“How do I invest if I have limited capital and income?”

To answer this question, consider the lives of two buddies, Jack and John.

Jack is diligent in finding ways to double his capital fast. While saving RM600 a month, he spends most of his nights online learning all about stock trading.

Jack learns about chart patterns, technical indicators, and market timing.

When his savings reach RM2,000, he starts trading stocks in the stock market.

In two years, Jack has mastered the art of stock trading and is able to earn RM500 a month from his portfolio of RM25,000.

What about John? John decided to become a Toastmasters Club member because of his belief that public speaking is a skill that will boost his effectiveness at work because his job requires him to meet clients and deliver sales pitches.

Membership fees for the Toastmasters Club is affordable as it’s below RM1,000 a year.

John now spends his nights at club meetings and learning about public speaking. This includes crafting a powerful speech, vocal variations, body language, grooming, networking and how to design impressive presentation slides.

After his meetings, John stays on for a cuppa as he enjoys picking the brains of seasoned speakers. He also meets up with friends who are either working or are in businesses related to his industry.

So, here’s the million-dollar question: ‘Who do you think is better off financially two years down the road?’

Can’t they trade stock and work simultaneously?

No. Trading is a skill. Anyone who trades stocks and wants to be consistently profitable must invest their time to learn, practise and master it.

Public speaking too is a skill. Just look at a well-presented speech that is highly impactful – that took time to learn, practise and master.

So rather, the real questions that should be asked are:

• ‘What is the skill to learn first to elevate your financial life significantly?’
• ‘Is it to trade stocks?
• ‘Is it to acquire a high-income skill that you could use to make money for life?’

The answer is clearer if you look at the questions from the perspective of a banker.

The tale of two high-income earners

Let’s go back to Jack and John. Two more years have passed. Both are earning RM10,000 a month. But, their sources of income are different.

Jack earns RM5,000 a month from his day job and he makes another RM5,000 a month in side income from stock trading activities.

John makes as much as RM10,000 a month solely from his day job.

Now, both are ready to invest in property and apply for a mortgage. How would the bank process their loan applications?

• Would the bank see Jack and John as individuals who earn RM10,000 a month?’
• ‘Would Jack and John qualify for the same mortgage amount?

The answer is ‘no’.

The bank will still view Jack as earning only RM5,000 a month. Jack’s trading income is not considered a reliable source of ‘income’.

Let’s say, both Jack and John have zero outstanding debts apart from their car loan instalment of RM1,000 a month which they always settle on time.

Based on a maximum debt-service ratio (DSR) of 60% and the rule of 200, Jack qualifies for a maximum mortgage amount of RM400,000.

Jack’s Maximum Mortgage

= ((Monthly Leverageable Income x 60%) – Car Loan Instalment)) x 200

= ((RM5,000 x 60%) – RM1,000) x 200

= (RM3,000 – RM1,000) x 200

= RM400,000

As for John, the maximum mortgage amount he qualifies for is RM1 million.

John’s Maximum Mortgage

= ((Monthly Leverageable Income x 60%)- Car Loan Installment)) x 200

= ((RM10,000 x 60%) – RM1,000) x 200

= (RM6,000 – RM1,000) x 200

= RM1,000,000.

The difference is RM600,000 in loan eligibility, which is a form of free money (or almost free) to real estate investors.

Thus, while Jack is able to buy a RM300,000 property, John is able to buy three RM300,000 properties.

Now, who do you think can build his net worth faster? Is it Jack or is it John?

Get your perspectives right

• The best investment if you have limited capital/income is yourself.
• You cannot make fast money from stock trading.
• It takes years to master the art of stock trading. In fact, not many can make trading profits consistently.
• Even if you attain that level of profitability, it’s likely that you’ll not build wealth as fast as the person focussing on building his active income.
• Why? That’s because income from trading is not leverageable but active income is, thus making it more valuable.

This article first appeared in kclau.com

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.