Dream – The first step towards achieving financial abundance

(This is a follow up article of “Money.. Money.. Money..” , make sure read it first before you continue. :))

Imagine when you wake up in the morning, you are greeted by a butler with a Hacienda la Esmeralda Geisha coffee in his hand. You walk towards the balcony while sipping the wonderful aromatic specially brewed coffee. From the balcony, you could feel the morning breeze softly touch your skin. You could see a beautiful garden filled with vibrant colourful flowers. Beautiful butterflies playing chasing each others between those flowers. At the horizon, the sun starts to shower you with rays of gold between the twin peaks of marvelous mountain range. Imagine you could have such life. Imagine such possibilities.

Everything happens or happened because of somebody dreamed of it. The car, the plane, and the laptop you are using to read this article: everything you have come across was dreamed by someone. The same thing is true when it comes to financial abundance.
You got to dream of the wealth you want. Dream of what you want to achieve.

Dream can be divided into 3 categories: the dream you dream while you are sleeping, day dreaming and the dream which you wish you had or the one you want to achieve. The dream I’m talking about is of course, the dream you want to achieve or wish you have. The dream not necessary only about materialistic stuff, it can be about sending your child to study in top notch university or building a free private hospital to treat the poor. It can be anything.

When you dream, set every single detail within it. If it’s a car, set the model, the colour, special accessories and so on. Set when your dream takes place. Is it 1 year from now? 2 years? 10 years? Next month? Next week? Just make sure you give ample of time. Try to be more realistic. But don’t delay your dream too long. Be daring to dream.

Other sources would have used the word goal, visualization or imagination, but I choose to use word dream because dream is something which you would enjoy of doing. In fact a concrete dream with details is equivalent to visualization with a goal. Do bear in mind, the dream I’m talking about is not day dreaming or dream while you are sleeping.

Dreaming is an easy thing to do. But, there are some people who are actually afraid to dream. They are afraid that they would disappoint themselves when they realize they couldn’t achieve them. So, they stop dreaming big. Dreaming is the only thing in the world where no body can interfere and set limit to it. Even the sky is not the limit. Don’t ever give up on dreaming. Even if you fail, keep on dreaming, as it could bring you closer to make it a reality.

Many of you would be questioning the power of dream. Many of you are being skeptical of what I’m saying. Many would say that their dream didn’t come true at all. The first reason why your dreams never work out is because you were day dreaming instead of dreaming with details and sense of time horizon fixed to it. You weren’t dreaming with consistency. One day you might dream of driving a Merz, the next day you dream of driving a BMW. You mind is not focused on what you dream of. You are not sure of what you really want. It’s all just seems like another routine of day dreaming.

Dream is just the first step towards financial abundance. In fact dreaming is also the first step towards abundance of everything. There are 2 more steps or requirement need to be accompanied with your dreams, or else your dream will remain a dream forever. They are desire and positive mental attitude. Just as I mentioned in my previous article, “Money.. Money.. Money..”


These 3 steps will open the world of opportunities. Of course it must be followed with your action. If no action, then there won’t be any results. In the next follow up article, we shall look at ‘Desire’ which is an important factor to reach a life of abundance. Until then, dare to dream and dream big. Remember, even the sky is not the limit.

Maximize Your Money 2: Mortgage Loan (Tips and strategy on managing and reducing your mortgage)

Welcome to the second ‘Maximizing Your Money’ section. I hope you all learned and utilize something from the 1st article of "Maximize Your Money:Hire Purchase Loan". and apply them to your real life. This time around we are going to look at mortgage or home loan. Before you continue, make sure read the “Back 2 Basic: Mortgage Loan” to get some understanding on how it works.

The method to maximize your money in mortgage is different compared to hire purchase loan. How different? Put on your thinking cap and start to digest the tips below.

1. Make additional payment.
This is the most commonly talked about method. The more you pay and the more frequent you pay, you’ll definitely reduce the period of payment and reduce the overall interest.

2. Always take the longest tenure.
“What are you crazy?” some readers are in shock. They couldn’t believe the above statement. Yes, my friend. Take the longest tenure you can take, but make your monthly payment as if you are paying for a shorter tenure.
Example:
Lyndia are planning to take $100,000 mortgage loan with 20 years tenure and 5% interest. Your monthly payment would be $657.22. She takes the maximum allowed tenure for 5%. Her monthly payment would be $480.20. But when it comes to payment, she still pays $657.22 instead of the $480.20. Overall, she will still settle her loan 20years.
Why doing such tedious thing? The reason is for your cash flow protection. Let’s say something unfortunate happens such as pay cut due to bad economy. Now, Lyndia’s budget is much tighter. So, instead of paying $657.22, now she could pay as low as $480.20. If she had taken a 20 years loan, she might have defaulted on her payment or cut down many of her other expenses.

By the way, if you are not good in managing your money, you might backfire yourself by increasing your other expenses and could only afford to pay the minimum.

3. Don’t wait until the end of grace period/due date.
The bank is calculating your interest on daily basis. So don’t wait until the due date to make your payment. Instead, the moment you get your salary, pay your installment immediate. You’ll be surprise that you would able to reduce your total loan periods by months and your interest.

4. Opt for fortnightly payment instead of monthly payments.
Fortnightly payment means that, you’ll be paying every 2 weeks slightly higher than half of your monthly payment. You have to check with your bank whether they offer it or not. By making fortnightly payment you would be saving interest as well reducing your loan period by years.

5. Refinance your mortgage
That’s right; you could save on interest by refinancing your mortgage with a lower interest rate. If your loan already out of lock in period, you should shop around for a lower mortgage interest. Lock in period is the initial period which if you settle your entire loan, you’ll be charged with penalty of about 2% on your entire loan borrowed amount. It’s usually 5 years.

I still remember by the end of 2005, all the banks started to offer BLR Minus packages. Before that, banks offered BLR Plus packages up to BLR+2%. Thanks to CIMB bank which first sparked the fire, offered the BLR-0.1% package. Currently, you can even find BLR-2%. BLR (Base Lending Rate) will change according to Overnight Policy Rate (OPR) set by Bank Negara. The current BLR is 6.5%. This means, if your mortgage is BLR-1%, then your interest rate would be 5.5%.

So, if your loan is a BLR+1% compared to a BLR-1%, you are losing 2% in interest. By refinancing your loan, you could save the 2% interest and lower your overall interest paid.

Note: When you refinance your loan, your monthly payment will be lower if you maintain the balance tenure. When you make payment, pay as if you are paying your previous higher interest loan. It could reduce your loan payment time as well for your cash flow protection. Also, don’t forget to apply tips No.2, if you have a good money management.

6. Instead of saving in FD, save them in your mortgage account.
Most banks allow you to make principal pre-payment. And some banks allow you to withdraw this pre-payment anytime. Usually they will have charge a minimum amount of fee around $10 to withdraw and will only allow withdrawal in multiples of $1,000 or so on. To find out whether your bank allows you to do that, check out your loan agreement. Now, let’s see how you’ll benefit from making capital pre-payment. Let’s think in percentage. Your fixed deposit (FD) interest rate will be always lower than you loan interest rate. This means if you have a FD and a mortgage at the same time, you’ll be losing out your money in interest.

Example:
Lyndia has a fixed deposit of $10,000 as emergency fund along with her mortgage with balance of $20000. Her fixed deposit interest rate is 3% and her mortgage’s is 5%. She’ll be gaining returns of $300 from fixed deposit and losing $1000 in interest due to mortgage. Overall she’s losing $700 in interest.


If she made principal pre-payment using her FD, she’ll be reducing her interest from mortgage to $500. That’s an additional savings of $200 in mortgage interest.


If Lyndia need the money for any emergency, she just has to go to bank and fill up the request form to make withdrawal. But, of course it would take several days before you get the money. (Note: Make sure your loan agreement states that you can withdraw them.)

So, this method will save you on interest as well reduce your payment period.

