Tracking my spending habits for a month

Dear Money-savers,

I am a cost conscious person. I dislike unnecessary expenditure and review my spending behavior on an adhoc basis. 

That being said, I have never tracked my spending using tools or analyzed it in a structured manner. Instead, my “tracking” has been based on my monthly savings ratio, which indirectly defines spending. I have not really had any reason to look further into my spending because my savings ratio has been stable. Nevertheless, I have been planning for some time to look into my monthly costs to understand what I actually spend money on and see if I should tweak it improve my savings ratio.

Mrs. Money introduced me to an app, Money Lover. I didn’t compare it to any other apps since my requirements were quite basic to do this evaluation – I just needed to be able to log my expenditure and segregate the items over the period. My first expense was a F&B item on the 20th of October. The period would ideally only cover my spending in Malaysia but I happened to be in Europe from the 24th to the 30th of October. Initially, I wanted to do two posts covering a two-month period with one including the trip and the other only Malaysian costs. But I realized that unexpected costs do always come up, and the Europe trip could attribute to an unexpected cost in a “normal” month. 

Therefore, the period I will share is the expenditure from the 20th of October until the 20th of November.

                          pieitemized

My total expenditure was RM4,416.82. (This does not include the flight ticket since it was booked the month before). 

My spending pattern doesn’t really come as a surprise. There is one item that contributes to 69% to my total expenditure – food & beverage. I do not cook, eating all my meals out. This has been the case for most of the past 13 years. I would say that convenience has been a big factor, plus that eating out is very affordable in Malaysia. My total F&B spending ended up at RM3,013.23, which I felt was quite low considering that it includes my dining in Europe.

The remaining are items I can’t really avoid. Bills and utilities expenses relates to my housing arrangements, as well as electricity and water bills. Since my office is within walking distance from my home and I do not drive, transportation is usually a very small expense. The transportation expense this month is mostly related to the trip. 

My take away from this exercise is that I do in fact live a very cost efficient lifestyle. However, I would like to balance my F&B expenses so that it moves from 100% dining out, to around 60%. There is a strong negative health aspect to consider when eating out frequently, which is something Mrs Money mentions to me often. It also just doesn’t feel right to indulge with dining out every day. I am planning to try out a 60% dining out ratio for a month in 2020 (possibly January) to evaluate the cost benefits of this.

 How does your spending habits look? Do you keep track of your monthly expenditures? What have you noticed?

Where to holiday next?

Dear Money-savers,

Mr Money here. My post today is more lifestyle-oriented which differs somewhat from the usual finance related updates written by me. It is however a topic I’ve wanted to share some insights on for sometime.

We travel quite a bit in work. During our first year together, our holidaying exceeded what was the norm for myself. It covered South America, Europe, South East Asia and several local holidays. The holiday budget for that year exceeded RM60,000 which we both felt was too high for a couple without kids. After that first year together, we set a yearly budget of RM30,000 which was based on one continental trip, one regional trip and trips within Malaysia.

WhatsApp Image 2019-11-16 at 22.35.08
Valle de Cocora was one of the highlights in Colombia.

With our new yearly budget, we have tried to plan trips well in advance. Unfortunately, strategically booking tickets during sales or well in advance to minimize travel and accommodation cost was never really adhered to. Despite us knowing this fact, we still seldom book tickets early. We however aim to do it but our careers have not allowed us to plan that far ahead.

Travelling within Malaysia has really opened both of our eyes on how incredible this country is. We started with this during our first years but have continued to book more local trips over foreign trips. Malaysia has so much to offer and we still feel that there is so much left to explore. The weak MYR exchange rate compounded with carbon footprints and flight shaming have further strengthened this belief.

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The weakened MYR since 2015 has further fuelled our domestic travels

Our trips in Malaysia have varied and encompassed luxurious resorts to home-stays, physical activity trips to weekend city discovery trips. The budgets for trips within Malaysia also vary greatly, our trip to Pangkor Laut was around RM7,000 whereas a weekend in Klang RM1,500 but both equally as enjoyable. I can really recommend the (free) Royal Klang Town Heritage Walk if you have an opportunity to visit.

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The wonderful Sea Villas at the luxurious private island, Pangkor Laut
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Climbing Mt Kinabalu was high up on my todo list. The pinnacle feels like a different planet.
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Adeline Villa & Rest House in Gopeng has it all. Proximity to serene nature, activities and incredible food. Just the food alone is worth the trip..

We have started to plan our trips for 2020. One of my favourite cities in Malaysia, Kuching is on the list.

