How to prevent your money from becoming a liability?

In my previous post, I mentioned that money is a liability simply because it will keep losing its value every year due to inflation. If you save more, you will lose more. This will be very hard for those die-hard savers to accept this fact. So what to do? To prevent the lost of money value, you must learn the term "Hedging".

What is hedging?
Give you an example. Let say you have two item 'A' and 'B'. When item 'A' price goes down, item B price will go up at the same rate. At any time if you add up 'A' + 'B', the value will always be the same. Please note that hedging is not about increasing the value. It is use to maintain the same value at any time. Let say you have 'A' amount of money, the first thing to do is to spend half of the 'A' amount to buy item B.

So what can be item B. There are a few investment tools which can use as item B. One of them is to buy gold. I am agreeable with our senior citizens who insist to keep gold instead of money. They somehow have the knowledge of preserving the value of their money. See the graph above, gold keep going up.

Why gold keep going up?
The total amount of gold is a constant. You can never create gold, but you can print money. In the current financial system, where money is printing without stopping, naturally the price of gold will go up.

You may read the following related posts on gold by click the links below:
GOLD VS SGD Chart. Why Gold might be a good investment?
How to buy gold for hedging purposes?

Housing loan, make it 15 years or 30 years?

I am using an example where housing loan is $150, 000 and the interest is 2.6%. You can see that you are paying $31306.80 in interest for 15 years and $66180 for 30 years. Wow so 15 years is better because I am paying $35000 less in interest. I can tell you a lot of my friends and colleagues will say the same thing. But I am totally disagreeing with this. No matter how I explain to them, they do not have any idea what I meant. The main reason I gave them is in your OA account, CPF will pay you at least 2.5% interest.



I am comparing how much OA CPF you have in 30 years (because both housing loan will be up in 30 years). Suppose your monthly OA amount is $1200. In 15 year plan, you save about $193 per month or $2312.88 per year. In 30 years plan, you save about $600 per month or $7194. By adding up the saving and interest for 30 years, in 15 year plan you will have $318287. In 30 year plan you will have $315836. The different is only less than $3k. Amazing? One points to note, CPF is giving 3.5% for the first $20000 in OA, so in fact the difference will be smaller.

This is just an example. My point here is to make your own calculation before you commit on the number of years for servicing your housing loan.

You may want to google "Housing Loan" to find out what are the rates given by different banks.

How to reduce your liabilities to zero.

Before you can reduce your liabilities, you must know the difference between necessities and liabilities.

Necessities are the "MUST HAVE" items in your life. They are things that you cannot go without. Some examples of necessities are food, water, shelter and even mobile phone.

Liabilities are the "GOOD TO HAVE" items in your life. They are things just to "beautify" your life. One example is high tech gadget. These items will deplete in value after some time.

Sometimes it will depend on your usage to determine a certain item is a necessity or liability. One example is internet broadband subscription. I had explained in my other post why I had chosen the 3Mbps plan instead of higher plan. In short, it is a necessity for me to use the internet and 3Mbps plan is sufficient for me. Higher plan will cost more and it will build up my liability. In Chinese, there is a saying "if you do not have big head, you don't wear a big hat". It means buying what is necessary, do not over bought.

Here are some questions that you might want to ask yourself:
Q1) Do I need a big house for my family?
Having a big house is not wrong if you are intending to sub-let one or two free rooms to collect rental. It will become a asset. But if you not willing to sub-let, there is no need for big house as some rooms will be un-occupied. Remember, do not pay for thing that you do not need.

Q2) Do I need to have a car?
Car can be an asset if it can bring in money. How? For example, if you are a housing agent and you can drive your clients to see houses. It helps to provide good service which increase the chances of making a deal. But if you just buy a car to drive from home to office and from office back home, basically you are under utilising your car. The car did not bring in money, and instead take away your money. It will become a big liability. So if your work required very little on car usage, I suggest you don't buy it. A car costs about $50000 to $100000 excluding all the ridiculous miscellaneous cost. Why not use it for investment since you have the intention to waste it on a car?

From today onwards, if you don't buy any "GOOD TO HAVE" items and don't overbuy the "MUST HAVE" items, sooner or later your liabilities will be reduced to zero.

Knowing the power of exponential can make you rich.

Einstein said, "The most powerful force in the universe is compound interest". In order to speed up the pace of achieving financial freedom, we must understand compound interest or the power of exponential.


Imagine you have $50,000 now. By carefully planning your investment strategy, you should be able to get around 20% growth per year (say 15% capital growth + 5% dividend). 18 years later, you will see that your $50,000 will become $1 million. Wow sound easy? If you want your money to work for you, the first question is do you want to risk your money?

So do you want to use your money to buy a liability that take money from you, or do you want to use it to buy an asset that can generate money for you? The choice is yours.

My Assets and Liabilites.