7. Consolidate mortgage accounts.
Consolidated mortgage account also known as offset account is an account which consolidate mortgage account with a saving account. It is also possible to consolidate current account and credit card account as well. How it reduce your mortgage? When your salary deposited into the account, it will act as if a capital pre-payment was done. Since your mortgage interest is calculated on daily basis, it will start to reduce your interest charged. Of course, you can withdraw your salary anytime you want to; just make sure you make the monthly payment as usual.
This method will definitely reduce your interest and mortgage repayment time by many years. Below is an illustration taken from HSBC website.

(Note: The above image is copyright by HSBC Bank Malaysia Berhad)

8. Make a pre-payment before bank disburse the loan.
If you have just taken a mortgage loan and the money is not disburse yet (or partially disburse); take your FD and dump it into your mortgage account. You would gain same benefit as mentioned in tips No.6.

There are another 2 benefits. Here’s the first one. Banks usually give special rates if you take higher mortgage loan. Let’s say you are going to buy a house for $250,000 and planning to pay $100,000 as a down payment, and only planning to take $150,000 mortgage. But the bank offer a better interest rate if you take loan more than $200,000. So, what you can do is, take a $200,000 loan. Once your application is approved and you signed the loan agreement, dump your balance $50,000 into your mortgage account. So now you can enjoy special interest rate and achieved your goal of just taking $150,000 mortgage.

The second other benefit is by using time value of money; however, it’s a bit complicated and risky. Even if you don’t get special interest rate, just by delaying your down payment by a month or two, you would be enjoying interest on your money. Here’s how it work.
Let’s say you are going to buy a house for $150,000 and planning to take $100,000 of mortgage loan. You pay the minimum10% of the total price, which is $15,000. You keep your $35,000 into FD for 1 or 2 months tenure. Then, you apply loan for $135,000. Once your loan application is approved, make some delay before you sign the offer. Make sure you don’t delay until the loan offer expire or by the time the bank disburse the money to the seller, your S&P (Sales and Purchase) agreement exceeds 3 months or terminated. Just before the bank disburse the money, pay the $35,000 balance plus additional money earned through FD.

How about the legal fee paid for loan agreement? Well, for this method to really work take the zero entry cost packages.

(Note: Before you use this method, check your loan agreement and banks, whether pre-payment before disbursement allowed or not.)

That’s it, 8 tips to maximize your mortgage loan. If everything is followed well, you’d be surprised how fast and efficiently you have reduced the repayment by almost half. I hope you all will benefit and make full use of it.

Have a wonderful day and enjoy managing your money to the max.

Back 2 Basic: Mortgage

Mortgage loan or home loan is the money which you borrow from bank to buy your house. It is the process transfer of interest in a property as a security to the lender. The word mortgage came from Old French word, which means death pledge. The death is actually referring to the end of pledge when the property obligation is fulfilled or is taken away for foreclosure.

Compared to ‘Hire Purchase’ loan, mortgage or housing loan is easier to understand. But to calculate the monthly payment, it would require a complicated formula. Don’t worry I won’t be touching all lot on it. I’ll teach you on how mortgage works and some simple calculations. Let’s start with an example.

Miss Florina bought a house for $125,000. She paid 10% down payment and took mortgage from bank for the balance, $112,500. The bank charges a fixed interest of 7% per annum calculated on monthly basis. Her tenure is for 30 years.

(Monthly basis is also known as monthly rest)

How to calculate the monthly installment? To calculate the monthly installment we have to use the following formula.


Yup, I know the formula look complicated. Even I didn’t use this formula to calculate. Instead I just used a financial calculator.

By using my financial calculator, the monthly installment computed is $744.13.

Now it’s time to look at how the interest is calculated. Instead of using any complicated mathematical formula, I’ll just show you through simple calculation.


Why we divide by 12? This is because the interest is calculated on monthly basis. A year has 12 months. In reality, majority of the banks’ interest is calculated on daily basis.


As you can see, the interest is calculated based on your balance at the end of 1st month. It’s not fixed interest like hire purchase loan. If you make additional payment, your interest will be calculated based on your mortgage balance. Let’s look at the table below for first 6 month of calculation.


Now let say Miss Florina got 2 months bonus from her company. She decided to pay 6 month installment one shot on the first month it self. Let see what has changed.


The first thing you might have noticed is the balance at the end of 6th month is lower by $66.14.

Let’s have a look, if the interest is calculated yearly basis and she paid 6 month installment one shot.


What did you notice? The first difference is the interest is calculated for the entire year at the beginning, unlike monthly basis where you calculate the interest every month.

Some of you might be wondering on how to calculate the total interest for any year without calculating month by month or day by day for daily basis. There are formulas to calculate them, but unfortunately I don’t have them and it is rather complicated. The easiest way is by using a financial calculator.

That’s all for our 2nd back to basic. Hope all of you learn something from it. Get ready to maximize your mortgage in near future. You will learn how to use your mortgage efficiently and maximize your money management. Coming soon…

Happy Learning. ;)

Maximize Your Money: Hire Purchase Loan.

I always love to talk about hire purchase loan more often because it is the most misunderstood loan in the market. I have seen friends and families who have been making the same mistakes over and over again. I’ll open your eye and show you the right way of managing your hire purchase loan. Before you proceed, go through ‘Back 2 Basic: Hire Purchase Loan’. Now, start your engine and ready to roll on.

(Note: All this maximization will work in Islamic loan as well)

Let’s look at some common tips (truth) about hire purchase loan.

1. Always take the shortest tenure

The reason is very simple, the longer your tenure is, the higher your effective interest rate will be. Remember that, hire purchase loan would calculate your interest using the borrowed amount multiply the number of years, which will increase your effective interest rate. Not just that you’ll be paying a very high interest in the first year itself.

2. Take the least amount of loan possible.

I have come across many car dealer advertising ‘0% down payment’ or ‘100% loan’. Some who might have some additional cash to pay for down payment would just take the 0% down payment offer. He might even be proud that he doesn’t have to put any money to buy the car. But, the effect is huge. With the amount of effective interest you’ll be paying, you’ll be losing in interest. If your loan interest is 5%, a $5,000 down payment would save you $1,250 for 5 years tenure and $1,750 for 7 years tenure. So, take the least loan.

3. Do not make additional payment

“What don’t make any additional payment? Are you crazy?” some might start to think I’m crazy. The reason is very simple; your additional payment won’t be reducing your hire purchase loan interest. You will only reducing your payment period, but not the interest at all. The next tip will make understand way making additional payment is a waste and teach a better way of making additional payments.

4. Pay at the end of grace period/due date.

You''ll be usually given 7 days period from billing date or beginning of the month to pay your installment. Many might even pay them on 1st day itself. Some might pay them even before the beginning of the month. By paying earlier, you are not gaining anything, as you are not reducing interest. In fact you are only helping the bank. So, try to pay at the end of grace period around 6th or 7th day. (Just don't exceed your due date)

So far, whatever tips you read might be quite common found everywhere. The next final tip is what will make you different than others. It is how you maximize your hire purchase loan.

"Whatever additional payment, save them instead."

That’s right, if you are going to make additional payment, save that money in savings, fixed deposit or unit trust, whichever you are feeling comfortable with. Save them into something which could give a return with low risk. Then, when your saving amount is equivalent to your balance minus rebate, pay them off one shot. Let’s have a look at illustration below.
Mr. Karipap never made any additional payment, while Mr. Dodol made additional payment all the time.


Now, let’s look at Mr. Cekodok. He maximized his money by saving the money for additional payment in a fixed deposit of 3% p.a interest. The below calculation done based on monthly savings.


Just imagine, how much you could save if you had invested in something which could give 5% return.

All in all, whenever you are going to buy car or getting any other hire purchase or Islamic loan, follow the tips above to maximize your money and towards a better money management.

Good luck and all the best.

