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The Wealth Dreamer versus The Pessimistically Realistic Wealth Builder

July 5, 2015 by Kyith 5 Comments

There tends to be 2 groups of how people look at building wealth.

They might eventually reach the same state of wealth, but the probability of success for these 2 group of people might vary.

Dreamer Wealth Builder

The first group is what I would term the Dreamer Wealth Builder.

They tend to be more sensing and feeling folks, and their trigger point would be more inspired by stories, hearsay from friends and family, articles that they read on Facebook linked by their friends.

They also tend to discount the past and present, and strive towards the future. The future in all their hopes, will be different from what happens in the past and present.

If they only have $300 in net worth they yearned for the $1 million dollars to reach financial independence.

Realistic Wealth Builder

The second group is what I would term the Realistic Wealth Builder.

These folks tend to be more calculative and somewhat more pessimistic or should I say cautious in how they evaluate the stories and information that comes along their way.

They tend to have a rather dim view of the world, or that their thinking is mostly the situation would not get any better than this.

The future will be exactly like the present.

In both Dreamer and Realistic, it is not to say that their economic situation is bad. They can be in a bad, average or reasonably good situation in their take home income, family financial situation and their prospect.

Much of their outlook depends much on their personality, how to world influence them, critical past experiences and their influences while they are younger.

When it comes to building wealth, Dreamers and Realistic Wealth Builders have the following differences:

Dreamer Wealth Builder

Realistic Wealth Builder

Imagine what kind of cash flow they would haveAppreciate the cash flow they currently have
Reject past failure to build wealth, more oriented towards building wealth in the futureAbility to build wealth depends on past and current ability to build wealth.
Timeline of wealth building is not linked. When one finishes another one startsTimeline of wealth building is cyclical. Whether the next one starts, depend on your success and work of the previous one. Small cycles adds up to big cycles. This creates momentum to continue
Depends a lot on your ability to earn more, spend less and build wealth wisely in the futureDepends a lot on your ability to earn more, spend less and build wealth wisely now
Wealth Goals are abstractWealth Goals can be a conservative estimation
High chance of great satisfaction or disappointment in achieving goalsLess emotion, since goals are SMART (simple, measurable, achievable, realistic, time-bound)
Over-optimistic in the money they will have in the futureLooks at money with harsh realism and tend not to be optimistic about money in the future

Realistic wealth builders tend to formulate a plan earlier

Realistic wealth builders tend to see in the future their situation will be same as now, they will be more inclined to make do with what they have now.

They start creating a plan, no matter how vague, to work with the resources they have.

They create simple systems or processes. And its often these simple system or processes that becomes the flywheel to build great wealth.

If they only have $3000 in take home pay and they are spending $3200, when they reached the trigger point or rock bottom, they will:

  • find ways to cut their expenses
  • pay off their credit card debts (set up auto paying schemes, GIRO)
  • then once those are done, find a realistic amount to start putting it away to build wealth monthly (recurring transfer to another wealth building savings account automatically)

The dreamer wealth builder will have it more difficult, because they will be hoping for the next increment to be good, then they will start. Or that their next job hop to bring in 10-20% increment, then they will start implementing.

S.M.A.R.T -er Goals

Due to their calculative and harsh reality based nature, the Realistic Wealth Builders tend to have more realism in what they can achieve.

Due to that, whether its disappointment or optimism, they know it outright, or become a big enough pushing factor to create some life shifting actions.

This is in contrast to the dreamers, who due to their environment being spam with much feel-goodness, may have goals that are ultimately set up to fail (Dilbert creator Scott Adams explains why goals set you up to fail a lot of times)

Take the same realistic wealth builder. With his take home pay of $3000, he will think his pay would not increase much more than 3% per year. So he got to work with what he has.

His research tells him that if he invest he could probably get 5-6% return over 10-20 years but will he be competent enough to achieve that? So he estimates that if he invest, he will grow his money at a 2.5% return per annum.

He starts seeing if he can put away $1000 per month into stocks, whether he can live with $2000 in expenses.

He then works out that if this sum grows conservatively at 2.5%, in 10 years it is $134,441 and in 20 years $306,536. If the wealth grows more than 2.5% then its a good bonus. He can be happy with $306k in 20 years.

He could vary the figures to $750 per month and will get $100k in 10 years and $230k in 20 years. That is slightly less, than $1000 per month and since he can save $1000 and have $200 per month saved for rainy days or emergency, he will put $1000 away monthly.

His goal is:

  • measurable: whether he is on track or not he can see if it matches this original calculation
  • achievable: as long as he put away $1000 per month repeatedly and sticks to it cycle after cycle
  • realistic: he knows its not a far fetch figure since he has done a back of an envelope calculation what he can conservatively achieve, what if he falls short of 2.5% and what with it really hits 5%. Its not a number pluck out from the sky.
  • time-bound: due to the above three points, he can measure at various time whether he is on target

There are little room to feel disappointed in the end, and if there is, it is if he is forced to not make that $1000 per month amount into stocks.

Realistic Wealth Builders Gains Quiet Confidence in Reducing Uncertainty

While the the realistic wealth builders are cautious about their wealth, good wealth builders have a away to reduce the anxiety that usually comes with being pessimistic.

James Clear wrote in this Lifehacker article that through centuries, our anxiety have helped us get away from danger. These stress, anxiety are supposed to help us in an immediate return environment. However, in today’s delayed return environment, where we are unsure whether we will eventually build our target wealth, these stresses creates anxiety.

How do we as humans alleviate these negative responses.

One aspect of what the realistic wealth builders does well, is to measure their wealth build. The S.M.A.R.T goals setting of a far goal, and near term milestones ensures less surprises, but also guidepost to adjust the strategy or plans when you do not meet the milestones.

The act of measurement takes an unknown quantity and makes it known. When you measure something, you immediately become more certain about the situation. Measurement won’t magically solve your problems, but it will clarify the situation, pull you out of the black box of worry and uncertainty, and help you get a grip on what is actually happening.

Where Realistic Wealth Builders fall short: being bounded

While realistic wealth builders seem to have an easier path to building wealth, that is not always the case. The conservative thinking and somewhat demoralizing realism of life can be counter intuitive to limit them:

  • They may pass over good job challenges because they are comfortable with where they are
  • They may not take a plunge to a business venture because they are bound by their idea that most businesses failed
  • They have a high chance of losing the drive to deliver more in a lot of areas and missed opportunities that might otherwise come to more optimistic people

This is where the Dreamers will catch up because some of these opportunistic threads that come along their way, once developed enough, may result in those goals coming through.

Many of the success stories that were spammed in Facebook and other media are by entrepreneurs taking the road less travelled, taking more uncertainty in their careers to get to where they are.

Conservative and harsh realism does not always result in the kind of astronomical wealth that you see in the papers.

The common, impactful success factors

Whether you belong more to a Dreamer mentality or a more Realistic mentality, it is important to know the various things that makes wealth building a success. Dreamers can build great wealth if they take something that is common for the realistic folks, and the realistic folks can do better if they have more controlled optimism in their daily encounters.

The common impactful success factors are follows:

  1. You need a trigger as a motivation to build wealth
  2. You need an action plan. Without action, dreaming or feeling pessimistic will not create any difference
  3. You need data and knowledge. Without these 2, you have no idea how to do (2)
  4. You need to create good systems and processes

Whether how you slice it, whichever method, if you don’t have the above 4, realistic or dreaming, you won’t even start building wealth.

So which type of wealth builder are you leaning more to? Do you disagree with this classification after looking at your peers, family and friends?

If you like this article, and would like to delve more into building wealth, do check out my resources section, where I share more truths about wealth building whether you are a conservative, aggressive or balanced wealth builder, whether you are starting out or seasoned.
To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.
Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

Filed Under: Wealth Building Tagged With: wealth building, wealth management

FREE Wealthy Calculator–Calculate different ways to become wealthy

December 31, 2013 by Kyith 14 Comments

You may have certain questions on your mind, such as:

  • Does starting to build wealth younger help me build greater wealth? How much more?
  • Should I allocate more funding to building wealth at the start of my career? What’s the impact?
  • What if I cannot allocate so much to building wealth? What are my alternatives?
  • Would taking on more jobs on the side help my situation?
  • How different rate of return, risks impact my wealth building goals
  • I want a realistic view of my wealth X number of years later

So I created a free calculator using Google Spreadsheet to help everyone who wants to figure these questions out.

