Financial Toxic: Whole Life Insurance Plans

This is the second installment on my financial toxic series. In this article I shall explore a common insurance product known as whole life insurance plan. It is also known as whole of life in some countries. Basically, it is meant to last as long as the life of the underlying person insured under it. I am sure many people have such plans in their portfolios and it has generated a lot of commission income for those who sold it. However, the product itself is toxic and I am going to prove it.

Before I move on to the proofs, let me repeat my disclaimer. This article is an expression of my personal opinion. I am neither a licensed financial adviser nor a financial expert. I am only an engineer. Here is the difference: Financial advisers and financial experts are trained to obey everything written in their text books without question while engineers are trained to think and analyze logically. In addition, engineers do not receive commissions for selling financial toxic.

Now that I have presented my disclaimer, I shall proceed with my points. Let me start by presenting the sales pitch for this product.

Sales pitch.
This is a savings plan. You save some money regularly in this plan. If you die, the insurance company will give a huge sum of money to your family. However, if you live to old age and do not need insurance protection anymore, you can take out the money you have saved. You will get back all the money you have put it plus interest which will definitely be more than what the banks can give. So, you have everything to gain and nothing to lose in this plan.

The hidden truth.
As you can see, the above is the common sales pitch for this product. Is it true? The answer is, it is only partial truth. There are other facts that are intentionally hidden in order not to lose the sale. Let me present the hidden truths in this product.

I shall address the insurance portion in the later part of this article. Here I will show you the flaws in the “savings plan” pitch. It is true that you keep the whole life plan for a long time like 20 years before surrendering it, you can get back more than you have put it only if you do not factor in the inflation rate for the whole of 20 years. If you factor in the rate of inflation, your real gain in this “savings plan” will be very small if not negative. So, it is a bad savings plan.

The sales pitch also compares this product with bank deposit. I find this comparison to be totally idiotic. Maybe, those sales folks really think the public as idiots to come up with such comparison. Let me show you why this comparison is flawed. Our money in the banks is liquid. We can withdraw them anytime we want. Even if you have put your money in a fixed deposit, you can still take the out at some cost like forfeiting the interest or even some penalty fees. You can never do that in a whole life plan.

If you have just bought this plan, there is no money in your account even after you have paid a few installments. Why? Most of the money you paid goes to the commission income of your agent, your agent’s manager and the agent’s manager’s manager. (In Singapore, the government allows up 3 levels for commissions.) The rest goes to the insurance company to cover the cost of administration and risk. So, you have nothing. Does this sound like day light robbery to you? This tells us that it is possible to rob legally. All you need is to sell this plan.

After some time, when the agent stop taking your money, you will have some cash value in your account. However you can never take them out without giving up this plan. The insurance company in its mercy will lend you the money you want based on the cash value in your whole life plan with interest. In other words, the insurance company will lend you your own money and charge you interest for it.

Next, let us look at the opportunity cost of this plan. If you have put in the same amount of money in an index fund that tracks index like S&P500 for 20 years, you will surely have much higher profits with close to zero probability of loss.

Are you convinced by now that the insurance companies have a very low opinion of your intelligence?

Therefore, the slogan that says the whole live plan is a savings plan is nothing more than an insult to our intelligence.

Next I am going to present what the whole life plan truly is.

Components of the whole life insurance plan.
The whole life insurance plan is made up with the following components:
1. High cost insurance.
2. Low yield investment.
3. High commission.

This first and second component makes it toxic but the third makes it the bestseller for insurance companies. Welcome to the world of financial services. You can sell any toxic waste as long as you are willing to be generous with the commissions. There will be a lot of people are willing to suspend their moral integrity to help you to sell your toxic. Of course the buyers of this toxic will the ones who will suffer the consequences but who cares. The commissions are in the accounts of the agents when it happens.

I am sure many people, especially those who make money from selling this plan will challenge me on the first two points. I shall explain in detail on them.

High cost insurance.
In order to help you to understand this part, I shall explain the basic operation of an insurance company. This may sound surprising to you but the truth is, insurance companies operate on the same principle as casinos and gaming companies. It is based on the law of probability.

If you go into a casino and place your chips in one of the squares on the table, you may win or lose but the casino always wins at the end of the day. In every hour, the casino collects a lot of money from those who lost their bets and gives away a lot of money to those who won. However, at the end of each day, it can be very sure that the amount of money it collects will be more than the money it gives away. Why? The rules of the games are designed this way. The house always has the edge.

Insurance companies work the same way. Every month, they collect a lot of money in insurance premiums. At the same time, they also give away a lot of money as insurance pay-outs, commissions and other costs. However, they can be very sure that in every year, the amount they receive is more than the amount they give out. They set their rules like the premium rates to ensure this.

This is why insurance companies operate the same way as casinos. The difference is, casinos do not insult our intelligence by telling us that they have savings plan for us, they care for our financial future or they care for our families.

How does this relate to my allegation of high cost insurance? Suppose that you are young and healthy. You want to buy a one year term insurance. How much do you think the insurance company will charge you in relation to the payout you expect? The answer is it will try to charge you a low as it can. Why? There is close to 100% certainty that you will stay alive for the coming one year period. The company can collect your premium and expect not to pay you anything. You are an ideal client. The company will try to charge as low as possible in order not to lose your business to its rivals.