Q&A Session 1

1. Q: I fully agree with you that you can be a millionaire with the magic of compounding interest. However I wish to know what are the choices available for us in Malaysia that offers deals with compounding interest other that Unit Trust? -Usha

A: There are many other choices to benefit from compounding power. It’s all depending on your risk acceptance level.
a) The lowest risk is of course your Fixed Deposit (FD). It still gives you some interest, but it’s not good enough to fight the inflation.
b) Dividend stocks can be considered for compounding power, but you need to put effort to learn on choosing the right stocks. B
c) Bonds offer a lower risk and a better return than FD, but you have to buy them in big bulk in hundreds of thousand dollars in primary market. You could still possible to buy in thousands in secondary markets. You also must make some research before buying.
The reason I mentioned on trust fund is because it could give you a good return with slightly higher risk than bond and FD. Yet, you still have to do some research before you buy one.

2. Q: Disregard of pension (I can say it's an auto-passive income for government servants). How will I know my passive income can support me and my family for long term? Thanks. -Anonymous

A: I’ll give 2 point of view.

In financial freedom point of you, the easiest way to look into this is to see how much is your expenses or income. As long your passive income is higher than your expenses, ideally it would able to support your family. The main thing is you must grow your passive income throughout time as the inflation will erode the value.

Let’s say you have a passive income of $5,000 every month and your expenses are $4,500. 20 years later, due to inflation and additional expenses such as new born child and child education, your monthly expenses grown to $18,000 per month. Definitely your passive income of $5,000 won’t be enough. So, what to do about it?

Here are some ideas.
1. Get a passive income which will grow with inflation. For example, property rental. Property rental will definitely go up throughout time. Other example, stock dividend will also go up throughout time. The percentage will be about the same.
2. Continue to invest. Don’t stop looking for passive income after you reach your goal. Continue to invest. Continue to compound your returns. It will produce more passive income for you and your family.
3. Make sure your passive income not only sufficient for your family expenses, but also for your investments.

In retirement planning view, there are some calculation needs to be done to determine how much money you must have in order to retire successfully. It will also determine how much you must save every month and where to invest to build the retirement fund. It still use your expenses and/ income as a guide to determine how you will sustain in the future. I will post some simple examples on retirement planning in near future.

3. Q: I am interested in trading, but with little knowledge. Can you give me a general guide about forex trading and option trading? -bala

A: Forex and option trading is regarded as a quickest way to be rich, and it is also quick way to see the bottom. Before you want to trade, you must have some fundamental knowledge about trading. You can read my post, ‘Trading in high risk high volatile markets’ to get more ideas on the basic. Hopefully it will be useful for you. I’ll post some articles on forex and options for further understanding in near future.

Trading in high risk high volatile markets.

It is many people's dream to able to make tens of thousand every month without sacrificing their time. They would love to spend their time at Hawaii beach, while others are busy sitting in front their PC handling their daily job routine. Many have chosen to trade in high risk high market such as forex, options and futures with a hope to achieve that one dream of not having to work. Yet, many fail. But, there are people whose full time job is trading forex, options or futures. How do they do it? Why others fail while they succeed? Here is my answer.

To be a successful trader, you have to conquer 3 pillars. The first and foremost is money management. It is the most important factor whether you will reach your financial freedom or not. Even in trading and investing, money management is one of the three main pillars which will determine your success rate. Why is it so? Trading involves a lot of risk management, and risk involves money. If you are unable to control your money, you’ll end up depleting your capital. That’s the reason many of my articles talks mainly on money management.

The second pillar to conquer is the method. Method is the technical/fundamental analysis you do on the live or historical data movements. You must have a method or two in order to know when to buy, sell and close your position. You will come across hundreds of methods out there. You have to find the right method to suit your style. Some methods are for intraday trading. Some are for inter-day trading. Some are for trending. Some are for ranging. Some are more suitable for forex. And some are more suitable for options.

Just to share my experience, I have been using a method to trade futures and it worked very well, until the market started to go sideways. My method started to fail. So, my solution was don’t trade in sideway market. Once the market resumed its up or down trend, I started to trade again.

The third pillar is the most difficult to conquer among all. At times, we might think we have conquered it, until something happen and prove us wrong. The third pillar is our emotion. Even if you have conquered the 1st and 2nd pillar, it would be useless if your emotion is not conquered. ‘Conquer your fear and greed’ is easy to be said, but to do it require lot of disciplines and learning from mistakes. Your mind has to be focused; undisturbed by your surroundings. The disturbance could be anything. It could come within you, such as your greed. It could even come from your loved one who somehow discouraging you. It’s not easy, but with full determination it can be achieved. At times you have to experience it to understand it better.

Here are some common mistakes done by many traders.

1. They want to earn a lot within the quickest possible time, but unwilling to learn the three pillars.
2. They use an obsolete method. Some methods might have worked a long time ago, but it no longer works due to change in trend. Some method needs some tweaking in order for it to work.
3. Using too many methods to trade. The more methods you have, the more confused you’ll be. So, try to choose a method which works for you.
4. Having all their money in high risk instruments. When you are not diversified, one bad move could end all your gains.
5. Diversifying into all high risk instruments. You are not really diversifying risk. The purpose of diversification is to minimize your risk.
6. They think trading is considered as passive income. The truth is it is active income. So, if something bad happens, they won’t able to support their family.
7. No proper stop loss.
8. No knowledge or experience. They trade as if it’s a gambling.
9. No extra/additional margins.

And here are some tips.

1. Having a mentor would have a great benefit in speeding up your learning curve, but don’t expect it for free. Some you have to show your determination and some you have to pay.
2. Read a lot books to gain more knowledge and
3. Choose only one. Forex, options or futures. If you try to venture into all of them, you’ll end up confusing yourself.
4. Once you have started to gain more and more money, put some portion of them into lower risk, long term investment. Try to create some passive income.
5. Learn to minimize the risk by having a proper stop loss.
6. Do some mock trading such as online demo or pen & paper trading.

The bottom line is to be a successful trader; one must be prepared both emotionally and mentally. It is not something impossible. The only question is, are you prepared for it?

Debunking: EPF 8% Means Paying More Income Tax!!???

I have been receiving some forwarded emails titled, 'EPF 8% Means Paying More Income Tax (For high income group)'. People stop forwarding this type of email and creating panic. Whatever written on it is only half the truth. Here's why?

Before I start to explain, lets see what they wrote,

"Assume monthly basic salary is RM4000.

- If your monthly EPF contribution is 11% ( RM440 ), taxable income = RM3560, income tax payable = RM77.

- If your monthly EPF contribution is 8% ( RM320 ), taxable income = RM3680, income tax payable = RM109.

Conclusion : If you choose to contribute 8%, you will end up paying more income tax to the government,

which will make the government richer. Finance Minister Najib said this measure is meant

to boost up the slow-down market, but from this example wee see that the money does not

go into the market. Instead the money goes direct into the government's pocket through

the greater amount of income tax that we will have to pay. Obviously this measure does not

help the market at all. Do we still want this kind of government that doesn't have the best interest

of the people in mind?"

So, let me start with your income tax.

1. According to the email, taxable income is after your EPF contribution is deducted. But the truth is your taxable income is before the EPF deduction.

2. Our Inland Revenue Board give us a tax relief of RM6,000 for EPF contribution and life insurance premium. Here is an example,

Mr. Atlee's monthly income is RM4,000 with 1 month contractual bonus of RM4,000 and some variable pays of RM2,000. He is paying life insurance premium monthly of RM150. If your EPF contribution is
a) 11% ->
(RM4,000 X 13 + RM2,000) X 11% = RM5,940.
Insurance: RM150 X 12=RM1,800.
Total EPF and Insurance=RM7,740
Since, your tax relief is only given up to RM6,000.
So, your total taxable income will RM48,000 after the RM6,000 relief.

b)8% ->
(RM4,000 X 13 + RM2,000) X 8% = RM4,320.
Insurance: RM150 X 12=RM1,800.
Total EPF and Insurance=RM6,120.
Since, your tax relief is only given up to RM6,000.
Your total taxable income is still RM48,000 after the RM6,000 relief.

(Note: Other reliefs are not included for simplification)

As you can see from the calculation, the higher your salary, you won't see any effect of 8%. Only those who with lower salary or/with no insurance might get affected. If you follow my advice as I mentioned in 'EPF: 11% or 8%? and choose to take 8%, even if you need to pay income tax (for those with lower income especially) it's still worth it to settle your credit card debts.

