Worth = Total Assets - Total Liabilities, we immediately also can link this ratio to the assets we own and the debt outstanding.
Now if your wealth ratio is under 1, the books terms you as a UAW, under accumulator of wealth. If you can exceed 1, you are termed an AAW, average accumulator of wealth. If you are one of the lucky few that score above 2, you are termed a PAW, prodigious accumulator of wealth. I love this ratio as it can be applied universally no matter what your income level is. Your goal is to become a PAW at any income level.
So how do you become a PAW?
Just looking at the ratio, it becomes obvious, increase your net worth (increase assets or reduce liabilities). This ratio can immediately be used to answer all 3 questions above. When your wealth ratio hits 2, you have adequate net worth if you sustain this ratio, you will definitely be saving/investing enough and your debt is adequate. To me debt is not a bad thing BUT it must be managed. The key criteria that you have to ask in increasing your net worth is if i buy the asset is it going to generate a better return than reducing my debt. SO with credit card debt its easy - cost of credit card debt is 12 - 18% p.a and unless my investments can exceed that rate, i would definitely increase my net worth by reducing credit card debt. But, if i have a property that is earning 8% and i have debt at 6%, i would buy the property and keep the debt. The real question is do i have adequate cashflow to maintain that debt and to grow my net assets. The next ratio helps to manage cashflow as well as grows your chances of becoming a PAW.
Savings Ratio = Total Amount Saved/Total Income earned
If you use an annual savings amount, then use annual income but the ratio also works for monthly figures as long as both denominator and numerator use the same base ie annual or monthly.
Now the key here is to have Savings rate above 25%. This means if you earning 10k, you need to save/invest at least 2.5k. This includes your EPF contributions which should be 9 - 11%, so you only need an additional 14 - 16% to be saved/invested. As you track this ratio and the Wealth ratio, you will find that a Savings Ratio at 25% will only let you become at the most a AAW. To be a PAW you will need to be saving/investing at least 35% of your income. This ratio will immediately ensure that you are not taking on unnecessary debt as well as controls your monthly spending.
Its a very simple ratio but very effective in becoming financially free. This ratio also answers the 3 questions above very well.
The next financial tracker answers question 1 and i use this as my long term goal. This tracker is the final piece and ties everything together in financial freedom. The goal is to be financially free. This means a lot of things to many different people but to me, it means not needing my income from my job to sustain my lifestyle.
People ask me when i plan to retire and i answer honestly 45. By the time i reach 45, i will have enough passive income to maintain my lifestyle without my job income. At that point, i will start my own financial advisory firm with the goal of helping others achieve financial freedom as well as to enjoy their lives now. To do this convincingly, i need to achieve financial freedom myself. I enjoy my life as well with the family holidays and appreciating things now. I can do this because every month, i work on ensuring i meet this goal at 45.
Financial Freedom (FF) Net Worth = (Ideal Annual Income - Passive Income) / Rate of return
Now for FF Net Worth, i use a very conservative rate of return, say 4%.
So for example, say Ideal annual income say 240k (20k a month) and passive income (from net rental, share dividends etc) is 60k (5k a month). Then FF Net worth (the net worth required to be financially free) = (240k - 60k)/0.04 = 4.5m.
This means that if i invest 4.5m at a conservative rate of return of 4% and i have passive income of 5k a month, i will be earning 20k a month, my ideal annual income, the income i require to maintain the lifestyle i want.
So in short these should be the goals -
Wealth ratio > 2
As you start your FF journey, dont be discouraged as you will see wealth ratios well below 1. I started at 0.3 and grew to 1.2 and then down to 1 which was a sign that i was spending too much and that my lifestyle had changed with my income level. Its a journey and i am striving to be a PAW as well.
Savings ratio > 25%
25% is the minimum goal. 35% will be ideal. I was hitting over 30% at one time but now it has dropped to 28%. Again, signs for me to control spending and grow investments/savings.
FF Net Worth
Here FF Net worth gives you the actual net worth required to be financially free. Again dont be discouraged by the amount. Even after years of striving, i have only achieved 14%. But, the good news is that as you grow investments (property/shares etc), your passive income grows and the FF Net Worth will actually fall.
Before striving for these ratios - there are three very important goals to achieve first. 1) Cash buffer account of at least 6mths - 1yr and 2) life insurance coverage when you have dependents and 3) medical insurance for yourself and family.
1 is to ensure you dont cut investments too early because of cashflow constraints.
For 2, use the same calculator under FF Net Worth but ideal income is your annual expenses for your family. First calculate what your job already gives you. You just need to get the balance. I recommend TERM life policies. These are the cheapest form of insurance and basically they cover you only if you pass before a certain age. If you are alive at the contract expiry, it is worthless. The good news is that it is cheap and a good way of getting high coverage. Remember if you are paying monthly insurance premiums above 10% your monthly income, you are paying TOO much.
