By AK (guest contributor)
How on earth can an average worker amass $500,000 in capital through work and frugality? The key is to stop being “average” and to make an effort to change for the better.
For example, a full time private tutor I know managed to save $50,000 per annum! I find it incredibly inspirational. He probably took on more students and worked harder than other tutors. All of us could make incremental changes to our lives to be more productive.
The first step towards passive income generation
What is the first step towards passive income generation? Find a job that pays your worth or more. Do not shortchange yourself. If you are worth more than $2,000 a month, find people who are willing to pay you more. If you are only worth $2,000 a month, find ways of increasing your value.
Personal story: I had a fellow soldier for a student when I was in the Army. I gave him free English classes because he was not from a well-to-do family and I was free in the evenings anyway. He took the ‘O’ Levels English paper twice before and could not make the grade. But he did not give up.
After a few months of lessons, I advised the student that there was another route that he could take. He should spend some time thinking about what he was interested in and good at. It does not necessarily have to require English.
When I met him again a few years ago, he told me he was in the IT industry laying cables and networking workstations. He was doing very well with a pay of more than $6,000 a month! This is a success story, which I still share with my students today. Find your strengths and build on them.
Unless we are physically or mentally disadvantaged, we can always find ways of getting richer. But, the willpower must exist and it must be strong. Where there is a will, there is a way.
When we make money, we must also know how to save money. Recognize the difference between our needs and wants. Fulfill the needs, and delay gratification of the wants. Save as much as we can. Once we have an amount of money that could cover a year or two worth of routine expenses, we can consider investing the rest.
The power of compounding
Must the $500,000 capital come from hard work and being frugal? If you invest in income-generating assets, the passive income generated could be re-invested or it could be spent. If you re-invest, our targets (no matter the amount) could be achieved sooner. This is the power of compounding.
To illustrate the power of compounding, let me use an institution in Singapore that we are all familiar with: the CPF. When I first started working, I was thinking of how probable it would be to meet the CPF minimum sum by the time I retire. Most of our contribution goes into the Ordinary Account (OA), while a much smaller sum goes into the Special Account (SA). At the face of it, 2.5 percent interest for the OA and four percent for the SA makes out to be only a 1.5 percent difference per annum. But think further: SA actually pays 60 percent more in interest compared to the OA! Moreover, if we compound four percent per annum, it becomes a very powerful force!
So, I voluntarily transferred my OA money into my SA for the first few years of my working life. Then, I let time help me meet the minimum sum required through compounding four percent interest per annum. Every 10 years, the SA money would grow 50 percent even if the monthly contributions should stop.
Do not restrict yourself to the stock market. Keep our options open and consider all possibilities.
By guest contributor AK, an experienced investor who blogs at A Singaporean Stock Market Investor. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.