How do you measure success in life?

It’s the 5th day of the Beijing 2008 Olympic Games and both China and United States have claimed they rank  atop of the medals tally able. (Source: http://online.wsj.com/article/SB121856271893833843.html) The reason is due to how the different medals are ranked.

How do you measure success in life? Some people measure success by what they own. Some people measure success by how many friends they have. Mothers often say, “My greatest achievement is successfully raising and educating my children to become good persons.” Some believe success comes in the form of contribution such as influencing and changing other peoples’ lives for the better. Some will say being successful is to achieve spiritual enlightenment. Yet others consider being successful in life is to live a meaningful life and living life to the fullest extent.

The truth is success comes in many forms. And at different stages of life people measure success differently. At the moment, I measure my success base on how much wealth I have. Mainly is because the experience of being poor and deeply in debt is still very fresh in my mind.

One day I hope to grow out of this stage and have a broader view of what constitute success. How about you? How do you measure success?

“The mother misses and yearn to see her daughter who is married to overseas. The son, wanting to see the mother’s wish come true, took a cash advance on his credit card to finance the trip for his mother and himself to visit the daughter.”

This is a TV commercial from a bank promoting its credit cards. After watching this commercial, I will never seek advice on wealth management, money management, investment products and retirement planning. There are 2 issues highlighting the lack of financial savvy of this bank.

The first is, why take a cash advance to pay for the trip? Airlines and almost all merchants now accept credit cards. He could have charged all these expenses to his credit card. By taking a cash advance, he is charged interest immediately besides the processing fee.

The second is, getting oneself into debt by going for a vacation that one could not afford only shows poor financial knowledge and skills. The bank, in recommending a lifestyle of “spend now, pay later”, isn’t putting the financial well-being of its customers as priority. Instead, the bank is putting its own profits as priority and is only concerned with how much it can earn off its customers.

Banks have a social responsibility towards the public by increasing our financial knowledge and fostering responsible money habits. I suppose banks are not doing this because if we become financial savvy, then the banks will have a harder time earning money off us via processing fees, late fees, exorbitant interest charges, management fees, advisory fees among others.

Remember this saying, “What is good for the person selling you the financial products or services may be bad for the client buying it and vice versa.”

I learned something new about my Paypal account today. My Paypal account default currency is USD. And I was able to accept GBP and keep the fund as GBP. I didn’t choose to convert the GBP to USD upon receiving the fund. I chose to keep the fund as GBP. Now I could pay for my items in GBP when shopping from UK retailers. This will save me some currency conversion charges.

I am also able to withdraw the GBP to my bank or credit card. The conversion rates used by these banks are better than the rates Paypal uses to convert the GBP to my local currency.

Paypal supports multi-currency account.

If you look at my Goals, you may wonder “Why is this person putting so much money into CD?”

It is a fact that interest rates from Certificate of Deposit (CD) is less than the inflation rate. And so, we will receive a negative real rate of returns after adjusting for inflation. This simply means that our wealth and buying power is eroded because the interest returns we get from CD is not enough to compensate for the inflation.

However, there are certain times when investing in CD is the best choice.

1. To build your credit.

   If you have no credit or bad credit, then you could use the CD to help you build credit. When you place a CD in a bank, you could also borrow against it. And if you can show the banks you can manage loan, then surely your credit will improve.

2. When you need the money in the near future.

   Assume you will buy a residential property in 6 months. Now you have the down payment money sitting in your savings account. You have 3 choices to manage your down payment within this 6 months.

   1. Do nothing. And your money loses its value each passing day.
   2. Invest the money in risk bearing investments. What if your investment suffers losses? Then you would have less money for down payment of the property. Could you afford to take this risk?
   3. Invest the money in non-risk bearing investments. Earn some income and at the end of 6 months, your money is intact and ready for the down payment.

   As you can see from above, when you need to use the money in the near future and you cannot afford any risks, then the best choice is likely to invest in CD.

3. As a source of stable income.

   Lets take a look at a case of an elderly couple. The breadwinner (the insured) passes away and the spouse (the beneficiary) receives a lump sum insurance payment of $200,000. What is important now for the spouse is to continue receiving a steady stream of monthly income to support his or her living expenses. He or She could place the insurance funds into CD and he or she could then every month withdraw the interests and part of the principal for paying the living expenses.If the spouse invested the money into risk bearing investments like the stock market, and he or she buys the wrong stocks or the stock market crashes, then the livelihood of the spouse will be at risk. He or She might not have enough money to live on until the end.

4. Tax-exempt income.

   In some countries, income from CD (aka Fixed Deposit) is tax-exempted. Assume the interest rate of the CD is 5% and the returns from an investment is 6% and your income tax bracket is 20%. The returns after tax on your investment is 6% x (100% - 20%) = 4.8%. This example shows that when the tax effect is taken into consideration, the rate of returns on CD is higher than you think and could even be higher than some risk bearing investments.

5. Zero transaction costs.

   It costs nothing to place and withdraw the CD at maturity. With other types of investments, transaction and brokerage costs could eat up a sizable portion of your gain.

While I was jogging just now, I realized that my stamina has increased slightly. I started jogging a few months ago and I am pleased with the progress I am making. I had procrastinated on exercising for many years. I have always come up with excuses such as “lack of time” or “I will start when I have more time after resign from my job and start working from home”.

A few months ago, my aunt was admitted to the hospital for high blood pressure. It was then I realized that I had to take my health seriously and start exercising.

The same experience could be applied to investing as well. People give many excuses for not investing their money. How many times have you heard “I don’t have excess money for investment” or “I am waiting for the right time to enter the stock market or buy my dream property”? The fact is people can start investing even with very little money, and if it is THAT easy to time the market then most people would have quit their jobs to go full time into buying and selling stocks.

The best time to invest is now when you are young. This is because younger people can take on more risks. If the investments loses value, they still have time on their side to ride out the setback and see their investment recover their value.

Why do we need to take risks? Because we need to manage our wealth so it does not get eroded by inflation. And when we retire at old age, we will have wealth that would support our retirement years.

If we do not invest at a younger age, then we will face higher risks during our retirement years because our wealth has been eroded by inflation. We might be forced to invest some of the wealth hoping to increase income to sustain the retirement years. But what happens if the market suddenly crashes and your investment loses value? You have no employment income to fall back on and you may not have the luxury of time to ride out this setback. Hence, it is better to take risks at a younger age and so the best time to start investing is now when you are young.