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)
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