The fact that banks like Merrill Lynch paid out $15 billion bonuses after $42 billion losses, or that Citigroup paid out $4 billion after two multibillion-dollar rescues, have been discussed and beaten to death. 

People were outraged, politicians were in disbelief, and President Obama called it the height of irresponsibility and shameful. But the biggest surprise for me in this whole matter is finding out how stupid these erstwhile “financial masters of the universe” are with their own money. 

There are many articles about disgruntled bankers (like the ones working for Citigroup, who only got $4 billion dollars in bonuses this year) who spend way more than their salaries, and therefore are royally screwed when they find that their bonus for 2008 is nowhere near the ones in 2007. 

Weird, eh? On one hand, these Wall Street people are supposed to be a lot smarter than us financially. But talk about personal finance, and these guys are no different from Mike Tyson or Michael Jackson! I mean, honestly, I won’t be surprised to find that a lot of people are smarter financially than Mike or Michael (note to self: don’t name son Mike or Michael). But being smarter financially than a guy who makes 10 to 100 times what you make? That’s gotta make you stop and think for a while, eh? 

Do this so you can self-proclaim yourself smart

So what I, a self-proclaimed “financially smarter than Wall Street bankers” guy did with my bonus, which just came in a few days ago (in January)? Well, I (1) gave some money to my parents, (2) planned a nice dinner with my family and (3) am going for a simple holiday later this year with my family.

The rest of it (around 90% of it) will be allocated this way:

1. 25% will go into either a AUD or a GBP fixed deposit.
2. 15% will go into ready cash for investments, in case a good one comes along (been eyeing MSFT for sometime now).
3. The rest will go into strengthening my safety net. We don’t know whether we’ll still keep our jobs tomorrow these days.

I like to think that that plan of bonus usage is pretty smart (Please feel free to let me know if you have any other ideas though!)

One of my friends bought a high-end home entertainment system. One of them bought a freakin car (on credit! The bonus is used for down payment). Another planned a holiday to Japan (which is a freakin expensive country, not to mention the strength of the yen right now).

(It kinda made me wonder actually: am I the only one who’s feeling the urgency of this financial crisis?)

Later on I realized something: it’s not that they don’t feel the economic pressure. They do. But the way they experience pleasure is totally different from me. They need to spend bonuses and reward themselves to get motivated.

Whereas for me, seeing the bonus figure is all the motivation and reward I need. I don’t get any kick out of spending money–my kick is from earning and investing money. And no, I’m not saying this to boast or feel self-righteous. I’m not sure why I’m wired this way either.

Oh well. That’s probably why I liked uncle Scrooge McDuck so much as a kid :)

(Images courtesy of AMagill @ flickr and Kanou Hiroki @ flickr, in the order of appearance.)

The job

Whoah. What a year. The job cuts are coming, and seriously, nobody is safe. NOBODY is safe.

I thought “headcount reduction” was something that would happen to other teams, but not mine. My team handles a critical business function, and we have been doing really well despite the economy situation. Why let go anybody from such a team, right? 

Wrong. No such luck.

Last week, my peer was let go on the spot. I felt really sorry for him, especially since his wife was on her way to getting retrenched too, but at the same time I’d be lying if I say I wasn’t relieved that it wasn’t me. 

That made me add one important item to the Roadmap: do everything in my power to keep my job for now! This is important. 

The emergency fund

I’m quite happy to find out that I was able to reach my February 2009 target of S$80k early. Because of this, I’m raising my target to S$110k by February. 

The (non-existent) bonus & raise

With the number of jobs cuts happening in the market right now, I have given up my last sliver of hope of getting any salary increment or bonus for this year. Whatever I get, if any, will be a nice (and very welcome) extra.

The business

Is going slow, unfortunately. Most of my energy is spent navigating the storm in the workplace.

The wealth management

I cashed out all of my mutual funds, thereby realizing the paper loss and possibly missing the market bounce, if any. I believe that our current situation is a deep systemic problem and it’ll take more than just a few months to recover from. 

A nice extra is that I can shop around for lower commissions. My previous financial planner insisted on charging higher commission because of the advisory services, but look where it got me now. I might as well manage it myself, at least I know that it is my fault. 

I am looking into options as a strategic investment. Also I have found a place to put my cash that gives a reasonable interest rate, compared to other similar alternatives. 

The path to CFA Charter

As you must have seen, this blog has become a lot more CFA-ish recently. My study is going well and I am confident I will pass the exam in June 2009. 

Discussion with other would-be millionaires

It’s REALLY HARD to find a REAL millionaire who will have enough time, energy, and willingness to spend them for an extended discussion with a bunch of millionaire wannabes (like me).

I certainly don’t mean any disrespect when I say that any discussion with other wannabes like me is really just the blind leading the blind. It is not arrogance, it is fact when I say I can’t see how someone who has been at it for 10 years and still not being a millionaire can guide me in any way.

