Saturday, November 28, 2009

An individual as a private company

I've been toying around with the idea that you can treat an individual financials as though it belongs to a company. Long time ago, as I was learning how to read financial statements - those pesky cash flow statements, income and balance sheets - I didn't realise that reading those are similar to an individual's statements. Let me illustrate:

Suppose I earn 100k in a year, but spent 70k, thus my savings would be 30k. Isn't this similar to a company with revenue of 100 mil in a year, 70 mil spent on costs, leaving 30 mil profits? Here's the interesting things:

1. Just like one can calculate a company's profit margin (profit/revenue), one can also do the same for a personal financial statements. Savings ratio (savings/total income) is very similar to a company profit margin and the analysis of it can equally be applied.

My savings ratio up to date is 60%. I didn't use total income, but used the basterdised version of it - total cash out/total cash in on a monthly basis (due to the nature of my job, there's a big difference between my income and the cash I get per month - that's another story for another day). It's lesser than last year, which goes around the insanely high amount of 80% on average. But hey, I'm happier this year and I definitely saved more in absolute amount. No regrets on spending money on people around me :)

2. A company that holds too much cash is not good because cash itself is not going to generate a good returns for the company. If you hold too much cash, you'll start to wonder if the cash is really there in the first place (think ass-shares). Similarly, for an individual to hold too much cash in the form of fixed deposits or savings accounts, it's going to reduce one's ROE (not the thingy that you eat on sushi - it's returns on equities).

For me, my ROE this year is definitely going to be low because I'm holding more cash than necessary. Why ah? "Me private limited" is going to have a amicable takeover with "her private limited", where the former is going to assume any profits and liabilities owned and owed by the latter. The impending fees involved would thus be reason enough to hold some cash to tide it over. Hopefully it's a good investment for me private limited :)

3. A company with weak balance sheet can withstand the storms of the business world. Likewise, a person with weak balance sheet cannot weather bad patches as well as someone with stronger balance sheet. What's weak balance sheet? High debts, low in cash high in 'assets' like cars are two things that come to my mind.

Here, we have an interesting situation. Too little cash is no good. Too much cash is not good too. Different companies have to adjust this cash ratio to suit their purpose, I suppose an individual have to do the same too. Just bear in mind the risk of holding too much cash.

Think I'll stop here. The good thing about learning to analyse companies is that you can analyse yourself as a company too :)

Tuesday, November 17, 2009

My 50k challenge

I've recently completed my 50k challenge. What's that? In the beginning of the year, I wanted to save money to complete a few short term goals that will commence in 1-2 years time. It's stated in this post here. Well, a few things had changed since then, but the challenge of saving 50k by 31st Dec 2009 remained.

I'm very proud to say that I've done it already, and it doesn't take 12 months to complete that. It took only 10 months. This is not a post to hao lian how much I can save, but rather, I wanted to share the idea that if you really set out a goal that you wanted to, planned to get it, you'll reach there.

I've never saved so much in my life in a span of one year before, so setting a goal of 50k is really out of my reach when I challenged myself at the start of the year to do so. Heck, I might not even earn that amount, much less save it. This is so crazy. These are the thoughts that ran through my mind throughout the months. But the driving force that pushes me to do it is that I've said it to everyone and I'm therefore accountable for what I've said. I must do it and well heck, I do not know how to get there, I'll try my best to reach there.

I set out to do a plan of how much I need to save to reach my goal. A simple calculation will show that I need to save $4.2k to hit 50k in 12 months. It's impossible for me to do this consistently for 12 months because I do not have a stable income every month. My peak season is towards the 3Q of the year and the 1st and 4th Q are usually much more free (and therefore lower income). Therefore, this is how it should be done:

Month---------Amt to be saved

Total amt=====50,000

If you're staring at it and wondering how can I ever do this when I don't even earn that much - well, I had the same thought as you. I remember telling my gf that this is so f**king insane BUT I'm still going to do it nevertheless. Armed with this suicide bomber mentality, I toiled month after month. I'm going to die trying it if I have to.

When you announce to the universe that you wanted this so badly, things will bend over backwards to make it happen for you. I cramped some much work in a single day that I broke all records in my 7-8 years in my career. I had the longest amount of work hours in a day (10 hrs of pure work, meaning 13 hours out of home), had the earliest lesson ever (7am), had the latest lesson ever (1130pm). I'm not out to set records, but if I really wanted something, I really have to do it. Whatever it takes, for as long as it takes.

All this takes a toil of course. I was very stressed especially over the Aug to Sept period. When I'm out pak talling with her on weekends, I'll sometimes whip out my black organiser and start to plan out the work for the coming week. I remembered confiding to her how am I ever going to save that much. I must have been quite a pitiful sight, because she gave me 1k to tide me over my darkest hours. Love her.

And so, when I mean that I've done my work for the year and I've earned enough, I freaking mean it. Nobody can say that I didn't do my best. This 50k challenge is especially sweet because there's a lot of people out there who care for me. When I feel like shit, they take me out for a drink and listen to my ranting. Hey, brothers and sisters who are followers of my blog, a big salute to all of you. I'm honored to have known you.