How an IT Manager feels about Investment

Some time ago, I had a chance to meet an IT manager of a multinational company. I had a short discussion with him on Investment. He is late 30 and he just started to learn to invest in stock market. He told me that it is very important to learn investment and he is now learning investment so that his investment could prepare him for retirement. When I told him that I am from IT background and I just changed my career to Investment line and he said that he should have followed my footstep 10 years ago. He told me also that staying in IT line could only prepare him as a salaried worker, while working in Investment line, he could start his own business by helping other people to invest - Fund management.

Actually what he said is exactly what I am preparing for. I have taken a big step by changing my field from IT to Investment. I have let go a lot of things:- my working experience, my achievements in IT and even my qualifications in IT. My parents and sibling were against my decision at first. But when they saw that I am really serious about this and understand my reasons of changing field, then only they slowly accepted my decision. Most of my friends were surprised at first when learning about my decision. I am not sure how they think about my decision. May be they think that I am brave enough to do so or may be some of them think that I am stupid to let go so many things. Anyway, I am the only who will take control of my own life, so, I will not let other people's thoughts affect my decision. What I am sure is that they will see my achievements in investment after a few years.

What I need to do now is focus on building my foundation in Investment. Learn as much as I can in as short time as possible, push myself to complete 2 papers of CFA in 3 years time and another paper in another 2 years. Hopefully about 5-10 years down the road, after I complete me CFA, I could become a fund manager.

Update on 5 April 2008:- I have involved in Investment industry for more than 6 months. I have seen people with CFA but they are not as successful as I thought before. I am now a full time Equity Trading Analyst and I have seen people without CFA that are very successful as they really have a wide knowledge about the market and they earn a lot of money from the stock market. This made think that CFA might not be a necessity to be successful in this line. I am still considering on taking CFA. I might take it just to gain more knowledge.

Financial Quotient (FQ)

I guess every one knows what is Intelligence Quotient (IQ) and may be some of you know the meaning of Emotional Quotient (EQ). But does anyone know what is Financial Quotient (FQ)?

Basically, Intelligence Quotient (IQ) is to measure the intellectual of a person in solving problems especially in Mathematics related problems. It was first used about 100 years ago by Alfred Binet to identify students who needed special help in coping with the school curriculum. Since IQ first appeared, it has been evolved to many forms. There are many IQ tests that you can find from The Internet and some of them are just for entertainment purpose. I found an interesting IQ test designed by Einstein, you might want to try it out (Einstein IQ Test).

Next, Emotional Quotient (EQ) or Emotional Intelligence (EI) was first used in 1985 but it was only popularized after Daniel Goleman published his best seller book "Emotional Intelligence: Why It Can Matter More Than IQ" in 1996.

Goleman's model outlines four main EI constructs:
1. Self-awareness - the ability to read one's emotions and recognize their impact while using gut feelings to guide decisions.
2. Self-management - involves controlling one's emotions and impulses and adapting to changing circumstances.
3. Social awareness - the ability to sense, understand, and react to other's emotions while comprehending social networks.
4. Relationship management - the ability to inspire, influence, and develop others while managing conflict.

There are debates that EQ is more important than IQ which I am agree with. I personally know a guy with very high IQ ( he scored CGPA of 3.99 in University) but his EQ is very low. He can easily become angry over small things and can easily get insulted when people make joke on him.

Since IQ and EQ are not the main subjects in my post, I leave them for you to explore on your own.

Financial Quotient (FQ)
It is a new phrase that I could not even find its meaning from Wikipedia. Financial Quotient is about the intelligence on managing your money, income, expenses, investment and just anything else that involves money (eg: Mortgage payment, Credit card interest, housing loan, study loan, income tax, insurance and more).

Some common questions that may come across your mind daily.
1. Should I rent a house or buy a house and get a loan?
2. Should I buy the $1 million house or the $500k house?
3. How much housing loan should I take and how much should I pay every month?
4. Should I spend using credit card? Should I pay in full for credit card debt before month end or pay it slowly?
5. Should I pay the study loan at once after I graduated? or should I pay it slowly every month.
6. Show I change to a better pay job but less free time spent for family? or stay in a job that has less pay but have more free time for family and have time to plan for my own business?
7. Insurance Policy A or B is better to prepare for retirement?
8. How much income tax should I pay?

My answer for question 5: I have 2 study loans, one has been converted to scholarship and the other I am paying very little amount monthly as it has very low interest (3% pa),

My answer for question 6: I prefer a low pay job so that I have more free time to think of any opportunity for me to start up my own business and use my free time to learn more about investment.

My answer for question 7: At the moment, I have only Personal Accident Insurance Policy. I am still considering to buy another insurance (Investment-linked Life Insurance Policy).

I do not have answer for the other 5 questions. The reason is I am just graduated from university about a year ago, I am not buying any house at the moment, I do not have credit card yet and my income is not enough for me to declare income tax. But I know that I will have to answer all the above questions not far in the future, so I am now preparing myself for them and this is also the purpose I create this blog and share my journey in improving my Financial Quotient and achieving Financial Freedom.

I found one self Assessment about ones Financial Quotient (FQ), it is call Wheel of Financial Freedom. It is using 10 criteria (Debt, Retire, Reserves, Save, Budget, Taxes, Financial Plan, Career, Worth, Will) to assess how financially free is a person. I personally think that the criteria are good but the scoring system is not clearly defined. I tried to e-mail the author but my e-mail bound back due to "Mailbox quote exceeded" and I think the web site has not been updated for a while (may be since year 2003).

I also found another Financial Quotient test over here. If you want to, after you have done the test, just send in comment and let me know your score.

What is Financial Freedom?