Do you have any travel and budget planning tips to share?

Buying my first property

Hi Money-Makers,

Mrs. Money here. I finally bought my first property – hoorah! I’m really glad that I’m on track with my short-term FI plan that I set out when I started this blog, just over a year ago.

In this post, I will share the journey towards purchasing my first home – the what, why and how. What started as a pie in the sky, soon led to me poring through blogs and property sites, talking to aunties and uncles, driving around suburbs like a creepy stalker, and whipping out my (phone) calculator to make decisions about the largest investment of my adult life.

House hunt 1 _ gate
One of the many cute little houses I stalked from my car. This one was in Subang Jaya.

Coming from an Asian family, buying a house was something we were encouraged to do right out of the womb. It’s a sign of financial maturity, independence, and most importantly, completion of one of our three core filial duties (the other two being married and having children). I also set my sights on buying a property as a means of cultivating a habit of savings towards a worthy goal

Early questions

However, as I was building up my savings, I found myself asking some questions: Should I even invest in a property? Are there better investments? Is it more financially savvy (and convenient) to rent for life instead of buying and maintaining a home? What is the true cost of home ownership? Am I ready to commit to such a huge investment?

This is a personal choice, and ultimately I decided to do it for two main reasons: 

  1. There is a lack of low-risk, secure investment options with stable, long-term returns in Malaysia (see Mr. Money’s post on the high fees associated with unit trust, as one example). Property prices have been averaging at almost 8% capital appreciation yearly in the Klang Valley (including rental yield), which is better than most other secure investments you will find in Malaysia.
  2. Know thyself: As someone who needs and values certainty, my ideal future envisions a roof over my head which no one can take it away from me (except my bank if I default on mortgage payments, of course). There is also something oddly secure and satisfying about owning a piece of land on our finite planet. And really, there are not many investments that you can actually live in.

Sure, there are downsides. It is expensive to maintain a house. There are costs of fixing busted pipes, roof leakages, paying quit rent and assessment, periodical maintenance such as painting the house and other random things that need to be seen to and that can be damaged over time. Dealing with tenants who may trash your home and more importantly, cause mental anxiety, compounds this. Then there’s the high upfront cost involved in the down payment and other fees. Capital appreciation also means nothing unless you plan to refinance your home, or when you actually sell your property and receive your gains. Otherwise, a house is an illiquid asset, sitting, waiting, hoping to be the goose that lays the golden egg of an above average capital appreciation at the point of sale. 

In any case, I decided the value (financial and emotional) outweighs any negative aspects of home ownership, especially as my pot of savings grew larger and I could begin to contemplate affording it. 

The next questions I needed to decide upon were (a) budget (b) location (c) type of property.

The easy part: deciding on a budget

I decided this based on two figures:

  1. First, was the amount I was able to set aside every month for the mortgage repayment. I calculated this by taking my nett salary – (monthly expenses + an additional 10% for additional savings/investments/emergencies), which meant that my mortgage repayment on a monthly basis would be close to 40% of my take home salary. To be conservative, I based my nett salary on the fixed part-time position that I had, disregarding any income that I occasionally get from other consultancies as that was less predictable. Based on this monthly figure, I worked out what the purchase price should be.
  2. Next, I needed to make sure I had enough upfront cash to be able to purchase the property – which is roughly around 15% of the total purchase price. This includes 10% for the down payment (most banks will give first time young home-owners with a good credit score a 90% loan), and around 5% in total which covers lawyers fees, stamp duty, valuation fees etc. This was the figure I had been working towards over the past few years. 

These calculations were just a guiding post. Since I took almost one and a half years from the time I started to look, to when I actually bought a place, my income increased and so did my budget. However, I would be cautious about being too flexible with that figure. You don’t want to be stuck with a massive loan that you will struggle to service.

The next two questions were harder. I felt like I was going around in circles, without a clear direction as to what property to buy and where. There seemed to be an infinite number of ways to look at it. 

The hard part: What, where…. and how?

Research, research, research

I went really nerdy with this next stage. I started by creating a Google Doc titled “First Home Purchase: Notes”, where I stored all links to sites, notes, and my reflections on criteria that I wanted to consider in my process of determining what property to buy. I pasted good articles, which included those that had strategies to start investing in property, good areas to buy properties in Kuala Lumpur, how to calculate rental yields, tools to compare properties for investments, freehold vs. leasehold, and anything else that was remotely relevant or insightful for my search. 