This is like lottery. You pay a small amount of money for a small chance of winning a lot of money. In the above insurance example, you pay a small of money for your family to have a chance of receiving a lot of money if you die within the one year period. However, there is a huge chance that you will not die.

How does this affect the whole life insurance plan? In this plan, as long as you hold on to it, you can be certain that you will be eligible to receive the payout. In other words, you can be sure of hitting the jackpot. You only don’t know when. Let us use some common sense here. Do you think in the insurance company will lose money selling your this plan? Do you think insurance companies will design products that will make their customers make profit at their expense? I believe the answer is quite clear. The premiums must have been set in such a way that they will be more than the payout you are expected to receive after taking into account their time value.

Buying a whole life insurance plan for protection is like buying all the lottery tickets for one draw. If you buy up all the lottery tickets in one draw, I can give you 2 guarantees. The first guarantee is you will qualify to win all the prizes offered. The second is, the total amount of money you spent in buying all these tickets will be more than the total amount of prizes you receive. So, you will have a net loss. In other words, a certainty of loss.

The only way you can “win” in a whole life insurance plan is when you die early. If you happen to live to ripe old age, your situation is like buying all the lottery tickets. So, do you still think this product is a good deal? Welcome to the high cost insurance.

Low yield investment.
Now, I shall explain why the investment returns for the whole life are always so low even when the stock market is booming. If you have such plans, you will notice that the cash you have inside it will always go up and never comes down no matter how bad the stock market is. This is an example on how the system works.

Suppose the market is booming and the insurance company makes 20% from its investment return in a year. It will not give you the full 20%. It will credit only 3% into your account leaving the balance of 17% in reserve. In a bad year where the investment suffers a loss of 5%, it will take out the reserves, make up the loss and still give you an annual return of 3%. So, you will have the impression of a consistent gain but do not be fooled. It comes from your own money. As I have mentioned earlier, if you have placed the same amount of money in an index tracking fund for the same period of time like 20 years, you can get in excess of more than 10% annualized returns safely. This is certainly more than the mere 3% annual returns from the whole life plan.

(The 3% I used is meant to the overall investment returns including the generous commissions paid to the agents. Without the commissions, the investment return in your insurance plan will be much higher.)

This explains why the investment portion in the whole life insurance plan is consistently low.

Conclusion
I hope I have explained sufficiently on why the above product is toxic. The money spent on this product can be allocated somewhere for better returns. Please note that I have never said insurance is bad. All I said is some insurance products are simply toxic and should be avoided. Otherwise you will only be making others rich at your own expense.

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Financial Toxic: Structured Products

I am starting a series in financial toxic. In this article, I shall focus on the analysis of structured products sold by financial institutions. Before I move on, I would like to state my disclaimer. The entire article is written based on my personal opinion. I am not a licensed financial adviser nor am I a financial expert. I am only an engineer. Financial advisers and experts are trained to obey everything written in the financial textbooks while engineers are trained to think and analyze logically. This explains why engineers have different views from financial advisers and experts.

Let us begin by some basic introduction on the subject under discussion. What are structured products? To put it simply, they are things that you pay a certain amount of money for. When certain conditions in the contract happens you will receive a certain amount of profits but when another set of conditions happen, you will suffer loss. This is supposed to be an “investment”. How do they work? I don’t think any one other than their creators know. This means not even the sales people (also known as relationship managers) know anything about them other than their commission and sales quota. They are extremely complex.

This is another proof on how bad it is when non-engineers are in charge of the financial sector. Why do you think they create such complicated products? Are complications necessary for our investment needs? I don’t think so. It is clear that such complications are only meant to mislead and deceive.

Engineers do encounter complex problems in our work. However, our role is to simply them. Let me share some of my experience in this regard. Once I was working in the construction of a recreation club at a hill slope. The whole plan is very complex. Due to many changes in the design, the drawings do not match anymore. The architectural and structural drawings were no longer showing the same thing. Nobody knew what to do.

When I first got in, my role was to set things in order. I knew that there was no use writing to the consultants to ask them what to do. I will only get some general answers, which will require me to ask even more questions. The only solution I could see was for me to take out the relevant drawings, take out my stationary and draw out the details that matches the engineer’s and architect’s requirements. Then I faxed my drawings to the consultants to ask for approval. They only have to answer “yes” or “no” and I always get “yes” to all my drawings. After I got the approval, I made photocopies of my drawings and pass them to the foremen to built accordingly. Most of the development was built based on the diagrams I drew. Basically, I had simplified a complex development into simple diagrams that individual workers can build.

This is what engineering is all about. The existence of the structured products shows us that their producers are doing the opposite from the principle of engineering. While we simplify complex stuff, they complicate simple stuff. The question here is why do they do that?

All products are supposed to meet the demand for specific needs. For example, our need to protect our feet creates the demand for shoes. Our need to protect our heads creates the demand for hats and helmets. So, what needs do the structured products fill? The answer is none. The structured products do not fill any need and there is absolutely no demand for them. However, they still got sold.

How did they do it? The answer is in the generous commissions and high pressure selling in a morally challenged environment. Let me explain in the Singapore context. In Singapore, we have a lot of senior citizens who have accumulated a lot of savings in the bank due to their thrifty lifestyles. They do not have much education and do not know much English. So, the only investment they know is fixed deposits.