I covered extensively how this calculator is used in our look at the very simple way to become wealthy.

How to start using the calculator

The calculator is in the form of a Google Spreadsheet, so you would need a Google Account (which is the same if you have Gmail, Google Docs, or an Android phone).

If not, you would need to create an account over here.

Once you have done that, you can make the calculator for yourself.

The Wealthy Calculator is shared here.

Go to File > Make a copy…

Then, enter a name for your copy of the calculator (say Dan’s Wealth Calculator) then click OK

Done! You can mess around with it.

You don’t have to ask for a request to share it. Just make a copy will do!

Now I will bring you guys and gals through some of the stuff

Legend

Throughout this calculator, remember: Enter the values in the grey cells. Don’t touch the light blue cells.

Time Frame

The first group of data to enter is your time frame.

We won’t know when do you want to start calculating but in Starting Year you can enter the year to start visualizing.

As a guide, note that to the right of the cells there are instructions and examples to guide you.

You will then enter your Starting Age (perhaps your current or next year’s age) and the number of Years to build wealth. Number of years to build wealth will be the number of years to your financial goal, or the number of years you want to simulate a particular sum at the end of the building period.

Notice in the light blue cell, the Ending Age is auto-computed.

Main Salary

In this section you specify  your monthly income in the monthly component. As stated, this is the gross amount or before tax amount. In this case, this person is paid $5000 per month.

The Additional Component, allows you to specify an annual amount that is on top of your monthly amount. Say this person have a 2 month bonus, and thus it adds up to $10,000.

The Annual Gross Total is computed for you.

The growth rate represents the growth of your salary over the period of time. This will vary from industry to industry, person to person.

You may  want to ask around or visit Glassdoor for an estimate.

If not leave it at 3% based on the average country GDP growth.

We are talking about disposable income here, so enter the tax rate which will be deducted from your salary. In this example, this person is taxed 20% of his salary.

If you happen to received your salary tax free (wow!) then enter 0 here.

What if you are calculating for a couple?

You can aggregate up your combine monthly and annual component to do that.

Side Jobs

Some of the enterprising folks will have done free lancing or monetizing their hobbies or create a side gig. This is where you feed in for the side jobs.

This is also a gauge for you to find out what happens when you take on something interesting and develop it.

This is similar to the main salary so I will not explain much.

You can leave the Tax Rate at 0 if this side gig is not taxable.

Combined Growth Rate

The combine growth rate is the growth rate taking into consideration your main salary and side job.

It is auto computed. In this case, because you did not specify a side job, the combine growth rate is that of your main salary.

Wealth Funding

This section is where you decide how much of your combine income (main salary + side job) will go into building your wealth.

You may have already channel some funds into wealth building prior to this, and you can specify this in Initial Investment.

First year wealth funding % refers to how much the person decides to allocate the first year salary to wealth building. This means that if his disposable income in the starting year is $20000 and you set this to 10%, he will fund $2000 for the rest of the years (1st  year $2000, 2nd year $2000, 3rd year $2000….).

Increment wealth funding as a % of main salary growth rate is a little bit complex. It means out of the combined income growth rate, how much % of it will be channel to wealth building.

So in this case the combine income growth rate is 3% and if increment wealth funding is specified as 40%, it means 40% of this 3% annually will be going to wealth building.

The Increment wealth funding % is auto computed in the next row.

Why is there a first year wealth funding and a increment wealth funding????

The reason they are separated is because it allows you to find out what combination of wealth building you should adopt.

Some people have a low initial salary and good increment, some people have an above average initial but doesn’t rise much.

There are most who spend a lot initially on marriage, housing so they would rather allocate more of their increment to wealth building.

Different people have different value system, and varying this 2 will let you visualize the result of different combination to let you decide which course of action to take.

Wealth CAGR

 

Different wealth building methods listed above have different projected growth rates.

At Wealth CAGR, this is where you specify it. In this example, the person projects his equity and bond portfolio to average 4% throughout this 15 years.

Varying this will let you see what kind of risk, returns you need to take to reach  your financial goals.

Wealth Summary

The result of providing all the information above is this.

Total Wealth Funding after X years indicates how much money you have channel from your income to wealth building.

Total Wealth Built after X years, shows the projected value after compounded growth.

(Click to see larger pic)

A table is provided below the summary to show more information.

The running Year and Age are shown to the extreme right.

Your annual main salary, side job for each year are shown in each row, as well as the respective after tax income.

Wealth Funding (1st Year) amount is computed using the after tax total income.

Wealth Funding (Total) indicates for each year, the amount channel to wealth (1st year + all the increments)

Leftover for spending allocation is important for you to identify whether this annual sum is workable for you to live on.

Wealth Funding as a % of Annual Total will tell you whether the overall funding for the year is more or less compared to previous years.

Summary

I hope this is useful for you guys and gals to find out just how much you should channel to building a retirement fund.

This spreadsheet is free, however should you want to contribute to my efforts in developing this tracker into something even better you can donate to me here! Else you may want to Like and Google Plus my site at the side panel!

If you like this do check out the FREE Stock Portfolio Tracker and FREE Dividend Stock Tracker today

Want to read the best articles on Investment Moats? You can read them here >

Filed Under: Site Tagged With: wealth building

The Wealthy Formula – How You Can Build Sustainable Wealth

December 23, 2013 by Kyith 108 Comments

Building Wealth is Not Only About Investing.

I used to think that to build great wealth for myself, I have to read a lot of books, enrolled in expensive courses and spend a lot of time on investing, so that I can build wealth.

And when I do not know how to do that, I felt insecure.

As an investor, I can share with you that knowing how to invest is important, but for you, that may not be the most important thing to build wealth.

As you go through life, you encounter friends and family with their own money stories. Why is it that some of your friends was able to become rich , while others, despite their great situation, always do not have enough money to use?

Yet there are some who started life with a very average environment, yet end up in a much better financial situation than most of us?

Do they all know how to invest, that is why they succeed and why others failed because they do not know how to invest?

Being a practitioner, as well as reading a fair amount of materials from thought leaders in wealth building, what I can say is:

Most of the authority and thought leaders are talking about the same thing.

There are slight differences, and perhaps in the way we present our concepts, but the magic formula to building wealth is largely the same.

What separates those that put themselves in a great financial position from those that didn’t depends mostly on mastering a critically important layer of competency.

Mastering this lay is simple. It makes you less reliant on having abundance in luck. It is very systematic and scientific.

And most of all, it means being wealthy is within your reach.

Why haven’t your friends start pursuing wealth actively?

I believe most of us wants some form of profound change in our lives.

Having more wealth is one of them. Not many people are zen enough to say having wealth do not change their lives greatly.

I find that the reason people do not start is because:

  1. They are not motivated to. They live a life very passive about wealth
  2. They do not know how to go about obtaining wealth

#2 is knowledge and wisdom. It is hard to discern when so many experts try to sell you various formulas. I will help you address this today.

Today, I will help you deconstruct this formula to learn:

  • The three fundamentally sound things that lay our wealth building foundation that YOU can do too
  • We compare how our wealth will differ, if we do more of these three different things
  • What are the 2 most important factors that greatly impacts your wealth and they just happen to be within your control
  • The alternative strategy to build wealth if you are not investment savvy
  • The difference in not saving now but saving later and end up doing just as well
  • If you build wealth, would you have enough to spend?

My Personal Journey to Wealth

I wasn’t born with a silver spoon.

In fact, due to a lot of circumstance I had to stop taking pocket money from my parents starting from the age of 16.

I went to a local university and came out of university with a degree and only $6,000 in net worth under my name and having to repay $16,000 in student loans that my parents helped me paid off.

So I therefore started my working life in Negative Net Worth state as they called it.

This may be common in USA but in Singapore, many of my peer’s parents are prudent enough to provide for university education fees that they do not need to repay, so they started off with a clean slate.

Money was hard to come by when I was growing up and this scarcity imbued the mindset that I cannot lose money, I need to watch and save it. Investing is a dangerous form of gambling that will always end in tears.