What is Financial Freedom?
To me, Financial Freedom is when you earn enough that you are able to live a comfortable life. Everyone has different definitions of "Comfortable Life". Some people want to own luxurious car and house. Some people want to have more than $ 1 million of cash and asset. Some people would like to earn enough so that they can do something else that they like which need some fundings (eg: George Soros). His initial intention to establish his own private investment company was to earn enough money to support himself as an author and philosopher (please see under Move to United States in Wikipedia). Some people simply want to become Financial Freedom because they think that this is the only way of living.

As per Wikipedia definition of Financial Freedom, Financial Freedom describes a well-planned lifestyle where one no longer is required to work for income to cover their expenses. It also states some popular routes to achieve Financial Freedom are Real Estate Investment, Internet Marketing, Trading and Owning a Business System. Out of these 4 routes, some of them might need a large amount of initial capital to kick start. One might has higher risk compare to the other.

My opinion on the popular routes to achieve Financial Freedom:-

1. Real Estate Investment
Basically, it is about buying properties not for own use but lease or rent out the properties for a good rental. People who invest properties normally do not have enough money to actually buy them. They have to pay the down payment for the property and get a loan from bank or lending institution to pay for the rest. Then in future, they slowly pay the loan (including the interest) back to bank.

Example 1 (no down payment) :
A house is selling at $200k
Down payment : 0%, $0k
Loan: 100%, $200k
Interest rate: 5.75%

Monthly payment: $1167.15 (for 30 years)

Example 2 (10% down payment) :
A house is selling at $ 200k
Down payment : 10%, $20k
Loan: 90%, $180k
Interest rate: 5.75%

Monthly payment: $1050.43 (for 30 years)

Normally people, who invest in properties, have the thought that they are able to rent out their properties. The owner of the house in example 1 and 2 might want to rent out the house for $1400 per month, so that he/she are able to earn some money from the properties and after 30 years he/she can own the house while other people are helping him/her to pay for it.

However, it may be too optimistic to think like this as many things need to be considered before starting to invest in real estate (eg: location, price of the house and the likelihood to appreciate in future, interest rate, demand vs supply of the properties, terms and conditions of loan and more). Invest in real estate without a proper research will pay a high price as real estate is not liquid. You can not convert the real estate to cash overnight. Credit crunch is now happening in United States because financial institutions lend money to people who have bad credit. They invest the money in real estate and they are not able to pay the loan back. Thus, the loans turns to bad debt and most financial institutions are getting kill because of this. I will discuss this topic further in another post.

2. Internet Marketing
As contrast with real estate investment, internet marketing needs lower capital to kick start. With the easy access to The Internet nowadays, many new business models by using The Internet are mushrooming. Internet Marketing can be categorized into large-scale(run by a big organization) and small-scale (run by anyone from maybe 8 years old to 80 years old). eBay is one of the very successful large-scale Internet marketing websites. Although eBay is a large-scale Internet Marketing website now, it was all started from small-scale by Pierre Omidyar. The success of eBay makes him the 76th richest person in the world as of 2007. On the other hand, setting up a Small-scale Internet Marketing might need platform from large-scale Internet marketing website. For example, a trader in eBay. He buys/sells things on eBay.

Example of large-scale Internet Marketing Websites:
1. Amazon.com- Marketing it products primarily books
2. Google.com (Google Adwords)- Offering to advertise for some companies
3. eBay - Offering a platform for people to trade among themselves

Examples of small-scale Internet Marketing:
1. Use eBay to buy low and sell high
2. Put on advertisement on your personal website/blog and earn money from each clicks on the advertisement (eg: Google Adsense). Please click on "Generate revenue from your site with Google Adsense" on the top right if you would like to register for Google Adsense"
3. Create a website/forum for a particular interest group (eg: anime - Naruto)

There are so many different ways to do Internet Marketing as The Internet offers unlimited of resources and it connects people from every part of the world. You just need to turn your brain on to think of a unique business model and start from there.

I found one interesting article on The Ten Keys to Success on eBay, this information might be useful for someone who wants to start learning how to do Internet Marketing on eBay.

Please be aware that there are some hoax Internet marketing websites especially the business model is Multi-level Marketing like or Pyramid Scheme like. Please do your own research on the web sites before joining them.

3. Trading
I believe that the term "Trading" here includes investing. If a person who has a high salary job (eg: $10k per month), after minus all the expenses ($7k), where should him put his excessive money ($3k)? Saving account ? fixed deposit account? Invest the money in Bonds/Stocks? People with low Financial Quotient(FQ) might put the money into saving account or fixed deposit account as he thinks that it is safer to do so. But the truth is putting the money into saving/fixed deposit has some risks(eg: inflation risk). If the saving account has interest rate of 1% per annum, the inflation on that year is 3.5%, he actually loses 2.5% of time value of money.

If you do not know what is inflation or what is time value of money, it is not too late to start learning from now. It is very important for everyone to understand these terms because we need to deal with money every day.

To achieve Financial Freedom, you will need to learn to make your money gains the compounding interest rather than putting money into saving account (eg: interest rate of 1 %) or fixed deposit (eg: interest rate of 3.5 %). To make your money gains the compounding, there are many different ways. I shall discuss more in another post.

4. Owning a Business System
Other than the Internet Marketing that has been discussed, you might want to start up your own business to achieve Financial Freedom. But here, you need to invest a large capital and it takes some time before you can see a positive cash flow. A well plan of budgeting is very important to determine a success or a failure of your business.

Examples:
1. Open a restaurant
2. Setup a consulting firm
3. Open a business to sell products

In my opinion, out of the four popular routes to achieve Financial Freedom, there are 2 routes which I think anyone can easily start off - Internet Marketing and Trading/Investing.

These 2 routes require very little capital to kick start but one needs to put some efforts and self disciplined in learning them before he can achieve Financial Freedom.