360 review - Cash

I have shared with you in my previous post the importance of your career. Today I am going to cover another topic - Cash. 

Cash is king!

Cash is cash. What is there to talk about? Well, you must have heard of the cliche Cash is King! 

When I first started out like you, my starting pay was only $1,850. As such, I am literally "cashless". All my salary is used to fund my daily life and starting my family at a young age is not helping but it help instil a sense of responsibility and gives me a purpose in life. It is also the reasons and motivation in the pursuit for financial freedom. 

However, I worked hard in my career and the pay steadily increases over the years. 

Me and my wife are good savers, or in our initial years at least. Haha. We saved regularly and take only short trips to the region like China and Thailand for vacations. No such thing as flying to Europe. We always spend within our means. 

Credit cards are bad 

I have seen real life examples of people who spent beyond their means and abuse the credit cards. In that process, they have dug for themselves very deep holes. They go for fine dining and luxury vacations, pay the minimal sum each month and roll over the balance. If you think loan sharks are evil, credit cards companies are the Great White Sharks. The printed interest rate is only 2% per month. That translate into a nominal rate of 24% a year and I have not even included the effective interest rate if you roll over your balance. That will be interest on interest and the bank is making compounded returns from you!

If you can't control your credit card spending and always pay the minimum sum, my friendly suggestion is to cut off your cards immediately and plan to pay off the credit card debts before you even think about investing. Get your house in order. 

It's not how much you earn but how much you save!

I want to stress again and again that it is not how much you earn but how much you save. Earning more means that you can shorten the number of years that you need to save but it doesn't take away the need to save up. You can make $10,000 each month but if you spend $15,000 each month, you are worse off than a person who makes $5,000 and saves $2,000. 

Unless you are born with a silver spoon, you need to save up. You need to accumulate a sum of money for rainy days but more critically, be your seed capital. Without your seed capital, you can't break out of the rat race. The capital can then be deployed into investments such as stocks and properties. 

To purchase a property, you should have saved up for at least a 20% downpayment to avoid over leveraging. We will talk about 360 review on property another day.

Holding cash is a position

I am never fully invested. In other words, I always hold some cash. I hold cash in anticipation of both opportunities and crisis. It also serves for rainy days in emergency. 

What do I mean by opportunity? For example I am currently evaluating another opportunity to invest in a pre-IPO company. I have blog about such opportunities way back in 2008, how time flies! That investment turned out to be a good one despite the GFC. I will blog about it another day. 

Such opportunities come by every now and then and if I like the company, I can then deploy the cash. If I have no cash, having such opportunities will be meaningless as I can't take advantage of it.  I will be investing in the next pre-ipo company, i will blog more about pre-ipo companies in 360 - Investments next time.

What do i mean by crisis? During the global financial crisis, you will have to opportunity to invest in properties and shares. There will be at least a few "global financial crisis" in your life time, remember to make full use of it and you can get out of the rat race much faster than anyone else. However, if you have no cash to deploy, the crisis will further add to your misery as you watch the opportunities slipped by.

Isn't holding cash means losing money everyday?

I have shared with you previously that your cash is losing money every day. The post is here. 

So while saving is important, knowing how to utilize the cash to get a higher return while waiting for the opportunities and crisis is even more important. This is the reason why i trade the markets and punt the IPO market with my "war chest cash". I also recognize that investing for dividends and passive income is important, hence I invest for the longer term using my SRS. Knowing your own time frame is also very important. I will blog about 360 - SRS funds in my future posts. 

Bonds for retail investors

It's good that MAS is finally relaxing the rules on retail investors investing in bonds. You will have more opportunities to invest into higher yielding and relatively safer instruments. However, I am personally not into bonds. The spreads are currently too low. The best time to invest in bonds is actually during the GFC where the bond like instruments are giving equity like returns and yet "safer" than equity given it's protection and liquidation priority over equity. The complacency since the 2008 crisis has set in again with borrowing rates and spreads at record low. 

Will history repeat itself? 

Frankly, I wouldn't be surprised, so get your war chest ready. A black Monday (or black swan) event will just hit the markets when you least expected it. I am expecting one to occur within the next18 months but I may be wrong of course. 

How much to save for war chest?

It really depends on what you are looking for. If you are investing in stocks, you need at least $100,000 as war chest to deploy into 3-4 positions for a return on investment of 2x. 

If you are investing in properties (not buying a home to stay), you will need between $250,000 to $500,000 to invest in a decent size property. The reasons why I favour properties over stocks because of cheaper financing, leverage effect and passive income while you patiently wait for market to recover. 

Are you ready if a black swan appears today?

If you are prepared, you will rub your hands with glee instead of panicking when history repeats itself. 

Save up today and you will thank me when the black swan appears. 

Happy saving up ^_^