Are money issues is taking a toll on your relationships?

Don't let it control our life. Let us take control instead...


1. Take calculated risks and invest our money. Inflation is around 6-10% every year, do we still want to put our money in Fixed Deposits and get only 3% return, making a net loss of 3-7% yearly?

Ensure that our net assets are growing at a faster rate than the rate of inflation.

2. Eliminate all credit card debt. It's pointless investing our money and getting returns of 8-13% if our credit card is shrinking our money by 18% every year.

3. Be careful when taking personal loans, ensure that the rate they offer you is the 'effective interest rate' and not the 'fixed rate'. For eg, if fixed rate for a personal loan of 5 years is 5%, effective interest rate is about 9.17%. If your effective interest rate is 9.17%, we're better off not taking the loan. Avoid taking unnecessary loans if you don't need the advance cash.

4. Calculate how much we may need when we retire and work towards how to achieve that target.

5. Calculate how much you may need for your kids' education and work towards it while they are still in diapers. Power of compound interest works in our favour the earlier we start.

6. Insurance is important if we have children depending on us financially, but buy term insurance and invest the rest. It's less costly and it comes with higher coverage. Insurance is for protection. If you're looking for investment with returns higher than inflation, look into other options. 

7. It's ok to invest in property but do not overbuy. Remember that we are borrowing to invest, thus our nett return may not be that great. For example, if we are getting 8% in property appreciation but paying interest of 4.8% yearly, our net return is only 3.2%. Minus inflation of 6%, your money is shrinking by 2.8%. Is it worth it? There are many hidden costs also in property investments such as yearly quit rent, assessment, repairs and maintenance, renovation expenses, security and utility costs and capital gains tax! Work out your NETT returns before you decide to embark on another property investment. (Furthermore, housing loan rates are usually tagged to the BLR, when BLR increases, the tenure of our loan will increase exponentially)

8. Set aside a fund for yearly family holidays, we need to live a life too.

9. Luxury bags can be put on hold until kids are older, don’t succumb to peer pressure. (unless you got it from US factory outlets, :-))

10. Don’t own more cars than we need. Buy a basic car just enough to fulfil family needs so that you can ease up your cash flow for savings/investments.

11. List out all our monthly expenses on a spreadsheet and check which areas are draining our cash-flow. Make sure we include an additional RM 300-500 for unforeseen expenses like wedding ang pow, sudden emergency shopping, etc.

Money is important but don’t let it affect our relationships with our spouses and children. It will cause much unhappiness among the children, stress and breakups in relationships. Changes you are making now can lead to a financially better life tomorrow. Short term pain for long term gain.

“Time, not money, is your biggest asset in life. You need time to invest in relationships (with yourself and your family) or to chase your passion.
Think again if you are still trading off time for money.
Let your money work for you. You don't work for money. That is exactly what Financial Freedom is...”
― Manoj Arora

Why are we losing money making these small mistakes? Check out this article I read from the Star bizweek  http://www.thestar.com.my/Business/Business-News/2013/07/06/Losing-big-on-small-mistakes.aspx

I have been wanting to write this for a while now but looks like Yap Ming Hui beat me to it. So true, yet many of us still make the same mistakes. 

Losing big on small mistakes

MONEY AND YOU: BY YAP MING HUI

Compounded errors can add up to quite a bit

THERE’S a famous proverb which goes like this, sikit-sikit, lama-lama jadi bukit. When it comes to the middle class and financial freedom, the only thing keeping them away from becoming financially free is a laundry list of seemingly small financial mistakes.

From my observation, the average middle-class Malaysian, those who make between RM10,000 and RM30,000 household income a month, makes mistakes that cost them between RM1.5mil to RM2.5mil over a period of 20 years. Can you afford such a loss?

The seeds of this financial disaster are planted years before their outcome. Further, the mistakes are often small and do not even look like mistakes at the time. So, many do not even realise that they are making them.

Even if they do understand the error of their ways, they are neither aware of its real impact on their overall financial position nor that it is eroding their chances of financial success. Worse, some take the mistakes lightly and are not vigilant when making these life-defining decisions.

When all these factors are combined, the result is simply a bombshell. If you fall prey to them, you are not going to achieve financial freedom, and you can certainly forget about becoming wealthy.

Thankfully, you can avoid falling into a financial black hole if you know what these simple mistakes are, the cost of making them and how to sidestep these pitfalls.

