Posts Tagged ‘cash flow’

Budget Planning Using Credit Card

November 13th, 2009

When it comes to credit card and debt, the most common advice one will hear is; pay off debt, cut half the credit card and send it back to the bank. For those who have accumulated mountain of credit card debt, this advice is the most relevant. These people fear of credit card because they let their emotion of overspending run them over. They can’t control spending habit with credit card lying around, and that is why this advice best suit them. However, with a bit of financial intelligence, we can use credit card to our greatest advantage!

  1. Higher leverage for your wallet. You don’t need carry a pile of cash anywhere you go, with this amazing plastic card, you can make payment on the amount a few times the cash you could carry in your wallet. Of course, you should not use it on the amount you can’t clear off on before the deadline. Otherwise you will need to pay interest.
  2. Spending visibility. Average people will say that there is less control on the amount of spending when using credit card, I beg the different. I will say using credit card on every spending you make massively increase your spending visibility! Usually credit card companies will provide an online portal for user to view their statement up to daily basis, while the least credit card companies provide is sending you the paper statement. With this statement updated on daily or monthly basis, it is much easier for us to monitor our own spending pattern.
  3. Convenience Input Data for Budget Planning – You can use credit card statement as historical input for your future budget planning. Best thing is you don’t pay for credit card statements. Bank track it down and send it to you, when you are minding your own business. If you review the credit card statement up to 4 months back, you can observe the pattern or trend in your spending habit. Is it increasing or staying average? If it is increasing, which items causes the jump in spending. Then ask the questions: Is the surge of amount causes by one-time item? Is it avoidable in subsequent month?  List out and discount the one-time and avoidable items, then you can project how much you will spend in each subsequent month.
  4. Credit Card as Cash Flow tool. Credit card provides a lot of flexibility in term of cash flow. Let say if you are a freelancer who get paid irregularly, credit card enable cash upfront for you to smooth out any urgent payments. Be sure you can make it in time for debt settlement before due. However, a little bit of interest can be unavoidable some times. One must know how to balance the cost of money with the urgency of usage. If the urgency far outweighs interest rate then paying the interest charge is still justifiable. For example: What to do if you are not able to pay the rental in two months time? The interest is probably ten dollars if you don’t pay in the first month, while you will probably get kicked out from the rental house if you don’t pay for 1 month.     
  5. Get Rewarded for Mindful Spending. While you spend on things you need, you also earn points on the purchase you pay with credit card. Most of the credit card companies have such system. One example of redeemable items is cash voucher. It is probably not much, but the thing is, this is something extra you get back while you spend. If you pay off credit card debt every month, this reward is like interest the banks have to pay you back. You don’t get those things by spending cash. Of course, don’t spend credit card for the sake of collecting points otherwise you will be out of control.

Read How Not To Be Millionaire on how you will never get rich by misusing credit card.

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Cash Flow or Capital Gain, Which One Is Better For You?

October 14th, 2009

Cash flow is recurrence income, usually every month, from an rental property either residential or commercial real estate. For a business owner, recurrence income is from the business they own. For an investor with huge capital at disposal usually hundreds of thousand to a million, they get income in the form of dividend from stocks they own. In nowaday information age, people earns recurring income by harnessing the power of Internet.

Most of the time when we invest in anything, we invest for capital gain, flipping – buy a pre-constructed property and sell it after completion with certain percentage of appreciation is capital gain. Stock market, buy low and sell high is capital gain. Mutual fund, unit trust, Amanah Saham, etc are all rewarded, ultimately, in capital gain.

So which one is better? cash flow or capital gain.

Ultimately if we want to retire early and retire young, we need cash flow. Why? – Simply because cash flow is automatic, it’s recurring every month without us actively working on it. If you own a few paid up rental properties, it will generate positive income every month for you to support your life and expenses.

However, in order for us to invest into a cash flow positive asset, we need huge capital, well lots of the time. That’s why we go for capital gain in the first place, through stock investment, flipping property, so on and so forth, until we have enough capital to invest in cash flow asset. However, saving enough money or invest in capital gain might be too slow sometimes, capital gain sometime might end up becoming capital loss. As Robert Kiyosaki put it, invest in something and hope that its’ price go up is a gamble. An investment have to make sense when the day you bought it, not 10 years after you bought it. Buying a stock at a fair price and hope the price will go up further is a gamble.

To raise capital in shorter time, this is when leverage comes into the picture - to purchase a property by borrowing money from the bank. It is very common nowaday for people to get a house loan with a 10 percent upfront, leveraged on the rest 90 percent. We can use the same leverage in acquiring cash flow positive asset or flip for capital gain if you know what you are doing. However bear in mind leverage is a double edge sword - if you don’t make a killing, you end up killing yourself. Typical example is owning a rental property that doesn’t make positive cash because the maintenance fee or mortgage interest is too high, in this case you need to fork out money in order to cover the negative cash flow, the cash from your wallet could deplete if negative cash flow recurs. That can’t go on for long, and you can’t afford to purchase another rental property. However a rental property that provide recurring positive cash, be it a small amount every month, you can keep doing it for a long time without eating into your own cash. Again, a deal have to make sense the day you bought the deal, not 5 or 10 years later, if a rental property can’t provide you positive cash, most likely it will be hard to turn around.

As a landlord myself, i know it is easier to say than done. There are a lot of problem in the name of renting property, for example difficulty in recovering rental from bad tenants, equally difficult to keep good tenants to maintain cash flow continuity, overwhelming processing work that consume your personal time, rental price go down because deteriorating surrounding environment which happen mostly to apartment building with bad management. But, no one says this will be easy. With some due diligent it’s not impossible.

