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Monday, May 10, 2010

Everyone Must be A Millionaire (Power of Compounding)

The Word Millionaire
You must have clicked to read because of the word 'Millionaire', most people do anyway. But let me tell you why everyone must be a millionaire. Because if you don't have that amount you will mostly likely be not able to enjoy your retirement days. If don't have, how ah? Everyday eat rice only and hope you die sooner than later...touch wood yay.

Why do I need a million just to survive? Assuming you retire at age 55, you should anyway; don't want to be working all your life. And you die at the age 80 (thanks to advancement in medicine & hard working doctors). You will have RM40,000 to spend each year for 25 years! You might say RM40k is too much but let me show you a comparison. A Char Koay Teow cost RM3.50 now but in 30 years later assuming 3% inflation, it will cost you RM8.50! Not just CKT, everything will go up eventually due to inflation. Now you tell me, true or not?

Concept of Compounding
So how can compounding help me? What is compounding in the first place? It simply means the ability to generate earnings which are then reinvested to generate even more earnings. Okla more simple, make money work for you. Does that sound nice? When you money into Fixed Deposit, you are doing just that. But they are more ways than just FD. Some might argue that putting it in FD & depending on EPF (Early Pre-Retirement Fund) is enough. Let me show you a BIG NO.

Let's assume for simplicity sake you get RM12,000 per year for EPF (6% returns) and you can save RM10,000 per year for FD (3% returns). You begin this routine at age 25 until age 55 when you retire.

Begin      $22,000
Year 5    $154,039
Year 10  $320,667
Year 15  $531,978
Year 20  $801,224
Year 25  $1,145,847
Year 30  $1,588,841

Congratulations! You are a millionaire at the age of 50. In reality not many people can do this, WHY? Some take their EPF account 2 for housing, some can't save RM10,000 per year, they have kids then start to blame life is not fair or tough. Some need money for family emergency and all sort of excuses. This is TRUE, simply ask the government, KWSP's recent survey show that most people retire with their EPF funds with less than RM200,000. What to do? Eat rice nia lor...or sell CKT.

This is why everyone should pick up investing, it's a life learning process. It used to be for the rich people but now it is a necessity for everyone and investing has been made more accessible now in our time of life. You can invest in stock trading, property, publishing, internet marketing, network marketing & franchising. I'm going to take stock trading as an example. If you can save RM100,000 in your first 5 years of working (20k each year) and get 15% returns per annum you will NOT be a millionaire BUT a multi-millionaire.

Begin      $20,000
Year 5    $158,085
Year 10  $317,965
Year 15  $639,542
Year 20  $1,286,348
Year 25  $2,587,305
Year 30  $5,203,994

The magic number is to use 72 divide by your returns % to know how long it takes to double your investment. In stock trading's case 72/15 = 5 years. If you compare to FD, 72/3 = 24 years. Remember that you need to follow the strict routine of saving RM10,000 per year x 30 = RM300,000 just to be a millionaire for retirement if you choose FD. Isn't it better to save RM100,000 and let money work for you and get RM5mil?

15% is achievable if you know where to put your money into. Read my previous posts on how I analyze stocks and value a company and you will see that investing is not hard, you just need to pour some time and less TV. Did I say TV?

How to Save RM100,000?
  • Pay yourself first. Put aside as much as you can for savings in investment, be kiamsiap (stingy), in better words don't succumb to spending. People spend because it makes them feel rich or the feel good factor, a person can look to be rich with a lot of possessions but behind got big bank loans, this is very common. You are saving to create wealth not save to spend! 30%-50% of your salary is a good figure if you can manage. This should be easy for graduates who just started work but quite difficult for parents, try to save 10%-15% then.
  • Don't commit to a house yet unless you got other streams of income. Having a house is a big and heavy burden until you pay off those heavy installments. Rent a place or stay with your parents, I'm sure they will be happy to see you. If you are buying one, installment should not cost you more than 1/3 of your salary so you still have headroom to save some. 
  • Don't buy an expensive car. If you can buy a Honda City for RM80,000 and pay installment for 5 years, I wonder why you can't save it instead? Some say no transport, then buy a cheaper car la or car pool with colleagues or take Bas Kilang. Don't always think BUY or NO BUY, I'm sure you have plenty of other options in getting around.
  • Be creative, they are many other ways. Like me, I park for free whenever I can if I drive myself and walk instead. I cannot do that if I were to fetch girls :) in case I scare them away. Eat or drink sparingly and minimize expensive food when possible. Follow the rules so you don't get summon, I learn this the hard way. Do you income tax properly and get back every single RM you can from the blood sucking government. The opportunities to save are endless, that's my point.
Last Words
If you think saving is hard but spending is easy, your life will become hard eventually and you will work hard and everything becomes hard believing this motto of life: Work Hard, Play Hard....Die Hard?

Most of the time after people reading this, they will say yala yala you are the boss BUT I'm still young not even 35 yet and you are talking about retirement. Let me ask this, if you don't start now then when? When you grow older or when you make more money? By that time, you have more commitments for sure, fact of life, no escaping. Making money is easy, work harder nia lor but building your wealth (retirement) takes time.

Wealth means the number of days you can survive forward when you stop working right now.

Starting it young makes the tough easier, if you start at 35, you need to retire at 65. By then I would have shaken my leg for 10 years already and wake up naturally everyday, no need alarm clock. Whether you believe in the power of compounding and investing is entirely up to you, don't say you never heard of it after this.

*Special thanks to AhYap's blog for insights into compounding as well as Ho Kok Mun, local writer of investing books.

BTW, I love this movie..

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