For 3, this is very important. The greatest threat to FF is the inadequacy to handle a serious illness that you or your family may face. Currently, including what my firm provides, i have close to 1m medical coverage with 500k for critical illness.
I hope the above helps as it has helped me on my journey.
Please feel free to drop me a mail at Ramukavisved@gmail.com if i can help further or to even create spreadsheets for you to map the above.
- what should my net worth be?
- am i saving/investing enough?
- should i be debt free?
Wealth Ratio = Net Worth divided by (Age x Annual Income)/10
Net Worth = Total Assets - Total Liabilities
So if you are age 35 and your net worth is 350,000 and your annual income is 100,000, your wealth ratio will be 1.
This ratio is valuable because it links 3 very important factors in financial freedom - your age, your annual income and your net worth. Breaking this down further as we know that Net Worth = Total Assets - Total Liabilities, we immediately also can link this ratio to the assets we own and the debt outstanding.
Now if your wealth ratio is under 1, the books terms you as a UAW, under accumulator of wealth. If you can exceed 1, you are termed an AAW, average accumulator of wealth. If you are one of the lucky few that score above 2, you are termed a PAW, prodigious accumulator of wealth. I love this ratio as it can be applied universally no matter what your income level is. Your goal is to become a PAW at any income level.
So how do you become a PAW?
Just looking at the ratio, it becomes obvious, increase your net worth (increase assets or reduce liabilities). This ratio can immediately be used to answer all 3 questions above. When your wealth ratio hits 2, you have adequate net worth if you sustain this ratio, you will definitely be saving/investing enough and your debt is adequate. To me debt is not a bad thing BUT it must be managed. The key criteria that you have to ask in increasing your net worth is if i buy the asset is it going to generate a better return than reducing my debt. SO with credit card debt its easy - cost of credit card debt is 12 - 18% p.a and unless my investments can exceed that rate, i would definitely increase my net worth by reducing credit card debt. But, if i have a property that is earning 8% and i have debt at 6%, i would buy the property and keep the debt. The real question is do i have adequate cashflow to maintain that debt and to grow my net assets. The next ratio helps to manage cashflow as well as grows your chances of becoming a PAW.
Savings Ratio = Total Amount Saved/Total Income earned
If you use an annual savings amount, then use annual income but the ratio also works for monthly figures as long as both denominator and numerator use the same base ie annual or monthly.
Now the key here is to have Savings rate above 25%. This means if you earning 10k, you need to save/invest at least 2.5k. This includes your EPF contributions which should be 9 - 11%, so you only need an additional 14 - 16% to be saved/invested. As you track this ratio and the Wealth ratio, you will find that a Savings Ratio at 25% will only let you become at the most a AAW. To be a PAW you will need to be saving/investing at least 35% of your income. This ratio will immediately ensure that you are not taking on unnecessary debt as well as controls your monthly spending.
Its a very simple ratio but very effective in becoming financially free. This ratio also answers the 3 questions above very well.
The next financial tracker answers question 1 and i use this as my long term goal. This tracker is the final piece and ties everything together in financial freedom. The goal is to be financially free. This means a lot of things to many different people but to me, it means not needing my income from my job to sustain my lifestyle.
People ask me when i plan to retire and i answer honestly 45. By the time i reach 45, i will have enough passive income to maintain my lifestyle without my job income. At that point, i will start my own financial advisory firm with the goal of helping others achieve financial freedom as well as to enjoy their lives now. To do this convincingly, i need to achieve financial freedom myself. I enjoy my life as well with the family holidays and appreciating things now. I can do this because every month, i work on ensuring i meet this goal at 45.
Financial Freedom (FF) Net Worth = (Ideal Annual Income - Passive Income) / Rate of return
Now for FF Net Worth, i use a very conservative rate of return, say 4%.
So for example, say Ideal annual income say 240k (20k a month) and passive income (from net rental, share dividends etc) is 60k (5k a month). Then FF Net worth (the net worth required to be financially free) = (240k - 60k)/0.04 = 4.5m.
This means that if i invest 4.5m at a conservative rate of return of 4% and i have passive income of 5k a month, i will be earning 20k a month, my ideal annual income, the income i require to maintain the lifestyle i want.
So in short these should be the goals -
Wealth ratio > 2
As you start your FF journey, dont be discouraged as you will see wealth ratios well below 1. I started at 0.3 and grew to 1.2 and then down to 1 which was a sign that i was spending too much and that my lifestyle had changed with my income level. Its a journey and i am striving to be a PAW as well.