The December Roadmap

And finally, this is the updated roadmap:

If we’re talking about living a good, comfortable life, sure, past a certain amount, it’s not about how much money you make, but more about what you do with that money, and managing your expectation. 

But if we’re talking about becoming a millionaire, then it’s a whole another discussion altogether. This whole “it’s not about how much money you make” thing just doesn’t cut it anymore when what we’re talking about is becoming a millionaire.

Becoming a millionaire means that we’re dealing with a hard, objectively measurable number, and with it comes the assumption that we’re talking about becoming a millionaire rather soon(ish).

Sure, we’ve all heard about personal finance authors doing the “save X% of your income for 40 years invested at Y%” thing. Hey, given 40 years, it doesn’t take a Warren Buffett to be a millionaire. And in 40 years, 1 million dollars will worth a lot less. (Try plugging in the value of 1 million in 1968 and see how much it’s worth today.) 

But if what we’re talking about is becoming a millionaire and retire in your 40s or 50s, this whole “what you earn doesn’t matter” bit is just wrong. Especially if you’re a 30-something like me, and only have about a decade or so to reach the status. 

It’s like this: if what you want to have is a nice, pleasant drive, what car you have probably doesn’t really matter as long as it’s decent, clean, well-maintained… whatever.

But if you’re racing to a defined finish line, saying “what you earn doesn’t matter, what matters is what you do with it” is like saying that in a race, it doesn’t matter whether you’re driving a Renault 4 or a Dodge Viper, because, after all, if the Dodge Viper is running with 3 flat tires, the Renault 4 will still do better… right? (If it sounds absurd and silly, it’s because it is.)

Let’s put it this way: if you are smart with your money and personal finance, making double of what you make now will bring you there twice as fast. As simple as that. And you don’t become suddenly stupid with your money just because your income doubles, correct?

(Image courtesy of Jeff Belmonte @ flickr)

1. The business has been going slowly unfortunately. Load at work has been unbelievable.
2. Thanks to the economy, I think it’s quite realistic to say that my target of getting a 6-month bonus for 2008 ain’t gonna happen
3. The market has been so volatile, I’ve decided to wait with some money ready on the side–taken from the safety net. I’m planning to build back the safety net to around 80k by February 2009.
4. I’ve registered myself for CFA Level 1 Exam in June 2009!
5. I’m in discussions for other potential income streams. Hoping they all go well and provide more security for my family in this uncertain times.

Uncertain times

J. Money at Budgets are Sexy asks himself whether he’d be rich if he earned $150k/year. J. Money feels that if he brings home $150-200k, he probably won’t have to worry about money again. That’s not true. At least for me.

Living Almost Large ponders whether earning $250k/year makes one rich. Her answer is no, except… well, read her post and see for yourself. I don’t want to comment on the political aspect, but I totally agree with her that $250k/year doesn’t make anyone rich. 

A 6-figure does NOT get you on TV

First of all, if we’re talking about rich people as in “those people we see on TV”… well… who are we kidding here, guys? A 6-figure dude, especially a LOW 6-figure dude, ESPECIALLY if he’s wise with his money, does not even begin to get anywhere near to being able to afford a lifestyle noteworthy enough to get featured on TV. Not in the US, not in Singapore (where I am), and not anywhere. 

The guys and gals we see in CNBC High Net Worth or The Luxury Channel make so much more money than our typical 6-figure person, it’s not even funny.

One of their lower-end Patek Philippe or Vacheron Constantin timepieces can easily costs a few months of a 6-figure person’s income (a Nautilus costs about USD30k).

The Burj‘s least expensive room can wipe out our 6-figure guy’s monthly income in less than a week. Even with internet discount. 

To buy a Bugatti Veyron, a 6-figure income person has to save $100k yearly for more than 7 years… that’s IF we’re talking about Warren Buffett’s style of 29% annual returns. 

In short, if we agree on the definition of rich as in “those whose lifestyle we see on TV”, a 6-figure income person cannot even begin to touch it with a 60-foot pole. 

An ordinary increase in income doesn’t change your lifestyle

I think one important fact that a lot of people (including me until recently) don’t realize is this:

Your Lifestyle Does Not Move In Lockstep With Your Income.

Consider a Patek Philippe that costs $300k. Does it matter to you whether you earn 15k/year or 90k/year? No, right? You still won’t buy it, although you have sextupled your income. Likewise, to most people, three guys who makes 100k, 200k, and 300k/year probably don’t look that different from one another either.

Sure, no doubt the 300k/year guy has more disposable income than the 100k/year guy. But that’s not enough to make a drastic difference in lifestyle. The 300k guy doesn’t look 3 times as rich as the 100k guy.