Narrowing down the search criteria

Then I chanced upon an article by KC Lau, sharing tips by Faizul Ridzuan. It had guiding questions and tips that can help set direction for anyone considering buying a property. These included understanding your long-term objectives and risk appetite, and then asking if this property will help you in achieving that. 

My risk appetite is low, and my long-term objectives were to be able to retire comfortably with a reliable stream of passive income. But I also wanted at least one house that I could call my home. A place I can possibly retire, or sell off at a later time to take advantage of appreciation or if I ever needed the money. Some additional advice he had included:

  1. Old is gold: it is better to go for an old property that is valued at lower per square feet, than a new, more expensive one in the same location.
  2. Go mass: go for a property that the mass market can afford
  3. Landlording (buying to let): this helps with your holding power in a financial crisis, and having rental as part of your income will help in obtaining future loans.

And of course, every other article talks about the importance of location, location, location.

Using all the information I researched and applying it to my personal goals and situation, I had a clearer sense of what I was looking for, which was: 

  • A central location (surprise!). I wanted somewhere in the Klang Valley, and some locations I was considering were Subang Jaya, Bangsar, and Petaling Jaya – the latter two being locations I had lived in for most of my life and was therefore very comfortable with.
  • A landed property instead of an apartment. I had initially been open to purchasing an apartment, but given the massive oversupply of condominiums in Malaysia, did not feel confident in investing in one. While rental yields are always higher for condominiums, I was prioritizing capital appreciation over time, rather than shorter-term gains.  
  • An older unit. I did not want to be paying a premium for the “newness” of a house which will wear off over time. 
  • Buying to hold, with an option to either occupy it myself, or to let.
  • In a decent condition, not requiring significant renovations. Mr Money always reminds me that it’s rare to be able to make back any money spent on large renovations in terms of improved rental yield or capital appreciation over time. For example, spending RM50,000 in renovations to improve my bathrooms and kitchen might bump up my rent by RM300, at most. This means that I would make back that initial investment only after 14 years of renting it out! This is not counting interest foregone (and the fact that our bathroom is now already 14 years old). While renovations and upgrades make sense for own stay, I would be very cautious about excessive renovations hoping that it will yield returns over time. 

The hunt begins 

This next step was basically one year of my life. 

I started contacting agents for viewings and spending hours every week on online property sites like Iproperty and Property Guru; using their filters to narrow down and save properties based on location, budget and type. A real estate agent with 30 years of experience, my dad was at hand to dispense tips and advice: see as many houses as possible, ask as many questions as possible, and take this opportunity to really learn and process options so you are ready when the right property shows up. 

He also gave me some really useful questions/things to look out for when viewing properties, including:

    • What has been the historical price trend of the area?
    • Is it close to public transportation?
    • Is it close to supermarkets, restaurants, universities, colleges?
    • Is it a mature area? 
    • How old is the house? Do you need to change entire roof, plumbing and wiring etc?
    • Is it currently tenanted? How much are they paying? How long have they been renting for (especially relevant if you are looking to buy-to-let)
    • What are the demographics of your neighbourhood?
    • Is it easy to get in and out?
    • How many families have lived there before?
    • Why is the owner selling? (so you have a sense of your negotiating power)
    • Is it freehold? (freehold is generally seen to be of higher value given limitations with the latter, although you can always try to negotiate down for leasehold properties). 

Some things to avoid:

    • House with the number 4 is generally seen to be bad luck in Chinese culture, limiting resale/rental value. 
    • Be aware that houses facing certain directions are preferred by certain religious or cultural communities. 
    • A house facing a T-Junction (also considered bad luck, limiting resale value)
    • Any place of worship nearby – due to traffic congestion and noise pollution
    • Houses near overhead power lines
    • House elevation: houses at a lower level than the road in front of it.

Finding “the one”

With these questions and tips in mind, I set off viewing single storey houses in Subang Jaya, Petaling Jaya and Bangsar over the next year. It almost felt like a part-time job, and I must have seen 40 – 50 houses in total. But what that meant was when I saw the house that I eventually bought, I had enough knowledge and “feel” to know it was the right one. I also got great ideas for house design (and things to avoid; e.g. silver wallpaper against bright red ceilings, ugh), learnt about different neighbourhoods and how people lived, increased my confidence in negotiations, and learnt so much about the property market – which were all great life skills to acquire. And because I had the luxury of time (thanks to the lacklustre property market), I didn’t have to stress through the decision, which made it so much more enjoyable. 