In the last year of my university, during SARs, I grew disillusioned while studying.

What is the use of studying one more year for an honors degree, sapping my family funds, when there isn’t much jobs waiting for me out there.

I began to look for something that is safe and better than saving in fixed deposits.

And that is how I descend into this unknown world of investing.

For the past 13.5 years, I worked as an engineer, not drawing more than $5,000 in monthly salary at any point in my career. I build a set of Wealth Machine that gives me financial security.

In 1.5 years time, I believe I can reach financial independence, where I can afford to take the foot off the pedal and choose how I want to live the second part of my life.

Looking back, I realize why I was successful was because I understand this layer of wealth building competency and what made the most impact to my wealth.

I called this the Wealthy Formula.

When I talk to the peers who were able to achieve success, they don’t really say their formula out loud, but when I deconstruct their success, it is very much due to this formula.

I believe you can do it as well.

The Wealthy Formula Explained

Building sustainable wealth for the average folk involves doing three things well:

  1. Optimizing your Spending by spending on what you Value and spending less on other things
  2. Earn more
  3. Build Wealth Wisely

Most of the finance advice you read anywhere are likely to distill to this formula.

After finishing this article, I am sure most would agree with me.

When your wealth is able to reliably distribute an annual cash flow to cover your annual expenses, annual subsistence expenses, you can reach FINANCIAL INDEPENDENCE or FINANCIAL SECURITY

So how do you spend less, earn more and build wealth wisely? What difference does it make to your wealth by doing these 3 things?

Let’s get to it.

Step 1. Optimizing Your Spending

The first part of the equation is that you need to optimize the cash that outflow out from your family or you.

We all started with roughly almost the average amount of privileges. We went through roughly the same education system, and judging by the trend, a large proportion of the people work towards a minimum degree in university.

What usually differentiates people are their spending patterns.

The wise ones

  • Spend within their means. If they earn $2,500, they won’t spend $3,500
  • What they spend on reflects their values. You will not see them buy the best blenders, television and go for big holidays if their highest value are their kids. You are likely to see them working within what they can spend on and devoting an above average amount compared to other parents on their children
  • Are conscious about spending and have a systematic spending plan. Some use budgeting to be in control where they funnel their income and seldom encounter an emergency spending that catches them off guard
  • Sell old stuff before buying new. There is a conscious effort to “liquidate” whatever they can, think thoroughly before buying something and ensuring they get a good value for their purchases (value is not cheap, its quality at an acceptable price)
  • Will not borrow to pay for things that do not build wealth. Using credit cards or loans to boost spending will mean not knowing what  you need to cut in the future to fund purchases that don’t add value

How much does your spending affects the wealth you build over time?

Lets go through this example.

Let’s use Kyith as an example.

Here is what we can assume about Kyith:

  1. Age Starts Off: 25 Years Old
  2. Age where we assumes he finish Accumulating Wealth: 55 Years Old
  3. Number of Years Accumulating Wealth: 30 Years
  4. Monthly Gross Income: $2,500
  5. Number of Months of Bonus: 2 Months
  6. Government Tax % (or Forced Savings): 20%
  7. Disposable Income %: 80%
  8. Annual Wage Growth: 3%
  9. 1st Year Wealth Funding %: 10% (you put in this % of your disposable income in the first year into wealth building and continues to put this amount over time)
  10. Subsequent Wealth Funding %:0% (how much % of your subsequent year’s disposable income increment is added to your annual wealth building amount. e.g 50% of 3% increment means contributing 1.5% of next year increment to wealth building)
  11. Wealth Growth Rate: 0% (annual rate at which your wealth building method grows at over the duration)

As a spendthrift, that is, a person who does not know how to save, Kyith only manages to commit 10% of his initial disposable income to wealth building, or a sum of $2800/yr.

A spendthrift not contribuiting enough to building wealth

In this example, the money is put in cash which does not have a Wealth Growth Rate. Once Kyith commits $2800/yr, he continues to commit $2800/yr for the rest of 30 years.

What you notice is that eventually Kyith will build up a Net Worth of $84,000.

While Kyith’s salary grew, his % of disposable income allocated to expenses or spending increases from 90% to 93.3% to 95.76%.

His % of disposable income allocated to wealth building overall fell from 10% to 6.6% to 4.24%.

illustration of a spendthrift not saving enough for wealth building

Kyith doesn’t have a problem with spending definitely, but can he do better in building wealth?

Now what if instead of spending so much, Kyith decides to spend less, be more frugal.  He decides to make a tweak to his life for the better:

  1. 1st Year Wealth Funding %: 50%

Due to spending less, Kyith would then be able to possibly put 50% of his initial disposable income ($14,000 per year for each of 30 years) to building wealth.

All other factors stayed the same.

 

spendthrift decides to spend less, be more frugal and builds more wealth

By increasing his funding rate to building wealth from 10% to 50%, Kyith built up $420,000 in 30 years compare to $84,000 previously. 

different in net worth in wealth building by being more frugal

There is no wage growth or higher wealth rate of return, just a simple tweak to becoming more frugal, the amount of wealth build up is drastically different.

You may have this question in your head: Even if Kyith is frugal from the start, wouldn’t his future spending increase? How would he be able to maintain that?

Kyith’s % allocated to expenses did drop to 50% but $14,000/yr is still a good sum for a young working adult to get started. Since Kyith continue to only contribute $14,000/yr in subsequent years and no  increment, his annual expenses can grow from $14,000 to $28,352 in 15 years and $51,983 at year 30.

After contributing the initial to building wealth, Kyith can scale up his spending over time, and yet remain responsible to his goal of wealth building.

What we learnt here: Spending less matters. The less you spend the more you can channel to build wealth, even when you build wealth with low return assets such as cash.

Step 2. Earn More From Your Take Home Income

Optimizing your spending is important, but doing that is working within the constraint of your existing employment situation.

You are limited by your income.

For this 2nd part of the equation, why not increase amount of cash inflow you take in?

The internet have made knowledge readily available, and have increase the different ways we can build knowledge and enhance our existing skillset, not to mention learn new skills.

It has also liquidfy the available opportunities that we can find to supplement our income from our main job.

The wise ones

  • Make use of company education and training to enhance their core competency.  They also developed an interest in their work to develop a valuable skill set. This makes them employable and able to seek opportunities with higher remuneration
  • Does not burn bridges and network extensively
  • Change jobs when they have learn what they can, when they do not feel challenged or seek up greater challenges or when they are not adequately compensated
  • Work overtime to gain extra money (but this is probably at the expense of health)
  • Build hobbies and interest areas into a monetary income stream. When you are interested in certain areas, you might be able to build a following and be able to sell goods and services using your expertise to supplement your main job income. E.g. A bike enthusiast who gains contacts on cheaper or not available bike parts and able to bring them in to sell to other local enthusiast
  • For some people with unique competency, the internet has liquidfy the environment such that you can take up free lance jobs. This includes, designers, artists through ODESK, Freelancer.com or you could have competent skills that can consult other contacts on the side
  • This may overlay previous, but a person can also start a side business with like minded folks or good friends to seed a business that may eventually provide a sizeable income stream

What are the effects to the wealth built up when we actively sought to earn more?

Let’s take a look at Kyith again,:

  • Age Starts Off: 25 Years Old
  • Age where we assumes he finish Accumulating Wealth: 55 Years Old
  • Number of Years Accumulating Wealth: 30 Years
  • Monthly Gross Income: $2,500
  • Number of Months of Bonus: 2 Months
  • Government Tax % (or Forced Savings): 20%
  • Disposable Income %: 80%
  • Annual Wage Growth: 3%
  • 1st Year Wealth Funding %: 10%
  • Subsequent Wealth Funding %: 50%
  • Wealth Growth Rate: 0%

Kyith is similar to the previous stage where he is a spendthrift, only this time, other than putting 10% of his initial disposable income into wealth building, Kyith also puts 50% of future disposable income increments (which works out to 1.5% per year) into wealth building to supplement the initial 1st year wealth funding of 10%.

A person decides to earn more and put into his wealth building

 

By putting 50% of his future increments into wealth building instead of spending them, Kyith’s net worth have already shown a remarkable improvement from $84,000 previously to $330,055 now.

