Read this in the papers yesterday and I was thinking of the times when I was in corporate, working 9 to 5 and receiving a take home pay at the end of the month.
I have always wondered 'Why does my pay never seem to be enough even when I get a raise every year? Why is it that I get a raise every years yet, you never seem to have more savings or a better standard of living?
After being in the financial industry I started realising the mistakes that most of us make and I have been through it myself.
Firstly, inflation has been slowly eroding away the value of our monies. We all know about inflation but many do not do anything about it.
The government tells us CPI increased. CPI? What's that? Can eat or not?
For those who knows what CPI represents, most will also ignore the consequences of high CPI.
Some who knows what CPI is, what is its repercussion and consequences, they will still procrastinate about doing something about it.
So what is CPI? CPI, Consumer Price Index or what we know commonly as Inflation is the silent killer that has been eating at our monies. So how does inflation affect us.
I remembered the year 2003 when I started to indulge in kopi-o. One cup of kopi-o then cost $0.50. 8 years on in 2012, my indulgence is now, $0.90 per cup. (And I do not take only a cup one day.) What do you think inflation of my kopi-o has been the past 8 years. On an average the inflation for my cup of kopi-o per year is 7.6%.
Many of you might think: 'But its only $0.40 what! Tang why you bother write blog for $0.40!'
Let us move the decimal points, something that cost $5 will cost $9. Something costing $50 will cost $90. Something that had cost $500 now cost $900. The difference is now, $4, $40 and $400 respectively. The difference will get bigger once the sum of money becomes bigger. $0.40 seems acceptable, but does $40,000 in 8 years sound reasonable?
To put inflation into perspective, imagine you earn $4000 every month, you spend $3,500, and save $500. You get a pay raise of 4% and inflation has been at 7%. After 8 years, your income after a pay raise of 4% every year will be $5,475. Your expenses that is growing with inflation of 7% will be at $6,013, with no more extra for savings.
Based on the above example, how can we maintain our standard of living when the cost of our expenses are moving faster than our pay! It has moved beyond our means and we have to start digging into our savings just to maintain the lifestyle we enjoyed just 8 years ago. And once our savings run out, we either start signing our credit cards or compromise our standard of living.
Being young and having my first credit card was detrimental. With inflation increasing, and me trying to keep up with my standard of living, I ran up a total of almost $30,000 in credit card bills. And with the interest rates of credit cards at 24% p.a it is almost impossible to clear my debt while just trying to pay off the minimum amount.
But when I started in the financial industry, the idea of planning began to sink in. I always thought that Income - Expense = Savings, but some seminars I attended changed my whole perspective. One speaker actually mentioned that the real formula to be rich and financially independent is to save and to save the formula is Income - SAVINGS = Expenses!
That blew me away! I had been a slave to my money! I have allowed myself to work for money, I have not allowed money to work for me. I have to be a master of money and not a slave to it! That day, I got home, took out my scissors, cut away my cards.
Found some personal loan that will give a slightly lower interest and transferred my balance so that I can pay off my debt in a very systematic way.
In the mean time, I also walked into POSB, ask them about an account that will take my money from my salary on a monthly basis on a fixed date. I do not want an ATM card or internet access for this account. They told me about the fabulous MySavings account that allowed flexibility of setting aside a fixed amount of my salary on a user defined date! If I need to withdraw from the account I had to go to the branch, queue, to get my money. (Though now the account has changed, they now give internet access and tie it to your ATM card. But the habit of savings has been formed)
Life changed, debts was cleared and inflation was still a concern.
Savings interest: 0.125%
Inflation: 7%
Real rate of return on my money: - 6.875%
I knew I had to do something about it.
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