I ultimately purchased a single storey link house at a great location in Bangsar with commercial potential for a price below market value. And contrary to my greatest fear, I didn’t have buyers remorse or any commitment issues when I wired over the massive sum for the down payment!

Antipodean_VKeong
One of the many adorable (and “atas”) cafes in Bangsar area. Photo credit: VKeong

Top tips

As I’m just about to collect my keys and begin my (very basic!) touch ups to the house, I have been reflecting on what I’ve learned through this process and want to share my takeaways:

  1. Understanding your needs and how buying your property helps you get there. I found Faizul Ridzuan’s exercises and some of my dad’s advice really helpful in the process of reflection and understanding what was important for me.
  2. Take your time and do your homework. There is so much value in going slow, learning, and taking it all in so you build your knowledge and confidence in the market and the process.
  3.  ..Then go with your gut.  There’s a big caveat here. The “gut” or instinct here should not be taken lightly – it is very valuable, but even more so when you have enough information on what you are making your decision about. Malcom Gladwell talks about this in his famed book “Blink”. For someone who is very risk averse, I was surprised at how easy the decision was in the end, and I really placed value in the house just “feeling” right. If you’re going to be spending so much money on it, and may live in it one day, you better like it. A lot.
  4. Information is power. Know how much properties are transacting in your area (you can see them on Brickz.my – another top tip from my dad). Ask all the questions above, and more. Make real estate agents your friends. They are financially going to act in the interest of the seller, so you want to be able to get them on the side of making the sale. They are your best hope of critical information on the property. Knowing the state of the market means you have greater negotiating power. I was buying in a soft market, and the house I eventually bought had already been on the market for over a year (in fact, I first saw and fell in love with it a year ago, but had to walk away because I was not willing to pay the asking price). Talking to the agent, I knew no one else had even made an offer a year later. With that, I was able to get the property 15% lower than the original offer price.
  5. Location is key. I really needed to feel confident in the area I was buying in – that it was urban, booming, matured, and would likely be even in the decades to come. Analysing capital appreciation over the past 20 years was one good way of gauging this. 
House hunt 2_brickz
A very diligent real estate agent gave me a printout from Brickz.my of recent properties transacted in the Lucky Gardens area of Bangsar.

And that is it! I’m really thrilled to finally own my first property, but have been so grateful to have learned so much from this process too. My immediate goal is to try to quickly pay down the loan, while working to diversify my asset classes. 

In my next post, I’ll write out the loan process – which was unexpectedly complicated by the fact that I was no longer employed by a Malaysian company. If you are working on consultancies or a gig position, you’ll want to read this. Stay tuned! 

Do you have any lessons learnt from buying properties that you would like to share? Any questions? We’d love to hear from you!

Update: Mr Money’s Portfolio, August 2019

Hello Money Makers,

It’s time for a long overdue review of my (Mr Money’s) portfolio. You might remember my initial post from December 2018 on the portfolio and my targets. This post is based on a snapshot on the assets from the end of August i.e. some 9 months since the last asset declaration on this blog.

MrMoney Pie Chart_August 2019
Total assets increased by 9.9% over these 8 months, above my annual growth target and despite the trying global and local economic outlook.

My goal to rebalance the asset distribution equally between the three classes seems to be going slower than expected. The plan is however on target and there are increased allocations to the equity class. 

I have allocated new funds to my existing index fund in Europe, and to ASNB fixed price funds. With this, I now have invested in all three ASNB fixed price funds. The funds dividends have been trending downwards with ASM 2 Wawasan reporting 5% in income distribution on Friday (30th August). The products however match my risk profile well and their risk adjusted return is still higher than other options in the Malaysian market. 

The increased index funds allocations for my Europe-based fund have been suppressed by weak currency development, down ~7% over this period against the MYR. However, the fund is up 16% in local currency since the beginning of 2019. Therefore, the asset allocation in my Equity class has only increased a mere 1% in the pie chart, primarily due to volatility in currency.  

The property class will remain a substantial holding, but I do not foresee any new acquisitions. 

The main reason why my total assets have increased by 9.9% despite a weak market is because I continue to have a low risk tolerance – prioritizing paying off my housing loans instead of investing in new equities in the market. 

In writing this, I realize that I need to strengthen my commitment to grow the equity class of my assets. Having said that, I am not aware of any other cost-efficient, medium risk products in the Malaysian market.

Have any of you come across any interesting financial products in the Malaysian market in the past few months? If so, please share here!