Notice the power of a psychological Jedi trick of pre-commitment of your future increment to wealth building. Kyith’s total wealth funding rate as a % of disposable income increase from 10% in year 0 to 23.5% in year 15 to 33% in year 30.

You can do something similar to Kyith if you cannot commit a larger % of disposable income to wealth building.

Be motivated and pre-commit your future increments to building wealth.

What if, Kyith makes himself more competent and his salary can grow at a rather much more than the conservative estimate.

If we smoothed out Kyith’s various job hopping and promotions, we conservatively estimate Kyith’s gross income growth rate to increase from 3%/yr to 5%/yr.

We make the following adjustment to Kyith’s wealth building profile:

  • Annual Wage Growth: 5%

What would such a small wage growth change do?

Wealth Builder decides to earn more and build more wealth

The first thing you will notice is that the net worth grew to $594,143 in 30 years compared to $330,055. That is just splendid

Kyith’s % of disposable income allocated to wealth building changes from 10% to 29.7% to 40.2%. Compare this to previous, Kyith is allocating a large % to savings, yet he has more money to spend.

earning more vs earning less in building wealth

If you ask me: Why has more impact, earning more or spending less, I would say earning more has more impact.

This is because there is just so much you can save and cut in your expenses, and its difficult if you only earn that much, but if you ramp up your earnings, you have much more room to play with.

The Impact of Side Jobs / Hustling on Your Wealth

For some of us that starts off, we realize that we have more free time then we initially realized. We can of course put the freedom in the mind to creating side businesses such as a content advertisement blog, drop ship business, or developing a business plan for a software as a service with some friends.

You could of continue your part time job at university by picking up 2 students and teaching them tuition for $400 per month each.

You could ask for more responsibility if you are paid more for overtime (which may also mean a bigger chance of greater salary increment or promotion)

This enterprising use of your mind and time, will enable you to supplement your Main Salary with Side Jobs, Temp or Overtime work.

Lets go back to Kyith who is putting 10% of his initial disposable income and 50% of subsequent increments into wealth building, where his salary also grew by 3% per year. The wealth built up was $330,055.

Kyith has grown more enterprising, paying more attention to his interest area and was able to create an additional stream from monetizing it.

This may be challenging to model because this stream might only be temporary and may not be long lasting but lets give it a try.

Kyith takes on a side job with the following profile:

  • Monthly Component of $200 for what the side job brings in
  • Additional Component of $0
  • The side job grows at 1%/yr
  • This side job is taxable

what a side hustle can do to wealth building

The side job here does not seem to bring in a large amount of income.

However, the additional amount  will supplement the expenses, in the case Kyith spends less and commits say, 70% of his disposable income to wealth building and only 30% for spending.

$200 monthly will help a long way.

The attractiveness of side hustles is that eventually they may morph to be something more. Side hustles can become main business.

And that could ramp up your wealth building.

The Lesson Learn here: Earning more matters. It increases the amount and flexibility you can devote to wealth building and spending.

Optimizing Your Spending and Earning More WIDENS the GAP

You will ask me: Kyith, which is more important, optimizing your spending or trying to earn more?

My answer is, it depends.

The overall idea, first came up by Paula Plant from Afford Anything, a great financial independence and real estate investing blog, is to focus on widening that GAP.

Some people are in circumstances that they cannot boost their earnings in the short term, so they have to focus on optimizing with what they have.

However, optimizing your spending can only do so much.

Instead, the philosophy is to do both, but focus on how much GAP you can build up.

The bigger your GAP, the more you have yearly to put into your Wealth Machines.

Then you can build wealth.

Step 3. Build Your Wealth Wisely

When you build up the GAP yearly, you have an annual CASH FLOW that you can divert to funding your wealth building on a recurring basis.

Wealth is built when this gap adds to next year’s gap which adds on to next year’s gap and the net year’s gap…. well you get the idea.

In the first 2 sections, optimizing spending and earning more, we are assuming that Kyith builds wealth through putting his money in savings and deposits, which is a low risk form of wealth building method.

 

Savings is a conservative way of building wealth, but because interest rates are low, all you are doing is putting your hard earned money away.

The money does not make more money, or so they say.

If you want more money, you have to work harder in earning more and be more frugal in cutting expenses.

If you hit a plateau in how much you can earn, then that is your wealth ceiling.

If you want to build up a sum of wealth, of around $500,000, with savings in deposits earning less than 1%, it will take you nearly 73 years from the chart above to get to that sum.

With higher return financial instruments, you will be able to reach your goal of $500,000 at a much faster pace, cutting time by years.

Take a look when the rate of compounding is 7%. The time is shorted to 47 years.

This will enable you to build wealth so that you can adequately meet your retirement spending needs, be financially secure, financially independent.

How can you build wealth at a higher wealth growth rate?

In this following table, I have an example of various ways of building wealth:

The different methods of building wealth have different characteristics and I try to categorize them.

For the experienced wealth builder, you may or may not agree with the categorization.

We are all different, and as such, a wealth building method that suits me, might not suit you. They very much depnd on:

  1. Your Risk appetite. How much short term losses can a person take that prevents him to sleep at night?
  2. Your ability in acquiring and maintaining a skill to wisely build wealth through that method. Sustainable wealth requires competency and it will depend on your willingness to build this through self learning, finding a mentor, going on courses, self-reflection after acquisitions E.g. learning the in and outs of purchasing a property and renting it out, understanding the returns, pitfalls, and effort require to be profitable for 30 years
  3. Active or Passive. How much time do you want to spend on building wealth? Do you want to spend more time with family? Different ways of building wealth comes with different time needed to become competent and also  different levels of recurring managing wealth time. (Read building wealth is not as passive as you think)
  4. Your appetite for leverage. Some people have assess to very cheap debts, which others could not. Some people are comfortable holding debts while others can’t wait to pay it off due to the risks involved
  5. Start up Costs required. Some wealth building requires a big down payment. One example is properties which may require you to have $200,000 in down payment. This sum may not be available for many. For other forms of wealth building such as Passive Exchange Traded Fund Investing with POSB Invest Saver the minimum start up is $100/mth

The kind of wealth building assets, together with HOW you build your wealth with it, are your Wealth Machine(s).

Think of your wealth machines as cash flow robots that you transfer your human capital (your main job) to so that you depend less on your human capital next time, and they will provide you with the cash flows to be financially secure and financially independent.

If you keep what your Wealth Machines generates, be it interest income, business income, dividend income, realized capital gains, by plowing them back into your Wealth Fund, you can put them back into your Wealth Machine, your wealth will grow at a greater compounded rate of return (CAGR).

I explain more on why you need to look at this important layer in your wealth building, by thinking in terms of funneling your money to a Wealth Fund and having Wealth Machines in this comprehensive article. Do read it and come back to the examples here.

How will a difference in Wealth Growth Rate impact your wealth building?

Lets go back to Kyith again:

  • Age Starts Off: 25 Years Old
  • Age where we assumes he finish Accumulating Wealth: 55 Years Old
  • Number of Years Accumulating Wealth: 30 Years
  • Monthly Gross Income: $2,500
  • Number of Months of Bonus: 2 Months
  • Government Tax % (or Forced Savings): 20%
  • Disposable Income %: 80%
  • Annual Wage Growth: 3%
  • 1st Year Wealth Funding %: 10%
  • Subsequent Wealth Funding %: 50%
  • Wealth Growth Rate: 0%

Kyith decides to make an insurance savings endowment his Wealth Machine or wealth building method. This is not uncommon and a form of wealth building that many conservative people chose.

When you purchase an insurance savings plan, you either pay a lump sum in premiums or an annual recurring fixed amount from your disposable income as premiums into the insurance policy. You transferred the job of wealth building to the insurance company. (you can take a look at my compilation of some past insurance savings policies and their rate of return)

Kyith conservatively think he can make 3%/yr in compounded average growth compared to 0% previously.

We changed the following:

  • Wealth Growth Rate: 3%

 

building wealth with insurance endowment

Instead of previously building up a net worth of $330,055, channeling to a 3% compounded insurance policy grows Kyith’s net worth to $456,912 instead.

Kyith decides to be motivated about wealth building.

