You want Financial Freedom? Save, Invest and Start Early.
There are countless ways to getting rich here in Malaysia. For the average and majority of Malaysians, I urge you all not to get caught up in the many get-rich-quick shortcuts out there. Instead, opt for the long winding but proven path of hard work, savings and consistent diligent investing.
The crucial and key thing is to get started and get started early . It’s best to save and begin investing at an early age. You should even start saving and investing on behalf of your kids the moment they’re born to give them an edge in this dog eat dog world. And trust me, saving as little as RM100 a month for your children the day they’re born will help them start off with about RM50K in their accounts on their 18th birthday. If I had RM50K to start with, I’m sure my portfolio would be much much bigger now. Start early!
Yes, saving money isn’t fun. Investing in boring index funds and the stock market for the long term isn’t sexy. And yes, it takes years, decades even, to build wealth this way. But trust me, it’ll all be well worth your while when you realize you have enough passive income to sustain your lifestyle.
One advantage I had was learning about the importance of investing at an early age. I was fascinated with the concept of passive income during my university days and started learning how to value stocks. I read tons of books on investments and decided at an early age to embrace frugality and diligent investment. I devoured and poured through books on investing and personal finance. Every day I checked the share prices of stocks I was watching in the newspaper. I loved it!
Investing isn’t just for the Rich
Because I’ve been asked this a thousand times over, I’d like to emphasize – Investing is simple and you can start with ANY amount. The crucial part is just to GET STARTED!
As of 2018, I’m 28 this year with a portfolio (my Freedom Fund) of RM300,000 in stocks. I started out with just over RM10K saved up from my university days. Too many people around me have put off their finances because they claim not to know a thing about investing. The most important step for you to take is to get started. Save up, pick a stock you can understand and invest in it. It doesn’t matter if you have a million dollars or only RM1,000. Just get started.
In fact my very own portfolio is built on frugality. Make savings a priority, get your emergency fund set up, then get to investing!
Here’s an analogy on investing I love.
Let’s say you are a farmer, you buy a little baby calf for RM2,000. It eats a lot of grass and over time grows into this big, beautiful, strong cow that’s now worth RM10,000. On a nice Sunday morning, you walk your cow down to the farmer’s market in town, and you sell it for RM10,000. Boom, a RM8,000 profit (and you didn’t even have to pay for the grass). This is your capital gain. Now, the period before you sold off your cow, your cow produced milk which you consume and sold off to your neighbors. This is your dividends.
- Your cow – Stocks (Asset)
- Your milk – Dividends (Cash flow)
Investing is really that simple, and you can start with any amount of money.
Now, lets take it to another level. You could’ve kept that RM2,000 you had at the beginning in your savings account. Over 20 years based on the 3% interest rate banks are paying now, your RM2,000 is now worth RM3,612.22.
OR, you can invest RM2,000 in the stock market. The KLSE index rose from 838 to close at 1813 on 29th November 2013 from 4 years ago for a total gain of 116%. On average, the compounded annual growth (CAGR) each year is 11%. Historically the markets around the world earn about 10% per annum, so here’s how much RM2,000 might be worth over 20 years, compounded at 10% per annum – RM13,455.00. (Note, this is the simplest illustration and example I could come up with, of course, many other factors come into play when one invests.)
Now compare investing to saving. Which one of these looks like the option to build wealth? Right, investing.
Mutual Funds and their Damned Fees
You’ve probably heard of investments like mutual funds, target date funds, or index funds. You might even own some of them. All of these funds have fees (also called the expense ratio), and if you’re smart you can save money on them.
Mutual funds are the worst (especially in Malaysia) because they rarely beat the market and usually have the highest fees, the average in Malaysia is a whopping 3%, I’ve seen some as high as 5%. These might all seem like insignificant numbers, so why does it even matter? It matters. Here, I’ll do some calculations to show you.
Let’s say you invest RM10,000 and earn 7% over 50 years.
0.0% fee: RM10,000 grows to RM294,570
1.0% fee: RM10,000 grows to RM184,202, and you lose RM110,369 in fees
2.0% fee: RM10,000 grows to RM114,674, and you lose RM179,896 in fees
3.0% fee: RM10,000 grows to RM71,066.83, and you lose RM223,503 in fees
I cannot emphasize how fees can kill your investments. I hope the above illustration will get through to my fellow investors out there. With a 2% fee, you’re essentially losing more than 50% of your investment to fees alone. What’s even worse is that the above example assumes you’re earning a 7% return p.a., what if you’re losing money? The funds still collect the fees from you! Isn’t that outrageous?
By investing in your own portfolio of shares, it means more money for you, less for the fund houses. Also to note are low cost Index Funds from companies like Vanguard that serve to mimic the market. The day that they come to Malaysia is the day I’ll dump most if not all of my savings into them.
(I understand some of you may be mutual fund agents and investors here so if you disagree, please do provide me your reasons for it. Don’t just send me hate messages and emails.)
I’ve written an updated article on mutual funds and unit trust hERE.
People love to get really worked up about inflation. Here’s what I think about it.
The best savings accounts earn about 1-3%. These accounts are great to stash money for an emergency, or to save a down payment for a house. The best Fixed Deposits (which you can only get if you deposit about RM10,000 and above for a few years) usually earn just less than 4%.
With Malaysia’s official inflation rate averaging roughly 3% (we all know it is much higher, I reckon its close to 4.5%), keeping money in a savings account or FD are both bad for building wealth because they don’t even keep up with inflation.
However, I always recommend keeping roughly 6 months of your take home pay in FDs as your emergency fund. The rest should be invested.
Going from RM0 to RM1,000,000
I want to show you something. Assume you’re 25 right now, and by age 50 you want RM1 million. To accomplish this goal, assisted by a conservative 7% return p.a., you need to save and invest just RM1,235.24 a month. Think about what happens when you increase this amount as you progress in your career. RM1 million isn’t a far fetched dream, it’s actually very much attainable and we should in fact aim higher.
The key takeaway from all this? If you really want to build wealth, you need to start investing right now. The longer you put it off the harder it becomes. And for you people whose time is not on your side, you should start investing too, it is never too late. More importantly instill this lesson in your children and future generations.
If you find the above makes sense and you’re ready to start investing, I suggest taking a look at – A Guide to Stock Investment in Malaysia.
If you’re interested in the stocks I invest in, you may find a full list of them in my portfolio – The Freedom Fund.
Again, be sure to read up and understand the company you’re planning to invest in. Keep it simple and consistent, and invest for the long term. Remember, start early and start now.
For the next article of the Investing Series, check out article 008 – DIVIDEND MAGIC Recommends: Stuff I Use.
“The best time to plant a tree was 20 years ago. The second best time is now.”
I’ll see you in 30 years.