‘I have a certain amount of money. What should I invest in?’
The above is a popular question and many expect answers which refer to a type of investment vehicle such as a stock, a property, a unit trust fund, ETF, cryptos, and so on and so forth. Often, these answers are quick fixes which are not likely to be beneficial to most in the long run. After all, how many people could attain wealth and sustain it through investment tips alone?
Personally, investing is more than just buying, holding or selling investments. To me, I believe investing is about embarking on a financial journey where my own investment decisions would be based on where I am financially today, where I’ll want to be financially tomorrow, and the investment vehicles that can bring me from where I am today to where I want to be tomorrow safely and efficiently.
So, if you do not know where you are financially today and where you would be heading in the future, it is hard to determine what you should invest in today. It is likely that you would ‘follow the wind’ when it comes to investment matters.
Thus, I’ll list down the 5 levels of wealth in the Malaysian context and from this, you can use this to assess where you are financially today and where you like to be financially in the future. In addition, I would add some pointers so that you’ll know what exactly you need to work on to reach your financial destiny quicker.
As such, they are as follows:
Level 1: Earn RM 3,000 a Month in Active Income
This could be you if you’ve landed your first real job after university graduation. Alternatively, you could earn this amount from starting a full-time enterprise. In both cases, you are new to the financial game of life. Now, this level is crucial to determine where you will be heading financially in the future.
There are two paths that you could choose to take:
Level 0: Commit RM 3,000 a Month in Consumption Debts
Understandably, for most, you could buy a car with a hire purchase loan for you need it to travel to work. In addition, with active income, you might want to get yourself a credit card or two. Some use them responsibly to build credit profiles while some abuse them and rack up some consumer debt and that is no good.
The question is, ‘Does making more money solve their financial issues?’
I believe the answer is nope. To them, it seems to me that earning more money would actually compound their financial problems further. The more they earn, the more they would spend and borrow, digging themselves financial graves. To the eyes of many, they look nice and instagramable. But, in reality, they actually had mismanaged their financial lives.
In this case, Level 0 refers to one who has dropped out from the financial game.
If you prefer another path, you may consider:
Level 2: Saving RM 3,000 a Month from Your Active Income
Logically, to do this, you need to make more than RM 3,000 a month. So, if your status is at Level 1, your focus can be on upskilling yourself so that you could be a more valuable employee to your employer, a much better salesperson to your customers or to become a more productive entrepreneur in the marketplace.
Concurrently, you should keep both living expenses and debt commitments (car loan, credit card loans, … etc) from growing in tandem with your active income. For example, if you earn RM 3,000 a month and spend RM 2,000 a month when you started off in Level 1, try to keep your expenditures at around RM 2,000+ in a month, despite a rise in your active income to, let’s say, RM 6,000 a month.
Why is this important?
This is because the RM 3,000 a month in savings can allow you to:
– Build a small stock portfolio consisting of fundamentally solid stocks.
– Raise RM 50-100 thousand in capital to invest in a small property in 2-3 years.
But, having capital alone is just one of the key ingredients to invest successfully. The other ingredients include having the right mindset and knowledge to invest and the experiences to deal with your emotions when investing. So, if currently, you are in Level 2, it is practical to focus on learning and building experiences in investing rather than chasing for quick and fast returns from investments.
Level 3: Paying RM 3,000 a Month in Income Tax to LHDN
At this level, you make at least RM 200-250 thousand per year in active income. Raising money to buy stocks regularly or to buy your second property shouldn’t be an issue. By now, you should have some results from your investing activities as you journey from Level 2 to Level 3.
If you are at this stage, you could consider optimizing your wealth by enhancing the current systems that you use to earn active income and to invest. Presently, if your active participation is constantly required to earn your income, there is a limit to how much your income can grow in the future. Hence, you can consider systemization as a means to improve work efficiency and productivity.
Meanwhile, in investment matters, it is helpful to spend time to reflect on what worked well and what did not for you. What are the common ingredients which contributed to having positive results? Likewise, what are the reasons that have caused you to incur investment losses?
Of which, you may optimise your portfolio accordingly to enhance the return of your investment portfolio.
Level 4: Earn RM 3,000 a Month in Net Passive Income
It is one thing to earn RM 3,000 a month in active income.
It is another thing to be earning RM 3,000 a month in net passive income.
Here are a few examples of net passive income:
This would be you collecting RM 36,000 a year in dividends from your portfolio, assuming that you did not use any form of leverage. Let’s say, you had achieved an average dividend yield of 5% per year from your stock investments. Hence, it means that you have invested as much as RM 720,000 to build your portfolio. It is important to note that this RM 720,000 is the total cost of your investment. It does not represent the market value of your portfolio, which could be higher or lower than RM 720,000.
#2: Real Estates
This refers to the amount of rental income netted from the interest costs of the mortgage, any service charges and sinking fees, assessment taxes and the other expenses related to your property investments.
This would include interest income, EPF dividends, royalties and income earned from passive business interests and annuities.
So, if you could earn RM 3,000 a month in net passive income from (1, 2 and 3), you have achieved tremendous financial success and are a role model for many. At this stage, you are living life according to your own terms. Many could regard this level to be the ultimate financial destination.
But, there is still one more level to achieve and that is …
Level 5: Give Away RM 3,000 a Month to Charity
At this stage, you are so wealthy that you could contribute to charities out from the regular profits of your investment portfolios. Perhaps, you would work hard or invest to add onto your contribution to the society at large. Hence, this could bring meaning and purpose to your life.
So, which level are you currently at today?
Except for Level 0, which is a debt trap, here is a summary of what you could be working on or where you could be investing to elevate your financial status:
Level 1 – Upskilling Your Career
Level 2 – Focus on Learning and Gaining Experiences from Investments.
Level 3 – Systemization and Portfolio Optimization.
Level 4 – Expansion of Financial Wealth
Level 5 – Impacting Societies with Financial Capital