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.
Thursday, November 20, 2008
Wednesday, November 19, 2008
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?
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,
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.
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.
Monday, November 17, 2008
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 1st 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 1st 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) – Nth month) ÷ 'Sum of months' × Total Interest charged = Interest portion for Nth month.
Example:
For 1st month of payment, the interest portion is:
((60+1) - 1)÷ 1830) × $12,500
= 60$ 409.836.
For 32nd 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)
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 1st 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 1st 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) – Nth month) ÷ 'Sum of months' × Total Interest charged = Interest portion for Nth month.
Example:
For 1st month of payment, the interest portion is:
((60+1) - 1)÷ 1830) × $12,500
= 60$ 409.836.
For 32nd 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)
Friday, November 14, 2008
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.
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.
Wednesday, November 12, 2008
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.
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.
Tuesday, November 11, 2008
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.
“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.
Sunday, November 9, 2008
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.
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.
Thursday, November 6, 2008
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
"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.
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.
Monday, November 3, 2008
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.
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.
Sunday, November 2, 2008
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)
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)
Saturday, November 1, 2008
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.
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:
Remember, credit card is just a tool. How you use it, would determine the effect.
"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:
- 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.
- Reduce your expenses by planning your redemption to reduce your expenses.
- Use the 0% interest installment plan to enjoy on your interest and to gain by time-money value concept.
Remember, credit card is just a tool. How you use it, would determine the effect.
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