When these people go to the banks to renew their deposits, the banks’ tellers referred them to the relationship managers who then introduced them to invest in the structured products sold by the banks. These relationship managers managed to convince their prospective clients (or victims) that the investment is as safe as bank deposits but produce a much higher interest. They made a lot of sales. When Lehman Brothers collapsed, the rest is history. Many senior citizens found themselves losing their life savings in their “safe” investments.

Even professionals who can read in English bought those products. Obviously they trusted those relationship managers more than they trusted in their ability to read in English. Somehow, these professionals must have thought that the title “manager” makes a person honest. Now they had to pay for their mistakes with their life savings.

This may be an isolated event but it tells us very clearly that the structural products are designed to make us part with our money. This is their only purpose. Their complexity is meant as a cover. Therefore the only conclusion here is never buy any of them. Shun them like toxic waste.

Of course, I will not be surprise if there are investment experts like financial advisers and relationship managers who disagree with me. After all, who am I to prevent them from earning their commissions?

Sources Of Passive Income

In my earlier article, I have explained that our retirement or financial security should be based on the passive income we have and not on our net asset. The reason is simple. If you rely on a huge pile of money to live on, you may finish it one day. Even if you don’t, you might do something foolish in your old age and cause the money to be gone. In contrast, if you have a regular flow of money, you can never run out of money. Even if you do some foolish things and lost all your money, you can always wait for the inflow of income next month. Therefore, passive income is the only way to achieve financial freedom.

In this article, I am going to give you a brief run down on the various sources of passive income. Please note that this article is not exhaustive in itself. It is only a brief introduction. You have to do in-depth study on the topic you are interested in. In addition, this is article is only an expression of my personal opinion. I am an engineer, not a financial expert. The difference between engineers and financial experts is, financial experts are trained to obey everything written in their textbooks while engineers are trained to think and analyze.

Let us begin.

Rental Properties
I have used this as examples in my earlier article because it is the most obvious form of passive income. You buy a property and rent it out. Every month you receive rents. Everyone can understand this. Not only that, you don’t have to fork out money to pay for the whole property. Banks and financial companies are willing to provide loans with favorable interest to help you to buy your property. (This is my only appreciation for banks. I like to take their money and not give them money.)

So, you only need to come out with a fraction of the property price and borrow the rest. As long as the rents you receive are more than the total of loan installments and other expenses, you have a net positive cash-flow. Your tenants pay for your mortgage installments and give you some income. Don’t you think this sound like a business from heaven?

There are basically 3 benefits from this option:
1. Positive cash flow which can serve as passive income.
2. Amortization because your equity in the property increase each time you pay off the mortgage installment from the rents you receive.
3. Capital appreciation of the property.

The main obstacle is in finding the right property, buying it and renting it out. The hard work is in the beginning. After that, you only have to wait for money to flow in.

How to start? You have to do your homework and read up on the subject. I am attempting to start my real estate empire but I currently cautious of the property prices in Singapore. Property prices here have been rising despite the absence of any clear economic recovery. I don’t like to get in now. My strategy is to wait for another downturn in property prices before I make my move. I am also looking at properties in Malaysia. All I need now is a reliable agent in Malaysia. Any recommendations?

Dividend Shares
This is also simple to understand. Buy shares on companies that have a good track record in giving out consistent dividends. Companies that can afford regular dividends must be very stable and have secured profit base. They should be quite safe. However, the problem is the shares of such companies will also be in high demand. Their share prices must be very high. So, the dividend yield, (derived by dividing the dividend per share with share price) will be very low, thus making such shares unattractive.

The only time, you can get them at attractive yield is during a bear market. At the time where the whole world is rushing to sell, we can find good bargains like companies that pay regular dividends. The main problem here is companies only pay dividends once a year. Dividends are more like bonuses than salary.

Is there any way to get monthly income from shares? The answer is yes. That is the next category.

Selling covered call options.
This only applies to optionable shares. I am not going to provide a comprehensive explanation on options here. I suggest you find out yourself if you are interested.

Here is the trick. Sell one call option on every share you own at a higher strike price. You will receive the money from your sales immediately. Your broker will lock up the shares that you sold options on. The shares are still legally yours but you are not allowed to sell them as long as the options you sold are still around. Those shares will only be released on either one of these conditions:
1. The sold options expired worthless.
2. You buy back the options you sold.

What will happen then? First, as explained you will receive a certain amount of money for selling the options. This money is yours to keep. Then it depends whether the underlying share prices exceed the strike price of the options you sold.

If the share prices remain below the strike price within one month until the expiry of the options, the options will expire worthless. The broker will release the shares back to you and you can repeat the process of selling options on the following month. The point to note here is that if the company pays dividend, you can still receive it even if the options you sold are not expired yet.

The question here is how much can you get by selling covered call options. Based on my study in US Stocks, it is possible to sell one month call options at more than 3% of the underlying share price. If the shares are worth $10, you can sell options at $0.30 for every share you own. If you repeat the process every month without compounding, you will receive a total of $3.60 a year from the $10 share you own. This works out to the annual yield of 36%. You would have beaten most of the fund managers.

