Blog Small Cap 101

5 Things You Need To Consider Before You Start Investing

You probably stumbled upon this site probably for a simple goal – to attain financial freedom through stocks investing. However, before you can even do that, it’s important for you to get the basics right first.

As you can see from the mind-map above, there are so many aspects of personal finance one needs to look at. And to be honest, I don’t have all the answers as every individual has different circumstances.

In one scenario, a discouraged worker may be mired in a huge debt burden and aim to just get out of the vicious debt cycle. In another, an eager daddy may be pondering on what type of insurance he should be getting, following the birth of his baby son.

Nonetheless, it boils down to these 5 key things to consider before you start investing (it’s a long post below… so you can click on the each link to read in its entirety):

  1. Focus on Good Debt, not Bad Debt
  2. 3 Simple ways to Save more Moolah
  3. Amp Up Your Earnings Power
  4. Cover Your Ass with Insurance
  5. How to Start Investing Now

The flow is pretty straightforward – Once you’ve paid off your debts, save up your emergency cash for a rainy day and insure yourselves, you can create financial goals and start building wealth.

Without further ado, lets get your financial house in order now!~

 

Step 1 – Focus on Good Debt

You probably don’t need to be reminded why racking up debt is a bad idea. Yes, we understand that spending money without any restriction is enjoyable; especially when you’re rewarding yourself for the hard work in the past year.

Imagine going on a long vacation to Europe or buying the latest Smartphone model – all of these things can feel awesome but… worrying about your upcoming credit card bill isn’t going to be pretty too.

As such, we prepared a few questions you can ask yourself on how to strike a balance between enjoying life and managing debt:

  • Have I shopped around to get the best deal?
  • Am I borrowing this money as cheaply as possible?
  • Will I be able to cope should interest rates rise in the future?
  • Will I comfortably be able to afford the monthly repayments?
  • Do I understand all the terms and conditions associated with borrowing this money?
  • Do I understand the risks and what could happen if things go wrong?

Answering these questions may serve as a simple guideline on how to keep your debt to a minimum and avoid any T&C which may be a rude shock to you in future. That said, borrowing money isn’t always a bad thing.

In contrast, borrowing money wisely can probably help you generate more income and increases your net worth in the long run – a term known as Good Debt. Good debt is an ‘investment’ that will grow in value or generate long-term income. Taking out student loans to pay for a college education is the perfect example of good debt.

Student loans typically allow you to finish your course of study before you start paying them back @ a very low interest rate compared to other types of debt. Furthermore, a tertiary education gives you the head-start to a better paying job and it definitely helps in building your golden nest egg in future.

 

Step 2 – 3 Simple Steps to Save More Moolah!

I can’t emphasise enough on how important it is to save money. I have seen people draw incredible salaries north of $6,000 but save only less than $500 every month and there are those who earn half the amount at $3,000 but can save almost $1,000 monthly. It is pretty clear on which group can reach financial freedom much faster.

Many finance websites have advocated/supported the notion of maintaining a budget and recording your every single expense. However, I beg to differ. In all honesty, how many people really do keep all the receipts and tally them up religiously at the end of the month? I tried it out for 1 month and that’s probably the max I can adhere to.

As such, we came up with 3 simple tips which look more plausible in action:

  • “Do not save what is left after spending, but spend what is left after saving”
    ~Warren Buffet~

I saw a remarkable increase in my savings after I took up the above advice. When 10% of your monthly paycheck goes into the savings’ portion automatically, you are “forced” to spend only the remaining 90%.

There are two inherent advantages for this:

  • Setting goals would be much easier since you know the fixed savings coming in
  • You will unknowingly curb on your spending slowly but surely (I now think twice when I want to get a cup of Starbucks now!)

This is also the core principle – “Pay Yourself First” advocated by David Bach, author of ‘The Automatic Millionaire’. Basically, he suggests setting aside a fixed, monthly sum of money automatically before considering what is left for living expenses; so as to avoid the temptation of using the money to pay today’s bills.

  • Get the best deals online

Looking to eat out with your family this weekend or a vacation sometime down the road? Check out daily deals at websites such as http://deals.bigsale.com.my/ and http://www.deals-malaysia.com/MyDEAL.

They share the latest deals for dining, entertainment, shopping, travel and more. In my opinion, buying something online is the optimal solution for saving money in the long term. I always tend to get 10-50% discount when I buy something online versus at a retail store. You can even get pre-loved items for up to 90% discount online!

  • Utilize your credit cards for rebates

Yes, we have said that you should get rid of any consumer debt and you think that we should shun credit cards altogether. On the contrary, if you are able to pay your bills promptly, getting credit cards makes a lot of sense as they offer many benefits such as cash rebates or airmiles which can offset your expenses.

You can turn to https://www.imoney.my/credit-card/ or https://ringgitplus.com/en/credit-card/to find the credit card suitable for you. Some of them even offer a cashback of 10%! That’s RM100 saved for every RM1000 spending!