I hope I have cleared your doubts. Next time, don't blindly believe all forwarded emails, as many of them aren't true.

Back 2 Basic: Hire Purchase Loan

Hire purchase loan is a contract which the buyer become the hirer and the bank or financier financing the goods (example: car) become the owner. You’ll be paying installment to the bank for duration as agreed in the contract, while you’ll have the possession of the car, not the ownership. As soon you have finish paying all installment, the ownership will be transferred to you.

The concept is, you be renting the car from the financier, at the end of the contract you’ll buying back the car at a predetermined price. In reality when you pay your installment it is considered as covering for the rental as well the predetermine price paid by installment.

(Note: Islamic loan use the same method of calculation as hire purchase loan)

How they calculate the interest?

Loan amount × Interest × Number of years = Total Interest

How to calculate the monthly installment?

(Loan amount + Interest) ÷ Number of months = Your monthly installment

Let’s look at an example.

Mr. Ali Babu Cheng (aka Mr. ABC) bought a brand new car for $55,000. He used $5,000 from his savings for the car down payment. He took a hire purchase loan from Iwantyourmoney Bank (aka IWYM Bank) for the balance $50,000. IWYM Bank charge an interest of 5% and the loan tenure is 5 years.

Total Interest = $ 50,000 × 5% × 5 years
= $ 12,500 (Total interest charged)

Monthly Installment = ($ 50,000 + $ 12,500) ÷ 60 months
= $ 1041.67 (The amount Mr. ABC have to fork out every month)


Every month when you make payment, part of the installment will be used to pay interest and another part to settle the principal amount. So, next question my fellow students, what is the amount of interest paid for the 1^st year by Mr. ABC?

Most people might calculate this way,

Total interest ÷ 5 years = Yearly interest charged

So, the interest paid by Mr. ABC for the 1^st year is, $12,500 ÷ 5 = $ 2,500 and interest portion paid per month, $2,500 ÷ 12 = $208.33

That’s what a lot of people think, but the truth is its totally wrong.
Get ready, it’s rather complicated. Here is how it’s calculated,

Step 1:

Add all number from1 until number of 'Total months'. Let's call it sum of months.

Example:
Total months= 60
Add all the numbers from 1 to 60.

60+59+58+57+56+…….+5+4+3+2+1=1830 (Sum of months)

The short cut to calculate this is,

(Total months + 1) × (Total months ÷ 2) = Sum of all number from 1 to 'Total Months'

The same example by using the short cut,
(60+1) × (60 ÷ 2) = 1830 (Sum of months)

Step 2:

((Total month + 1) – N^th month) ÷ 'Sum of months' × Total Interest charged = Interest portion for Nth month.

Example:

For 1^st month of payment, the interest portion is:

((60+1) - 1)÷ 1830) × $12,500
= 60$ 409.836.

For 32^nd month of payment, the interest portion is:

((60+1) - 32) ÷ 1830) × $12,500 = $ 198.09

Step 3:

Now to find the 1st year interest paid by Mr. ABC's on his loan, add interest portion from month 1 to month 12.

(60+59+58+57+56+55+54+53+52+51+50+49) ÷ Sum of months × Total Interest
= Interest for first year.

So,
654 ÷ 1830 × $12,500 = $4,467

That’s 35.7% of your total interest.

As you can see, instead of paying the interest equally, you are paying the most in the first year. Let’s see the percentage of total interest you’ll be paying according to years and tenure for a loan of $50,000 with 5% interest.


What is rebate?

When you have paid fully earlier or would like to settle earlier, you’ll be given a rebate on your interest. Don’t think that you have some discounts on your interest. It’s just a term without any value used to calculate the balance you have to settle. Let me explain in the below example.

Mr. Dhandhum took a hire purchase loan of $50,000 to buy a car. He took it for 5 years with an interest of 5%. He planned to settle the loan within 3 years. At the end of 3rd year, he decided to settle his loan. What would be his total rebate? How much balance he has to pay?

His total loan is $62,500 including interest.
At end of 3rd year, his rebate would be his unpaid interest portion.
So his total rebate = Interest for year 4 and year 5.
= $1,516 + $533
= $2,049

Balance to settle loan = Total loan with interest – Total installment paid – Total rebate
= $62,500 – ($1041.67 × 36 months) - $2,049
= $62,500 – $37,500.12 - $2,049
= $22,980.88

Did you notice something? If you pay your 5 years loan in 3 years, the total interest paid is higher than a 3 year loan.

That’s all for the 1st ‘Back 2 Basic’. I’m sure some of your head already started to spin the moment the math portion came in. But, don’t worry the next ‘Back 2 Basic’ will be much easier than this. Enjoy learning.

Get ready for some mind boggling method to maximize your money. Go to Maximize Your Money: Hire purchase loan. (Coming soon)

EPF: 11% or 8%?

It has been almost a week since the government announced the reduction of EPF employee contribution from 11% to 8%. Many might be confused of what to do next. Should they accept the new contribution rate of 8% or maintain at 11%. There have many people debating of what to do. Some are pro towards maintaining at 11% and some pro towards accepting 8%. What is my stand? It depends. Let me help to guide you on deciding, whether to choose 8% or 11%.

EPF (Employee Provident Fund) or KWSP (Kumpulan Wang Simpanan Pekerja) in Malay was created to help workers to save and provide a retirement fund once they retire. It is a useful thing for many as this could be their only savings they would have for their entire life. There’s two part contribution. The employee part of contribution of 11% is sliced out from your monthly salary. While the employer part of contribution of 12% is given on top of your salary.

Starting from January 2009 until December 2010, your portion of contribution will become 8%. But, you do have an option to maintain at 11% by filling up the Form KWSP 17A (AHL). What you should do?

Accept the 8% contribution only if you,

1. Are having high interest debts such as credit card debts. My advice is to accept the 8% contribution. Use the additional 3% to pay off your bills as soon as possible. Why? The credit interest can be up to 18% per annum which is significantly higher than your EPF average return rates of 4% - 5%. Check out my posting ‘Thinking in Percentage’ to understand why.

2. Have found an investment opportunity which offers a better return than your EPF returns. Make sure you only use the money to invest for long term and not to spend away for unnecessary expenditures.

Maintain at 11% contribution if you,

1. Don’t have any high interest debts.
2. Have no proper saving plan so that you would have something when you retire.
3. Are the types who can’t control your expenses and only knows how to spend away every single cents.
4. Don’t have any other investment opportunity which offer better rates to invest or low risk taker.

So, the choice is yours, to follow my advice or ignore it and continue your extraordinary spending.

“How about if I’m at a very tight budget and need some extra cash to support my family? That extra 3% could help us out.”, someone trying to get pity by telling their hardship. You must understand how important your savings is for future. So, you have to live your life according to your income and not according to your desire. Those who are really living in poverty is acceptable to go with 8%, but not those who are earning enough but refusing to accept the truth of life.

All and all, there are advantages of both 8% and 11% contribution depending on which criteria you are in. All the best in making your decision.

YOU CAN BE MILLIONAIRE WHILE EMPLOYED!!!

I just attended a talk on financial IQ and independence several nights ago at Gurney Hotel, Penang. It was a useful talk. Even thou I knew many of them, yet they serve me as a reminder or refresher. There was one thing I disagree with their statement. They said you can never be rich by being employed. The main reason they are saying it because they are promoting some MLM indirectly. It is a common misconception by many. Many believe you can only be rich if you running a business. It is going to be true, if that is what you believe so. Let me open up your eyes and show you, how you can be millionaire even if you are employed for the rest of your life.

Let me tell you a secret... The reason you can't be rich by being fully employed is because you have programmed your mind to think that way. Being employed doesn't mean you can't invest elsewhere. Being employed doesn't mean you can't buy property. Being employed doesn't mean you can't do some business part-time.

