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If you have $200,000 today, how much of it would you spend or invest?
WHY?
Most of us will reinvest most of the $200,000, because we were taught to save capital and not to spend it.
Reason: In order for us to retire we need a huge capital base to generate monthly disposable income .
Example: We need a capital base of $480,000 to generate $2,000 a month at 5% return per annum. Bigger capital is needed if we factor in inflation (Inflation rate in Singapore is 2-3%) and compounding.
How much of your income is spent?
WHY?
Most of us will spend 80-90% of our income and save the balance because we expect income to come every month. Because of the “spend first, save later” syndrome, most people will not have enough capital base to generate a comfortable monthly source of income when they retire.
Most people invest for Capital Gains
But What We Need is a stream of continuous Income.
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A Capital Gain Investment Programme
Examples of Capital Gain investment programme are Real Estate, Stocks and Shares, Unit Trust, Real Estate Investment Trust, Fixed Deposit, Bonds, Land Banking etcs
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A typical capital investment programme
- Investment appreciate in value over time.
- Sell the asset (exit) to recover capital and profit.
- Only one time profit
- No more asset once sold
- Have to look for other investment programme to repeat the cycle.
- Have to time the market as to buy low and sell high.
- Risk on the capital
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A Cash Flow Investment Programme
Also called a business model, lets take a coffee shop for example. Shop owner spend $50,000 and few months to renovate the shop. This coffee shop only sells coffee, so the first $50,000 worth of coffee sold were for the capital recovery. Break even point (full capital return) of this coffee shop business is reached when it had sold the first $50,000 worth of coffee, after achieving break even point every coffee sold will be profit (Gross - Cost) for the business.
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A typical cash flow investment programme
- Recover capital
- Risk on capital reduces every month
- Generate cash flow every month
- Do not need to sell asset
Depending on what business investment break even point can be achieve in 1-5 years. After break even, investment is risk free and it is generating cash flow monthly. Inflation will also be adjusted according.
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Investment Strategy
- Always protect our capital
- Shortest time possible to recover capital, risks reduce when capital reduces
- Generate cash flow
- Counter Inflation
- Re-invest into the same successful formula to create Income Monthly
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Building Passive Income.
- Take the example of the coffee shop business again. The initial investment of $50,000 for the 1st shop breaks even say in 3 years. Every businessman will repeat the winning formula and take the initial capital from the 1st shop to start the 2nd shop, 3rd, 4th, 5th and so on.
- With just an initial investment of $50,000, he now owns many shops.
- Investment in the 1st shop is now risk free, full capital return and is now enjoying a cash flow every month.
- Reinvest into the same formula will see the businessman creating cash flow every month from all his coffee shops. (cash flow 1 + cash flow 2 + cash flow 3).
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