Category Archives: Education

Information here are based off from various distinguished sources and are used purely for financial education for the group.

Passive Income

Every person who had achieved financial freedom almost certainly have at least one stream of passive income.

So you may have wondered what are the characteristics of passive income which gives you financial freedom?

1) Its nature

All forms of passive income are exponential. It leverages on a model to allow for an exponential increase as time goes by. For example, returns from investments compound over time as profits are reinvested back to achieve a greater return. A business can expand infinitely as it leverage on network to generate greater sales. It is different from a salary where your income grows in a linear fashion.

2) Time

Making more passive income doesn’t necessarily take you more time. Because of its nature, you can be sure that your passive income stream grows without you spending more time and effort on it. Finally, it goes on autopilot mode and you repeat the whole process of building another stream of passive income in another endeavour.

It takes faith and discipline to build a stable source of passive income, but the rewards are worth the fight. Here’s a guideline to it:

http://www.entrepreneurmag.co.za/advice/personal-wealth/personal-finance/build-passive-income-doing-what-you-love/

How the financial crisis started (Part 2)

What was shared previously was what I felt an accurate and easy-to-understand graphic description to help assist readers on the cause of the 2007-2008 financial crisis.

For starters, what largely fuelled the crisis was greed. Greed from brokers, investment bankers and investors who all wanted a piece of the action. However, to put down this act of the people is to go against human nature itself. That definitely isn’t the way to tackle the problem.

However, we don’t really want to go into the nitty gritty details of the crisis. That’s what you’ll do if you’re an economist.

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In this post, our next focus is what the government did in order to mitigate the crisis.

The Federal Reserve. The Federal Reserve is generally the central bank of USA. (Think ‘box of bank money for every monopoly game).

It began to improvise with new unprecedented policies. It broadened the eligible collateral for its loans (think ‘I’m so desperate I wouldn’t mind lending anyone car just so they’ll get lunch for me’); previously only Treasury bonds were eligible, but now all sorts of more risky securities are eligible, including mortgage-based securities. Most importantly, the Fed extended loans to investment banks for the first time in its history. Investment banks are not regulated by the Fed, so it has always been thought that the Fed had no responsibility to act as “lender of last resort” to investment banks when they are in trouble.

However, when the investment bank Bear Stearns was on the verge of bankruptcy in late March, the Fed decided that it had to act as lender of last resort to Bear Stearns. Since Bear Stearns was heavily indebted to so many different financial institutions, its bankruptcy would have caused very widespread losses and could have resulted in a complete meltdown of the U.S. financial system—nobody lending money to anybody for anything—and a disaster for the economy. That was Fed chief Ben Bernanke’s nightmare, and why the Fed intervened so quickly and decisively as lender of last resort to these investment banks.

Then, in September 2008, when the bankruptcy of Lehman Brothers (at the time the fourth largest investment bank in the U.S.) triggered a worsening of the crisis, the Fed took an even more extraordinary and unprecedented step to bail out an insurance company, AIG, the largest insurance company in the world. AIG had dominated the market for credit default swaps, which are a form of insurance against the default of bonds, including high-risk, mortgage-based securities, as well as a form of speculation that bonds and other securities will default. But AIG was in such financial trouble that the Fed feared the company would not be able to pay off on all the insurance policies that it had sold. And failure by AIG to pay off would mean losses for banks (and others) that had bought this insurance, adding more losses to the already staggering losses suffered by banks. So once again, the Fed decided that it had to bail out AIG in order to “save the financial system.”

So far, the Fed’s unprecedented policies have been mildly successful, but by no means a complete success. At least an all-out financial collapse has been averted (for now). And investor confidence seems to have been restored somewhat by the demonstrated commitment on the part of the Fed to do everything possible to avoid a financial disaster. However, commercial banks and investment banks have still not increased their lending. And the Fed’s policies do not solve and cannot solve the fundamental problems of too much household debt, declining housing prices and rising foreclosure rates.

(source quoted from http://isreview.org/issue/64/us-economic-crisis)

(However, the question remains whether these investment banks, the ones who caused the crisis in the first place, deserve to be saved. There has been a huge debate over the situation and rightfully so.)