However, the above scenario only works if the share prices stay below the strike price at the expiry of the options. What happens if the underlying share prices shoot above the strike price at the expiry of the option? Your broker will force sell your shares at the strike price.

Here is a numerical example.

1. You have shares worth $10.
2. You sell the call options at strike price of $11 for $0.30.
3. You get to keep the $0.30.
4. Your shares price move above $11 at option expiry.
5. Your broker will take away your shares and pay you $11 per share.

In short, you still get to keep the money from the sales of options and additional profit from the force-sell of your shares. However, you will not be able to repeat the process of selling covered call options because you no longer own the shares to cover.

What is next? You have a lot of cash in your broker account but no more shares. Do you intend to buy shares to sell options on or sell cash covered puts? You need a Plan B on what to do when share prices go above the option strike price. Only then, will you have a complete option selling plan.

This method is not completely passive. You still have to do some work but the work is only once a month. After you sold your options, you only have to wait for them to expire in one month. Then, you work again either on Plan A or Plan B. All you need is a computer, internet connection, broker account and some capital. You can do this anywhere in the world as long as there is internet connection.

Please note that this is not options trading. Trading involves buying and selling. This method is only about selling only.

Automated Trading
The advancement of internet allows the trading on almost everything by everyone. Trading basically involves identifying entry points, make the entry with direction and exit with either profit or loss. There are many books and seminars out there teaching people how to trade. The trading method you can get from the are all mechanical systems. All you have to do is to follow the rules and odds are supposed to be in your favor.

This is not exactly passive unless you can get the computer to trade for you based on specific rules. Such facilities already exist. In fact this is something I am doing right now. I have a forex trading account that allows me to choose the automated trading system I want and I specify the risk parameters. The software will do the rest.

Let me tell you why this is the best business ever. Most businesses require commitment. You can either commit a lot of money or a lot of time. If you have a lot of money, you can put in a lot of money. If you do not have a lot of money, you will need to commit a lot of time and hard work.

Automated trading is the exception here. It requires relatively lesser money to start with and it does not require a lot of time to manage it. The money I invested into this account cannot be used to start a restaurant. I do not wake up in the middle of the night to trade. The computer program does it for me.

So, I suggest you consider this option seriously.

Network marketing
This is the type of business that requires you to commit a lot of time. Network marketing sounds good in theory. Here is how it works. You recruit 10 people. Each of the 10 people recruits 10 other people. The process keeps repeating until the entire city becomes your network.

The problem is it does not always work as planned. I got into it once but never make any money out of it. What I don’t like about it is I am not suppose to use the word “network marketing” when I introduce myself as though it is something I am ashamed of. I don’t like that. If I am in this business, I want to be able to state unashamedly that I am into it but doing so will scare my prospects away.

Another problem with this option is the products they sell are expensive despite the claims that they have eliminated many middleman. So, their marketing strategy is to sell the business rather than the products.

I don’t mind doing it if the products are cheap and common like toothpaste. I can then tell my neighbours, “Instead of going to the supermarket to buy toothpaste, why don’t you buy from me? The price is the same and you can save on the transport cost.” Unfortunately, I cannot find any network marketing groups that sell cheap and common stuffs yet.

Should you get into it? It depends. If you happen to be a very outgoing person and have a lot of friends, you may want to give it a try. Just remember not to spend too much money in it.

Franchise
This option is those who has a lot of money sitting around. Think of McDonalds. How much talent do you need to open one? The answer is none. All you have to do is to pay them what they want and they will provide everything you need to start one. Your work as the boss is only to follow instructions from the franchiser and you get to call yourself an entrepreneur.

Since the job is about following instructions, you can even hire a manager to do it for you. Your role then is to collect money.

Personally, I find this to be a good balance to properties. When the rental yield is high, buy properties and rent them out. However, if the rental yield is low you can rent some space and do some franchise in it. You get to benefit no matter where the rental rates move.

Conclusion.
This is all for now. Let me remind you again that this article is not exhaustive in itself. You have to to your own research.

A Revolutionary Concept In Retirement Planning

I am sure most of us are familiar with the concept of retirement planning. Financial institutions like banks, insurance companies and independent financial advisory firms have been promoting it to improve their business. Wherever you go to for your retirement planning needs, you will always get some standard textbook answers on this subject, which will result in commission income for these institutions.

In this article, I will run through these “textbook answers”, reveal their flaws and propose the true engineering solution to it.

Let us begin with the basic definition.

What is retirement?
All of us will have to retire unless we happen to die in our jobs. Retirement is a stage where we no longer do the jobs we used to do nor do we receive the salary we used to receive. Why do we retire? There are 2 basic reasons for people to retire:
1. Too old to work.
2. Too rich to work.

As you can see, the first case is the equivalent of being thrown out of your job while the second case is the situation of you throwing out your job. The objective of retirement planning is to ensure that we retire for the second reason. We retire because we become too rich to work and not because we become so old that our employer wants to get rid of us.

Now, that we have determined the reason for retirement, let us move on to the standard textbook answers on how to plan for retirement.

Standard textbook retirement planning.
Here are the basic steps on how to plan for retirement according to the standard textbook:
1. Determine the annual expenses needed to pay for your desired lifestyle after retirement.
2. Estimate the amount of years you are expected to live from your retirement onwards.
3. Multiply the annual expenses to the amount of years you are expected to live after retirement.
4. Factor in the expected rate of inflation from now until your retirement age.
5. The result is the retirement fund you need to build up in order to fund your ideal retirement.
6. Create a wealth building plan to build up that amount. This plan will invariably involve putting aside a portion of your current income to the recommended investment portfolio.

