Tuesday, January 6, 2015

The Two Approaches to Making Money

Sometimes life can get really boring. Let's ask ourselves what have we been doing in our lives so far? Study hard, graduate, start working, earn money, spend money and what's next? What we are focusing on right now will change our lives forever. In this post, we'll explore the 2 different approaches to money and how it will impact us in the future. By the end of this post, you'll be able to differentiate and choose the path which you desire for a better future.

The first approach - Make money working for money

Most of us are at this stage. We studied hard to earn our certification, diploma or degree and then land ourself in a job with quite a stable salary to give us a decent life. Some are not so fortunate and earn lesser than others so they have a simpler life. But, for these 2 groups of people, life is actually the same. Both are working and earning money through the exchange of time. The person who earned a higher salary may seem to be living a better life with a bigger house and a bigger car but in fact, he or she is no different from the man who earned a lower salary. Why is this so?

Happiness does not come from living a more luxurious life

It has been reported again and again that Singapore, although being a developed nation, has one of the most unhappy people in the world. Our local newspaper, The Straits Times, reported on 20 December that Singaporeans are not only emotionless but unhappy as well. Singaporeans are apparently less upbeat than the people in places like Iraq, Yemen, Afghanistan and Haiti. This is getting quite ridiculous. In the report, the main reasons cited for the negativity was the competitive culture, work pressure and rising cost of living. Are we focusing on making money so much to the extent we lose our happiness?

We do business but still focus on making money

When we can't earn enough from a salaried job, many people start their own business thinking it will give them more money to have a better future. Some work so hard to make their business successful that they neglect their family. They grow cold with their spouse and their children grow up without the love of a family. Before they realise it, it may have been too late to go back in time.

Trading in the stock market

There are also those who think it is easy to earn money from the stock market. Using $1000 to make $10,000? Its becoming a common mindset now. But what is the result? Most people lose money in the stock market, lose their sleep and even their lives. Yes, some people literally commit suicide because they lost too much money from the stock market. Trading in the stock market is also active income. It is a professional job which amateurs should learn the ropes before joining the leagues.

The problem with active income

Now, you might have realised money is not the source of happiness and sacrificing time for money makes it even worse. Having said that, money is not everything but everything we see around us involves money. It would be foolish to say that money is not important.

Most of us climb the corporate ladder to earn a higher pay check. As our salary increases, so does our standard of living.

Our lives evolves from this:

To this:

I'm not against living a luxurious life. But did you know most people's luxurious lives are short lived while a small group of people will be rich forever?

This is why most people's luxurious lives are short lived:

One year later:

Once this high income earner loses his job, he still has to pay for the mortgages for his house and car and other miscellaneous expenses. If we assume his savings to be $24,000, it can only last him for a maximum of 3 months. If he cannot find a job within that period, the consequences will be undesirable. 

The above person is having 80% of his income in debt which is very dangerous. That is why the TDSR was introduced to limit all debts to 60% of your income. For the above example, if debt is limited to 60% of his income, his savings would have doubled and can last him more than 6 months. That is the power of just 20% more savings in a year. 

You may ask how does the above calculation work out? Assuming the above person is limited by the TDSR of 60%, his debt repayment would only be 6k every month instead of the 8k loan repayment he has now. As such, he would have an extra 2k savings per month which is 24k a year. This brings his total savings to 48k a year which is doubled of his initial savings if he had a 8k loan. That is how with just 20% more savings per month, your savings would have doubled in a year. 

Fast forward 30 years later at retirement age, this person would have accumulated a savings of $720,000. But without any investment or passive income, the income could only last him 7.5 years if he stops working. We might say he would have finished paying for the house by then so his expenses would have been lower. Even with a lower expense of $5000, his savings over the 30 years would only last 12 years. 

Imagine working for 30 years and your savings could only last you 7.5 or 12 years. That is what happened to a lot of people who took the make money working for money approach.

The Second Approach - Make money letting money work for you

The second approach is what I call the visionary road. Only those who look far ahead will see it. You'll see how a person who take this road will have money that last him a lifetime.

This is how it looks like:

One year later:

This same person loses his job but because of his low expense and high savings ratio, he manage to accumulate a savings of $100,800 which can last him 50 months. This is approximately 4.2 years. Don't forget because this person focuses on letting money work for him, he has steadily achieved a passive income of $420 per month. 

The magic happens from here forward. Assuming this person finds another job but earns much lower now than before. He only manage to get a $5000 per month salary. 