Mistake No. 1: Paying too much in insurance premiums

Many people either over-insure themselves or pay an excessive premium for insurance because they do not know how to optimise their money. For example, consider two insurance products for a person at age 35: term insurance for RM500,000 will cost RM1,625 per annum, whereas a whole life policy will cost RM14,225 per annum.

Remember that the idea is to buy insurance cover to protect our loved ones from financial hardship in case of an untoward event. We should go for the lowest possible premium and invest the difference between the two premiums to optimise our money.

If you buy term insurance instead of a whole life policy, you will have a saving of RM12,600 per annum to invest. At an 8% return on your investment over 20 years, you will gain RM576,600. On the other hand, with a whole life policy, assuming you receive the entire premium paid (RM14,225 x 20 years), you will have RM284,500. The loss is about RM292,100. Small mistake, big losses.

Mistake No. 2: Failing to increase savings when income rises

The writer C. Northcote Parkinson, who is famous for the so-called Parkinson’s Law that “work expands to fill the time available for its completion”, also said in his book, The Law and the Profits, that expenditures rise to meet income.

He added that “individual expenditure not only rises to meet income, but tends to surpass it, and probably always will.”

This is typical human behaviour. When an employee gets a raise, he decides that he can now afford a better lifestyle. He or she may drive a better car, get a better handbag or mobile phone or enjoy a better holiday. Instead of saving, the average person will spend the extra income.

However, a person who knows how to optimise his wealth would maintain his current lifestyle and increase his savings. Assuming that he saves RM1,000 per month and invests that amount, at an average rate of return of 8% per annum on his investment over 20 years, that would be RM589,020. Another small mistake that results in big losses.

Mistake No. 3: Not optimising the returns on savings

One other common error is to keep too much money in savings instead of investing it. Usually, this is due to fear of making losses or being too busy earning an income or attending to various needs. Say you put RM2,000 per month in a fixed deposit account for 20 years. At 3% interest p.a., FD will give you RM656,603. However, if you invest the amount, at an average rate of return of 8% p.a. on your investment, you would get RM1,178,040. You lose RM521,437. The outcome is even worse for those who put their money into a saving account, which gets only 1% to 2% p.a. Again, a small mistake that leads to big losses.

Mistake No. 4: Failing to revise the interest rate on your mortgage

Remember that the interest rate on mortgages fluctuates. Currently, it is about 2.5% below the Base Lending Rate (BLR) or 4.1% p.a. Some house buyers who are not mindful of the current rate may be paying a mortgage interest rate of BLR + 0% or 6.6% p.a. For a loan of RM500,000, at 4.1% you pay RM3,190 per month. In total, you pay RM765,672 over 20 years. Compare this with 6.6%, where you pay RM3,757 per month. In total, you pay RM901,766 instead. If your current mortgage interest rate is BLR+0 and you do not ask the bank to revise your loan to BLR-2.5%, you will end up paying an extra of RM136,094. Once again, a small mistake that costs you dearly.

If you take into account all four errors, the total losses is a whopping RM1,538,651. This does not include the investment losses made during the 20-year journey. They could be in the form of an abandoned property, frozen gold bullion investment, and unit trust or share market investment losses. Think about it: when a middle income earner makes unnecessary money mistakes, he would have accumulated at least RM1.5mil to RM2.5mil less wealth when he is 55, depending on the kind of mistakes he made.

This is why many middle-class people cannot reach their goal of becoming financially free. None of the four mistakes discussed here are in themselves disastrous. However, their combined and compounding effect rob the middle class of their financial freedom.

A final word: it does not matter whether the mistake you make is big or small. Every single mistake will impact on your goal of financial freedom.

If you seriously want to set yourself free from all your financial obligations, review and plug all possible leakages. At the very least, you can avoid making the mistakes mentioned above at all costs.

- end of article

___________________________________________________

Want to know more mistakes we make?
Avril would like to add a couple more.

Mistake No 5: Buying too much property for investment on borrowed money.

Once our pay increases, we tend to think that we should invest into more property by leveraging.

What is leveraging? Leveraging means using borrowed capital expecting the profits made to be greater than the interest payable.

Many of us forget that there are also costs incurred when investing into property
1. Stamp duty
2. Legal fees
3. Bank fees
4. Interest on loan, currently between 4.6 - 5%.

Thus if borrow money to invest, and our returns from our property investment is say 8%, our nett return is only 3 - 3.4%.

