MONEY MATTERS

The slow and steady way to wealth

Investing takes time and the patient investor knows delayed gratification will be amply rewarded in future

By WONG SUI JAU , Published January 24, 2007

IN TODAY'S materialistic society, it is very common to have a whole list of wants as we go shopping and see all the nice things for sale during the festive season. Especially when year-end bonuses might be given out, and with easy spending offered by credit cards the temptation to spend is even stronger.

The important thing is not to be penny-wise and pound-foolish. Very often, it is the big-ticket items and events that result in us depleting all our preciously built up wealth and reserves. Your nest egg should be something that is constantly growing.

However, a key part of building your wealth, especially when you are starting out, is to save. You can't build wealth from nothing. So, every cent of savings that you can set aside for investment helps. It is important though that we do not get into the mindset of seeing saving and investing as a huge sacrifice, or think that we need to really scrimp and scrouge in order to save for retirement while living a hard life now.

It is far better to think positively and be goal-oriented about the future rather than bemoaning any current sacrifices made in the name of saving and investing. Some people think 'I have to set aside some money, so I will not buy this branded bag, or this plasma TV' - and so get depressed, even resentful, about saving. Perhaps after a while, they break down and buy the treat anyway, and just give up even trying to save, because they feel that it's impossible. This is worse than saving less because they have totally given up saving.

The better way might be to rather tell yourself, everything should be done in moderation, and that saving and investing is about delayed pleasures. Don't tell yourself you will never get that plasma TV. Tell yourself that with the money you save and invest, in time to come, it will have grown enough so you will be able to buy that plasma TV later, and still have money left to build up your wealth.

An easy method to gauge how wealth might grow is to bear in mind that at the rate of 10 per cent return per year, your net worth will double every seven years. So, if you are able to achieve returns of about 10 per cent per annum on your investments, then any amount you put into them will have paid for itself in seven years' time.

Investing is about time. You have to be patient. Short cuts often lead to grief. Investors who think they can hasten the way their wealth grows by going into very high risk investments are generally taking on too much risk, and often eventually end up losing money instead, because of their impatience. So, rather than tell yourself 'I have to scrimp and save for these next seven or 10 years before I can spend this money', instead, give yourself certain goals within a shorter frame of time and give yourself small rewards when you achieve those goals.

Instead of thinking that money needs to be hoarded, think of your wealth as a reservoir. You are adding diligently to your reservoir of wealth, but every now and then it is fine to reward yourself with the fruits of your investing success. The saving-diligently part still comes in. You cannot and should not stop saving, especially when you are in the initial phase of building up your wealth. Some people save and invest through their entire life, simply because it has become a lifelong habit, which is a very good thing.

Here's an example of how to adopt a more positive way towards saving and investing.

Adopt a regular saving plan with a fund you feel you can hold for the long term: savings plans can be as little as $100 per month. Then set a certain threshold of cash you are comfortable with in your bank account. At the end of the month, if you have more than that threshold, then that excess amount can be set aside as savings and investments. When you get your yearly bonus, before you even start to spend it, take half of it and invest that first, then spend the rest. Then, at the end of the following year, if your investments have done well, reward yourself by taking some money out and buying something you fancy.

This way, you are not trying to dramatically tone down your lifestyle just to save. Look upon it more as living a lifestyle in moderation such that you are able to set aside some savings which will bear fruit in future.

Here's an example how this might work in practice. Please note that this is a example and may not be appropriate for every investor out there. Alicia has $1,000 in investment already. She also keeps a threshold of $3,000 in her bank account at all times. Here's how she saves her money and rewards herself with some of the returns each year (see table).

You can see the entire process of wealth building from $1,000 to $8,600. This did not require her to totally sacrifice her lifestyle. She had just $100 less to spend each month and she spent only half of her year-end bonus. When she did have extra, she saved it. And gradually but surely, she is building up her wealth.

And as she sees her wealth grow, she is able to give herself small rewards as the fruits of her success. The important thing is not to take away too much money to reward yourself, especially at the start when you are building your wealth. Many years later, when your wealth is large enough such that it is generating a large amount of returns purely on its own, then you can afford to give yourself some bigger rewards.

The key thing is to get into the habit of saving and investing without having to make it a big chore and feeling resentful about it. To some, this may still be a rather painful adjustment in lifestyle (especially if they have been living beyond their means in the first place). But for others, once they get into the habit, it will be an unconscious thing they will practise throughout their lives.

The important thing is not to be penny-wise and pound-foolish. Very often, it is the big-ticket items and events that result in us depleting all our preciously built up wealth and reserves. Your nest egg should be something that is constantly growing (unless it is a very bad year of markets). Even your rewards to yourself should not cause it to shrink by more than what it gained in that year. So, as best as you can, try not to treat it as something you will freely dip into every time you need cash. That is the surest way to end up with nothing at all again. Some big ticket items would include spending on a car, renovations for a house, buying a house, costs of a wedding, expensive vacations and expensive electronic items.

The whole point is to moderate your spending, or perhaps in some situations, even delay it. Do you absolutely have to buy a car right now? If you can do fine without one, perhaps 10 years down the road, you would have enough wealth to buy that car and still have a substantial amount left in your savings. So, your savings and investments would have paid for your car instead of yourself. Or weddings. I read of some couples that spent tens of thousands of dollars on their wedding, which when you boil down to it, is just one day. Take it as experience from one who has got married himself, it's not worth overspending on weddings just to have a 'perfect, once-in-a-lifetime' memory. Because after all, when the wine is drunk and the guests have gone home, that's when you true marriage starts. How happy a marriage you will have depends on what you and your spouse do after the wedding day, not during.

Or instead of buying that expensive $10,000 audio set plus LCD 40-inch TV now, settle for something half that price, and invest the $5,000 you saved. Sure, it might mean a slightly smaller picture (maybe 32 inches instead of 40 inches) and a slightly less ear-shattering sound system (your neighbours will thank you for it). But in the years to come, that money you saved might be generating you free DVDs each year while adding to your reserves of wealth.

In conclusion, get into the habit of saving. But do not treat it is as a chore or a big sacrifice. Instead of telling yourself 'I have to spend less and scrimp,' tell yourself 'By spending less now and saving it, I will be rewarded every year in future.' Investing can be a happy thing, especially when you see the fruits of your investments and get to spend some of them. Think of it as planting the tree now so that you can eat the apples that the tree grows each season in future. Investing is very much the same.

The writer is the general manager of Fundsupermart.com Pte Ltd, a division of iFAST Financial Pte Ltd.