Let's see what happens in 10 years time

In 10 years time, this person, although earning a lesser salary at $5000, managed to accumulate a savings of $553,330 through prudent savings and investment at 5% compounded. What he did was to just to invest, get dividends and reinvest the dividends. Within just 10 years, this person has achieved financial independence with $2305 passive income per month. Even if he loses his job, he still can live normally for the rest of his life. He could even choose not to work any more. 

Let's move even further to 10 more years ahead: 

With consistent savings and investment, this person's passive income more than doubled. Money does work harder for you at a compounded rate.

Key takeaways of the 2 approaches
  1. High income with high expenses is suicidal
  2. Money can work for you if you create passive income
  3. Passive income grows at a compounded rate. 
The visionary road is accessible for anyone who diligently seek it. The people on the visionary road focus not on making money but on doing the right things. They build a strong base through savings and proper money management then invest the money slowly and steadily. They may only make a few hundred dollars in the first few years then thousands and tens of thousands for the next 10 years and for a lifetime.  Do the right things and money will flow into your life.

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Related Posts:
1. Why extreme savings is more powerful than investing
2. Going from working middle class to rich with a simple tweak


  1. very good article. very good illustrations. you should share more about in detail wealth building articles.

    1. Hi Kyith,

      Thanks for the tip. Your site offers very good articles on wealth building. It'll take awhile for me to write it out. I hope to write up a series in detail on wealth building soon if time permits.

  2. How come we are so sure that we won't make bad re-investing mistakes over future market cycles and greatly negates our many early years of compounding gains?

    1. Hi Uncle CW,

      Save wisely and invest prudently is the key. Always know the risk involved.

  3. is there any recommendations on how to create passive incomes?

    1. Hi hueylee,

      We can create passive income through many ways. It can be an intellectual property such as a book, art piece, music album. It can be through investing in high yields stocks such as Reits and business trusts. It can be through starting a part time business or an online business etc.

      You may want to read a previous posts i wrote on passive income here: http://sgyounginvestment.blogspot.sg/2014/10/make-money-investing-for-passive-income.html

  4. Hi SGYI,

    I really like the diagrams and your very clear explanation.

    Conservative returns are assumed and that sends out the message that for wealth building, frugality can be even more important than investment skills.

    1. Hi 15HWW,

      Thanks for reading and giving your good comments. Savings can grow our wealth a lot indeed! But investment can propel us to greater heights for financial freedom.

  5. Hi SGYI

    Illustration makes it easier to explain than numbers.

    Clear and concise to the meaning.

    Looking forward for more building wealth articles from you.

    1. Hi B,

      I hope it did its job well. Spent quite awhile to do up all these. Your articles are good too. I learnt a lot about investment from you :)

  6. Replies
    1. Hi Lizardo,

      Hope that article inspires! Thanks for your kind words :)

  7. Hi sgyi,

    I like a few things:

    1) clear explanations
    2) 5% is exactly what I use for planning purpose haha

    I wish you would have used a median income to relate to more people and also use 3% compounded and show that it can also be done ;)

    1. Hi LP,

      The $5000 I think good for family income? 3% is definitely a good illustration too. Shall do that next time.

  8. good examples!very useful! Thank you!

  9. Hi SGYI,

    Great effort n illustration. Always so savvy!

    Seems like v true. But ...Hmm.. then again, not all high income earner are not as financial non-savvy as u think or as they look. Not all low income earner with so call appear financial savvy are that financial savvy as it look. Maybe like CW say "so sure 5%?"

    Sidetrack, Maybe good to judge a person by his inside not his outside. Just for eg If a person is poor but kind hearted he is to be respected. If a person drive a posh but not showy or never look down on those who do not have posh... Then he is to be equally respected!

    Climbing in work / growing businesses and growing income from investments are all equally good. All require skills n knowledge doing wat they r good at. All are commendable! Savings is important as u say, to make money work. But earning then save is also important.

    For a sustained high income earner for many years, it means his knowledge n work attitude allow him to be, not just luck. Even if he loose his job, he can land another one and sustain easily. This is human asset! Same as ur equity portfolio.

    Frankly I rarely seen those with good track records in work loose their job easily. Very often they r the last to go... Even in crisis.

    Once those who r wise in work, some subsequently become equally wise in financial planning. Those I seen that earn 10k spend 8k (no other income) are normally those who are temporary success and eventually they will feel the pain and suffer in crisis.

    Sometimes in life, there is so much to experience rather than just seeing. That is why it's encouraging to listen to those who had more experiences sometimes even if experiences means failure.

    Look at CW....

    1. Hi Rolf Suey,

      Haven't seen you here for a long time. Hope life has been good for you?

