How would you fill in the blanks above?

Is it R I C H? or, is it P O O R?

Hmm … Wait a Minute!

Aren’t all people become RICHER as they make more MONEY?

How is it possible for some to become POORER as they make more MONEY?

Good question. Let us discuss.

I believe, it is possible for us to be either RICHER or POORER as we make more money. Our outcome depends greatly on our understanding of what Wealth is as it will determine how we use or spend our money when we receive them.

What is Wealth?

I have read Rich Dad’s Cashflow Quadrant and would be adopting his definition on wealth. It is as follows:

‘The number of days you can both survive and maintain your standard of living without physically working.’

For instance, Tom and Jerry has RM 100,000 each in savings. Tom spends some RM 2,000 in monthly expenses. Jerry spends RM 5,000 in monthly expenses. In cases where both Tom and Jerry stop working, Tom’s savings is able to support his living expenses for 50 months. Meanwhile, Jerry’s savings would last him 20 months as he spends more than Tom.

Tom’s Wealth

= RM 100,000 / RM 2,000 per month =  50 months

Jerry’s Wealth
= RM 100,000 / RM 5,000 per month = 20 months

Hence, Tom is wealthier than Jerry despite having the same amount of savings. Wealth is measured based on quantity of time, not quantity of money or one’s possessions.

Am I Rich or just ‘Looking’ Rich?

How do you tell, whether or not, one is really rich and wealthy?

Is it by looking at the car he drives, the phone he uses, the restaurants he eats, the drinks he drinks, the places he travels, the clothes he wears … so on and so forth?

No doubt. Some of these people are really rich and wealthy. But, looks, I think, can be deceiving. It is hard to tell one who is wealthy from another person who looks rich but not-so from his outer appearances.

Instead, I find that a person’s financial statements is a more reliable method of determining one’s level of wealth. Here, I’ll share how is it practical to our own financial lives:

When Looking Rich is not Being Rich

Let’s meet Chan, a 24-year old electrical engineering graduate who have lately landed himself a job as an associate in an engineering firm in Petaling Jaya. He makes RM 3,000 a month, spent RM 2,500 a month, and hence, able to save a total of RM 500 a month.

At 24, he has a savings of RM 15,000. Thus, his wealth can last him for a period of 6 months. It is useful to him if he decides to quit his job to find another.

Instead, he worked hard and soon climb his ranks to be a project engineer over 3 years. Now, at 27, Chan increased his income to RM 7,000 a month. With rise in income, Chan upgraded his lifestyle and spend RM 6,500 a month. It includes having a fancier car, costly meals, holidays, smartphones, entertainment … etc.

Chan felt that he is doing good as he continues to save RM 500 a month and he has, after 3 years of saving RM 500 a month consistently, increased his amount of savings to RM 28,000. Formula:

Chan’s Savings

= Savings at 24 + (RM 500 x 12 months  x 3 Years)

= RM 15,000 + RM 18,000

= RM 33,000.

Chan looks more ‘prosperous’ but is he wealthier?

The answer is Nope. Chan’s wealth at 27 is 5 months, a decline from 6 months of wealth when he was 24. This is despite him having more amount of savings.

What if Chan Maintains his RM 2,500 a Month Lifestyle?

Let’s assume, Chan’s monthly pay increment is a step-up from RM 3,000 at 24, to RM 4,000 at 25, to RM 5,500 at 26, and finally hitting RM 7,000 at 27. In the 4-year period, Chan maintains his living expenses at RM 2,500 a month. Hence, Chan would save RM 114,000 in 4 years.

Adding to his initial savings of RM 15,000, Chan would increase his savings to a total of RM 129,000. His wealth is RM 52 months. Thus, it means that Chan has enough savings to sustain his current lifestyle for, at least, 4 years if he chooses to quit his job today.

As a result, Chan has become wealthier … although he might be ‘branded’ as a list of names like Scrooge, Stingy, Thrifty, ‘Koo-Hon’, ‘Kiam-Siap’… etc. In a way, peer pressure may come as a difference maker between you ‘looking rich’ or a person who is really wealthy.

Considering it part of the price of ‘Becoming Rich and Wealthy’.

The Power of Investing for Cash Flows

Supposedly, Chan had invested half of his savings into an investment vehicle, it could be stocks, ASB, properties … etc, and is now receiving an average yield of 5% per annum. As for his remaining half, Chan places RM 34,500 in a handful of fixed deposit accounts which earns 3.5% yield per annum and RM 30,000 in his savings account. (Note: Returns have to be in Cash Flow, not Capital Gains)

Chan earns RM 4,433 a year or RM 369 a month in passive income.

If Chan stops working today, he would continue to earn passive income of RM 369 for, at least, one year. This amount would subsidises Chan’s living expense of RM 2,500 a month. Hence, Chan’s net cash outflow per month is reduced to RM 2,131.

Therefore, his wealth of RM 129,000 is estimated to sustain his lifestyle for 61 months as a result of receiving passive income. Imagine. What would your life look like if you know that you have enough finances to last you for a period of 5 years without working?  

Achieving Infinite Wealth

Here is a question:

‘What if, the amount of cash flows received from your investments have really surpassed your monthly expenses?’

Congratulations! You have achieved financial freedom and more importantly, a lifetime of infinite wealth.

In the case of Chan, if his passive income is RM 2,500 a month which works out to be equivalent to his monthly expenses, he can practically quit his job and be comfortable, knowing that his accumulated savings would not deplete, at least, for the shorter term.

Chan’s Wealth

= Savings / (Monthly Expenses – Monthly Passive Income)

= Savings / (RM 2,500 – RM 2,500)

= Infinite Wealth

Conclusion: A Common Road to Real Wealth

In short, let me sum up the article with a handful of pointers which are useful if you intend to build real wealth for the long-term.  

1. Wealth is measured based on time, not money or possessions.  
2. Looking Rich is not Being Rich.  
3. Maintain Current Lifestyle despite Pay Raise. Unless if you can continue to raise income faster than your increase in living expenses.  
4. Turn excess savings received into cash producing investment assets.  
5. Infinite Wealth is achieved when Passive Income exceeds your monthly expenses.