The 1st rule to become millionaire while employed is proper money management. As long as you never improve your money habit, no matter how much is your salary, it will never be enough. You might be making $1,000 or $10,000 a month, but if your expenses is equivalent or more than your bring home pay, it will never be enough. And of course, as usual blame your job, that your salary is not enough. So, most importantly, reduce your expenses and produce a positive cash flow. Positive cash flow means your expenses are lesser than your income so that you’ll have additional money for savings.

“So, you are saying just by saving we can be millionaire?” some skeptics started to question. The answer is yes and no. Yes, if your salary is big enough and no if your salary is not big enough. I never say saving alone is enough. Once you have saved, you must look around for better returns. As a starter, look at unit trusts which could give you an average return of 7% – 8% returns per annum. In fact if you know how to maximize your unit trust return, you could get almost 12% per annum average.

“It’s just 8% - 12%. How can we become millionaire with such small return?”, as usual people will start to question on everything as if they know better. Have you heard of power of compounding? If you save $1,000 every month, let’s see how power of compounding works through the chart.


As you can see, your investment grows exponentially. As you continue to save and invest every month your total investment grows. The higher the returns, the faster you’ll achieve $1,000,000.

“Duh, I have to wait at least 20 years to see my first million. Who knows whether I’ll be alive or not?”, more start to hesitates. Now the question is, do you have the million Dollars. If not, then shut your mouth and mind from hesitating, complaining, and blaming. Start to do something about your life and how you are going to make your first million. You have a choice, to start saving and investing or to reasoning that by being employed you can never be millionaire.

Another group of people start to complain, “Where got $1,000 to save every month? If I start to save, I won’t able buy a car, buy nice clothing, buy, buy…”. Just as I said, the choice is yours. It’s not necessary to save $1,000 from the beginning. You can start with 10% of your salary. As your salary start to increase, start to save more, maybe 20% of your salary. One day you’ll be able to save more than $2,000 a month. You might even hit that million Dollar mark in 15 years.

Let me tell you another secret, there will be definitely more millionaires 20 years from now, and why don’t you want to be one of them. The reason is our currency value is dropping every year due to inflation. I still remember many people have been dreaming of becoming millionaire since 20 years ago. And about every 15 to 20 years, the value of 1 million is decreasing by half. It means that 15 years from now, the 1 million dollar today will become $500,000 in value. So, stop complaining and blaming others, that you can’t be a millionaire while employed. It will just be easier and easier as time passes by.

“I do want to save money, but my company is paying me so low. What can I do?”, someone start to seek a place to share their sorrow. Here are some of the things you can do to increase your salary, but still money management is still the rule No.1.

1. Be the best employee. By being the best, your salary increment would be higher than the average.
2. Be the best in what you do and have specific skills which many don’t have. This will create more demand for your skill and you can demand for a higher salary.
3. Upgrade yourself by studying part time or acquiring new skills. If you are just a admin with less than thousand salary, get a diploma or degree and work somewhere else for a better salary.
4. Jump companies. Usual, when you jump to another company, it is possible to gain between 20% – 30% increment.
5. Change field. At times certain filed won’t provide you with good salary. So, you might want to think of changing to a better prospective field.

So, stop complaining that your job doesn’t pay you well and keep on staying there. Go out and look for the high paying jobs.

Let’s have a recap.
The first thing you must do is to save money. Then, invest your savings to get a better return than fixed deposit. Look around for a better job opportunity by being the best in your company and field. Upgrade yourself from time to time, so that you can be competitive. And of course change job for a better pay.

All and all, you can be a millionaire while employed.

Thinking in Percentage

“Man, I have just lost $10,000”, Alberto was grieving to his friends that he has lost money in the recent stock market turmoil. Not to be left out, Roberto started to tell his sad story, “You know what, that $10,000 is nothing. I have just lost $100,000”. All their friends felt sorry for Roberto. Now the question is who has lost the most.

“What silly question is that? Isn’t it’s obvious that Roberto lost the most”, as usual some readers would be pondering. What if I say, you could be wrong. The answer is it depends on the situation. To evaluate who made the most lost; we have to look at the percentage of loss, not the amount. That’s right, whenever it comes to investment, gain or lost must be calculated in percentage. Or else, there is no way to evaluate how good or bad your investment or business really is.

Now let’s see whether Alberto or Roberto made the biggest loss.

Alberto made an investment of $20,000, and loss $10,000. So,
Percentage of loss = Amount of loss/Amount of initial X 100
= $10,000/$20,000 X 100
= 50%

Roberto made an investment of $1,000,000, and lost $100,000. So,
Percentage of loss = $100,000/$1,000,000 X100
= 10%

From the percentage we could see that, Alberto made the biggest lost from his investment. Roberto just made a loss of 10%. Even thou, Roberto’s amount look big, but the percentage is quite small. By right he shouldn’t be worried at all.

But the truth, the general public would always look at the figure and always make their decision based on it. They would get worried when they see some big amount losses even thou percentage wise it’s very small. Same goes with small amount of losses won’t make people get worried, even thou percentage wise it’s big. One very good example is lottery. Those who buy lottery never realize that every time they didn’t win the draw, their loss is actually 100%. By not thinking in percentage, they are actually losing a lot and will keep on wondering where they went wrong.

Another thing to notice about losses is if you lose 50%, to break-even you need to make 100% gains. That’s a long way to break-even. So, when it comes to investment, you must always have a stop loss system to cut your losses. You must set yourself maximum losses you are willing to accept and set it in percentage.

“As a successful investor, one must always think in term of percentage to maximize their investment.”

Let’s look at money management side, and the importance of thinking in percentage.

Let’s say you have personal loan of $20,000 and a mortgage of $200,000 with both terms is 10 years. You have extra $1,000. The personal loan total interest for this year is $2,000 and for mortgage is $15,000. Many would be paying the $1,000 to their mortgage because the total interest amount looks big. By right one should be paying off the personal loan because the interest rate is $10%, while the mortgage’s is just 7.5% (Note: Simple interest rate method was used for easier understanding). By paying the personal loan, you would have saved additional $75 in interest.

Here’s another scenario.

Arulin is a disciplined saver. Every month he would never miss to save a portion of his salary. Now he has a fixed deposit of $7,000 which is giving a return of 5% p.a. Arulin is saving them for his retirement which is 20 years from now. He also has a credit card debt of $5,000 at 18% p.a interest. He never misses to pay at least the minimum amount of his credit card bill. Is he doing the right move?

The right move should be to settle his credit card debt as the interest rate is way much higher than his returns. 18% of debt interest versus 5% of saving interest. Overall he would be losing more money, rather than gaining. He is only delaying his goal to retire earlier.

Does that mean no matter what we must settle the credit card debt first? It depends. If you have found an investment which gives stable higher returns than your credit card interest rate, then its okay pay the minimum amount for your credit card and continue to invest. It also depends on your cash flow health, which we will look at my up coming posts.

“As an aspiring millionaire to be, one must always think in percentage to maximize their money management, as you will see the example below.”

Why people aren’t making a decision based on percentage? The problem, we have been raised since kid, that the more money we, the better. This is true, but is not applicable when it comes to investment gain/loss and money management. People tend to get confused and make a bad decision most of the time.

All and all, when you make an investment and/or money management decisions, make sure that you think in percentage to maximize your overall returns.

The Choice is Yours: While you have credit card debt

You have a choice to go clubbing by paying $35 cover charge and feel good for few hours
OR;
You have a choice of paying your accumulated interest and feel good that you are going to settle your debt earlier.

You have a choice to spend your money on that beautiful $100 dress and feel good for a week
OR;
You have a choice of paying taht $100 to reduce your debt and feel good for a better wonderful future.

You have a choice of buying that $1000 new Nokia handphone and feel good for a month
OR;
You have a choice of settling some of your debts and feel good the sense of relief.

You have a choice of renovating your house and feel good for a year
OR;
You have a choice of settling all your credit card debts and feel good forever.

The choice is in your hand.