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Government Intervention. In February 2008, Congress quickly passed an “economic stimulus” bill of $168 billion that included tax rebates for households and tax cuts for businesses. These tax cuts had some positive effect on the economy last summer, but their effect was small and temporary. At best, the tax rebates provided a one-time boost to consumer spending, since these rebates could be spent only once.

1. The incoming Obama administration and Democrats in Congress are working on a second, much larger stimulus package of about $850 billion, which will consist of two-thirds increased spending and one-third tax cuts. This second stimulus package will be somewhat more effective than the first, mainly because it is so much bigger, and also because more of the total money is for increased spending rather than lower taxes.

The positive effects of this second stimulus will be short-lived, like the first one. If the economy is still contracting in 2010, there will probably be a need for a third stimulus plan. But will that be possible? And in the long run, there are possible negative effects of this wildly expansionary fiscal policy. When the recovery finally comes, it will be slower than usual, because interest rates will have to be higher and taxes will have to be higher in order to pay for today’s stimulus spending and tax cuts. Plus, expansionary fiscal policy does not solve the fundamental problem in the economy—the heavy debt burdens of households and businesses that threaten bankruptcies and restrain spending. A significant portion of this debt must be written off if this fundamental problem is to be solved.

2. In July 2008, Congress passed an anti-foreclosure measure, which allows for the refinancing of existing mortgages, which are in default with new mortgages that would have a value of approximately 85 percent of the current market value of the houses, and would be guaranteed by the Federal Housing Administration. However, the lenders must initiate this refinancing, and so far very few lenders have been willing to initiate these new mortgages with write-downs of the principle owed.

3. In early September 2008, Fannie Mae and Freddie Mac, the two giant home mortgage companies that own or guarantee almost half of the total mortgages in the U.S., were in danger of bankruptcy due to the continued deterioration of the home mortgage industry. The Treasury responded by taking over Fannie and Freddie in a conservatorship and guaranteeing to pay all their debts in full. This bailout will probably cost taxpayers hundreds of billions of dollars. William Poole (ex-president of the St. Louis Fed) has estimated that the total cost to taxpayers could be in the neighborhood of $300 billion.

4. Then in late September, as the crisis worsened, Treasury Secretary Paulson requested and Congress approved (in the threatening environment of a rapidly falling stock market) $700 billion to purchase high-risk, mortgage-based securities (“toxic waste”) from U.S. banks. $700 billion is a lot of money; it is $2,300 for every man, woman, and child in the United States. Soon after the law was passed, Paulson changed his mind, and decided to use the $700 billion to “inject capital” into banks (rather than purchase their toxic securities), in the hopes that this would be a better way to encourage banks to increase their lending. So far, the first half of the $700 billion has been spent, as a giant bailout of the banks and their bondholders, but banks have still not been willing to increase their lending. Prospects are similar for the second half of this bank bailout money.

Having to choose between these options represents a stinging indictment of our current financial system. The situation suggests that the capitalist financial system, left on its own, is inherently unstable, and can only “avoid” crises by being bailed out by the government, at the taxpayers’ expense. There is a double indictment here: the capitalist financial system is inherently unstable and the necessary bailouts are economically unjust.

(source quoted from http://isreview.org/issue/64/us-economic-crisis)

(In the end, there definitely is a need for governement intervention. Leaving the economy as it is will spell disaster for the US economy. However, is what the governement enough? Much like initial concerns, the stimulus, coupled with the bail outs, are not enough to push the economy back into tracks. There are also concerns over corruption cases involved. There is much to be done, but I personally feel that we shouldn’t keep assuming the government as miracle workers. Healing also require time after all.)

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That’s all for this post. This was a brief summary of what the US government did for the country. Next post will be how our Singapore government tackled the problem here.

How the financial crisis started

Hey Ratpack!

The next few posts will be dedicated to informing you about something that has recently happened that shook the entire world in its foundations. That was the

2007-2008 Financial Crisis

I shake my head in disbelieve that people even till this date have no clue how this financial crisis started. Worse still, many people out there are still repeating the same mistakes that will cause the crisis in the first place. Therefore I feel it is the duty of Ratpack to duly educate its members of how the financial crisis started and what you can do if it happens again.

The oblivous vs the bankers

First off, this is an introductory video on how the crisis started. Enjoy.

More will be posted on this topic in future posts. Stay tuned!

