I have to apologise for the lack of regular updates in my site recently. I have been trying to get my “engine” started ever since I came back from Australia and my recent illness has done nothing to help the situation. I have also been having more hours of sleep these few days compared to the past.
If you know of any method to “kick my butt“, please do so. 🙂
On a more serious note, coming up with interesting and relevant things to write about can sometimes be a challenge. If you have any ideas on what you like me to write about, I would welcome your suggestions.
Today’s topic will be of particular interest to anyone starting out with investing but with limited capital.
Some of us might be fixated with the returns we can achieve on their investments. We spend time comparing the returns we can get on the particular class of investments we are interested in. For example:
Certainly, such comparisons are a good practice and should be done to maximise the returns you get on your investments.
However, what most people don’t realise that there are two components to accumulating wealth: Investing your savings AND managing your expenses.
The latter is often neglected.
When I talk about managing your expenses, I’m not talking about big ticket expenditures of a few thousand dollars and above. I’m refering more to your everyday expenses.
Suppose you manage to save $50/month as a result of being more conscious about the things you spend on. $1.67/day might seem like a small amount but it works out to a $600 savings per year. Again, $600 might not seem a huge amount but let’s try to see things in another perspective:
If you can put aside $1.67/day for savings, it is like creating a $60,000 virtual fixed deposit investment. It might take you a long time to accumulate $60,000 but the same effects can be duplicated by the simple act of setting aside $1.67 a day. This is something that everyone of us can achieve.
What if you can save $500/month? That will be the equivalent of having a $600,000 fixed deposit working for you.
Wealth accumulation is the fastest when you can get a good return on investments and at the same time increasing your investment capital as much as you can.
This concept is even more important if you have a limited investment capital. Let’s say you only have $10,000 as investment capital.
Person A gets a 4% return of $400 by buying a long term bond.
Person B gets a 10% return of $1000 by investing in stocks.
To get the 10% return, person B might need to do a lot more work than person A. Yet the absolute return in the first year is only $600. If person A can afford to spend $50 less a month and put it into his investment fund, he would be in the same financial position as person B after one year.
A $2400 ($200/month) savings adds 24% to the $10,000 investment portfolio.
A $3600 ($300/month) savings adds 36% to the $10,000 investment portfolio.
A $6000 ($500/month) savings adds 60% to the $10,000 investment portfolio.
When the investment capital is small, the amount of money you can add on to your portfolio will play a greater role in the growth of the portfolio than the investment returns you achieve.
For a person who has just started working and is planning for his retirement, managing his expenses is a critical aspect not to be ignored. Spending on a big ticket item (like a car) will slow down significantly the growth of his investment portfolio.
Having said that, I’m not advocating saving every single penny you have. Life is about having the correct balance and everyone will have different needs depending on his circumstances.
Live the lifestyle you want, but make sure that it is within your financial means and you are able to still achieve your long term financial goals.
“If you fail to plan, you plan to fail.”