Inflation - Slient killer of Wealth

Inflation is a effect that will reduce a  certain percentage of our money over a certain period of time.When investing ,inflation is a key index to take note of .

For Singapore, our inflation stood from 2.7% - 5.7% .Thus our investment returns should yield more than the inflation rate to preserve our wealth .In the long run,any return that is less than 5% is not helping to grow our wealth .

For simplicity sake , we assume the inflation at 2.7%  for the next 10 years,however this is not the ideal case.

For example, today we pay $10 for watching a movie and with 2.7% inflation rate per year.

After 1 yr, we need to pay $10.027 to watch a movie.

After 5yrs,we need to pay $11.425 to watch a movie.
$10(1+0.027)^5 = $11.425

After 10 yrs , we need to pay $13.05 to watch a movie
$10(1+0.027)^10 = $13.05.

After 20yr , we need to pay $17.04 to watch a movie.
$10(1+0.027)^20 = $17.04.

From above example,i using a inflation rate of 2.7% and with such a low rate we can see how our money is being reduced over time.That is the scary part of inflation ,it is unnoticeable and slowly eroding our wealth .

That is why people tend to complain that things get expensive and coupled with low salary increment , ppl who tend to save will lose out in this game .That is to say ,what we have now does not equal to what we have in the future unless we have zero inflation rate but that is out of this world.Although the movie tickets does not increase every year due to sentiment  and business costs , it will increase at a go after several years.

Sometimes we watch from the news that NTUC  will not increase the price of essential goods such as rice/cooking oil to absorb inflation for lower /middle income families.Sound great but an entity like NTUC who have large number of retail stores across SG , to increase price every year is not cost productive as price tags and IT system need to re-entry which will costs further more  and taking people sentiment in consideration ,will we be happy if we see the price of our daily usage goods increase every year?

That is why they will rather increase  the price at one go but after several years later .

Compounding -The secret to Wealth Creation

I will like to share with you guys about Compounding which is vital in growing our wealth in this difficult yet opportunistic period.

Before we proceed further , it is strongly advisable to have spare cash for any contingency that might arise during the stages of our life as it will ultimately affect our decision in our investment and our investment horizon should be at least 5 years or more to witness the effects of Compounding.

The formula for calculation as follow :
R = P (1 + IR) ^ T
R=Return
P=Principal
IR=Interest  rate
T= Time

For example , we have $12,000 for investment and will like to invest in equity (SPH). At current price $3.90 ,its dividend yield is 6. 15%.
1 shares of SPH  is at $3.90.
1 lot = 1 000 shares
1000 shares x 3.90 = $3900 + (GST/brokerage fee/other fee)

For 1 year return:
$12,000 ( 1 + 0.0615)^ 1 = $12,738.
Approximately  return of $738 for 1 year.

For 5 years return, and assuming we reinvest the dividends:
$12,000(1+0.0615)^5=$16,173
Approximately  return of $4173 for 5 year.

For 10 years return,and assuming we reinvest the dividends:
$12,000(1 + 0.0615)^10=$21,796
Approximately  return of $9796 for 10 year.

For 20 years return , and assuming we reinvest the dividends:
$12,000 (1+0.0615)^20=$39,590.
Approximately  return of $27,590 for 20 year.

Above is an example , the dividend yield will fluctuate if the Company is earning less profit and cut back on it's dividend payout.For defensive stock like SPH and telecom stocks such as SingTel/Starhub/M1 ,their earning are quite predictable and thus conservative investors will just buy and hold it for dividends.Price of the shares do fluctuate during bearish period(bad times) and bullish period (good times)that is why we should have a longer horizon to ride out the the volatility .But shares of defensive stocks tend to remain in a certain price region due to it's nature and any dip in price provide a opportunity to accumulate.

We can conclude from the above by reinvesting and starting to invest in our early age will have a significant impact on our return.Imagine if we left the $12,000 in saving account with less than 1% interest rate ,the money will grow at a slower rate provided no inflation (impossible scenario).With inflation , our wealth will slowly eroded as our purchasing power drop as time pass by.That is why our government set up Temasek and GIC to preserve and to grow our wealth.

Plant the seed of wealth

The fundamentals towards having a residual income is through a discipline approach;  Saving ,Spending & Investing.(SSI).

With conscious spending ,it will ensure surplus of cash been  left over to deploy for investment.

With inflation raging at a low to high range from 2% ~ 5% onwards, our saving is being slowly eroded as our purchasing power keep lower  year after year.(Banks saving account interest rate is pathetically low).

To preserve and grow our wealth, investing is a must but come with careful planning of budget.

To start with , have a book stand ready to record  all the expense and earning and at the end of the month, review and determine which expense should be cut or forsake to have a better cashflow at month end.To do this ,great discipline is needed,it may be tough for a start ,once used to it,it will soon be a habit.

Ideally the money we earn should be more than enough to cover our expense and should have some decent cash left over for investment.The surplus shall formed the backbone of our wealth building process ,no matter how small it may look,every cents counts.

Example of a Mr A Expense :

Income:
Salary : $3000

Essential Spending:
Transport:$300
House loans:$1000
Uilities:$200
Food:$500

Non- Essential Spending:
Entertainmet:$500
==================
Cash flow :+ $500

From the above example ,Mr A could save $500 per month ,and these surplus could use for investment when he managed to save after a year.Mr A could save more if he want to cut down his spending on entertainment

Renting out a flat or buying blue chips companies for high yield dividend is one of the many ways to earn passive income .

The portfolio should ideally target for long term horizon and be balanced in growth and defensive sector.

The rule of 72 is the most important number to calculate how many years it will takes to double our investment .

For example: we invest $10,000 in a Company which pay dividend yield of 6% pa for 5 yrs.
Assuming the returns after each year are reinvested and % yield remain the same.
Using rule of 72:
72 divide by 6 = 12 years.
it will take approx 12 years to double our money from $10,000 to $20,000.

So it very important that we start saving/ investing as early as possible and most people can achevie it with discipline.