Fast comment: How BNM’s recent announcement on interest rates affects your investments

Bank Negara Malaysia decided to lower the Overnight Policy Rate (OPR) by 25bps to 3.00 percent today. This was somewhat expected, which also prompted Mrs Money to try to renew some deposits prior to the BNM meeting.

The OPR was reduced to accommodate growth and in view of the current slowing global demand and heightened downside risks to the Malaysian economy.

I thought of listing down some areas in which the OPR change affects our personal economy.

  • Equity – lower interest rates tend to boost the stock market since it eases the funding cost for companies. The financial sector is an exception, especially banks with high net interest margin earnings which will face some pressure.
  • Mortgages – lower interest rates usually means lower mortgages for home owners. I doubt that we can expect a 25bps decrease in our mortgages but there should be a significant reduction in rates which in turn would spur activity in the real estate sector.
  • Bonds – Existing bond holdings with fixed interest rates will increase in value since the differential with the OPR will be higher.
  • Fixed deposits – banks will lower the rates for fixed deposits to reflect the lower OPR.
  • Currency – A reduction in interest rate decreases the value of the currency since its yield is lower. The MYR should depreciate in value due to the change in OPR.

For myself, the impact on equity, mortgage and bonds will have the largest effect to my assets. Therefore, I welcome this OPR reduction that will hopefully further spur my asset growth as well.

How will the OPR reduction affect you, Money Makers?

How to Develop a Financial Independence Mindset: My 7 Steps (Part 3)

Hi Money-makers,

In the final part of this 3-part series, I will share the steps I took to begin shifting my mindset from one of lack, scarcity, and guilt, to one where FI was a real possibility.

In Part 1 of this series, I shared how this paradigm shift happened for me, in the windy beaches of Cherating. In Part 2, I talked about identifying and beginning to overcome limiting beliefs that were holding me back from achieving FI.

So Step 1 of the FI journey is really that – identifying and overcoming limiting beliefs.

As I was beginning to overcome these beliefs, I was able to feel more confident and hungry and managed to negotiate higher salaries. I thought the solution must be earning more money, right? Well, that’s part of it. But as I advanced in my career and started earning more, I continued to have this same mindset, and still very little to show at the end of the month – which was frustrating! What was I not getting? I felt that no matter how much I earned, I was still caught in the same cycle.

It slowly dawned upon me that earning more money was only one part of the equation. I needed to have a plan.

Step 2: Set a clear goal

This is simple. Set an ambitious but achievable goal so you can start taking actions that are within your control to reach that goal.

At the early stages, I would set a goal to, say, hit RM5,000, or save enough for a trip, but I would never go beyond a certain ceiling before it went down again (read: excessive travel habits – although I’ve since learned to travel smart).

I realized very quickly that I needed a tangible goal to get me to not dip into my savings account the first chance I had. So I decided buying my first property was a worthy goal to set my sights towards.

Based on my income at the time, I decided I should be able to afford a monthly mortgage for a RM700,000 property – which meant that I had to save around 15% of that (10% deposit + 5% stamp duty, legal fees and other ancillary costs). That was a whopping RM105,000 in cash that I needed to have! Although it was a monumental task, I now had a target..

The only caveat I would issue here is to make sure your goal is related to an investment, instead of a consumption item. At the risk of stating the obvious, setting a goal to buy a car or to go on a nice holiday is not getting you any closer to FI.

Step 3: Start! The power of habits

Ok so you have a guiding star — now you just have to make your way towards it.

The aim at this stage is to develop a sense of control over your finances – which tends not to be the case when you are living paycheck-to-paycheck. At the time I set the goal of buying a property, I had not chanced upon the FI community yet. All I remember thinking was – I need to start investing so my money can grow. But with just a few thousand ringgit, what were my options?

Savings:  Well, first off, start developing a habit of saving more. I tracked my expense using a money app, figured out some expenses I could cut, and the decided to try to cap my monthly expenses. So every month when my salary came in, I would transfer that capped amount into my expense account, and keep the rest in a separate savings account that I opened. Although I inevitably dipped into my savings account for travel and other larger expenses or emergencies, it reversed my thinking so that savings was the default, rather than spending.

Investments: Around the same time, a friend recommended unit trust as a good mid-long-term investment that could help grow my money for a downpayment for a property, so I decided to just dive right in. In hindsight, the returns have not been great after taking into account the fees I have been paying, it instilled a valuable habit of setting aside money monthly and automatizing my investments. Since it was directly debited from my account into my investment account, It was money I never saw and thus, money I never missed. I also signed up for a Private Retirement Scheme, which was also auto-debited from my account.