He reads books, find mentors and does his own due diligence, in short, builds up his competency and changes his Wealth Machine to managing a Low Cost Passive Stock and Bond Exchange Traded Fund  (read here).

He knows that this form of Wealth Machine means his wealth would have increase volatility (sometimes positive sometimes negative, more ups and downs), but it takes him very little management yearly, and have the potential to earned a 6%/yr rate of return.  The potential of wealth build looks higher.

We changed the following:

  • Wealth Growth Rate: 6%

wealth building with a stock portfolio

Instead of a $452,912 net worth, a 6% compounded wealth rate of return over 30 years will grow Kyith’s wealth to $662,121.

You will notice that the amount Kyith put in (blue line) versus the amount eventually grow to is much wider than previous.

This is due to the beauty of compounding over time.

various growth rate

3% and 6% Wealth Growth Rate is scratching the surface here. In the chart above, we see how Kyith’s net worth will grow when the wealth growth rate changes.

wealth building at different growth rates

I summarized the example above, where Kyith puts decides to put 10% of 1st year disposable income to wealth building, 50% of subsequent year’s declared increments, 3% wage growth.

You can observe the net worth changes at 5 year intervals.

Also, I have tabulated the difference in $ and % between 0% and 3%, 3% and 6% and 6% and 9%.

You will observe a few interesting facts that may influence how you look at wealth building:

  1. The differences between building wealth at a higher rate is small initially but over time the difference is big. The power of compounding over time makes a big difference.
  2. The interval difference is rather uniform between 0% to 3%, 3% to 6% and 6% to 9%. This may mean that sometimes you don’t have to be pressured to increase your Wealth Growth Rate by taking on more volatility and risk. We will go through this in depth later in what makes the most impact to your wealth building
  3. The counterpoint to #2 is that you are missing out on huge wealth if you do not step up wealth building from 0% to 6%.  Just add up the 2 gap difference and you can see the difference
  4. If we talk about the magnitude of wealth building that makes a difference, 25% difference is big enough, and that usually take place after 20 years. What we can infer is that at certain times, putting more of your disposable income to wealth building have a bigger impact then trying to grow your money through wealth building at greater efforts. (I written an article on when you should focus on putting more of your disposable income to wealth building and when your wealth building competency matters more here)

There are many ways to build wealth, and you require different competencies, different commitment levels, but if you are really good at what you do, and is able to jump from 3% growth rate to 9% growth rate, you realize that you need less money to reach your eventual net worth goal.

Lessons Learn: Building wealth by taking different approaches can give you higher growth, but the wealth builder have to take a prudent approach otherwise it will result in more detriment then good result.

What makes the MOST IMPACT to Your Wealth Building?

Lets recap. We know that by optimizing your spending and earning more, perhaps taking on some side hustles, we increase our positive cash flow or the wealth gap.

We can put this positive cash flow to wisely build our wealth, so that we do not always have to depend on pure savings.

You may realize that there are many variables which may determine the size of eventual wealth.

Which of these variables matters the most?

More importantly, which of these variables are within your control?

Some time ago, John Rekenthaler, head of Morningstar research wrote a piece called What matters the most.

It’s a good read. You may need to create an account to login.

John highlights a company that profiles an average aspiring retiree:

  • 42 years old  employee
  • Makes $40,000 annual
  • Salary grows 3% annually
  • No contribution to company investing account but will contribute 6% of income annually to the company account and the company will match it with 50% of the person’s contribution
  • The company investment is a passive portfolio with a 0.72% expense and looks to gain 7% per year before this cost
  • This person looks to retire at age 67 years old (25 years later)

What course of action will help this person the most to reach his/her goal?

  1. Start early. Find a time machine to go back and start earlier
  2. Higher salary. Get a 25% raise to $50,000 a year
  3. Salary growth. Grow his or her salary at 4% instead of 3%
  4. Increase wealth funding rate. Instead of funding 6% of the annual income, choose to fund 8%
  5. Increase company match. The company willingly increase how much it matches the employee’s contribution rate
  6. Cheaper investment plan. Instead of 0.72% expense, switch to a plan similar but cost 0.22%
  7. Better return fund. Get a fund that yields 8% instead of 7%
  8. Retire later. Wait 2 more years to retire, instead of 67.

Among these actions, which are the actions that he or she have a direct control over?

  • 1 – Choosing when to start investing
  • 4 – Increase funding of wealth building
  • 8 – Retire later
  • Partially 7 – a Better return fund. A better way to look at it is taking a more active approach

They did a study to determine based on this person’s profile, which would help the person more. The result is below:

The great thing is that the top three are the things that are within the persons control. The surprising thing is that cost (cheaper plan) matters so little, which they attribute to the original plan is relatively not expensive in the first place.

In the following section, I will expand on the variables that makes the biggest impact to building wealth.

1. Start Funding Your Wealth Building Early in Your Life

The amount of money you need to commit to wealth building, and the amount you build up varies by funding it early versus funding it late.

Consider the above 3 scenarios, the first one (Early) where the person funds wealth building with $6,000 of his take home income annually for 16 years from age 20 to 35 years old. the second one (Late) funds his wealth building with $9000 (more than mr Early) of his take home income annually from age 36 to 65 years old or 30 years and the last guy (Early and Continue) who did the same as the first guy (Early) only thing he continued to 65 years old or for 46 years. All of them build wealth at the SAME RATE OF RETURN.

The interesting thing is that Early build more wealth than Late but with LESS MONEY COMMITTED. You can liken this scenario to someone who committed to wealth building early for 16 years and then uses that $6000 for other part of his family’s expenses. Such flexibility!

The third guy (Early and Continue) did the best with the same amount of commitment as Late, and gotten at least $400k more wealth.

The 3 options here for you is that you can:

  1. Cut Spending, Earn More and put a high percentage of disposable income at the start to your Wealth Machine, then spend a higher percentage of subsequent income increments
  2. Cut Spending , Earn More and put a small percentage of disposable income at the start to your Wealth Machine, then ALSO put a higher percentage of subsequent income increments into your Wealth Machine
  3. Cut Spending, Earn More and put a high percentage of disposable income at the start AND a higher percentage of subsequent income increments into your Wealth Machine

The difficulty for most to do (1) is that cost of living might be high and large spending takes place at the start.  (2) will be more applicable for them. (1) Work well for singles.

It make sense to funnel more to build wealth and let compounding work its magic AS EARLY AS POSSIBLE.You need less of your take home income to reach the desired amount over time when you fund wealth building early than late

2. Put a MUCH Larger Sum of your Income into your Wealth Machine(s)

Note: those that are less investment savvy should pay attention to this factor.

You have many ways to fund your wealth building:

  • Choose to fund 10%, 20%, 50% or even 70% of your disposable income annually to wealth building
  • Choose to fund a higher initial disposable income (50-70%) and then less of your subsequent annual increment or a lower initial disposable income (5-15%) and then a large part of your subsequent annual increment

Or course if you fund more into wealth building you have less for your other life’s expenses.

What is the upside for us to be so drastic to fund 50-70% of our take home income to wealth building?

Increasing the % of income put into wealth building shortens the length of time towards your financial independence or wealth goals

For one thing, we are all working towards our financial independence, that is when the wealth that we build up is able to afford our life more freedom to semi-retire, or take a more risky life endeavor.

What many do not know is that how fast you can reach financial independence depend greatly on the amount annually you use to fund your wealth building AND the rate of return of your Wealth Building Method.

If you fund little, you take a long time to reach that stage. If you fund a lot more, it becomes faster. If the rate of return per year of your wealth building method is small, it will take longer, if it is high, it is faster.

This can be illustrated in the chart above.

This chart shows the number of years to reach financial independence versus the percentage of take home income a person or family channels to building wealth. The various different color lines show different rate of returns per year of the wealth building method chosen.

Observe that

  1. if the amount of take home income channel to wealth building is lower at 10%, the rate of return of your wealth building method determines greatly when you reach financial independence, in 84 years or 20 years
  2. if you channel 50% of your take home income to wealth building, whether the rate of return is 1% or 20%, it matters much less. You will reach your goal in either 9 years or 23 years
  3. if you only know of wealth machines that generate a rate of return of 1%, then to retire in 20 years, you need to save at least 50% of your take home income

This means that even if your wealth building method yields 1% per year, you will reach financial independence at age 48 years old if you start working at 25 years old.