The above are the basic steps for the conventional retirement planning. They are available in every financial institution that is interested in making money out of this idea. Can you see the flaws in the above steps? Let me start by pointing out the obvious.

Flaws in the standard textbook retirement planning

Consider the last step, Step 6. How are you going to build up the amount for retirement derived in the above steps? You will probably be told that you need to invest regularly into a portfolio that will give you a certain percentage of annual growth. However, there is no guarantee in the estimated growth. Your advisor will not be liable if the recommended portfolio fails to achieve the targeted growth stated in the plan.

By the time you realize that your investment fails to achieve the target for retirement, it is too late for you. You will not going to retire in style. As for the financial planner who planned the failed investment, he or she will still be keeping the commission you paid from your investments. You need to be aware that financial planners get rich from the commissions from clients like you, not from their own investments. Their expertise is in persuading others to invest with them so that they can earn their commissions.

Financial planners are expert salesmen. They are not expert investors. So, if you choose to trust your financial planners with your life savings, you are heading for your own doom.

Next, let us assume that you can really achieve the targeted amount for your retirement. Let us assume some numbers here. Consider the following:

Based on your retirement planning, you need $5 million at age 60 to enjoy your desired retirement lifestyle for the next 30 years and you have successfully achieved the $5 million.

What is next? What are you going to do with that $5 million in your investment? Are you leaving the amount in the stock market? If you do that, you are exposing your retirement nest eggs vulnerable to the fluctuations of the stockmarket. Any market crash happens during your retirement will have the potential to cancel your retirement.

However, if you choose to liquidate your investments and keep the $5 million in your bank account, you are subjecting your retirement fund to inflation. No one can predict how high inflation can rise. When inflation becomes very high, you will lose a significant portion of your $5 million savings. Your retirement plan can still be cancelled.

What are you going to do? If you are thinking of withdrawing half into cash and leave the other half in investment, you will still face the risk in both sides.

So, the question is, how can such a bad plan become a standard textbook retirement plan? Who invented such a bad plan? Obviously that person cannot be an engineer. Engineers will never come out with such a toxic plan. Trusting a non-engineer for your financial future is very risky.

I believe that one of the main reason the global finance is in such a mess is the financial sector is run by non-engineers. Non-engineers should not be allow to be involved in the financial sector, let alone becoming financial advisors or planners.

Please note that I have nothing against non-engineers. I am sure most of the readers of this blog are not engineers. I have nothing against you. However, if we truly want to have a prosperous economic system and retire comfortably it is essential that we regulate the financial sector and only allow people with proper engineering background and training to manage it. In the end all of us, (engineers and non engineers) will benefit from a properly managed financial system.

There are many jobs that non-engineers can do but finance is not one of them.

At this point, I believe many will ask me what is the solution to the flawed retirement planning? Here is the answer.

Yeap Chee Seng’s engineering solution to retirement planning.
The engineering way toward retirement planning is to look at the retirement income and not the total amount. Instead of asking, “How much money do I need to save to retire?”, the engineering question is, “How much passive income I need in order to retire?”

The key word here is passive income. Passive income is defined as the income we receive without having to work for it. The clearest example is the income from rentals. If you have a property which you rent out, the rent will come to you every month without you having to work for it. If the amount of rents you receive is more than your total expenses, you are free to retire.

This means the correct way to plan for your retirement is to build up sources of passive income. In the above passage I use rental properties as an example but it is not the only source of passive income. There are many others, which I will cover in future posting.

How do you execute your retirement planning? This article is not meant to be exhaustive by itself. I can only give you some brief guidelines here. Maybe I will expound on this in future.

First, start your own research on the sources of passive income. The internet has many choices for us choose from. Then, make your move to build up your source of passive income. As you do, keep improving and enhancing your system. You have to keep reminding yourself that the real objective is regular passive income.

It will be helpful if the field you are involved in to be one of your hobbies or areas of interest. It is less tiring to do the things you like. Your hard work will not feel like hard work if you enjoy it.

Yes, it requires hard work. You have to do additional work after your regular paid job. In your paid job, you work to make your employer rich. It takes basic common sense to start working to make yourself rich by building up some sources of passive income to fund your retirement.

Is there an easier way? Of course there is. Give your money to the financial planner with no engineering background and hope for the best.

How about the target of my passive income? Your current income is a good guide. Let us assume that you own an internet business that gives you an income of 10% of your salary. What you have to do is either to increase the sales of your internet products by 10 times or set up 9 other internet businesses that gives the same result.

Once your passive income matches your earned income regularly, you are ready to retire anytime. You have to make sure that you don’t spend more than your passive income. At this stage, you can choose to resign if you want to. If you choose to keep on working, use your salary to build more asset base to create a bigger buffer in your financial fortress.

The result is financial independence the engineering way.

Prepare Your Fields Before Building Your House

27 Do your planning and prepare your fields before building your house.
Proverbs 24:27 (NLT)

Proverbs 24:27 is another financial planning verse we can benefit from. In this verse God wants us to plan. We must place a higher priority in our “fields” over “house” in our plans for our future. What do “fields” and “house” mean in the above context and can we benefit from the above advice? We shall look deeper into it in this article.

