How to Make Your Money Work for You.

“Make your money for you.”

We’ve all heard of this phrase many times but what does it really mean? “Make your money for you” means using your money to get more money. We get money by trading our time for money. And we store the money in a bank account. With current interest rates, you wont get much interest on your money and your money will not grow fast.

However, investing is a way of making your money work for you at a quicker rate. Investing in stocks has consistently proven to be one of the most profitable forms of investment available. The other avenues for investing are unit trust or mutual funds, bonds, property auctions and so forth.

Benefits of investing in the stock market

• Immediate Buy/Sell so you can sell part of your investment any time.
• Very low transaction cost.
• The freedom to work at your own place, at your pace in your own time.
• Easy monitoring — log in to the market from anywhere in the world.
• Being able to maximise returns whilst spreading your risk.
• A predictable form of investment if you know what you’re doing.
• Putting you in control and freeing you of fund management fees.
• Considerable tax advantages.

Things to be ware of:

• The market can be a volatile place.
• You must acquire knowledge of what you are doing.
• You must monitor your investments.
• You must learn the discipline to enter and exit the market on entry and exit signals.

Can Ordinary People Profit from the Stock Market?
Many people say things like “I’d love to get into the stock market” or “If I had more money, I’d invest in stocks”. Many people also believe that to make a profit from the stock market you either need to be rich already, be a full-time investment trader or be a financial whiz.

Far from it!

Investing in the stock market is a simple process. Just like everything else in life, there are risks you should be aware off.

Here are some examples of investing in the stock market.

Scenario 1:
Jonathan works in a manufacturing plant earning USD33,000 a year. After rent, living and personal expenses, Jonathan has managed to save USD1,500 over the past 6 months that he wants to invest in the stock market. Jonathan buys 1,600 shares in Enron at USD0.90 per share (USD1,440). He also pays USD32.95 brokerage fees for buying the shares. In total, Jonathan has invested USD1,472.95.

Six months later Jonathan decides to sell his shares. He has kept an eye on the performance of Enron and they have risen to USD1.19 a share. Jonathan sells his shares for USD1,904. He also pays USD32.95 brokerage fees for selling his shares, leaving him with USD1,871.05. That is a profit of USD398.10.

USD398.10 may not sound a lot, but remember, Jonathan only invested USD1,472.95 for 6 months, so he won’t make a huge return. Nevertheless, Jonathan made a 27% profit which is far better than he would have made by putting the money into his savings account.

Scenario 2:
James and Samatha both work full-time in professional jobs. Together, they earn USD120,000 per year. After mortgage repayments, living and personal expenses James and Samatha have managed to put away USD5,000 that they want to now invest in the stock market. They buy 1,500 shares in Exxon Mobil at USD1.48 a share (USD2,220) and 1,500 shares in Shell at USD1.33 a share (USD1,995). They also pay USD65.90 brokerage fees for the two transactions. Their total outlay is USD4,280.90.

Over the next 12 months Exxon Mobil shares have risen to USD2.60 a share and Shell shares have moved to only USD1.38 a share. James and Samatha sell their shares for a total of USD5970. They pay their broker USD65.90 and are left with USD5904.10. Their initial investment was USD4,280.90. So, they make a profit of USD1,623.20.

These examples show that investing in the stock market is a relatively simple process. However, one should always take a prudent approach when investing in the stock market. Never listen to rumours. Always do your homework, which is to study the background of the companies that you’re investing into.

I will explain more about investing in the stock market in the next post.

6 Ways to Manage Your Money

In current economic times, its always good to go through these age old money management tips.

1. Save a minimum of 10% of your monthly income

Saving a portion of your monthly income is the start of all debt management. Experts usually recommend 10% of your monthly income. The more the merrier but what if you cant save 10% every month. Then start with 2%. If you earn 3 thousand a month, 10% would be 300 and 2% would be 60 dollars. Can you save 60 dollars a month?

Don’t scoff and say that 60 dollars is too little and thus negligible. Every penny saved is not a foolish endeavour. 60 dollars a month is 720 dollars in a year and 7200 in 10 years.

The secret to doing this is to automate the process.

The Automatic Millionaire

David Bach in his best seller, The Automatic Millionaire (one of the best books on getting out of debt that I’ve ever read), advocates automating your bill payments so that you never miss a payment and incur penalty charges.

Similarly, automate the saving of the 60 dollars into another savings account. They key to making this money grow is to make it difficult for you to withdraw the money. Don’t get an ATM card for the savings account. The more difficult it is to take the money, the higher its chances to grow for you.

2. Have at least four to six months of your monthly expenses in your emergency fund

Every one should have an emergency fund. How much money in the fund is based on your monthly expense and how long it would take you to find your next job. If you’re in a very niche market (which means you’re in demand because you have unique skill sets), then 1 or 2 months of savings should be fine.

But for the rest of us, we need around 4 – 6 months of savings.

Life always has its up and down. It’s nice to know that in severe emergencies, you wont lose your house when trying to save yourself.

3. Retirement expenditure at 70%~80% of last drawn income

Don’t take retirement lightly. remember how much you eat during the weekends when you don’t have much to do. Well, retirement is the same. Okay, you might not eat much, but you will require around 70~80% of your last drawn salary.

Retirees like to to travel, after all the years working. All this requires money.

Never take money out of your Employees Provident Fund (EPF) or your 401k except for emergencies or buying property. This money is for your retirement.

4. Your life insurance cover should be at least 7 to 10 times your annual income

While financial experts agree with this rule, the exception is that it depends on whether you can pay the premiums. Your life insurance depends on how many people depend on you for their livelihood.

A life insurance is meant to cover your earning potential. An example would be:

Assume you’re a 35 year old who earns Rm120,000 per year and your child is only 5 years old. Let’s assume he’ll be independent when he’s 25, so you realistically need money that will last him for another 20 years. That should be 120,000 x 20 = Rm2.4 million. At 10 times your annual salary, your life insurance should be for Rm1.2 million.

5. Your home loan payments should not exceed 33% of your monthly income

Most banks in Malaysia conducts credit checks and will usually set the borrowers limit to 33% of your monthly income. The rule of thumb for housing loan repayments is that when you’re buying the house to live in, then go for the shortest loan term possible while staying within the 33% limit.

But if the house is for investment purposes, then stretch the loan repayment period for as long as possible. This will allow you to have very low repayments. Why is this a  good thing? This is good during the times when you dont have tenants staying in your house and you have to fork out the loan repayment from your own pocket!

6. The percentage of your portfolio to be invested in equity should be 100 minus your age.

Take risks when you’re young because when you make mistakes, time is on your side. But when you’re aging, you have to wise in your dealings and as you age, you should lower your exposure to equities.

Always take into account your objectives, risk tolerance and investment timeline.

Identify what types of investments you’re comfortable with and determine its objectives and duration. Consider rainy days.

Then consider your attitude towards risks. How much risk can you take? As the stock market fluctuates, can you sleep well? If you cant, diversify your portfolio between equities and bonds and units trusts (mutual funds).

To close this topic, always track your portfolio. Always know their value and monitor their performance. This allows you to sleep better at night.