For more money saving tips, check out this “66 ways to save more” guide here!

 

Step 3 – Amp up your Earnings Power

There is a limit to how much you can save but there is none when it comes to making money. There are a few ways to potentially do that:

  • Boost your Salary

If you are a salaried worker (like what 99% of the population out there), there are 2 possible ways to increase your pay:

  • Negotiating a Salary – Ask for a pay raise assuming you know that you are bringing much more value to the company
  • Switching Jobs – According to a survey from this site, those who stayed in the same company often get the shorter end of the stick when it comes to a pay increase. While frequent job hopping may give you huge pay jumps in a short period of time, it may leave a black mark in your resume in the long run. Thus, it is best to exercise caution and do it within reasonable bounds.
  • Start a Side Hustle

Owning a business can be a real eye opener. You will deal with issues you normally would not deal with when working for someone else.

From how to incorporate, to balancing the books, to developing a business plan and managing cash flow — there’s always something new to learn.

Moreover, it does not cost an arm and leg to start an online business in this digital age as compared to a traditional business where you need to fork out huge chunks of money for rental and labour costs etc.

And touchwood – if you should lose your job, you still have a Plan B waiting for you.

  • Turn your Junk into Ka-ching $$

Look around your house for items you no longer use; chances are you may have lots of items still in good condition and able to be sold for some cash. All you need is a free account in online marketplaces such as http://www.mudah.my or https://sg.carousell.com/ and you are on your way to make some quick bucks.

On a side note, you should not be-little how much you can earn for this. As the saying goes: “One man’s trash is another man’s treasure”. Who knows if you can luck out and sell off something worth 10x the original price?!

 

Step 4 – Cover Your Ass with Insurance

So what exactly is Insurance?

 

Insurance is the transfer of risk by an insured to the insurance entity. The insurance entity receives payment in the form of premium and will compensate you in the event of losses or damages sustained.

No one likes to hear this taboo word – Insurance because it equates something untoward may happen. Moreover, horror stories of how Insurance agents mis-sell their products to get their lucrative commissions just seek to turn people away.

However, Insurance is a must especially with rising healthcare costs and changes in your dependants’ needs in this modern era. For a reasonably affordable rate, it helps to protect you and your family against significant potential losses and financial hardship and most importantly a peace of mind.

What are the types of Insurance?

By and large, there are 3 main categories of Insurance namely: Life Insurance, Health Insurance and General Insurance. Let’s find out more below:

  1. Life Insurance

A life insurance policy pays out an agreed amount known as the sum assured under certain circumstances. This will be paid to you if you are permanently disabled or critically ill, if your policy provides for this, or paid to your estate if you are no longer around. This money is intended to help you meet your financial needs and / or those of your dependants if these events happen.

Some of the policies under this category include Whole life insurance, Term insurance and Endowment plans etc.

  1. Health Insurance

Health insurance may be the most important type of insurance you can own. Without proper health insurance, an illness or accident can wipe you out financially and put you and your family in debt for years.

To help you and your family cope with expenses at these times, there are different health insurance policies available such as Hospitalization insurance, Disability Income insurance and Critical illness Insurance etc.

  1. General Insurance

General insurance gives you some financial coverage against a range of events or losses which could be suffered, for example the loss of your belongings, or damage to car or house. If the event happens, your insurance company will pay you an agreed amount, or an amount to cover some or all of the loss.

Some of the policies under this category include Travel insurance, Motor insurance and Home Insurance etc.

Questions to ask yourself before you buy Insurance

  • How much do I need to plan? And for how long?
  • Can I afford the premiums for the long run?
  • Have I shopped around and compared the products enough?
  • Are there any limitations (e.g. how much co-insurance and deductibles you have to pay for Health Insurance first before the policy reimburses your medical bill)?
  • What if I stop paying? And what are my options?
  • Do I trust the agent? How many years of experience can he/she bring to the table?

All told, you can also turn to this website which has tons of useful information on Insurance as a whole.

Step 5 – How to Start Investing Now

Apart from getting a simple pay-check month to month, you can turn to investing to make their money grow at a faster pace. But before you set out to invest, you ought to know this important money concept which can literally change your life.

The 8th Wonder of the World – Compound Interest

Albert Einstein called compound interest “the greatest mathematical discovery of all time”. We think that it is a miracle because it can literally change your life once you understand the concept and how to apply it dutifully.

So what are we actually talking about? Simply put, compound interest lets you earn a higher rate of interest on your money over time and the results can be truly mind-boggling. Let’s take a look at this scenario which many would probably have heard of:

If you were given a choice to receive one million dollars in one month
or a penny doubled every day for 30 days which one would you choose?

Well, many people are also aware that this is a trick question and the correct answer points to the “doubling of a penny daily”. But do you know how big the difference really is at the end of the month? Here’s the calculation:

Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12

Amazing, isn’t it? The difference comes up to a humongous $4.3 million, more than 4x of the instant gratification of $1 million!