The best explanation I’ve seen so far about this fact comes from Michael Masterson’s Automatic Wealth: The Six Steps to Financial Independence, from which I took the excerpt below:

“But what about the mansions, yachts, private jets?” I asked. “I still can’t afford those toys.”

 

“Those are just toys, ” he said. “$150,000 per year is all you really need to live a full, rich life. And here’s the interesting thing: This doesn’t change in any meaningful way when your income passes $200k, $300k, or $400k. In fact, it doesn’t really change until you are making more than a million dollars.“

 

(Images courtesy of kamalaboulhosn @ flickr and www.bugatti.com, in the order of appearance)

• “He might be rich, but he may not be happy.”
• “What’s the use of having a lot of money if you have no life?”
• “I have to backstab and play politics, which I don’t like, but I have to do this for my career and wealth.”
• “She may be rich and powerful but no man would want her!”
• “I value my health. I won’t destroy it just for money.”
• … and gazillion other examples.

Oh well geez. Set a higher standard for yourself, will ya? How about aiming to become rich AND happy? How about aiming to have lots of money AND lots of life? Let’s see, Donald Trump. Richard Branson. Heck, Hugh Hefner! Just 3 guys who have more money than 99.999% of the Internet users (including me), and have more “happening” lives than 99.9999999% of the Internet users (definitely including me). How about becoming rich AND healthy? 

It’s weird. People have no problem imagining happy AND healthy. People have no problem imagining “having a life” (whatever that means), AND keeping one’s health. People have no problem imagining being a super backstabber in the office AND being a loving mother at home. 

But throw MONEY into the equation, and suddenly everything is flipped from “AND” to “EITHER/OR”. Suddenly you can’t have money AND be healthy. You can’t have money AND have a life. You can only pick one! Something is really screwed up with our social programming, I think.

I say that setting our expectation on “either/or” is really shortchanging ourselves.

Imagine what will happen if a guy has the belief that to become rich, one MUST be a mean backstabbing machine? In the end either we’ll get (a) a guy who’s rich but hated by everybody because he backstabs his way to the top, or (b) a nice guy who never becomes rich because he doesn’t want to be a backstabber. I have to admit that as long as the guy is not me, I prefer option (b). But he’s really shortchanging himself, don’t you think?  

IMHO, it’s really important to start with the right mindset. Wealth? Happiness? Heck. Go for both!

(Image courtesy of That Guy Who’s Going Places @ flickr)

1. I’ve started a business so I can claim deductions for my business-related expenditures
2. I’ve decided to dedicate my resources to learn Forex trading till the end of 2008. 
3. I’ve decided to try to save 80% of my salary every month till I’ve got a safety net to put aside.

Specific: I want to build a net worth of 5 million dollars, within a decade.

Measurable: The objective is achieved when I have built a net worth of 5 million dollars. That translates to about USD3.5 million with the current exchange rate.

Achievable: Achievable as in people have done it, yes. Achievable as in I know how to get there, not yet But this is the whole point of this project.

Realistic: Sure. A lot of people have done it. Those investment bankers, getting paid a million a year, they’ll break through this goal like it’s nothing. Others have done it too using a different way.

Time-bound: 10 years.

Exciting: You bet it is!

Relevant for me: Definitely. There are so many reasons why I want to do this.

But it’s actually a bit more complicated than that, just like we can see from Paul Lutus‘s excellent financial calculator here. There are 5 factors that we can play with:

1. Present Value (PV). This is the money that you have, now. Obviously the greater this number is, the better! If I already have $5 million NOW, then I won’t need to have this 10-year project in the first place.
2. Future Value (FV). This is the money that you want to have in the future.
3. Number of Payments (NP). This is the number of payments. Let’s say in 10 years, I manage to put 100k every year. That means I make 10 payments. On the other hand, if I put, say, 10k every month, then I make 120 payments.
4. Payment Amount (PMT). This is in negative because the money is taken away from us (by the bank, for investment, etc.)
5. Interest Rate per period, in % (IR). This is the interest rate during that period. Meaning, let’s say I make 12 payments in a year. Then I should put the monthly interest and not the annual interest.

Now the interesting thing is that, with these 5 parameters, if you set 4 of them, you can always calculate the remaining one. So for the purpose of this blog, we know that:

PV = 0. I don’t start with any money.

FV = 5,000,000. The end goal.

NP = 10 years, so assuming months, there are 120 payments, and 120′s what we’re gonna enter.

Interest rate = Since we’re using monthly payment period, we have to use monthly interest as well. Let’s be convervative and put this at 0.5%.

The calculator tells us the Payment amount: I have to put in more than thirty thousand dollars per month to reach this target.

No matter how you look at it, 5 million is a HUGE target for me! To be honest, I’m not sure yet how I can get there. But I’m sure it can be done though!