Proverbs 24:27 was written in an agricultural background where people did farming for a living. The term “building your house” may suggest that the recipients of this verse might not be living in houses. They could have been living in tents. So, building a house to live in is an upgrade to them. Living in a house will not only improve their standard of living but it will also show that they have reached the next level, from being tent dwellers to become house owners. Today’s equivalent will be moving from government subsidized housing to a luxurious beachfront property. This is definitely something good.

The term “prepare your fields” in the agricultural context means the following:
1. Sowing seeds.
2. Softening the soil through plowing.
3. Ensuring sufficient water for the crops through irrigation.
4. Ensuring sufficient nutrients in the soil through the application of fertilizers.
5. Protecting the crops from pests.
6. Preparing for harvests.

In short, it means doing everything it takes to make sure that your harvest will come. According to Proverbs 24:27, preparing the fields is more important than building house. The actual message is, don’t even build your house before you have fully prepared your fields. Why is that so? The answer is simple. Preparing your fields will bring you income. It will lead to prosperity. In contrast, building a house is about spending your money in luxuries. (Please be reminded that those people were already living in tents. So they were not exactly homeless. Having a house is more like a status symbol to them.)

The message God has for us is, make money first before spending them. I would like make it clear that God is not against us spending on luxuries. There is nothing wrong in wanting to drive a bigger car, living in a bigger house, owning your own personal plane or even your personal island. God has no problem with that. However, it is silly for us to get those things at the expense of getting into debts and forfeiting our future prosperity. God wants us spend on luxuries only after our financial base is secure. As long as our financial base is not yet secure, our priority should be set on building on our financial base and not on luxuries.

I believe this advice is relevant to many of us because we tend to spend more as our income increases. This is the temptation we should avoid. Let us have an example. Let us say that you used to bring your family out for McDonalds once a week. Now that your income is doubled, will you double your trips to McDonalds? The shareholders of McDonalds will be happy but you are not maximizing on the benefits of the increase of your income.

This is the problem that many people faced. Every time their income increases, their spending increases as well. As a result, no matter how high their income is, they are still making ends meet. Their financial base never grew. Their houses and cars may get bigger and more expensive but they are still as poor as they were when their income was a fraction from the amount they are receiving now. The increase in their salaries does not make them rich. In fact, it could make them poorer if they loaded up more debts in acquiring their houses and cars. This is not the prosperity God wants for us.

When God increase our incomes, he wants us to be richer and not poorer. Therefore, each time we receive an increase in salary, a huge bonus or a sudden windfall, we must discipline ourselves in order not to be tempted to waste them. Our priority should not be luxuries. We should focus on building a strong financial base. Only when our financial base is secure, should we move into acquiring luxuries.

How do we build our financial base? We need to invest our money to make it grow. This is the equivalent of preparing our fields. However, this is not just about calling a financial adviser, buy all the financial products he wants to sell. You need to do your own homework. Read up more on investments. You can start from the “Financial Planning” category in this blog. All my articles there are based on the Bible. The Bible itself contains a lot of lessons on financial planning.

Go to the library to borrow books on investments. Read up on them and start planning to build your own financial base. Once you financial base is secure, you will be in a good position to acquire some luxuries without harming your finances.

The Reality Of Money

2And Abram was very rich in cattle, in silver, and in gold.
Genesis 13:2(KJV)

34And he said, I am Abraham’s servant.
35And the LORD hath blessed my master greatly; and he is become great: and he hath given him flocks, and herds, and silver, and gold, and menservants, and maidservants, and camels, and asses.
Genesis 24:34-35(KJV)

Welcome to another non-faith article of mine. The Bible teaches us a lot about faith and on how to use it for our prosperity. However, this does not mean it is limited to faith alone. There are other truths in it that can benefit us if we bother to study them. In this article, I will show you the concept of money from the Bible and how we can benefit from it. If you have been reading my articles, you will realize that I always write about applications and benefits. I can’t help it because I am an engineer. Engineering is about applications to bring benefits.

Throughout all my articles I have been using the term “money” liberally. In order not to create confusion, I am going to use another term “currency” to refer specifically to cash, the stuff that are printed by governments like US Dollars, Euro, Yen etc. Throughout history, when a civilization reached a certain level, they will have some sort of currency in place. The main functions of currencies are medium of exchange and storage of value.

However, in the Bible, God only recognized the first function and not the second for currencies. I can’t find anywhere in the Bible where God describes anyone as rich for having a lot of currencies. The verses I put above show the typical way a person is described as rich. It also shows us that there are basically 2 categories of wealth. You are considered to be rich as long as you have a lot of either one of them.

I shall name them Organic Wealth and Inorganic Wealth. The examples of Inorganic Wealth are gold and silver. I call them inorganic because they are inanimate. It will never die because it has no life in the first place. When I walked into shops selling ornamental fishes, I found some fishes being sold at the price of a few thousand dollars each. The strange part was people are still buying them. Don’t they know that if the fish died, a few thousand dollars will be gone? You will not have this problem if you buy gold or silver.