Here is another view where we show the above chart in numbers.

The numbers in the red and green cells show the number of years to reach the desired financial independence amount (whether it is $100k, $500k or $1 mil).

It gives you extra motivation to earn more or spend less, because the more you earn and less you spend, you will be able to achieve a high savings rate, or wealth funding rate.

When you move on from being a junior associate to manager, the earlier you are able to do that, you may be able to channel 70-80% of your disposable income. Even at a 1% wealth building rate of return per year, the number of years to reach financial independence is between 10 years or 6 years!

The best optimization is when you and your spouse are aligned and want to reach financial independence, where both of you can optimize your combined income to channel well to wealth building after optimizing expenses.

Usually it is when you have combined income or a higher earning professional that 70-80% is possible.

For myself, I am working with a 50% disposable income savings rate, which will take me 15 years or so to reach financial independence as a single.

If you increase the % of your income put into wealth building, your investment rate of return matters lesser

Other than reaching your wealth goals earlier, there is one added benefit of funding more to wealth building, and that is reaching financial independence despite not being so sophisticated when it comes to wealth building.

Suppose you decide to channel $5,000 per year from your disposable income to wealth building, starting at the age of 25 years old.

For the next few years, you have 3 different option to increase the amount from your disposable income you put into funding wealth building every year by 0%, 5% and 10%. (think of this as similar to the earn more examples)

You also have 2 different Wealth Growth Rate:

  • 3.5% per year (E.g. bonds, insurance endowments)
  • 7.0% (E.g. stocks).

How fast can you reach your goal for financial independence, in this case $500,000?

Observe that to reach $500,000, the number of years with no funding increases growing at 7% p.a is close to 5% annual increase growing at 3.5% p.a.

This is the same for 5% annual increase growing at 7% p.a. and 10% annual increase growing at 3.5%.

Here is another way of looking at this.

The table above illustrates how many years it will take you to accumulate $300,000.

$300,000 is a worthwhile goal and many felt that you need to pursue some sort of active investing to accumulate that.

If you put $200/mth or $2,400/yr towards that:

  • 0% rate of return: 125 years
  • 3%: 52 years
  • 6%: 36 years
  • 9%: 29 years

Your rate of return matters a lot!

However if you put in $1000/mth, the difference between investing at 3% (conservative bonds) versus 6-9% (more risky investment products) is 3-5 years!

If you commit $2,000/mth, the difference is 2 years between a rate of return of 3% and 9%.

If you make the decision to pay yourself first, fund more of work income to your wealth building, you do not need a higher return to achieve your goal for your wealth machine.

To obtain higher returns, in most cases you need to subject your capital to higher volatility, or putting in more effort so as to build wealth wisely, which you may not have

Since higher return usually comes with higher risk and volatility, this shows that by putting more of your disposable income over time to building wealth, you do not need to increase your risk level, especially if you traditionally have a low risk appetite.

This decision is important AND within your control.

A good example here is that many people always gets sub-consciously influence by friends saying that their money should be pushed as hard as possible to get the most returns.

If you understand this concept, you will see that if you focus on your career or that, your career is much more lucrative than others, by sensibly increasing your funding to wealth building above the average, say 50-70% of your initial take home pay and 50% of your incremental pay, you do not need to push your money that hard if you understand how much you actually need to achieve financial independence. As you are funding more, you can put majority of your wealth assets in insurance endowments, bonds and 30% in a broad market stock exchange traded fund, compare to your friend who is funding less, who have to put 100% into a broad market stock exchange trade fund.

Your return might be on average 5% compare to your friend’s 7%, but as you are funding more, you end up at the same destination. A side note that is out of the context of discussion is that, because you put your wealth assets in lower volatile instruments, you get less of the extreme swing in the value of your wealth assets, there by less psychologically affected to do stupid things like sell low instead of buy low.

Do You Focus on Putting More of Your Income Away to Build Wealth or Spending more time on Investing?

We only have so much time to do the things that we want.

And for some of you, your job and family takes up much of your time.

So the question you may ask is: How important is learning to achieve a greater rate of rate of return by focusing on building your wealth machine?

The opportunity cost of that is, you may have less time and focus on your job. This could impact your career trajectory.

The benefits is that your business, or your wealth machine(s) can reduce the single cash flow risk of your job, or may develop into something that eventually becomes a substantial chunk of your personal cash flow.

In Focusing on Saving More Versus Focusing on Investing: Are you Being Smart about It , I provided how you should evaluate this decision.

Your investing return on a small capital base at the start will be small.

Much smaller than the annual increments you can work on, had you focus on improving your ability to earn more.

Thus at the start of the career, if you earn more, you have more disposable income.

You can then channel more of this increase disposable income to your wealth machines.

This is like a 50-100% return on capital. Hard to achieve with investing.

However, at some point, your wealth machine(s) are well funded.

Suppose they get to $500,000.

Losing 50% of $500,000, is not a small sum. Making a 50% return is $250,000. It may take you 10 years of saving to get that amount.

At an annual 5% rate of return, your $500,000 can provide $25,000/yr or $2083/mth in cash flow.

That can substantially provide financial security.

To have a wealth machine, you need to have wealth building competency. To have wealth building competency, you need to learn about investing, execute, reflect on mistakes and success and tune accordingly.

You need to invest upfront and recurring effort.

This is a paradox that you cannot run away.

Ideally, we need to do both, earn more and learn to invest.

You need to Put the Big Rocks In First

Why are we talking about big rocks and small rocks?

Because we need to discuss priorities in life.

Many people have illustrated this experiment of trying to get all the rocks of different sizes (large boulder rocks, pebbles, sand) into a container.

And there are different methods to attempt to do it.

However, you will realize you cannot get all the rocks into the container unless you put them in a certain sequence:

  1. Put the big boulder rocks first
  2. Put the pebbles next
  3. Put the sand last
  4. Then you filled it with water

You might not get all the water and sand in.

The art of Manliness has a better illustration:

The big rocks and small rocks is an analogy of what we prioritize in life.

Here is how we look at Wealthy Formula in Rocks:

  • Which of the things in life allows you to build wealth?
  • Out of these things that help you build wealth, which one makes the most impact?

The answer of this could be:

  1. Earn More, Optimize your Spending
  2. Investing Wisely
  3. What I gone through about making the most impact: Build wealth early, and putting more of your income to building wealth

Those are your big rocks.

And you should get them in before the small things like:

  1. Which stock should I get?
  2. Should I invest in stocks or bonds or cryptocurrency at this point?
  3. Should I go for motor cycle A or motor cycle B?

If you put the big rocks of wealth building in, your wealth building should not go too wrong.

The small rocks will help you get to where you are, but in their absence, you will take slightly longer but will eventually reach your destination.

How my wealthy formula was applied on myself

I have never earned spectacularly on my human capital over the years and my Wealth Growth Rate is nothing to shout about.

And that makes it possible for YOU to do what I did.

If you decide to do your best and apply what I showed you up to this point:

  1. Optimize your spending and strive to earn more. You will funnel 40% of your 1st year disposable income of  $3,000 with 2 month’s bonus into building wealth. Subsequently 30% of your annual increment of 3% will go to building wealth, together with that initial 40% of your 1st year disposable income.
  2. Learn to build wealth wisely. You decide to quarterly invest in a passive portfolio of stock and bond exchange traded fund as your Wealth Machine, growing your wealth at 4%.
  3. Start early. You decide to start wealth building out of university and will have 30 years till age 55 to build wealth.
  4. Contribute more

 

case study

You would have funded a total of $580,360 to building wealth and with your Wealth Machine, the wealth would potentially increase to $1,011,109.

Your annual gross salary will grow from $42,000 to $63,528 to $98,975.

What was a 40% contribution to wealth building out of disposable income slowly went down to 34%.

Your annual available spending amount will grow from $20,160 to $32,216 to $52,066.

At 15 years, you would have build up a net worth of $312,199.

If you withdraw a cash flow of 5% from $312,199 per year, the cash flow will amount to $15,609/yr or $1,300/mth.

$1,300/mth won’t offset all your expenses to reach Financial Independence, but it may just be enough to offset your basic survival expenses to give you the courage to take that risky career switch you wanted.

