Chapter Outcomes • What is wealth? • Secret toward wealth • Step-by-step to build wealth
What is Wealth? • Residuals income after subtracting all expenses • Assets – Liabilities = Equities (Wealth, Net Worth) How much wealth you need? • Depends on your goals So, • More net worth – you can reach financial goals easier
What is Wealth? • Wealth is not equal to richness. • Richness is subjective term which has no definite meaning. • Wealth is also not equal to income. • A huge income does not guarantee that it will generate wealth. It is very much dependent on the person consumption habits. Therefore, to create constant and lasting wealth: • You need to add value to all your financial resources. • These financial resources are simply utilized to create added residual value over time.
What is wealth? • Dream? • Richness? • How much is rich? • What to have? • Millionaire? Billionaire? Financial FREEDOM
What is wealth? • Financial freedom • Using financial ratios to check • Survival ratio • Wealth ratio • Line to distinguish between wealthy and poverty
Financial Freedom Can be called “Financial Independence” • When passive income > expenses When you have financial independence: • You do not have to work for income • You can choose whether or not to work and how to spend your time and energy Conclusion: • Ability to live OR • A life we want OR • Survive without needing to work or depending on others for money • Financially independent
Using Financial Tools to check on yourself Survival ratio = income from work + from assets expenses Analysis: Survival ratio >1 Good Financial independent To increase Survival Ratio: Increase passive income (income from investment and savings) reduce your expenses you take a look at your expenses each month and figure out what you need to make each month to live. Then set goals in order to move your personal wealth
Ex: Passive Income • Rental property • Dividend from stocks, bonds and income trusts • Bank fixed deposits and monthly income schemes • Royalty from creative works, e.g. photographs, books, patents, music, etc. • Alimony, Child Support or Child Trust Fund • Renting out professional or academic qualifications  • Interest earned from deposit accounts, money market accounts or loans • Oil leases • Notes • Business ownership • Patent licensing • Trust deed (real estate) • Life annuity • Pensions • Affiliate marketing
Using Financial Tools to check on yourself Wealth Ratio = income from assets expenses Analysis: Wealth ratio >1 Good Financial freedom Income from Assets: Income not from working Examples: Rents Dividends Interests Other returns on investment
Using Financial Tools to check on yourself Survival ratio Wealth ratio Mr. Adam gets income from work of 50,000 baht per month and income from renting his beach home for 20,000 baht per month. His total expenses per month is 60,000 baht. How much is survival ratio? Is Adam financially independent? From survival ratio information, Is Adam having financial freedom?
Line to distinguish richness and poverty Income Expenses Loss Gain
Line to distinguish richness and poverty Income • Salary • Bonus • Rental • interest income
Distinguish richness and poverty Rich People: • Income – Expenses = + (Gain) • Income > Expenses Poor People: • Income – Expenses = - (Loss) • Income < Expenses Conclusion: • Middle class people, gain income but borrow. • Rich people, gain and invest to create more money.
Secret toward Wealth What to do? How? “Pay yourself first”
Pay Yourself First Common Practices: • It is easier to spend than to save • For most people, savings are residual (you spend what you like and save what is left—Spend first and save later) Pay Yourself First Means: • Spending becomes the residual • Save first and spend later • Save for L-T goals
Secret toward wealth • How to earn? • How to save? • How to spend? • How to invest? • Build your wealth
1. How to earn? • Knowing how to use your ability (Human assets) to find income from different channels both from work and investment
2. How to save? • Knowing how to hoard (save) and create discipline in saving money. Wealth and opportunity to grow will come with decent saving amount. • Minus 10 strategy and plus 10 strategy
2. How to save Saving – 10 Strategy • Save 10% of total amount you earn before spending Example: • If you total earning is 50,000 baht per month, how much you should save? Use saving-10 strategy to calculate. Saving + 10 Strategy • Aim to have additional saving by saving an additional 10% of what you spend Example: • If you spend 20,000 baht this month, how much in addition should you save? Use saving + 10 strategy to calculate.
3. How to spend? • Knowing how to spend. Do not extravagant (spend too much on items you do not need). • Consumption planning (able to control expense, disciplinary of saving) Be smart when you buy: • Buy only when it is necessary • Buy items with cheaper price per unit Be smart when you spend: • Use items with care • Try to save money in different ways Be smart when you live your life: • Value is not about price
4. How to invest? • Learn how to invest in various types to distribute risks and find investment that fits your life style. 1. Know your gain/profit and risks of investment 2. Choose what fits your life style 3. Make investment choice that creates wealth
5. Build your wealth • รู้ก่อนรวยก่อน Wealth is built from saving. Why save? Saving is security Change of life cycle
Saving is security • For emergency use • For further education, personal business, making purchase of items you want • For building life security while you still work • For better future of yourself and your family • For retirement • For your children to inherit
Change in life cycle • Life-cycle planning suggests that financial planning is a lifelong process. • Career development • Family formation • Retirement • Nowadays, higher education is common and it requires money • People start working late but retire sooner; therefore, lessor time to work and earn income • People get married and have kid late in life. They depend on themselves and need more money. • Life expectancy is longer; therefore, higher saving needed for spending after retirement.
Step-by-Step to build Wealth • Process of building wealth in order to have financial freedom
Wealth Management Process and Financial Planning Wealth Creation Wealth Accumulation Wealth Protection Wealth Distribution Insurance Planning Tax Planning Consumption Planning Estate Planning Retirement Planning Investment Planning
Step-by-Step to build Wealth Wealth Distribution Wealth Protection Financial GOALS + ---> Wealth Accumulation Wealthy, Richness, Financial Freedom Wealth Creation
Wealth Creation • Wealth creation involves the building of assets by means of careful investment into asset based investments • usually over a long period of time so as to achieve an income stream that will ensure a continuation of a high quality lifestyle in the years beyond retirement
Wealth Protection What: • Protect wealth and assets How • Insurance: life insurance and property insurance • Retirement Planning: Pension Fund etc.
Wealth Accumulation • Tax Planning Strategies • Able to use tax strategies for different financial and personal situation • Tax avoidance The use of legitimate methods to reduce one’s taxes. • Tax evasion The use of illegal actions to reduce one’s taxes • Investment • Why investment? • Money today worth more than money tomorrow (TVOM)
Wealth Protection What: • Protect wealth and assets Example • Life insurance : Income protection
Wealth Accumulation • Concept of time value of money with compounded interest Notes: • Not all assets are of equal value in creating long-term wealth Depends on how much is used to buy assets Must invest in assets that will increase in value • A person, who spends on things that depreciate in value, will decrease his wealth • Examples: non-wealth building assets are: TVs Furniture, unless those appreciate over time. iPods • Therefore, when more money is spent on Wealth-building Assets, the faster you will achieve a higher net-worth.
Wealth Distribution • Estate Planning • A definite plan for the administration and disposition of one’s property during one’s lifetime and at one’s death