Laughter the best medicine

In an Asian economic summit, all Asian leader were discussing on what to name the Asian Currency Unit. The current Malaysian Prime Minister, Datuk Seri Abdullah Ahmad Badawi, plan to leave a legacy behind before he step down from his seat in March 2009. So, he proposed the new currency name in his speech.
"As we all know the US Dollar have a huge amount of influence in the current world economy. Thus, we shall have a currency name strong enough to compete with the US Dollar. Do not undermine the name as the name would be a force to reckon. The US call their one unit as 1 Dollar, ours shall be called 1 Dollah..". :D :p


For those who don't get the joke, the name Abdullah especially 'dullah' portion sounds similar as Dollah. Now you get it. :D

When your loan app rejected...

“That stupid bank! I applied for loan and they simply reject it”, Clarisa frustrated because her loan application is rejected. She’s worried that she couldn’t get money to renovate her house as she planned. Now, she started to look around for other source of loans.

Many would have came through this, and they still confused of why their loan application is rejected. They believe that they are still eligible for the loan. They won’t give up and look for other source. Some would look for loan sharks. Some would get some third party agents. Worse thing is some people are not eligible at all and they knew it, and they use forged/fake documents to apply.

Let me tell you all something. The reason you get rejection is because there is a high chances that you won’t able to pay them promptly and risking of defaulting the loan. What does this mean? It means you have to re-evaluate your financial situation now.

If you take up the loan, the chances are high that you will end up in a deeper crisis than before. Here is a true story to prove my point.

"Peter (not his real name) doesn’t have a proper income. He wanted to get a second hand car for $10,000. He has been blacklisted by financial institute. But, he believes that by having the car he could do some business more effectively and could pay the loan promptly. So, he used his wife, Jane (not her real name) as the bait to get the car loan. Here is the worse thing. She’s a housewife. No income, nothing.

Peter got some help from his friend to get a fake payslips for his wife. Then, he applied the car loan under his wife’s name. He was proud of getting the loan. But, as time pass by, he started to default on his monthly payments. After a year or so, his car was repossessed. He tried to borrow some money from his friends and family and managed to get it. He got back his car. After a year or so, the same thing happens. He started to hide his car. Yet, the car was repossessed. Now, he has no money to get back his car.

The bank sold off the car in an auction and his wife name is blacklisted as there’s still balance of $3,000 to pay."

The moral of the story, don’t borrow or get loan when you are not eligible. You’ll just make you and your loved one suffer. Just look at the US sub-prime crisis. Why did it happen? It happened because of loosening of loan borrowing criteria. During the property boom, some of the financial institute started to give loans to people with history of bad records. As witnessed by everyone, it caused one of the biggest financial crisis in US histories.

So, when your loan application is rejected? It means something is wrong with your financial DNA. You have to sit down and find out why it is rejected. Is it because you have too many debts? Maybe your income requirement is not met? Perhaps, you have a history of bad payment? Or maybe it’s just no proper documentation.

Whatever it is, you must first stop complaining about it. Don’t try to look for other source of loan. When you are rejected, other loans would be worse for your financial health. Fix the root cause of your loan rejection.

If you have too many debts, settle them first. If you are planning to get a loan to settle your other loan, make sure your new loan offer better rates. Discuss with the bank on your plan to settle other loan. They might consider it.

If your income requirement not met, find a better paying job or take up a part time job. Or you could save some money so that you don’t have to take loans beyond your paying capability.

If you have a bad payment history, try to clear it by having at least 12 consecutive good payments, as your Central Credit Reference Information System (CCRIS) system only shows your past 12 months payment. Even thou you could just pay consecutively for 3 months and reapply, but it doesn’t mean your ‘payment due’ habit is taken care of. If your bad payment history was due to jobless issue you could show proof that you have found a job and negotiate with the bank.

Remember, your loan rejected because you are not financially sound and don’t try to get loans beyond your paying capability. You might have ‘hopes’ that you can pay them on time with your unrealistic plan, but those are just false hope. Be realistic.

Here’s another true story.

"Kevin (not his real name) was very enthusiastic when he bought his second hand Honda Civic. He managed to get a loan of $20,000. At first he tried to get the loan from banks, but his salary didn’t permit him one. So, he went to a credit institution and applied. They approved with a higher interest rate and one condition, he must have a guarantor to back him up. Since he is staying with his girlfriend, he asked her to be his guarantor. After few months paying, he started to default his payment. His girlfriend who is still studying at college had to help Kevin to pay it with her savings she saved from part time job.

Later on after almost a year, Kevin and his girlfriend break off and he couldn’t manage his financial matters. He starts to default again. Worse, he lost his job. The financial institute has to repossess the car. He was mad at it and went to argue with the staff. He ended up getting violence and arrested by the police. All this happened because he’s not qualified for the bank loan in the first place. The car got sold off at auction and whatever remaining balance has to be paid by the guarantor."

We could learn few things from here. First, the bank rejection already signaled that you will get into trouble if you get a loan. Secondly, don’t ever sign as a guarantor for a loan, especially if you are not rich enough. When financial institute asking for a guarantor, it shows the borrower’s income or history is not in good shape or didn’t meet the minimum requirement.

Some might be saying that they urgently need money; for renovation, for wedding, to buy car, to buy house, to modify car, to pamper yourself, for vacation and so on. But is it worth it to find alternate source of loan when your application rejected. Think of all the hardship and suffering. Think about thousand of people who have gone through the this.

Just delay your plan, and fix your financial leakage. Improve by learning better money management. Improve by getting a better income. Improve by fixing your bad history. Improve, improve and improve.

All in all, when your loan application rejected, it means something is wrong with your current financial situation. Fix it first before you re-apply and avoid using any shortcuts to get a loan. This is to ensure you of achieving your goals without any unnecessary risks.

I'm debt free... financial freedom!? Part 2 of 2

(Click here for Part 1)

Mr. Leemubu, is a humble man. He leads his life comfortably with his wife, Eliza and 2 children, Sam and Dash. Sam is studying engineering in UK, while Dash is studying medicine in Australia. They are staying in a single storey house which is on mortgage and a fully paid compact car. Mr.Leemubu and his wife bring back home $20,000 from their job.

Since Mr.Leemubu started to work at the age of 24, he saved almost 20% of his salary every month, and now he is 45 years old. Even thou he had the money to pay off his mortgage, but he didn’t. Instead, he invested part of his savings in stock market and the rest in low cost apartments. For his apartments, he only paid 50% down payment and the rest he took mortgage. Whatever money he gains from his investments he reinvests them by buying more stocks or properties, and he took more mortgages to cover his properties.

One fine day, Eliza received a phone call from Mr.Leemubu’s office. She was shocked. Mr.Leemubu admitted to hospital. Eliza rushed to the hospital and found out he had a stroke and paralyzed. Eliza was worried. She was worried about their financial commitment, as her salary is only $7,000 and it’s not enough. She was worried on how to support their children’s study. Mr.Leemubu is released from his job as he is unfit to work. But, Mr.Leemubu wasn’t worried at all.

Fast forward into the future, Mr.Leemubu had recovered almost 90%. His recovery rate was quite fast, thanks to his wife’s loving care. Eliza quit her job just to take care of him. His children had completed their studies and back home. Their house is still their and in fact they are planning to move to a bigger house. How this can happen? Isn’t Mr.Leemubu had a lot of debts due to his mortgages? Even Mr.Mubulee, who was debt free, could get into a personal financial crisis. How did Mr.Leemubu and his wife,Eliza manage it?

The answer is Mr.Leemubu’s idea of financial freedom is totally opposite of Mr.Mubulee. Even thou he had a lot of mortgage; his passive income is equivalent to his active income. Yes, that’s right, he earn rental income from his properties and dividend income from his stocks. But he has to pay his mortgage, how is it possible?

Mr.Leemubu make sure that whenever he invest in property, his monthly rental collection is higher than his mortgage payment. This is to ensure his income is always a positive flow. Since reinvest his passive income, he managed to use ‘Law of Compounding’ to accelerate his passive income and made his active income and his passive income equivalent. Then, how is it possible his wife to quit her job? Isn’t her income will be still needed to support the family?