This is Financial Security.

Related: How much Wealth and Cash Flow you need to achieve Financial Independence and Financial Security?

Case Study: How a high income earner who hopes to be Financially Independent by 40 can achieve it with the wealthy formula

So we hear stories, of people who was able to retire in their 30s and may probably be envious of their situation.

They must have rich parents or high income earner.

How close to the truth is that?

Perhaps some have overestimate what is required to retire, but financially independent is possible.

If we failed to see the MATH, especially those discussed today, then they will always have some special luck allowing them to do that.

You reaped what you sowed.

Some folks have worked hard in school, or managed to get into a profession with a high starting starting pay, would he or she be able to be financially independent at a young age?

The premise

In our simulation here, we have the following scenario

  1. Stay single and choose not to get a dwelling
  2. Assuming he is privileged to start off with a high salary relatively. He will funnel 80% of his initial disposable income of  $5,000 with 2 month’s bonus to building wealth.
  3. Subsequently 20% of his annual increment of 3% will go to building wealth.
  4. Learn to build wealth wisely. He decides to quarterly invest in an active portfolio of stock and bond exchange traded fund, growing his wealth at 6%.
  5. Start early. He decides to start building out of university and will have 15 years till age 40 to build wealth.

case study

At the end of 15 years, he would have accumulate a net worth of $1,095,146. Note that an assumption here is that he would have to build wealth rather wisely.

He funded $44,800 of his first year disposable income into building wealth.

At the end of the 15 years, his wealth funding only increase by $5,740 more.

At this point, with a safe withdrawal rate of 3% per year, he would have generated $32,654/yr in cash flow or $2,737 per month, which will be able to take care of the necessities in life.

This is a good situation to be in.

We can see many examples of top performers excelling in school. If they take advantage of their education to gain good employment and be able to sacrifice extravagant spending to create financial security, or independence, he puts himself in a good position for the second phase of his life.

You are young enough to choose how to live the Second Phase of your life

What this means is that at 40, this guy is young enough to make a profession decision that will more likely satisfy him.

He could have choose to find love then.

He can choose to start a business with the knowledge he has accumulated up till then.

Can anyone live on $11,200 per year?

A common question readers will have is how can anyone survive on such a low amount per year?

This will work out to $933 per month in expenses.

How one decides to live is a matter of where their values and priorities lie.

Different people have different values and a person like that may be sacrificing much (you can’t earn back time), but that is his or her choice.

$933 is a sum that you can work with, you have to optimize your spending.

And at the end of the 15 years his allocation to spending actually increased to $34,000 per year.

Believe that you can achieve it

Remember at the start, we ask the question why less of your friends actively pursue it and one of the key reason is down to motivation?

Motivation and knowing how to do it is related. (Read: why motivation, grit and determination is important to building wealth)

Expectations versus Reality of Building Wealth

If you do not know the blue print how to get started in building wealth, how much you need, you have the idea that the end goal is so far up, and you are so far down you could procrastinate on it.

Knowledge allows you to see that in reality, through systematic steps, it is achievable, in different ways.

Gather Knowledge and Wisdom to Know how to Build Wealth Wisely

For us, building wealth is unlike playing a professional tennis match.

In a professional tennis match, the professional tennis player wins by performing well and outdoing another professional tennis player. That requires high competency.

If we play recreational tennis, we outdo our friends by making less mistakes.

To build wealth well you need to learn:

  1. how to actually build wealth in your wealth machine
  2. what not to do in your wealth machine
  3. find out the 20% of what determines the performance in your wealth machine
  4. what you need to know, but you do not know now
  5. what you won’t know, and how to tackle this unknown

Read: acquiring knowledge and wisdom is important to building wealth

Proactively build systems and processes to make actionable progress

This may push you to take actionable steps, create your wealth system and processes.

The great motivational speaker Jim Rohn said: “Life doesn’t get better by chance, it gets better by change.”

Take proactive steps.

There is a difference between reading up on wealth and becoming a wealth builder.

Many I know, are only interested in reading up on wealth and imagining being wealthy. They are more into financial porn.

Only when you inculcate actionable tasks into your daily and weekly life that revolves around wealth, can you achieve the reality.

Summary

If you manage to reach here,  congrats!

You may just have the grit and motivation to build wealth.

To be wealthy is simple. The reality is that you have to

  1. Stop giving yourself excuses, take action today and find ways to optimize your spending
  2. Never let go of improving yourself to stay employable, get promoted at work
  3. If you believe in financial freedom, pick up one of the wealth building methods to grow your wealth further
  4. Sacrifice things that hold low value to you to funnel more to build wealth
  5. If you are constraint and are unable to fund a high amount now, commit to use your increment to fund wealth building. I shown that it is a viable route.
  6. The less mistakes you make, the more wealthy you become

80% of what is  suggested are within your control. It is whether you will do it.

Pick out one area that you need to improve and work on it. Share with me what are the potential problems building wealth this way.

Share this with your friends who you think will benefit from.

If you are interested in calculating how your wealth would grow, I have created a FREE Wealthy Calculator here (which we use above) to project how much of your income you would like to channel to building wealth today and the wealth build at the end of X years.

After learning the simple way to start building wealth, let me share with you

  1. how much you need to achieve Financial Security or Independence 
  2. why Wealth Machines are different from financial assets, and why you need Wealth Machines
  3. why motivation, grit and determination is important to build wealth
  4. why knowledge, wisdom is important to build wealth

Grow Wealthy, start Building Wealth, start with the Best Resources section.

Filed Under: Wealth Building Tagged With: budgetting, passive investing, wealth building

How to build wealth–its not so passive as you think

November 4, 2013 by Kyith 18 Comments

The dream of a lot of people is to have  a successful wealth plan in place enabling them to accumulate wealth so as they can retire early, retire at 65, or at as a buffer for an unstable career.

Friends, acquaintance as well as mass media have sold us the idea that you can easily start or setup a passive income strategy to meet your wealth goals.

However, the word passive seem to be thrown around too much. It makes us wonder whether each of our wealth building muse is actually “passive”

 

(click to view larger image. Once you pay yourself and channel to wealth building, what will be your wealth building muse?)

Passive income

The term marries two very beautiful thoughts to an investor.

Passive means you don’t have to spend much effort. It is ” autopilot “.

Income means you have a consistent stream of liquidity.

It is the nirvana of wealth building and what many of us spend our time searching for.

It also gives much opportunities to folks touting their trading or investing methodology promise you this nirvana.

  • Forex course
  • Options course
  • Property course
  • Value investing course

Follow their method and you will truly be on your way to financial freedom they say.

People underestimate the level of rigor required

The reality is that almost all wealth building methods are not 100% passive.

The sooner you understand that, the better you can prepare for a successful system.

Successful wealth building systems requires rigor

Malcolm Gladwell stress that the truly successful folks excelling in their skilled field put in a lot of their efforts to improve their knowledge, prospecting , execution, risk management.

Investing and trading in a world that is not constant means that no system works like how it was originally taught.

Much season traders share that markets change, systems that used to work will not work well anymore.

If you shorten your upfront cost by going to a course you will realize it may not work when conditions change. Does the course teach you how to test an identify your new system?  Perhaps that is the important skill.

Courses that bridge and teaches you individual stocks investing, value investing, dividend investing tries to cover what Warren Buffett, Peter Lynch and dividend managers learn in their 10-30 plus years of training, mistakes and enlightenment in 5 days.

You wonder that is enough.

It is likely that you will require much maintenance in knowledge, prospecting to reach a level of competency to have adequate success rate in Stock investing

Upfront cost

There needs to be an upfront cost.

You may need months to build up the knowledge, distill it to follow that path of wealth building.

This includes

  • Spending weeks and months to acquire knowledge
  • Spending time researching the pros and cons
  • Identifying whether the methodology works
  • Where to find all the necessary resources such as trading accounts, price info, economic information, earnings release, company factsheets
  • Setting up the wealth building system, the maintenance system, how to measure performance

Many folks who do not know where to start will attend a 4-5k 5 day course hoping that will be all they need to hasten this learning process, keep them from falling into common errors and pitfalls.