Unfortunately, after a while, I lost sight of my goal, and lost track of my plan. I decided that it was time for me to move out of my parents home into my own place. I found myself a lovely 1 bedroom rental in Bangsar. While the year I had there was really pure joy, it put a massive dent in my savings. I also took a really amazing (but expensive) trip to Latin America. By the end of the year, I felt almost like I was back at square one.

Enter Mr. Money.

Step 4: Study, experiment, repeat: Begin understanding the power of money

The one thing Mr. Money loves, is money. He loves reading and learning about finances, interest rates, the economy, investments. Although I initially found this terribly dull, after a while, some ideas begin to seep in. He started asking me about my investments, and I realized I knew very little about them. He was shocked that I was just “giving money to the bank” by keeping money in savings account instead of a fixed deposit. I never bothered to read about how much fees I was paying, what interests I was getting out of my investments.

He, on the other hand, has structured his savings and investments almost from Day 1, and is very clear about his path. He is also a minimalist. I always tell people in amusement about how, apart from work clothes, he only owns 4 polo T-shirts and 2 pairs of shorts, 2 jeans and 2 “party-shirts”. His home, which looks like an IKEA showroom, is pristine and tidy, with almost every item serving a purpose. He keeps his life simple, and I really love that about him. Watching him be intentional about his expenses and savings and reading the numerous articles he would send over, made me rethink my choices about what I own and what I purchase, and actually got me slowly (and very reluctantly) interested in money.

On a lazy Sunday, we were chilling at home when he told me about this movement picking up in United States called FIRE (Financial Independence, Retire Early), led by Mr. Money Mustache. We started reading up about him and watching some videos and were totally captivated! Here were a bunch of young Americans, living a simple lifestyle, saving and investing between 50% – 80% of their income over a few years, and managing to actually retire early! Many of them still work, but they don’t have to anymore. It was totally mind-blowing.

So that began the real process of learning for me. I obsessively read articles and listened to podcasts (my favourite is Choose FI, I highly recommend it!). I started hearing about how so many people from all walks of life have chosen this path, and have actually managed to achieve it by just being intentional about how they spend, earn and save.

The big “A-ha!” moment for me came when I realized why all those years ago, I never felt like I could set aside savings despite being able to earn more money. It was all about my expenses! As I earned more, I correspondingly increased my lifestyle and expenses. Although I would always look for a bargain (read how I got this habit from my dad here) and was never into big brands, I was also not really conscious about what I was buying, and whether I needed something in the first place.

I started by looking at all my expenses again, but this time, with the proverbial microscope. I started with my recurring expenses such as my mobile phone, car payments, insurance, internet. I reconsidered clothes, toiletries, gadgets or anything else that I didn’t need. I would always try to ask myself “Do I really need this?” before paying for something. I found that just stopping to ask yourself that question, helps in making smarter purchases. I also did a Marie Kondo, and cleaned out my wardrobe and all my possessions, and really just simplified my life.

I definitely don’t lead a frugal life, but just being more intentional about my expenses and understanding money and my investments better meant that I started making smarter choices, and were important building blocks to creating an FI mindset.

Step 5: Having good role models

Heard of the phrase “You are the average of the 5 people you spend time with”?

For me, that included Mr. Money and the good guys Brad and Jonathan from the Choose FI podcast that I listened to almost daily on the road when I was driving, cooking, or just doing laundry. That’s the beauty of podcasts and Youtube! You can surround yourself with all kinds of people these days – all from the comforts of your living room or your car. Listening to tips, stories and ideas for earning, investing and saving more just ingrained it in my daily thinking and choices.

I also started talking money to friends and family, which can often be seen as a bit of a taboo topic. I would ask them about investments they were making, how they felt about it, and tips of how to make smarter financial choices. I realized when I would start sharing, people are more open to it and actually welcome the opportunity to share advice and learn.

Step 6: The “Why”

Amidst all of this, I was acutely aware that I could fall off the FI bandwagon, so to speak, at any time. I still had many days of eating out unnecessarily and spending on other things without much thought. While home ownership was a worthy goal and helped in developing good financial habits, I was beginning to realize that it was not enough of a long-term motivation. Once I purchased a home, what then?

I realized that I didn’t really have a “why”. Why did I want to earn more money? What would I do with it? What was my motivation? For Mr. Money, financial independence was the security of knowing that he could at any time just leave his job and live a life he wanted, without thinking about whether he had enough. That was a solid long-term vision.