The answer is Mr.Leemubu made sure, whenever he buys a property, he’ll take a MRTA insurance coverage. MRTA which stands for Mortgage Reducing Term Assurance is a insurance which is used to settle your mortgage incase some unforeseen circumstances happen, such as death and permanent disability. So, when he got stroke, he’s declared unfit to work due to his disability.

Now, Mr.Leemubu and family have passive income to cover the entire family expenses as well some extra money to invest.

Conclusion

Being debt free doesn’t mean you have achieved financial freedom. The main keyword in financial freedom is ‘passive income’. Only when your passive income could support your life or lifestyle without working or doing any active job, that’s when you can declare yourself, has achieved financial freedom.

I'm debt free... financial freedom!? Part 1 of 2

Mr. Mubulee is a proud man. He’s proud because he believes he has achieved financial freedom. His favourite word phrase is “I achieved financial freedom because I’m debt free”. He has fully paid for his house. His car and his wife’s are also fully paid. He always pays by cash or cheque. He has 2 children, Stevie, studying medicine in Ukraine and the other, Ronie studying engineering in US.

Mr. Mubulee and his wife, Elika bring in a total income of $20,000 per month. Mr. Mubulee started to save at young age, almost 20% of his salary. The current house he’s staying is worth $200,000 at the time he bought it. He bought his house cash. Same goes for his cars; he paid cash. Since they don’t have any debts, they started to live quite lavish life. They don’t really save much money now days as their income is just enough to pay their living and children’s college fee.

Mr. Mubulee is a proud man. He proudly claimed himself to has achieved financial freedom.

One fine day, Elika received a phone call from Mr.Mubulee’s office. She was shocked. She was informed that Mr.Mubulee collapsed in the office during a meeting. She rushed to the hospital and found out that her husband had a stroke. Luckily, he was admitted on time, or else it would have been a danger to his life. Mr.Mubulee looks so helpless.

They were worried, confused. Mr. Mubulee discharged from hospital, but he’s paralyzed. He’s not fit to work. His company had to release him from his job. Mr.Mubulee’s income has stopped. So, the only breadwinner is his wife, Elika. Her income is only $7,000. Since Mr. Mubulee is bedridden, they need someone to take care of him. If Elika quit her job to take care of him, there won’t be any income. They get a maid to take care of him.

Elika started to feel the pressure. Now, she has to pay for everything; their household expenses, their children’s college expenses, transportation expenses and their latest expenses, Mr.Mubulee’s medication and maid services. She started to use her credit card and live with debt.

As months pass by, she couldn’t handle the financial situation. Mr.Mubulee felt helpless, he couldn’t do anything to help his wife. Stevie and Ronie, their children has been barred from attending their courses as their fee has been due for months. Elika had to sell off their car to support Stevie’s and Ronie’s education, and bought a cheap secondhand car.

Elika’s credit card debt started to pile up. Now, the bank is going after her. She has only one choice, to sell their only home sweet home. Mr.Mubulee has to agree with Erica’s decision. So, they put the house for sale at market price of $300,000. Unfortunately, the property market isn’t doing so well. It has been 2 months and there were still no buyer, and the banks are chasing her. Their children also started ask for more money for their education.

They have no choice but to sell their house for $220,000 below the market value of $300,000. She had to use the money to settle her credit card bills and send some money to her children. Mr.Mubulee and Elika have to move to a rented house. The economy started to get worse. Erika’s company had to deploy pay cut. Now, she’s panic as she can’t afford the maid service, and her credit card bill start to pile up again. Their struggle continues as time pass by.

Mr. Mubulee’s proud has totally vanished into thin air. What he was proud of being financially free now is just a myth. What was the mistake he did? Isn’t being debt free means you have achieved financial freedom? To answer that, tomorrow we’ll look into the story of Mr.Leebumu, who has different idea of financial freedom.

(Click here for Part 2)

The Goodness of Credit Card

The title itself would cause a massive controversy in today’s financial planning. Many people only looked at the negative portion of a credit card. That it’s interest rates is too high, uncontrollable usage and even stories of people going bankrupt due to credit cards. Now this article could be an eye opener for those people outside there. Nope, I’m not going to talk about using credit cards in case of emergencies. It actually could bring you a step closer in achieving your financial goals.

"Credit card is just a tool. How you use it, will determine the effect"

There is only one condition for these to work; you must be a person who can control the usage of credit cards, no impulsive or unnecessary spending. I’m going to talk on how you can use your credit card to save and reduce your expenses. I’ll be using examples from Malaysian’s credit cards as I’m familiar with them and I assume other countries have similar equivalent benefits. There are a total of 3 benefits you can make use out of credit cards.

Gain interest by using other people’s money.

Note: In Malaysia, this method will only work if your balance is zero. Other countries might still work even with a balance.

Every month, you’ll have a certain fixed expenses. This includes your monthly groceries, bills, gasoline, and so on. These expenses will occur whether you use your credit cards or not. This means that you have cash ready on hand (or in bank) to pay for these expenses. Now, you use your credit card as if it’s your debit card. Whatever you spend, use your credit card to buy them.

Now, some of you might be asking, why not I just use cash or a real debit card. The answer is, with credit card, you are using other people’s money (OPM). Who are the other people? It’s the bank. You use your credit card while your money sits nicely inside your bank account while it earns interest. If you use a debit card or cash, you’ll loose the chance of earning interest for yourself.

Furthermore, there is this 20 days grace period (interest free period) from the date of your credit card bill. So, let wait until the last 2 days to pay them back. You’ll further gain more interest on your money in bank. Isn’t it’s a great news. Let’s look at the illustration below. Assume your billing date is 20th every month and the investment opportunity is 5% p.a.

As you can see, if you had paid immediately with cash upon purchase, you would have missed the chance of earning that $69.68. Don’t spend that money off, invest it somewhere.

One rule of thumb, make sure you spend on what you can afford on as if it’s your cash.

Reduce your expenses

Every single dollar you spend using credit card, you’ll earn points on. These points can be used to redeem items, cash rebates, and vouchers, which is excellent. But if you put through a proper planning, it can be used to reduce your expenses. Remember by reducing your expenses, you would able to create additional savings for your financial goals.

Most people when they see they have thousands of points, they would be tempted to get unnecessary items to pamper themselves. Think for a while, would you get them with your own cash now. If the answer is no, then don’t redeem them. If you are planning to get buy with your hard earned cash, then the answer is yes. By doing this, you able to save more money and put it for a better use, let the money work for you. If you are about to buy something and you are just a couple of hundred points away to redeem it, then just wait another month or two, so that you won’t have to spend any cash.

One great item you redeem is grocery voucher from Tesco, Giant or Carrefour (These are the 3 biggest hypermarket in Malaysia; I wonder will Wal Mart ever enter the market). Since every month you would buy groceries, why not use these voucher instead and reduce your expenses.

The zero interest installment plan

This is actually a great tool offered by some banks, and it can also cause uncontrollable spending. But yet if it’s used properly, it would save you a lot of money and in fact could gain you some. Note that, even thou it’s zero interest, some banks charge some very low administrative fee.

There are 2 way to look at it, so let me start with the 1st approach, inflation. A dollar today is worth more than the same amount in the future. Using this principle, isn’t its better to delay the payment? The answer is definitely ‘YES’. As you can see below, with an inflation of 5%, and opting for the 36 months installment, the value of total paid at the end of 36th month, its value is only $4,963.08 on present day.


The second approach, you can invest the money you deferred and let the money work for you. If you can earn more than admin fee, isn’t its better to invest them? The answer is definitely ‘YES’. Now let’s look at the figures below. By investing the $5,000, at the end of the installment period, you could gain $411.51. If you have just paid cash, or didn’t convert or buy through ‘0% Installment Plan’, you would have lost the opportunity to gain almost $400.


Conclusion

Remember these 3 great benefits:

1. Use other people’s money by using your credit card as if it’s a debit card. Earn interest while you wait to pay before it’s due.
2. Reduce your expenses by planning your redemption to reduce your expenses.
3. Use the 0% interest installment plan to enjoy on your interest and to gain by time-money value concept.
   

