How you can create wealth.

Everything seems to be cheap nowadays. Thanks to the wide variety of credit options, people can buy anything they like even though the item is very expensive. Most people are spending almost half of their income to pay their debts. Even if the pay gets an increment, the liabilities also get an ‘increment’.

In Singapore, you can buy a first hand car with just a dollar down payment. With this kind of offer, people are more tempted to buy a car even if the loan amount increases to almost half. In this country, you can even buy a hand phone on instalment basis. Practically, you can own anything that you see and like.

With liabilities almost half of an individual income, there are bound to problems. The concept of taking a debt is widely mistaken. Debts are actually taken only if one can service their loan. With this statement, of course you can expect a lot of people taking on debts because they know that they can pay. However, they will have troubles servicing their loan as time goes by.

Why?

The answer is very simple; people do not have cash flow management. If only we are taught on how to manage our cash flow in school, I am very sure that we will not have any problem handling our money.

There is no single subject in school that teaches us on wealth creation. What our teachers tell us is that we have to study very hard so that we will have a good future. Our teachers explained to us the consequences of not studying hard enough but never tell exactly how we can create wealth when we study hard.

Wealth creation is something that very complex. There are many factors contributing to an individual’s net worth. One of the golden rules is not to have a debt service ratio that is more than 45%. Personally, I would recommend one to minimise to as low as 20%. No matter how much your income can be, if your debt service ratio is high, you cannot create wealth because you will be spending too much money servicing your debts.