Cheers,

Theodoric

Robert Kiyosaki

Here’s the person that probably inspired the entire group here, and that’s Robert Kiyosaki. Take some time to listen to what he has to say.

Robert Kiyosaki is the author of the book Rich Dad Poor Dad, where he writes about the importance of financial education, and gives a glimpse of how he grew up with 2 different fathers and their contrasting points of view when it comes to the subject of money.

How much do you need to survive on comfortably?

Hi everyone, I am back to update on this blog after a break. Sorry for the recent gap as I have been on a short vacation and University camps. It’s time for me to refocus on the topic of financial education.

After introducing the concept of money and inflation in the previous posts, I want to focus on the amount of money, aka nest egg, one needs to accumulate to survive after retirement.

 

ImageSure, some of you may say that raising kids to take care of your golden years might work, but for how long would this be true in a society where filial piety is losing its presence?

To find out how much money one would need to accumulate for retirement, we would firstly determine how much one needs to survive on.

Let us take a look into the expenses of a typical non-married person by using reasonable estimates at current market prices.

Monthly:

Transport – $200

Food – $300

Utility and Phone/internet Bills – $400

Entertainment – $100

Miscellaneous ( Hobby, clothes, home necessities ) – $100

Annual Expenses:

Luxuries ( Vacations and gifts ) – $2000

A typical person would be incurring $15,200 in expenses annually. That boils down to $1266 in monthly expenses on average. In other words, one needs to have an inflow of at least $1266 per month to maintain a basic lifestyle.

However, it is virtually impossible to live off with only this amount of money as we have yet to set aside contingency funds and savings for a rainy day. It is also assumed that you aren’t married, and there is no need to give money to others (alimonies, giving to parents, IOUs, etc) After factoring in all this, let’s just say $2000 per month is a comfortable figure to look at for retirement at current prices.

Let me re-emphasize the previous point. It means that we need $2000 per month coming into our pockets at retirement age to let us continue living comfortably into the golden years. Most of us in Ratpack are presently in our twenties, if we are able to have this amount of money inflow as passive income, we would be financially free. However, let us take the common workforce to illustrate for this example and in this case, age 60 would be the consensus retirement age, which most people are contented with.

[WARNING: PLENTY OF CALCULATIONS IN THE NEXT PART]

Taking inflation of 2% into account, $2000 would have the same value as $4500 in 40 years’ time. We would need to look at the amount of capital needed by age 60 to be able to generate you $4500 per month to live with. Surely after all the years of being in the workforce and saving, you would have amassed your nest egg to invest with. How big your nest egg is during retirement depends very much on how much you save, how early you start investing and how you invest. A good financial advisor should be able reap at least 4% returns on your capital invested on top of inflation. Hence, assuming 4% return is what you get from your capital, $1,350,000 is what you need to build from now onwards to retire.

You may use this format to suit your own needs and eventually obtain the capital you would need to set as your goal. To calculate the value of money after n number of years, simply use the CPF retirement calculator online.

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As I move on to the next part of the calculation, it gets more personal. After knowing how much we need to build to retire comfortably, we need to look into our own lives currently to see if we are saving and investing adequately. A simple way to calculate this is by taking your annual inflow ( salary, bonus, CPF ) minus your annual expenses. For those of you who are paying for insurance premiums, check if theres a cash value to it after a certain number of years. If there is, you may take into account the premiums paid as part of savings and investments. After which, you may take the total amount of savings and investments annually multiplied by the number of years you have left to your intended retirement age. This sum added on to the amount of savings you currently have would give you the amount of money you have at retirement age! In other words, the earlier you intend to retire, the more savings and investments you would need because you have fewer years to accumulate that capital!

Now put the above exercise into your own life. Are you having a shortfall under or a surplus over the required capital?

If you are having a surplus, congratulations! But don’t forget the kind of assumptions you are currently using. Expenses increases as you grow up, buy a house and start a family.

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If you are having a shortfall, then you need to look at increasing your inflow or decreasing your outflow. It is simple Mathematics here. But trust me, focus on increasing your inflow because I believe in expanding your means of living and not living below your means.