      Yup, in life there is no one fix rule for all. If we can have a high income and still live prudently, then our wealth would grow much faster than a person who earns little but saves a lot. Its all about how we manage our finances. Life is not all about money. A poor man can live happier than a rich man. A rich man can live happily also. Its all very subjective. But what we want to ensure is we do not get into trouble with money such as getting into debt or even bankruptcy. I've seen a lot of my friends parents end up in bankruptcy and have to sell their terrace house and still not enough to pay for the debt. There are people who email me about their family's situation also. That's why in the above example, I focused on car and house. These 2 are the debts that kill most of us which crisis strikes. All wealth can be gone just like that if we're not careful.

    2. Hi SGYI,

      I am fine. I hope your 2015 is prosperous and continue to generate wonderful posts.

      Wealth is not measure in terms of money! Unfortunately many people are sunkened because of it.

      Just have a frd who pay 90k DP on his car. I do not think he is facing problems because his earning capacity is still good with calculated expenses. Now he can afford it and is happy about it.

      Haha....I do not think now i will pay so much upfront cash for a depreciating assets.

    3. Hi Rolf suey,

      Haha, depreciating assets are liabilities. We buy assets which generates cashflow then pay the liabilities with the cash flow generated. This is how people become richer and richer. I suppose that's what you do too ;)

  10. Hi SGYI

    This was very well written. I touched briefly on the road to retirement and how it could be broken into 5 stages (see http://remiretail.blogspot.sg/2015/01/review-of-personal-finances-for-2014.html) but your very clear and detailed post has made it unnecessary for me to go into further details!

    1. Hi RetailTrader,

      Good post you have there. Congrats on your marriage too. The way to financial freedom is actually laid out clearly long ago. Once we know it, we have to set out step by step and build it up slowly. It takes time but it'll all be worth it.

  11. Hi SGYI, i'am 19 this year a international student that has being studying in SG for 13 years since primary school, went to ite for one year finished with a Nitec cert.
    Currently still no PR, application always being rejected don't know the reason to that. So basically i'am a Singaporean just without the black and white.

    Presently studying in kaplan (dip in Hostility and tourism).

    I have read some of your blogpost on life in Singapore and how to achieve goals here so i'am inspired by you, therefore I need your help. i have a few questions for you hope you can help me out.
    Recently i have seem to lost my way in life don't really know what i want to do in the future either. I might go back to my country but still no confirmations.
    What i need your help on is all the advice you can give like education, work life etc... Basically just all the things that you can guide on a 19 yo dude haha.

    Reply to this email - paseoblossom@hotmail.com
    Thanks alot and hoping & looking forward to your reply soon!

  12. Hi SGYI,

    I have been following your blog for a few months now and learning a lot from you, both in terms of finance and in terms of how to be a sensible person :-) I like your down-to-earth way of managing your life and finances.

    I ma writing in this occasion prompted by your thoughts about how to invest. To me, one of the most important decisions when investing in stock market-related products (stocks, funds, ETF, etc) is to keep the cost of investing under control i.e. using a stock broker that is well prices in terms of comissions of operation (buy/sell) and keeping (which is often very high).

    I have heard about Interactive Brokers, which is a low-cost Broker originally form the US. Their rates are well below any Singaporean bank of broker, but I am not sure about them. Do you happen to have any point of view about this broker?

    Best regards,

    1. Hi,

      Thanks for following my blog the past few months and thanks for your kind words :)

      Yup, it is important to keep cost low when investing. As long as we can keep it below 1% I think its quite manageable. From what I know, interactive brokera is more for traders in the US. If you want to invest in the SG market, you'll have to go with a local brokerage. Check out the banks in Singapore who have a brokerage arm. Their rates are generally cheaper. I personally use Citibank Brokerage.

  13. Hi,

    When it comes to investing I'm a complete noob. I have been following your blog for a while and I recollect that you have been emphasising a lot on save invest insure.

    I have been doing really well on saving and budgeting making sure I have stretch every single dollar. In fact I have already started saving some money for investment but have yet to use them to "grow" as I'm a complete noob when it comes to investments. Could you share where should I start from to build up invest knowledge? What is key?

    1. Hi,

      Maybe you can start by reading one of my post on how to start investing here: http://sgyounginvestment.blogspot.sg/2013/06/hot-do-i-start-investing.html

      The key to successful investing is first investing in your own financial education. When buying stocks, we need to know when to buy, how much to buy and when to sell. These are the things we need to learn before putting our cash into investment.

      Feel free to email me at sgyounginvestment@gmail.com if you have any questions on investing.

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