In term of wealth building, there is a rule called 10-90 money rule; 10 percents of effort and 90 percents of rewards. It basically means if we are willing to sacrifice 10 percents of our life time in hardwork to build up businesses and cash flow, we would have 90 percents of your life time of financial freedom.

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Posted in Real estate, Robert Kiyosaki, Wealth Building, investment, passive income

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Learn How To Pick Stock Like Warren Buffet

October 14th, 2009

When I did stock investment, I used to pick stock base on the name of the company and whether if i like the company rather than it is a profitable company. Profit From Panic (a book written by Singaporean author) described 8 steps in determining a good stock, i follow that ever since i read the book. I’m comfortable with his analysis techniques because he combines many winning stock picking strategies from some of the greatest investors such as Warren Buffet, Benjamin Graham and Peter Lynch. One of the famous strategies adopted and embraced by Warren Buffet is value investing which was taught to him by his mentor, Ben. Graham.

I extracted most of the stock trading strategies from the book which i think most useful. The information is comprehensive and easy to follow so i think it’s a good to follow that guideline everytime i want to buy stock. Now here is it:

1. Consistant Earning Growth – First criteria of the stock i will be looking at is the company’s earning for 5 continous years (or more if you want to). Of course this will require me to study through the company’s annual report for 5 years (Usually the company’s website will highlight this in financial summary). Well, you don’t need to read everything in annual report considering it is hundred page long. Just some key figures will do, like profit after tax or income from operation. The earnings need to demontrate some consistant growth over these period of time, let say a growth of 10-15% year to year. If a company’s stock demonstrates consistent earning growth of 10-15% every year, then i would it’s a good buy. However we also need to look at other criteria.

Where to get earning figure: Net income/Profit after tax in balance sheet.

2. Sustainable Growth – After determining the company’s consistant earning growth, now i have to consider the sustainability of the growth, after all investing in a company’s share is actually buying into their growth, future prospects and you think the company can do well in the coming years. There are several factors that could interfere a company growth and one of them is competition. In order to overcome this obstacle, the company needs to demontrate either one of these few characteristics such as brand name, large existing market share, economic of scale, etc. For example: Coke is a soft drink brand every one in this world will know, and Genting being the one and only one in casino business in Malaysia.

3. Debt - Profit is only considered as real profit when there is no debt. For example you borrow 100k to start up a business and your revenue is 20k per month. Minus off operation expense, rental, employee and your own salary, you can only pay back 10k every month. You will only be able to break even on the tenth month and started to make profit on the eleventh month onward (This is just an oversimplified scenario, corporate financial is excruciatingly complicated).

But realistically speaking there isn’t much company out there has zero debt, a little leverage is still consider as healthy. There is no sure way to determine how much is too much debt, however as a measure, the figure should show at least something like; the long term debt is no more than three times of the annual net income then the company is still considered as healthy.

In real life, a good company is always in expansion and growth, which is good thing, so most probably there won’t be chance where you will see zero debt. As expansion require borrowing of money, borrowing needs to be paid, and earning to sustain the payment, this constant cycle that can never end. So as long the debt-to-annual net income ratio is not too high, says 3-1 in this case, then it’s only ideal. I personally went through many industry leaders’ company financial statement and their debt-to-income ratio is not as low as described, a lot of them is slightly higher in leveraging. So if that’s the point, it’s very subjective and we need to look further.

Where to get key figures: Non-current liability and annual net income (also call profit after tax) under balance sheet.

4. Return on Equity is another key figure we need to consider when reading a company’s annual report. The calculation looks like this:

ROE(%) = Net Profit After Tax Divided Divided By Shareholders’ Equity

In the result of this calculation we have an idea of roughly how much return is for per share. The book says 15% and above, however, i think the percentage is rather subjective, consider it is very much depended on type of company, or the sector the stock belongs to for example. However 15% is a safe guideline the book can assume.

Where to get ROE: It is included in balance sheet, but a lot of time we need to calculate it.

5. Strong Cash Flow – In difficult times like economic crisis, or natural disaster, cash flow is very important for a company. Consider the company suddenly encounter drop of revenue because of drop in demand, and then income suffers. Excess reverse of cash can be used to fund debts and operation expense before economical rebound or demand recovers. Lacking of cash might result a company to go for desperate measure like issue new shares, retrenchment or even bankruptcy. To measure a company’s cash position, we need key figures; net cash flow from operation, capital expenditure, and revenue . Net the cash flow from operation of the Capital Expenditure we obtain the free cash flow. The percentage margin of free cash flow is to divide free cash flow by total revenue. The bigger the percentage the more cash rich it is.

Where to get the key figures: Net cash flow from operation can be obtained from cash flow statement under operating activities section. Capital expenditure can be obtain from investing activities also under cash flow statement. Revenue can be obtained from Income Statement.

6. Management is Buying Back Shares – The most likely reason for a company’s director or CEO to buy their own share is because they think the market has undervalued the stock and they are picking it up as bargain and they want to make money when the share price goes up.

In contrast, if you know that the management is aggressively selling shares, most probably the stock price is overvalued and a correction is in pending (Correction is term use to refer to adjustment of stock price by the market to it’s so called fair value). Another reason could be that the company is in some kind of trouble and only the management knows that the stock price is in for a big dip!

In the next part i will write about stock intrinsic value calculation. That is the part i spend most of my time in picking a value stock.

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Posted in Millionaire mind, Stock market, Wealth Building, investment

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