Savings ratio > 25%
25% is the minimum goal. 35% will be ideal. I was hitting over 30% at one time but now it has dropped to 28%. Again, signs for me to control spending and grow investments/savings.
FF Net Worth
Here FF Net worth gives you the actual net worth required to be financially free. Again dont be discouraged by the amount. Even after years of striving, i have only achieved 14%. But, the good news is that as you grow investments (property/shares etc), your passive income grows and the FF Net Worth will actually fall.
Before striving for these ratios - there are three very important goals to achieve first. 1) Cash buffer account of at least 6mths - 1yr and 2) life insurance coverage when you have dependents and 3) medical insurance for yourself and family.
1 is to ensure you dont cut investments too early because of cashflow constraints.
For 2, use the same calculator under FF Net Worth but ideal income is your annual expenses for your family. First calculate what your job already gives you. You just need to get the balance. I recommend TERM life policies. These are the cheapest form of insurance and basically they cover you only if you pass before a certain age. If you are alive at the contract expiry, it is worthless. The good news is that it is cheap and a good way of getting high coverage. Remember if you are paying monthly insurance premiums above 10% your monthly income, you are paying TOO much.
For 3, this is very important. The greatest threat to FF is the inadequacy to handle a serious illness that you or your family may face. Currently, including what my firm provides, i have close to 1m medical coverage with 500k for critical illness.
I hope the above helps as it has helped me on my journey.
Please feel free to drop me a mail at Ramukavisved@gmail.com if i can help further or to even create spreadsheets for you to map the above.
Friday, January 8, 2010
Don't Call it a Comeback, I've been here for years
This month i turn 35.
Thats an interesting age. Young enough to view the world going forward with excitement but old enough to know that the path will be not be easy. At this age, i have seen a friend die. I have had my wife hold my hand as my father passed and i have held hers as she said goodbye to hers. At the same time, i have seen my two beautiful daughters grow, my elegant angel and my fiery princess.
I have had successful years and hard years. I have had mornings where motivations are low and then perfect days. I have learnt to dream and to realise and to let go. I know never to make policy statements. I know support as i have the strongest, my iron rose. I have fought and compromised.SO many lessons and the most important, i know what it is to be adored and to adore.
2009 was the year of insecurity and it struck me very personally and i forgot these lessons. I heard but did not listen. I laughed but quietly.
Then i held a candle as my godson was baptised and touched his forehead with a cross. I celebrated Christmas the way it was - surrounded by laughter and noise and with family away from our lives and in holiday. I returned to this home but not home and the New Year was here with friends and family and a perfect night. I was recharged.
2010 will be an extremely hard year. In Korea this year marks the turn of a 60yr cycle, and they refer to this year as the White Tiger and its an auspicious year. I feel it and i believe it will be a great year. I start every year with a motto and this is my 2010 motto - "Don't call it a comeback, i've been here for years".
All my experiences, good and bad has brought me to this very point - this excitement to face 2010 and to overcome every obstacle. Bring it on as i am recharged, on fire and motivated. This ain't no Comeback, i've been here for years.
d.
_______
happiness sometimes does not come with money or fame but sometimes with just the quiet nobility of knowing you have led a good life. - Peyton Sawyer Scott
Thats an interesting age. Young enough to view the world going forward with excitement but old enough to know that the path will be not be easy. At this age, i have seen a friend die. I have had my wife hold my hand as my father passed and i have held hers as she said goodbye to hers. At the same time, i have seen my two beautiful daughters grow, my elegant angel and my fiery princess.
I have had successful years and hard years. I have had mornings where motivations are low and then perfect days. I have learnt to dream and to realise and to let go. I know never to make policy statements. I know support as i have the strongest, my iron rose. I have fought and compromised.SO many lessons and the most important, i know what it is to be adored and to adore.
2009 was the year of insecurity and it struck me very personally and i forgot these lessons. I heard but did not listen. I laughed but quietly.
Then i held a candle as my godson was baptised and touched his forehead with a cross. I celebrated Christmas the way it was - surrounded by laughter and noise and with family away from our lives and in holiday. I returned to this home but not home and the New Year was here with friends and family and a perfect night. I was recharged.
2010 will be an extremely hard year. In Korea this year marks the turn of a 60yr cycle, and they refer to this year as the White Tiger and its an auspicious year. I feel it and i believe it will be a great year. I start every year with a motto and this is my 2010 motto - "Don't call it a comeback, i've been here for years".
All my experiences, good and bad has brought me to this very point - this excitement to face 2010 and to overcome every obstacle. Bring it on as i am recharged, on fire and motivated. This ain't no Comeback, i've been here for years.
d.
_______
happiness sometimes does not come with money or fame but sometimes with just the quiet nobility of knowing you have led a good life. - Peyton Sawyer Scott
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