Sunday, April 27, 2008

Fundamentals of Investing – Part II

Ah, I just love the irony of money.

The more you have, the more you’ll get and the less you’ll need.
The less you have, the more you’ll spend and the less you’ll get.

Sounds cryptic? Let’s compare the two persons in the
diagram above:

Do you see the crucial difference between Haji Bakhil and Bumbling Bill?

Haji Bakhil (aka THRIFTINESS personified)
(a) Haji Bakhil has RM100K in the bank (he has a lot of $$$).
(b) He’ll get more money as the money in the bank will generate more income for him (RM120K @ 10% interest = RM12K per annum)
(c) As he’s so thrifty in the first place, he doesn’t spend much. So every month, he saves an additional RM6K.
(d) This is a virtuous cycle. The more he saves, the more income he will earn and the less he’ll need. Heck, he probably can retire very soon at the rate he’s going.
(e) He has a lot of money and is going to spend even less (because he can use his interest income to pay for his expense) and is going to need less money (because he doesn’t have any interest payment to pay).

Bumbling Bill (aka BIG SPENDER)
(a) Bumbling Bill spends Ringgit that he earns and barely saves RM100 per month
(b) However, he needs his *toys* such as that luxurious Toyota Camry he has been eyeing and also the luxurious Bungalow in Damansara Heights. He borrows to the hilt to buy these big-ticket items.
(c) Unfortunately for him, he’s going to spend more on interest payments to the bank.
(d) He has very little, but has spent more (on interest payment) and is going to get less (interest income on his money).

1. Increase your cash inflow (if you can – earning side income or through wise investments).
2. Reduce your cash outflow (by spending on things that are of value and you really want).
3, Preserve your savings and wait for the stock market to CRASH! (It’s only a matter of when, not IF). Then you can swoop on all those goodies!


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