But sometimes this answer doesn’t come to easily either, and it didn’t for me. Sure, it would be nice to be able to take off anytime I wanted and travel the world, but I actually like working. I get so much fulfilment from it, and would be happy to continue to do so for years to come. At the same time, I realized that that’s not really a smart way of thinking, because my situation could change anytime. I may not be able to work, or may be made redundant, or may have a family and my priorities could totally change. Still, I felt like I needed a stronger “why”.

I was listening to a financial independence podcast one day, and the speaker, Grant Sabatier framed this in a different way that I think could help some people think about the “why”. Ask yourself, “What kind of life do I want to lead, and how will money help me get there?” I found that the answer come so much easier to me then because I had something to visualize.

I saw myself living in a beautiful cottage, surrounded by mountains and lakes and trees. Having my own vegetable garden, living sustainably and in connection with nature and people around me. Mr. Money and I having coffee in the garden, eating off our land, going for runs in the forest. Surrounded by family and close friends. Close enough to nature, but also to a city (Mr. Money is more of a city person). I still see myself working on interesting projects related to my field of social impact. Travelling to exotic parts of the world and perhaps even living in different locations for prolonged periods of time. Hahhhhh. Just writing this out makes me so happy.

Lake cottage
If I just visualize this hard enough…

But let’s be honest, this lifestyle is going to need some serious financial planning. It will require not just owning a property, but also having a very steady and substantial stream of passive income to be able to up and leave at any time, travel the world and take care of my health and that of my loved ones.

What’s beautiful about it is that this visualization exercise is that it is something everyone can do, and it can help you start developing those habits that will eventually help you start to lead the kind of life you want to lead. Like eating well, exercising, prioritizing relationships with friends and family, and understanding where your career fits in with everything. These are things I can start doing NOW, as I build up a plan for financial freedom that will hopefully allow me to be able to lead this life.

Ultimately, for me, the life has to come before money in the path to achieving financial independence. I don’t want to scrimp and save and struggle in the years leading up to FI, forgoing my health, important relationships and experiences for the sake of this dream, but when I get there, I realize that everyone hates me, I’m unhealthy and I have the spiritual depth of a stone.

So ask yourself – what is the life I want to lead, so your motivation to earn money has that positive energy behind it. More importantly, so you can start living your life today, in a way that helps you get there down the road.

BONUS Step 7: Increasing your income – the golden side-hustle

So this has been a recent revelation for me, and one that I would really encourage everyone to start thinking about. There’s a limit to how much you can cut your expenses, but there is no limit to how much you can earn.

You can save all you want (and it’s still important that you do), and keep your expenses low, but if you have a low income, it just will take you that much longer to get there.

Although my income had been steadily increasing over the past 5 years or so, I had not learnt to be conscious of my spending at the time. So the additional income didn’t really make a difference to me because I would spend it just as fast as I would make it. However since I started capping my expenses, actively saving and being conscious about spending, earning additional income was really a game-changer for me.

Last year, I decided to leave my full-time job, to take on a part-time job. Apart from the fact that the new position was a really exciting one, I did this for two other reasons: (i) the part-time gig paid me almost as much as my previous full-time job; and (ii) it also gave me an additional 2 days a week to take on other types of work. I also had the opportunity to work full-time for 4 months as a maternity cover. My income almost doubled over a 4 month period. My expenses however, didn’t change. Seeing that money just exponentially grow in my account had a surprising effect on me – I saw it was possible. Following that, I was determined to increase my income with the side hustle as much as I could. I’ve since started doing consultancy work with that additional two days, and that has really boosted my income, and consequently, my savings. 

Even if you are in a full-time job now, but you feel like you have more to offer and would like to see how you can capitalize on your talents and hard work to earn more, I would strongly encourage you to start by just setting that intention first. Start thinking about what unique skills sets you have to offer and starting learning about the market. I will write a separate post about the details of how I developed the side hustle, the challenges of figuring out a charge out rate, and all that other fun stuff soon!

Where to now?

The famed philosopher Alan Watts had the best definition of success that I’ve ever heard. He says “Success, is the progressive realization of a worthy ideal”. I believe I have a worthy ideal; and that I am progressively realizing it. I think this means I am successful! YES!

So that’s the journey so far. It has been one full of mistakes and hard choices and wonderful lessons. I’m still very much on it, but I’m just excited to be able to feel a little bit more in control of my choices and my finances than I was 5 years ago.

Ultimately, it is a process, and importantly, like all else in life, you have to enjoy the path that leads you to the goal in order for the goal to mean anything at all.