While the upfront cost varies, many acknowledge that it is Ok to spend an adequate amount of effort here setting up their system.

Maintenance cost

The part that they wish to be minimal is the time and effort spent once the system have been in place.

Much systems take 30 minutes a day of maintenance with a monthly 1 hour review of results.

There does seem to be an underestimation of the effort required here most of the time.
This usually stem from course trainers selling a plan that is too good to be  true, or investors underestimating the rigors that is required.

**************

Here are some systems to build wealth and how they differ in upfront costs and maintenance costs

Passive investing in an equity and bond portfolio

Upfront cost: Medium

Maintenance cost: Low

What I consider the least taxing effort wise also requires some effort.

Investors allocate their stream of cash flow into an equity and bond portfolio, keeping cost low, keeping their mental state in check, ignoring the market and rebalancing it yearly.

The upfront cost is the cost of reading up and  familiarizing how to create a  standard portfolio, choosing low cost exchange traded funds, the pros and cons.

The maintenance is the lowest, because effective wealth building through this method is to ignore the market noise and continue to fund the portfolio as well as an annual rebalancing.

Andrew Hallam

Andrew Hallam wrote a book on how he amassed million dollars on a teacher’s salary. He used to be an active manager but now manages his money through a passive exchange traded fund portfolio.

Since he lives in Singapore, he covers a bit on the Singapore context using Standard Chartered Online Trading with STI ETF and US based ETF

Andrew Hallam’s page

Canadian Couch Potato

As the name suggests, it is a blog based in Canada helping folks make sense of creating a portfolio that mimics close to the market at low cost

Canadian Couch Potato page

Monevator

Here is a UK guy, who comes up with very good investment articles. His focus is a lot on retirement and behavioral part of management.

And there is a reason for that because, when the upfront cost is invested, all you need to worry about in maintenance is controlling your emotions!

Trust me out of all these passive guys, this guy have the best resource!

Index Investing in Singapore

We don’t have much resources for Singaporeans but this guy’s blog shows you his execution.

Securities Selection – Investing in individual stocks and bonds

Upfront cost: High

Maintenance cost: High

Majority of investors believe that they can be competent active managers. They would like to build wealth by buying a portfolio of individual stocks.

They may choose to build the portfolio based on hearsay, or follow certain stocks selection methodology such as momentum /growth investing, value investing and dividend investing.

The upfront cost to learn is rather large. Most investors do not come from a finance background and will need to learn the basics required to prospect for stocks.

It is why most turn to courses to bridge that gap.

Many have shared that what you learn in courses are not enough and you will need to supplement more through self learning.

The maintenance can be as much.

Many have the perception that you can just buy blue chip or dividend yielding companies when in reality you will need to prospect the companies under your portfolio.

They may be overvalued and as an active manager you have to evaluate whether that is good for your portfolio to consistently buy without much margin of safety.

High yielding stocks may plateau and you will end up adding at very low yields.

On a daily or weekly basis, you will need to evaluate your existing stocks, and also you will need to prospect for new ones.

To ensure you buy good companies, you will need to read up on the business model, the competitor models, tabulate years of financial data, evaluate them.

You will need to discard most prospects and focus on certain to deep dive into them.

During earnings announcements, you will need to see if business have met expectations.

Anything less than this accounts to speculating to the point of punting.

Value Buddies

Valuebuddies is a Singapore based forum focus not on trading but more on prospecting businesses.

You will find that there is not so much comments on “can buy or not” but more on how folks take in news that affect individual businesses and what can be a good and bad outcome.

To find new business, you need to gain a level of business prospecting to understand the signals and block out the noise.

You will also need maintenance on the business models of new prospective business. All these requires reading up.

An example of diving deeper into understanding SPH business

Geoff Gannon

Geoff Gannon writes a lot on business prospecting.  If you would like to know the level of work that needs to be carried out upfront and maintenance wise, check out these prospecting articles.

It shows that successful investors deep dives to achieve a level of comfort in their picks to  invest with higher conviction.

  • A seemingly strong moat company that  with more second level thinking they reject it
  • Men’s Warehouse analysis: Take a look at the conversation between Hoang and Gannon. The level of business model discussion to  dissect a business

Active Trading – Day Trading, Momentum Trading

Upfront cost: High

Maintenance cost: Medium/High

For those who feels prospecting stocks are not their cup or tea, they may fee more affinity to trading in stocks, futures, options or Forex.

Many courses in news paper advertise to bridge the learning gap often touting that their technique is passive and all you require to reach financial freedom.

The upfront cost are usually more than that and turns out you need to put in more work to self learn more trading systems, evaluate their risk reward profile, back test the systems.

The maintenance is just as much. While some tout you only need 30 minutes daily,  the problem happens when the system stops working.

It’s hard to imagine the perfect system working in all market conditions. Most season traders shared there are different systems that works in different environment.

They also spend much time fine tuning their systems to make it more successful.

Depending on the time frame that you trade and the instrument, it will require a trader to do that nightly, daily or 1.5 hour daily identifying new trading prospects.

The best traders keep logs to evaluate their performance and learn from their mistake and that is part of the maintenance as well.

All Star Charts

JC Parets is one of the traders that blogs at Stock Twits. He runs his own hedge fund based on trading and he is a Chartered Market Technician.

You would think that if they run their shop based on trading, their system should be passive and low maintenance.

But what we get is the evidence that he spent his weekend reading more materials to sharpen his edge. And there are week where they will take off for mental maintenance.

If a system is fuss free, then a trader shouldn’t have the need to do maintenance things like that.

Alex Lew

Alex trades only charts and he shared with me that he denounces Forex Courses because you can’t learn what is necessary in a 6-7k Forex course.

You learn by experiencing and studying.

Each setup that he trades takes 2 hours  of prospecting as well.

Alex Lew at Seeking Returns

Passive income through property rentals

Upfront cost: Medium

Maintenance cost: Low

One of the most prevalent perception of passive income is to invest in additional properties, rent them out and collect rents.

The upfront cost is fairly above average, where an investor need to get the nuances of picking good prospective properties at good yield or with good appreciation values.

You will also need to project manage to furnish the property to get it to a rentable condition.

The prevalent means is to engage a property agent to fulfill the rental needs and paying a commission for it.

The maintenance cost is rather below average depending on how many properties an investor have.

Choosing the wrong tenant could result in the investor needing to chase him down for rent or compensation for rental damages.

The investor would also need to repair and bring the properties to a rental state again.

All these requires yearly efforts.

Work and family commitments

Depending on different level and scope of work, many would find that they will have a difficulty extracting time to engage in this second job of active wealth building.

It is true that if we want something we have to take action and  work for it.

However certain situations may result in an investor better prioritizing certain wealth building methods over others.

A very high stress but lucrative job may require the investor spending more of his time recharging his batteries by relaxing, concentrating on funneling more streams of cash flow into building wealth and relying on lower maintenance approaches such as a passive ETF portfolio and property rental.

If you are in a full time job, and there are many commitments to distract you, perhaps it will not be fair to your company to trade actively on a daily time frame. It could cause additional stress on your life.

Alternatively, you are  a young chap that can have the energy to have a  second job, you can choose to trade actively in Forex or us stock market at night.

Summary

Whichever wealth building muse you have chosen, you will have to figure out how much maintenance cost the investor requires to upkeep the wealth building process.

Do not let a course deceive you on the level of work and  rigor required.

However , do not be scared by the level of rigor. Human beings may require some challenge once in a while.

Top performers dig in and work. Losers complain.

A person that values relaxation, family bonding may have to choose a more passive approach. They have identified that they do not want that second job.

For gung-ho folks, it is important to realize that there may be more time and monetary costs involved then you think.

Above all, it doesn’t mean a more active approach equates to more wealth being built.

Low quality of approach, failure to master the behavioral part of investing by the investor may actually be detrimental and result  wealth destruction.

So which way would you choose? The more active hands on approach or passive approach?

Are you ready to take on a second job?

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out theresources section.

Filed Under: Money Management Tagged With: wealth building

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About Investment Moats

Kyith Ng is the founder of Investment Moats, which mentors you on wealth management towards Financial Independence

Investment Moats shows how you can build wealth through stock market investing, dividend income investing through a value based approach. And then to distribute wealth.

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