The other characteristic of this category of wealth is, it is compact. Unless you are super rich, you don’t need to build a warehouse or a barn to store all your gold. A chest or a box is good enough. As such it is easy to secure and easy to run away with when things go wrong. It is easier to run away with a box of gold than with goats or grains of the same value.

However, the main weakness of Inorganic Wealth is it does not grow. If you keep 1kg of gold in your safe and open it up again 10 years later, you will still see 1 kg of gold.

Furthermore, the Bible never says God will bless your gold and silver. If you read Deuteronomy 28:1-13, the blessing from God covers a lot of area but gold is not among them. In the Bible, gold and silver are seen as the result of prosperity. They are not the origin of prosperity. They will not make you richer. They will preserve but not expand your wealth.

This is where the Organic Wealth comes in to fill the gap. Organic Wealth refers to life assets like cattle, sheep, goats, crops and anything that has the ability to grow. In today’s context, it covers stocks, properties and other businesses. Deuteronomy 28:4 tells us about God’s blessings on all types of Organic Wealth.

4Blessed shall be the fruit of your body and the fruit of your ground and the fruit of your beasts, the increase of your cattle and the young of your flock.
Deuteronomy 28:4 (NLT)

Organic Wealth grows with time as long as the environment is right. When you sow seeds to the ground, the seeds will grow into crops. On day, the crops will give you harvest where you will reap more than you have sowed. You will get richer. The herds of cattle and the flocks of sheep will reproduce. Baby cattle (calves) and baby sheep (lamb) will grow in size. All these will make the owner richer. This is the most important characteristic of Organic Wealth, which Inorganic Wealth cannot achieve. So, if you want to be richer, focus on Organic Wealth more than Inorganic Wealth.

The main weakness of Organic Wealth is the higher risk of losing it. A foul weather and pest can destroy crops before they can be harvested. Some time ago, there was a serious flood in Bangladesh and it happened just before harvest time. It was sad. The farmers were looking forward to their harvest and suddenly the flood destroyed it all. All their efforts were wasted. Such is the nature of Organic Wealth. It is more fragile and subjects to the mercy of the environment.

Organic Wealth is also less portable. You cannot pack them up and run away when things go wrong. After Jacob left Laban, he had a huge flock with him. When he realized that his brother Esau was in front of him with his army, Jacob found himself trapped. He could not run away with so many sheep. The situation would have been different if his wealth was in the form of a few boxes of gold.

So both Organic Wealth and Inorganic Wealth have their own strength and weaknesses. If you allocate your wealth into these 2 classes, you can have the best of both. The next question is, how does currency fits in?

On the surface, currency seemed to have the benefits of Organic Wealth and Inorganic Wealth. Like Inorganic Wealth, it is compact and easy to protect. Like Organic Wealth, it can grow if you put it in a bank to earn interest. However, in reality, it is worthless in itself and I shall prove to you in the subsequent part of this article.

In ancient times, governments used precious metals like gold and silver to make coins. The precious metal is necessary in the coins in order to give value to them. The problem is, when these governments faced budget deficits because their income was lesser than their expenditure, they would resort to produce coins with lesser gold in them. This is called the debasement of currency. For example, every coin used to have 90% gold in it but after debasement, the new coins now have 80% gold.

The traders were not dumb. They knew about it and charge higher prices for their products and services. The higher the rate of debasement, the higher the prices would be raised. This is called inflation. Those who relied on fixed amount of income will be poorer because they could buy lesser things for the same amount of money.

That is the past. Do things get better now? The truth is, our modern system is even worse. We use paper money now. Once upon a time, nations used gold standard for their monetory policy. They pegged their currencies to gold. This means having US Dollars is like having gold. However, this standard was abandoned and all the world currencies become free float. This means, governments can print as much money as they want. Some governments in the Third World had printed money to solve their financial problems and resulted in hyperinflation. Prices of things may get doubled everyday. Their currencies are worthless.

Even if governments do not print money to solve their problems, inflation will still happen and the prices of things will increase because the currencies do not have value in themselves. This means the currency in you wallet and bank account will decrease in value. You will be poorer each day as currency depreciates. The main action for governments to protect the value of their currencies is to raise interest rates. However, raising interest rate will also cause unemployment. So there is some balancing act to be done between protecting the value of currency and protecting jobs. Most of the time, governments choose to protect jobs. Therefore the drop in currency value, or inflation is inevitable.

What does all this mean to us? I believe all our income is in the form of currency. As such, its value is subjected to drop. So the prudent thing for us to do is, each time we receive our income, the first thing to do is to allocate them for our giving (tithing and sowing), expenses, repayment of debts (if any) and keep some of it for emergency. If there is any balance, allocate them into Organic Wealth and Inorganic Wealth. This way, your wealth will be protected from inflation and be able to grow more.

Know The State Of Your Flocks

23 Know the state of your flocks, and put your heart into caring for your herds,
24 for riches don’t last forever, and the crown might not be passed to the next generation.
25 After the hay is harvested and the new crop appears and the mountain grasses are gathered in,
26 your sheep will provide wool for clothing, and your goats will provide the price of a field.
27 And you will have enough goats’ milk for yourself, your family, and your servant girls.
Proverbs 27:23-27 (NLT)

Welcome to my Bible Study Blog. This time, I am studying it from the perspective of wealth management. The Bible contains many lessons on wealth management from God that benefits us. Proverbs 27:23-27 is one of them.