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In the posts ahead, I would be looking more into how to amass more capital, which I think is the primary concern for young people. Without capital, there is no way anyone can invest or buy opportunities. As a teaser, saving more of your salary is definitely one sure way to success, but it is not the only way. There are more channels out there that allow us to build a passive income.

If you guys prefer an excel sheet format for these calculations, feel free to contact us or leave a comment below. I do hope this post allows more of us to determine our current financial standing and discover each of our own financial needs.

Cheers,

Thomas

YOUTUBE.

I’m sure everyone has heard of this Internet phenomenon that is called

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Yes, there’s even Youtube is every other country. It’s like they were trying to recruit a cult or something.

For those living under a rock, Youtube is video sharing site where users can upload their videos to share to the world. What started off as a simple concept is now bought by Google themselves. With such a potential for high user traffic, Google has successfully manipulated Youtube to generate high returns for itself. Talk about an investment with high yield.

Fact: Youtube was bought in November 2006 by Google for US$1.65 billion.

To summarise how powerful Youtube is, here’s a picture, which speaks probably more than a thousand words:

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As you can see, Youtube is another powerful form of social media. Just by uploading videos, Youtube has created a stream of constant traffic combined with word of mouth marketing from the users themselves.

Youtube has, however, encountered violent opposition from a very recent competitor, which is none other than Facebook. Facebook provides the same profiling and video uploading services and more, putting Youtube slightly out of the limelight in the last few years. However, Youtube has been giving Facebook a run for its credits by constant reinnovating and rewarding top uploaders with cash.

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A representation of the fight against Google (which owns Youtube) and Facebook. Except those behind should be fat nerds. In glasses. Eating Cheetos.

So why Youtube? Why am I sharing this on the RatPack blog, which is geared towards financial freedom?

To start off, here’s a representation of the top earners in Youtube to date.

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As you can see, Youtube can appear as an investment of your time and money for a good amount of income per year. Here are some reasons for doing so:

1. It is PASSIVE. Video viewership is totally passive and there is hardly a need to promote past videos (if they’re good).

2. Fame material. Who doesn’t love to dwell in a bit of fame? Being a Youtube celebrity is highly regarded now in the world, compared to TV and movie celebrities.

3. Hobby. If making videos is something that interests you, then all the more this is something for you. Who doesn’t like to do something that you enjoy doing? AND making money?

So here’s another food for thought to your everyday entrepreneurial spirit. Youtube, one of the greatest global phenomenon. Are you going to capitalize on it?

Peace out,

Theodoric, Ratpack Group.

Key to Financial Freedom

The key to financial freedom is to obtain passive income > expenses. This post adds value to the idea of passive income and where to obtain it.

There’s several ways to go about to obtain this kind of passive income. These are opinions garnered from several books I read and from having my own experience ( and my parents’ experiences for the case of property ) earning from each of the below passive income sources.

Firstly, I personally believe that one of the best sources of passive income is rental yield from property investment. However, to be able to amass a capital large enough to make a downpayment for a property will take ages if we are to work in a job.

Secondly, we could obtain a relatively stable passive income from dividend yielding stocks, such as REITs which gives approx. 6% returns per year. However once again, we would need to have a 6 figure capital to be able to depend on this form of passive income. Dividend returns for most stocks are often very low.

Lastly, one of the most risk free ways to build a passive income is from building business. In a business, how much effort you put in is how much you will get out of it initially. But eventually you own a system which works for you. There are opportunities out there that allow you to start up a business with relatively low capital. Not only its a good experience, it allows you to learn the fundamentals of looking at financial numbers. You might have noticed that almost anything out there is related to business ( i.e you invest in companies in the stock market, you invest in properties, which are built by big developers who see a potential in a piece of land ). Hence, all successful and wealthy people have a decent amount of knowledge in businesses and have basic literacy in cashflow statements and balance sheets.

In summary, my approach is to take steps to start acquiring cashflow generating assets. I believe that hands-on experience is the best teacher. I learn about how the stock market works by investing a sum of money I’m comfortable with it.  I learn the fundamentals of  a business by being involved in one.

One cannot test the depth of a river without having one leg inside it, or just by listening to what others say. Keeping an open mind to take on opportunities which can lead you to acquire cashflow generating assets could eventually open up a path which leads to your financial freedom.

Would you be ready to take action when an opportunity presents itself?

Cheers,
Thomas Wu