The bottom line is, spend only on necessary items and make use of these 3 great benefits. These 3 benefits will only work if you already have cash. Don’t expect it to work if you are in debt.

Remember, credit card is just a tool. How you use it, would determine the effect.

Basic Rules of Investing

I posted this at some group in 2006, and thought it would be a good idea to post it here as it is still useful relevant article. Enjoy my revised 2006 word of wisdom. :p

There are many choices of investment available these days within single click away. Many people never realize what they are putting their money on. They just follow what other people do or advice and in the end lose all their money.

So, the first MOST important rule is,

"Never ever invest in something you don't understand"

Many people just look at the gain, without realizing what are the risk involved. These cause them to easily wipe out their investment. If you don't know anything about investing, the possibility of someone cheating your money is high. Take "Pyramid Scheme" for example. Many people didn't understand what it is all about, but yet they still invest on them. In the end they not only lost
their money, but lost their good relationship with their friends and family as well for introducing them into the scheme.

So, the solution is...

"Understand what you are going to invest on"

Yup. Learn, study about them. Ask all sort of questions. Find out whether it is legal or not. Try to get REPUTABLE 3rd party opinions. Reputable mean, someone who knows inside out about investment. Don't get influence by the figures they show you. Find out all the risks
involved. Think rationally and make a move, whether to invest or not. Most importantly, make sure you will be financially stable if you lost all your money in the investment.

"The greater the return, the greater the risk"

Find out the risk involved and study whether you can take such risk or not. One way to find out how much risk you can take, (especially for stock market), try to invest a small amount of money (make sure this is not your life savings) by buying some stock. See if you can sleep soundly in the night or not. If even a 1 cent drop gives you sleepless night, then definitely its not for you.

"Learn to minimize the risk/loss"

Many people do not know just when to stop their losses. They always keep on hoping that the loss will be temporary, but the truth is you will never know. It could become worse, if you don't get out as soon as possible. To learn to minimize a risk or loss is not easy, but it can be learned through experiences. Read books on risk management. It could help you out to understand and get new ideas on how to manage it.

"Learn from mistakes"

Everybody do make mistakes, but don't let the mistake haunt you. Learn from it, and use it as a powerful tool of wisdom. I have seen many people, who keep on repeating the same mistake over and over again. The only good habit they have is they never give up, but its useless if you still repeat the same mistakes. Also, the earlier you do a mistakes, the lesser it will impact you. But, it doesn't mean you must do a mistake to gain experience. Another away is learn from other people's mistakes, they are abundant.

As for Stock/Derivative Market (Which can also be applied to other sort investment), many books or people says there are 2 important rules,

1. Don't be greedy.
2. Get rid of fear.

but I would add another 2 and make it 4 important rules, they are:

1. Don't be greedy.
2. Get rid of fear.
3. Never ever regret.
4. Don't be too hopeful.

That's all for now. I hope this would help to enlighten many future and current investor to
prepare themselves before they start to invest.

Happy investing.

Money.. Money.. Money..

Why money is causing so many problems to people? Is it because money is root of all evil? Is it because it corrupts people’s mind? Is it because money diverts people away from spirituality?

The answer is money is not the problem at all. The problem is YOU, YOU & YOU…

Yup, that’s the one and only truth. Perhaps, you might have come across many articles and books on personal finance and they all talk about the same thing. To make more money, you have to change yourself first.

“Oh no, another site talking rubbish, instead of telling us anything useful”, some voices of irritated reader who are in deep financial crisis. Hold on there for a second. Let me tell you why it is important to change yourself first and how changing yourself can make more money for you.

Changing yourself or more precisely your mindset about money, you’ll start to see abundance of opportunities of making money outside there. How is it possible just by changing your mindset you’ll start to see the opportunity?

Let say you are a diehard football fan, anything which you came across related to football, you’ll notice them.When you flip your daily newspaper, you’ll able to notice anything related to footballs, no matter how small is the article, even every single advertisement related directly or indirectly to football. That’s because your mindset had been tuned to the football frequency.

“Does that mean I have to stop tuning my mindset to football and start to only think about money?” a confused reader start to ponder.The answer is no.

Only thinking about money without a purpose is like a body without a life aka robots. I have came across people who destroyed their entire life just because of chasing money without a purpose.

“Haha.. See money can destroy people’s life, so it’s indeed evil to have too much money”, a reader start to accuse baselessly.

Money is just a tool. A tool can be used for either good or bad deeds. For example, a hammer can be used to build your shoe rack, and it can also be used to knock people’s head. Does that mean the hammer is evil because it’s used for hurting someone? Of course the answer is no. It’s the user who decides the purpose of the tool.

Same goes for money; it is you who decide how you are going to use it. The choice is yours. You can use it to live up your dreams and do some good deeds or destroy yourself and do something bad.

Remember this, without money, church, temple, mosque or any worship places can’t be build. Without money, health care centers, old folks home, foster house can’t be build. Without money, foundations couldn’t be formed. Without money, there won’t be any charity. Think about it. How are you going to contribute effectively without money?

Okay, let’s not talk about charity. Let’s talk about your dreams. Let’s take the die hard football fan for instant. I’m sure he’ll be wishing to watch every single match in the season, live. But can he do that, for an average Joe, it’s not possible. He needs money to travel around, to buy the best seats as well to support himself and his family. Aside of money, he need time to do all of that. If he is on a good paying job where he can afford to watch all the games, but might not have time. He has to trade his time for money. If he takes a long break, how is he going to earn for living.

So now he has a reason to change his mindset to make money, by making his dream as his burning desire. But remember not to make it as a desperate desire. When you are desperate, you’ll tend not to see all the opportunity and could end up losing your money in bad investment.

Having money is also to ensure that you don’t have to worry about your child’s education, your retirement, your vacation, and whatever you want to do for you and your family.

Imagine this, you were walking around a shopping complex, and you came across a beautiful diamond necklace which you really want to buy for yourself (If you are a man, then imagine you want to buy for your wife), but you found out the cost, $5,000. Unfortunately, you don’t have the money and you could only wish for, and you go back home with disappointment. You could have paid using your credit card,but have to suffer paying them later. Now imagine that you have the money, $5,000 here I come. Yup, you don’t have to think twice.

Now let’s imagine a second scenario. You are watching your favorite news, and they were showing a story of a young brilliant kid who is suffering some rare disease and need fund to support her treatment which cost $100,000. The kid’s parents making a plight through the news. You could only feel sorry for the kid and wish you could help her out. But unfortunately, you don’t have money for yourself. You end up feeling sorry for her.Now, imagine you are a multimillionaire; you could easily help the kid and be proud of yourself being a Good Samaritan.

“But, when you have more and more money, you’ll get stingy, just like all those evil rich people out there”, again some dissatisfied souls start to condemn.

The reason you might be accusing the rich as evil is because of our human mind always tend to remember negative things a lot deeper than positive things and blindly make conclusion based on our negative perspective. Just give yourself some time, think of one rich person you have met who is humble or generous. I’m sure you could name at least one. Don’t stop there, try to recall as many people you have met or heard of.I’m sure you can list at least 5 people. Some of the generous famous rich people are Bill Gates, Warren Buffet and John D. Rockefeller.

Another reason we always accused the rich as selfish, evil and so on because of jealousy. We also tend to believe that they should share out their fortune with us. But isn’t it’s selfish to think like that. They worked hard (or smart) for the money they have accumulated and just like that we hope they would share their money. They deserve to be rich for their effort. Some of us just sitting around and condemning others for being rich. Of course these people don’t deserve to be rich, as they are not putting any effort at all.

Ben Franklin once said, “God helps those who help themselves”. And I would further add,
“God help people who want help themselves regardless of what religion or race they are from.”

By looking at the positive side of money and the desire to achieve your goals and dreams, you will find a way. You will see almost every single opportunity passing in front of you. Knowing one is an opportunity is not enough. You got to take the action, make the first step to grab the opportunity.

To sum up all in one,


Look out for my next few articles near future discussing on 'Dream', 'Desire', 'Postive Money Thought' and 'Action'. Until then, enjoy looking for new opportunities.