Let us start with the background of the above passage. It was based on a rural environment where it was common to keep domestic animals like goats, cattle and sheep. This passage was written to advise the people there to take good care of their animals because when they do, their animals will take care of their life expenses. How can we benefit from this advice?

What will you do when you receive a windfall? A windfall can be in the form of winning a lucky draw that comes with a lot of money, a huge bonus, salary increase or a drastic increase in the value of your property. I believe most people will celebrate and spend like they have never spent before. They will have a great time in their lives but after some time, they will get back to their pre-windfall standard of life. Why? They spent all their money. They are poor again.

There are people who are just earning enough for their expenses. We call that making ends meet. Suddenly their salaries are doubled. Logically you would have thought that they would be able to save half of their salary. However, they will still end up making ends meet. Why? They increased their expenses along with their salaries. They may buy bigger houses and cars. After deducting the new installments they will have nothing left in their bank account.

This is not the will of God for us when he blessed us with financial prosperity. God will not give you a lot of money for you to enjoy for a few months and back to normal again. He wants our prosperity to be permanent. This is why he wants us to learn wealth management and he put in the principles of wealth management in the Bible. In other words, God wants to give us a lot of money to make us permanently rich and he wants us to manage it well.

Proverbs 27:23-27 speaks of taking care of animals. These animals represent income producing assets. Today’s equivalent could be rental properties and dividend paying stocks. It refers to assets that can provide us with continuous income. Why do we need them? Proverbs 27:24 tells us riches don’t last forever, and the crown might not be passed to the next generation. This means our money in the bank will not last. Unless you are super rich, you will use up the pile of money in the bank. The “crown” here refers to our jobs. Let me tell you the truth about your jobs. They belong to your employer, not you. We do not own our jobs. As long as you are employed, you are at the mercy of your employer. God wants our prosperity to be secure and not be at the mercy of any other party.

“Does this mean we should not work?”

We are designed by God to work. Work is meant to be a fulfillment to our lives and not to keep us in bondage. If we have to depend on our jobs and forced to toil in and suffer in it to pay the bills, we are under bondage. God wants us to enjoy ourselves and glorify him in our work. It is his will to set us free so that we don’t have to work for money. It is the will of God for money to work for us. Money is meant to be our servants not masters. He wants us to work because we want to and not because we have to. I call this the freedom to work.

One of the reasons why God wants us to have continuous supply of prosperity is to enable us to be free to do what he has put in our hearts to do without being constrained by the lack of resources. Therefore, when he gives us a lot of money, he expects us to invest in “goats and sheep” in order to ensure continuous supply of milk and wool. When you are overflowed with milk and wool, share them with those who are hungry and naked.

Please note that God is never against us living in a bigger house, driving bigger cars, wearing expensive clothes and enjoying any other luxuries. He wants us to get our priorities right. He does not want us to sacrifice the goose that lays golden eggs for our luxury. He wants us to wait for the goose to lay golden eggs first and then sell the eggs for our luxuries. Spend the eggs and keep the goose.

How do we do that? The following are the priorities we should consider:

Priority 1: Tithe and Sow

These should be our first priority as they guarantee future windfall into our lives. When we tithe and sow, we are setting the stage for greater prosperity in the future. Please note that I mention tithing and sowing separately because they work in a different way.

Tithe is restricted at 10% of our income. The full benefits are stated in Malachi 3. When we tithe, we are making our field fertile, creating the perfect weather for our crops to grow and provide full protection to our crops from pest and other enemies. However, it does not come with free seeds. So, if you tithe and not sow, you will have a fertile field, the perfect weather and full protection from pests but it is empty because you did not sow any seeds in it.

This is why, after our tithe we need to sow as well. Unlike tithing, there is no fixed amount to sow. So we can sow as much or as little as we want but the bottom line is our harvest is proportional to the amount of seeds we sowed. The more we sow, the larger our harvest will be. If we sow and not tithe, our seeds may not grow well as it will be subjected to risks from the nature.

Therefore, the combination of tithing and sowing will provide us with the best outcome for our prosperity. In doing so, we are making a statement to the world that the richer we are, the world will be a better place. There will be lesser people dying of hunger, more people getting to hear the Gospel, lesser sufferings and more joy.

Priority 2: Clear all debts.

Debts are financial cancer. Being in debt restricts our finances. Therefore, we should be determined to clear them as soon as we can.

Priority 3: Buy goats and sheep

This is the lesson in Proverbs 27:23-27. We should start looking for gooses that lay golden eggs and get them. As mentioned earlier, this represents income producing assets. If you are living in the same environment as Proverbs 27:23-27, you may consider buying more goats, sheep or any other domestic animals and provide the best environment for them to grow and reproduce. As they grow and reproduce, your net-worth will increase.

The other option is to buy properties to rent out. The rental will serve as income for you. You have to ask God to show you where your “goats and sheep” are and commit your wealth in it. Only then you can make your prosperity permanent.

As for luxuries, the best option is to buy the “goose” first and get your luxuries after the golden eggs come. If you really cannot resist the temptation, then set aside a fixed portion for it and make sure that you don’t touch the rest.

In conclusion, God wants us to manage our wealth wisely. Only then will he trust us with more prosperity.