Do any of you want to share your tips towards developing a FI mindset? What struggles are you trying to overcome? I want to hear from you!

Understanding risk in investments

Hi Money-Makers,

We often talk about returns or yields in the investment community without addressing the risk involved. No risk usually means no returns, unless you have an arbitrage situation. A recent conversation with a friend, compounded with my own observations from acquittances led to this post on my thoughts on risk and risk-adjusted returns. I have omitted some risks such as currency risk since I believe most Malaysians invest in Malaysia without any exposure to foreign currencies. Instead, my interest lies in highlighting an area I hope more retail investors understand and factor in when sharing about returns.

Risk asset classes

Different assets classes carry different risk. For instance, a fixed deposit account is a low risk product. Essentially your only risk is a credit risk on the bank that the deposit is placed with, and if the amount is below the PIDM threshold (RM250,000 – corresponding to around 97% of all Malaysian retail depositors), then it is covered by sovereign Malaysia (which is a credit risk rated A3 by Moody’s). Mutual funds have a higher risk than fixed deposits but a lower risk than stocks. The reasoning is that mutual funds have diversified holdings whereas a stock has a concentration risk on one company. The more stock you hold eliminates the concentration risk and if your portfolio holds exactly the same proportion of each stock represented in the index – voila! you have created an index fund. An index fund does not carry concentration risks on companies but has market risk. KLCI Index for example has a Malaysian market risk or the Dow Jones indices has a US market risk (albeit several international companies have a second listing there).

The graph describes the relationship between risk and return. Mutual funds is missing but it would be placed between Large Company Shares and Higher Yield Fixed Income.

 

Risk Return

 

One rule of thumb I try to follow has been to allocate to different asset classes based on your age. The idea behind this is that the older you are, the more sensitive you are to shocks in the market and access to liquidity is more important. The formula is simple, you differentiate between high (growth) and low risk (defensive) assets. Your age corresponds to the % of asset allocation to low risk asset classes, and 100 – your age to high risk asset class.

Using this and the graph above, a 25 year old would invest 25% of their assets in cash and government bonds. The remaining 75% would be in growth assets such as mutual funds, shares etc. The formula means that a 100 year old would have all their asset allocation towards low risk assets which always made sense to me as the ability to withhold market shocks over cycles is harder then.

Mr Money’s assets

If you look at my asset allocation, you will see that I have not been very strict on the allocation rules but they have served more as guidelines and also an reminder to recalibrate periodically (often needed when the times are good and you find it tough to sell down on stock holdings). An observation I made earlier this year on my own holdings is that I am heavily weighted towards property as an asset class. The concentration risk is high but the market risk is somewhat mitigated from the fact that they are in very different markets. I therefore decided to rebalance and channel new liquid funds into riskier assets classes such as index funds and PNB (mutual funds) but not stocks as I unfortunately do not have the time to follow companies. The stocks I hold today are in 7 Large Cap listed entities with global operations and in my opinion strong moats (Warren Buffett reference) in their fields.

Risk-adjusted returns

Risk-adjusted returns define an investment’s return by measuring how much risk is involved in producing that return. There are different metrics used which includes alpha, beta, R-squared, standard deviation and Sharpe ratio. I would not dwell in that but instead say that it is important that we compare apples with apples. To compare the return from a fixed deposit with a stock is not fair since the underlying risk is very different. It is important to be mindful when investing, but also when talking in general that returns are always connected to the risk taken to receive it. A risk-adjusted return could be negative but the absolute return positive.

Early on in our blog, Mrs Money and myself posted about our investment in a PNB fund and mentioned a comparison with other similar options in the market. In my opinion, there are two options in the market with similar risk and public access. These are fixed deposits and mutuals funds – of which I would limit it to KLCI i.e. an index fund for better comparison and similar risk. The risks are similar with fixed deposits being the lowest due to their PIDM insurance followed by PNB funds (their ownership) and highest risk being the KLCI index fund which also carries a credit risk on the bank issuing the mutual fund. The PNB funds and KLCI are expected to deliver higher returns than a fixed deposit. Unfortunately, KLCIs recent poor performance paints an even clearer picture and it remains to be seen how this will affect the future of PNB funds dividends. Moreover, the cost involved with transacting and managing mutual funds (ETFs would probably be cheaper) makes PNBs a superior choice. I do note that the recent aggressive drive from banks to grow deposits has definitely raised my opinion of the returns from fixed deposits (5% on short term fresh funds).

Money-Makers, how do you view risk when investing?