I am trying to identify my assets and liabilites and guess what, I have neither of them. In my last blog "the expenses of a married man with a kid", all the expenses are necessities, so cannot be treated as liabiites. I have been reading up a lot in the past one year on how to build up assets and started trying out some methods.

Expenses of a married man with a kid.

My Monthly Expenses:

The above picture show you a rough breakdown on the expenses. The total is about $3000. This give you an idea if you instead to get married and wish to have a kid in the future.

Just recontracted my broadband plan

I just recontracted my 3mbps unlimited broadband plan. The cost is roughly $24 a month as compared to $35 per month in my last contract. Wow $11 cost saving per month, ($132 per year or 1 day work). I had been thinking last few days whether I should upgrade my plan. I ask myself these questions:

Q1: What is my current utilization rate?
A1: I spend at most 4 hours per day. So in one month I use 4 X 30 = 120 hours. $24/120hours = $0.2 per hour. No different even I have higher bandwidth plan.

Q2: Do I really need higher bandwidth like 6Mbps or more?
A2: Normally I only watch YouTube videos and even in HD, there are no lags at all. So I really no need any bandwidth higher than 3Mbps.

Q3: Will my liability increase if I subscribe to higher bandwidth like 6Mbps or more?
A3: Of course, higher bandwidth will cost more. This is against my plan to reduce my liability.

All these questions pointed to a conclusion which is to stay in the same plan.

If you are thinking of having higher bandwidth to download video, think again. You are in fact paying more subscription to have these video downloaded.

How much does a plate of chicken rice in 2040?

I remember that in my primary school times in 1980s, I always go to hawker center near my place to eat chicken rice. The normal type cost $1.20. During my secondary school, the chicken rice cost $1.50 and in my unversity time is cost $2.00. Now in 2009, the chicken rice cost at least $2.50 in hawker center, and in food court at least $3.50. Wow, from $1.20 to $3.50, nearly increase 3 times. See the chart below to find out how much a plate of chicken rice might cost in 2040.

Is money a form of liabilities?

The above picture is an Inflation rate (consumer prices) (%) chart. It shows that most of the years between 2000 to 2008, the rate is positive. So it means that the value of the money will reduce most of the time. So if you keep the money in bank with low interest (or under your bed), the value of money will keep dropping. Based on my previous post on Assets and Liabilities, I mention that Liabilities are things that you owns which take money from you. So doesn't it mean that money itself is also a form of liability? Click there to see how much does a plate of chicken may cost in year 2040.

Assets and Liabilities

In order to achieve financial freedom, it is important to identify what are assets and liabilities.

What are Assets?
People always have a misinterpretation that assets are things that belong to them. Well that is only half true. The true meaning of assets is things that you own which help you to create money. For example, you have bought a house, and you pay $1000 for instalment every month. Instead of living in the house, you rented it out for $1500 per month. You can call your house as an asset because it brings in $500 to you every month.

What are Liabilities?
Liabilities are exactly opposite to assets. Liabilities are things that you own which take money from you. Using the same example, you have bought a house, and you pay $2000 for instalment every month. Instead of living in the house, you rented it out for $1500 per month. You can call your house as a liability because it takes $500 from you every month.


Learning how to increase your assets and reduces your liabilities is an important step towards finance freedom. By the way, is money itself a liability?

What are Investment Instruments?

Investment Instruments are tools that individual use to make their money grows(or gone).
These tools include:

1. Equity Stock Market
2. Unit Trust
3. Bond
4. Forex
5. Future
6. Commodity

I will be explaining each of the above investment instruments in details in my next few posts.

My Passive Income (24 Sep 09)

Currently my passive income is $600 per month. This income is able to pay off around 20% of my monthly expenses. My target is to increase it to $3000, so as to acheive my financial freedom status. So how to find another $2400 per month? If you have any good idea, feel free to leave some comments.

What is financial freedom?

What is financial freedom?
Before explaining what financial freedom is, there are two terms you need to know. They are active incomes and passive incomes.

What is active income?
Active incomes are incomes that you get by doing some services for other. One example of active income is money that you earn by working for other. There is nothing wrong with this type of income, but this is not the income that will make you rich. You are using time to exchange with money. Logically the more you work, the more you earn. But what if you suddenly couldn't work anymore, for example you become very sick permanently? This source of income will stop too. Normally people will only focus on this source of income, which is why very few become rich after working for their whole lives.

What is passive income?
Passive incomes are incomes that you received without doing anything at all. Yes, you can treat it as money dropping from the sky. So how can it be possible? Some examples are rental you collect by renting out your room or the whole house, interest that received in your fixed deposit and dividends that you collect from your stocks. People who focus on this source of income will slowly become richer and eventually their passive income is more than their active income. Let me tell you a story about Jack and Jill to illustrate this point.

For the term financial freedom, it means that your passive income is more than your expenses, and you will no longer need to have any active income (or need to work anymore).