Now a 100% return every day is impossible, but what’s more important is to understand the principle of compounding and how it holds true for even smaller returns. This is why compounding is a core aspect of good personal finance and the reason why the rich get richer.

For this reason, the earlier you start investing, the greater is the time period available to grow your portfolio as the power of compounding works in your favour. That said, it is never too late to get started. Even small amounts invested wisely canresult in a sizeable fortune over a period of time.

Next up, we look at the things to look out for when you open a Stocks Trading Account…

How to Open a Stocks Trading Account (In Malaysia)

Before you can buy shares and make some ka-ching, you will first need to open a Central Depository System (CDS) account in Malaysia or Central Depository (CDP) in Singapore provided that you are at least 18 years old. The CDS account is basically a place where all the shares you have bought in the local stock market are ‘kept’.

We are not so concerned about how you should learn to open a CDS account. You can do this easily by going to any stock brokerage firm or bank and they will also set up your trading account simultaneously. Once done, you can buy and sell shares either through online trading or by making phone calls to Remisers and/or Dealers.

5 Things to know before selecting your Stocks Brokerage Firm

1) Stock brokerage fee

When an investor purchase or sell shares, a commission charge is payable during both the purchase and sale of shares. For new investors with limited funds, it is usually advisable to go for the brokers with lower minimum fees.

Because the industry is so competitive, most of the rates offered by brokerage companies are quite similar. Nonetheless, there are a few brokerages offering lower commission fees (RM 8 or RM 12) compared to the standard RM 28. Examples are: Hong Leong Bank, RHB, UOB Kay Hian and more.

2) Cash upfront or collateralised accounts

You have to choose between opening a Cash Upfront account, a Collateralised account, or both when it’s time to open a new share trading account. So what’s the difference between them?

For Cash Upfront account, your trading limit is capped at the amount you’ve deposited into your trust account but your brokerage fee is lower (i.e. if you have RM1000 in your trust account, you can trade RM1000 worth of shares).

For Collateralised account, your trading limit is usually multiple times of the amount you’ve deposited or pledged to your trust account but with higher brokerage fees.

Take for example Maybank2U:

  • For the Cash account, your trading limit is 1x whatever your deposit and the min. brokerage fee is RM8.
  • For the Collateralised account, your trading limit is 3x your cash/shares and the min. Brokerage fee is RM12.

3) Trading platform

In this era where online trading is much more prevalent than calling in to your remisier to place trades, it’s rather important that you are comfortable with the trading platform. You wouldn’t want any hiccups when it comes to overseeing your portfolio and executing your trading activities.

Preferably people would be looking at these few features -> user-friendly environment, fast execution and reliability. All told, it’s also helpful to browse through online forums and see what people are saying about the online trading platform of your broker of choice. Don’t forget about the mobile trading platform if you wish to save time and trade on the go!

4) Reliability and reputation of stock broker

Investing in stocks require you to place a huge amount of monies in a company for a long time. Hence, it’s crucial that you should always go out of your way to find out how reliable it is.

Bank brokering units (i.e. CIMB) are generally trustworthy as they are tied to the banks themselves, but that is not to say that securities companies, especially the big ones, aren’t dependable too. One good approach is to check with any of your friends who have been investing in the markets for some time. But if you don’t have that kind of network, remember the Internet is your friend.

 

5) Starter Promotions

Last but not least, similar to getting a new credit card or bank account, some brokerage firms will dangle some perks if you sign up with them. For example, Jupiter Securities offer promotion rates for new clients at 0.05% or min RM 8 for 2 months from the date of account opening.

Last but not least – Do your Homework

Setting up that stocks trading account is only the 1st step.

It’s critical that you do a lot of research or pore through a lot of books before really jumping into the investing world. Over my years of experience, I have seen people buy into stocks they totally don’t understand based on someone else’s “stock tips”.

To borrow a quote from Benjamin Franklin:

An investment in knowledge pays the best interest.

For new investors, one can either start small and get the ‘feel’ of the market OR create a stock virtual account where you trade stocks using virtual $$.

In addition, a mentor (I can be yours! Just email me at contact@smallcapasia.com) can also be very beneficial in your learning journey as you are able to cut short your learning curve significantly. Having been through the ups and downs of the markets, I wish that someone would have told me all these in the early days.

To help you get a head-start, I have documented 7 common mistakes stock investors make and hopefully, help you avoid the Pitfalls that have beset many people out there.

Conclusion – Continual Learning

So there you have it, 5 core personal finance concepts to super-charge your financial success namely:

  • Reduce debt.
  • Save earnestly
  • Increase your Earnings
  • Protect Yourself and Your family
  • Invest wisely

I sincerely believe that you are well ahead of your peers once you keep practicing these key things in your daily life. Learning how to manage your money is a lesson never taught in school but in fact, the most important lesson everyone should know about.

As such, I implore you to keep learning; keep your mind young and retire financially free in the future.

Here are some of the FREE resources to kick-start your learning journey today! (we will be constantly adding to the list)

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