Thursday, September 24, 2009

Spend Wisely Today , Invest For Better Future Consumption


When an individual entering job market and receive the first paycheck, he or she will be excited with the money in hand and eagerly to reward himself or herself with shopping for apparels or even begin to plan on buying luxury item such as branded watch or an oversea trip.

From the perspective of time value of money and compounded grow of investment fund, an individual is advice to spend wisely in early years so that a significant portion of income can be invested every month for future consumption.

If rate of return from investment is higher than inflation rate , all else equal , future purchasing power will be higher than today.

An individual is advice to spend wisely by focusing on needs and the possibility to push out luxury items to a later date.

Besides spending wisely , an individual should practice good time management to free out some time at daily basis to follow through economic news , learning financial and investment knowledge. As financial market is dynamic, this step is crucial on mastering investment strategy to invest successfully towards achieving investment goal.

Let’s illustrate the differences by analyzing 2 individuals; Individual A is slightly conservative while individual B is slightly aggressive in spending.

Individual A focuses on conservative spending pattern during early years to generate excess income for investment.

Individual B focuses on more aggressive spending pattern during early years to enjoy better life style.

Individual A and B will enjoy same life style from year 11 onwards


Key assumption

☺ Current income at $30,000 annually with 7% annual increment for next 30 years
☺ Tax and other statutory contribution = 20% of income
☺ Basis spending = 30% of income
☺ Balance of 50% of income is use to cover for major spending plan and any excess will be contributed to investment fund.
☺ Any shortfall in annual spending will be support by accumulated investment fund
☺ Major spending plan covered
☻ Car – life cycle of 10 years
☻ House – only purchase one house for self consumption until retirement
☻ Holiday plan – increase by 10% per year from current budget
☻ Investment goal – $2,000,000 by end of year 30
☻ Investment fund annual compounded rate of return at 15%
Table below summarize details of major spending plan for individual A and B























Chart below represents income surplus available for investment or income deficit which required support from accumulated invested fund.


Income surplus : Disposable Income > Expenses

Income deficit : Disposable Income <>


Chart below illustrates that, throughout more conservative spending at early years, Individual A manages to generate higher annual investment fund as compare to individual B.





















Through discipline and well manage investment strategy, the excess income has been put into action to generate more income, which is use to support major spending in years with income deficit while continue growing the fund to fulfill investment goal.

Chart below illustrate accumulated investment fund from year 1 to year 30. We can observed that individual A has significant reserve in accumulated investment fund to support major spending funding whereas individual B at borderline condition and potential running into financial distress if unforeseen expenses occurred.



















By year 30, individual A and B are expected to accumulate $4,022,350 and $1,363,284 respectively in investment fund.

Individual A will be $2,022,350 above investment goal while individual B will be short of $636,716.

As individual A with surplus accumulated investment fund, he or she will has the alternative below from year 11 onwards while achieving investment goal by year 30

☺ Spend more
☺ Improve life style
☺ Less worry about unexpected expenses
☺ Upgrading to better car or accommodation
☺ Take an luxurious holiday trip
☺ Early retirement
☺ Reduce investment risk by investing in more conservative investment with lower return

As individual B with accumulated investment fund below investment goal, he or she required action below to achieve investment goal by year 30

☺ Spend less
☺ Postpone lower priority, long term goal such as holiday plan to a later date.
☺ Continue working until investment goal is achieved.
☺ Improve investment skills and resume higher risk, aiming for higher return.
(Need to achieve 18.1% compounded return to maintain same life style while
achieving investment goal of $2,000,000 by year 30)

In summary, spending wisely today, mastering financial and investment knowledge, invest income surplus for a better future