Everyone talks about this, but not everyone knows how to go about doing it. I believe everyone knows the way to passive income is out there, but not many knows what it is exactly.
How to make them work for you
I think everyone agrees with me that not many of us would get to one million (S$1,000,000) in our banks just based on our basic income including overtime pay or bonuses or whatever income we have just based on our day to day job. And yet many still believe that the way to financial security is by working hard, ever heard of a success story of someone working hard for money? Me neither. How about those that make money work hard for them and succeeded? Definitely! A high annual income is definitely helpful to achieving large wealth, but its definitely not the main determinant.
According to statistical studies, two factors are most important in achieving wealth:
- The time frame that one has been consistently saving and investing. Keyword is 'consistent' here
- The ratio of funds placed into platforms with higher returns, in Singapore, that could be as simple as the new Singapore Government Saving Bonds (SGSS)
This does not mean that higher return investments should be consistently held regardless
of price and risk levels. The historical evidence is clear that both
the future return on investments (ROI) and their risk depends on the
level of market valuation and trend (Investor's Behaviour) . However, it is well known that high net worth individual hold more investments over time as compared to their counterparts. The key to their fortunes is a consistent rate of return over the period of investment. If you need the help of a formula, here it is:
Future Wealth = Current Wealth x (1+k)T
k is rate of return earned
T is time allocated for the investment
T is time allocated for the investment
The winning formula can be used to aggregate the kind of environment your money is in. By adjusting the different factors in this formula, you can easily determine how much wealth you could accumulate over your lifetime!
Increasing the long-term annual return (k)
For most Singaporeans increase the long term returns may seem bleak but here is an extract of what could be out there for Singaporeans
While taking risk is basic to generate better long-term returns, it is important to understand that market risk is typically rewarded much better in some Market/Investment Climates than in others.
While taking risk is basic to generate better long-term returns, it is important to understand that market risk is typically rewarded much better in some Market/Investment Climates than in others.
Increasing the time horizon (T)
The best way to do this, is to start saving young and doing this consistently every single time!
Referring to the extract, you can see the humongous difference for saving in 5 or 30 years. By starting early, you can secure a higher capital for more adventurous investments. With just a measly $1,000, you can actually save up to $10,000 with a unit trust investment!
Some advice about saving
Don't treat you savings as expendables! It is more on your saving habits, are you a spend then save? Or a save then spend? Most Singaporeans are more habitual spender then savers. The reason to treat you savings as important as the credit card bills is because the opportunity costs are much higher then paying for the interest of the credit card bills. You have to treat savings as if it is similar to your utility bill and phone bills. Being so, you can ensure yourself that you savings is sound!
The bottom line
Financial
security does not necessary mean winning the 'TOTO' or having a high annual income. A strategy has been in place for consistent saving into a investment portfolio called 'Dollar-Cost Averaging'. And by starting early and consistently, into a controlled market environment and taking risk considerations. You are looking to accumulate a larger wealth then what you can by pitting your hopes on lotteries!
Hello! My team and I would like to share and discuss topics on financial planning especially on the topic of necessity, and how financial planning interlinks with our daily hectic lives in Singapore! Feel free to ask us any questions and we will do our best to answer any of your queries!