Remember that loan instalments are not constant, we need to look at this other factors that will affect our future disposable income:-

1. Should BLR go up, the tenure of our loan increases (check out my previous blog post on how the tenure increases here)

2. Inflationary pressures. When inflation sets in, you'll find that our purchasing power is decreasing. We need to earn more to sustain our lifestyle, feed our children, pay fees, etc. 
Check out the recent price of fuel hike, not only it decreases our disposable income, it's going to increase a lot of other cost of goods too.

Property investment is great if the value of our property appreciates and if we rent our our property to a reliable tenant who pays promptly. It's also a no-brainer that our rental income needs to be more than our loan instalment amount (that's what leveraging is all about).

Ideally, the extra amount 'earned' from renting our property (after deducting loan instalment and other expenses) should be invested to build our assets and increase our net worth.

Mistake No 6: Carrying too many credit cards and not paying them in full

This is one of the most obvious reasons why most people wonder why they have to keep working even after retirement age.

As long as we take up too much credit (borrowing), we are under bondage. 

We continue working just to pay off our loans, not planning or keeping money aside to build our own retirement/ pension fund.

Check out my post on how to manage credit card debt here

____________________

Albert Einstein once said, the power of compound interest is the 8th wonder of the world.

Every little drop makes an ocean, so every little cent counts when you are young and are able to save for a 20, 30 or even 40 years. For example, an initial of RM 10,000 with just monthly savings of RM 400 will grow to Rm 1.08 million in 35 years.

Smartphones nowadays have great apps, download a good financial calculator app that will help you in calculating if your investments are reaping in favourable returns for you. The one I used above is called 'EZ Calculators', it's FOC and pretty user friendly.

Start your pension fund today and enjoy a fuss free retirement.

Three Dangerous Stock Market Myths

Stock trading has been around for hundreds of year. The earliest stock exchanges, which bought and sold grain, quickly expanded to other commodities. These early deals were carried out in the house of a man called Van der Bourse, which is why stock markets are sometimes called bourses today.

Even though stock markets have been around for years (or maybe it’s because they have been around for so long) investors have perpetuated a collection of false notions about what goes on there. Unfortunately, some of these myths have become so ingrained that many consider them to be true. But believing these untruths could damage your wealth! 

Myth No 1 - Timing Is Important 

Some traders believe they can predict the markets’ every turn, but the truth is no one can. So when is the best time to buy shares? The short answer is always, if you plan to invest for the long haul. Over the long-term, the stock market has returned around 10% on average. If you have never invested in shares before, a good place to start could be through an index tracker such as the SPDR Straits Times Index ETF (SGX: ES3). It does what it says on the tin – the Exchange Traded Fund tracks the performance of the Straits Times Index (SGX: ^STI). So, by investing regularly, you should smooth out the inevitable fluctuations in the market.

Myth No 2 - You have to take profits to make money

You don’t always have to sell your shares to make money. One of the best examples of holding onto a good share for the long term is provided by Warren Buffett’s 9% stake in Coca-Cola. In 1988 he bought shares in the fizzy-drinks maker at a split-adjusted price of $3.75. At the time, the shares had a dividend yield of 4%. Since then, Coca-Cola has maintained its 50-year unbroken record of annual dividend increases. The payout today is $1.88 and the shares are worth around $40 a pop. So as far as Buffett’s investment is concerned his yield on the cost of his original investment is 50%.

Myth No 3 - The stock market is a casino for the rich

Many people are put off investing in shares because they think that stock markets are massive gambling dens where rich people gather to plays games of chance using shares as currency. Firstly, the stock market is not a casino, and secondly shares are not just for the wealthy.

A stock market is a place where people can buy a stake in a company through the purchase of shares. Each share entitles the owner to a portion of a company’s profits. So, as the company flourishes, shareholders will benefit too. Of course, investors are trying to ascertain how a business is likely to perform in the future, which can cause share prices to fluctuate in the short-term. But over the long-term, a company’s financial performance will be the main driver of its share price.

What’s more you don’t have to be rich to buy shares. The Internet has opened up the market for brokers so you can now buy and sell shares at a modest cost. As an added bonus many brokers provide useful data and research tools that were once available to just a privileged few.

So you don’t need to be a financial genius or be fabulously rich to invest in the stock market. But you could miss out on increasing your wealth if you let these untruths send you down the wrong path.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.

Extracted with thanks from http://www.fool.sg/2013/03/three-dangerous-stock-market-myths/?source=s76yhocs0070001

About me

Why is it important to have a healthy positive Net Worth?
What is Net Worth?
What are the implications of Inflation on us?
Do you know how much are you going to have when you retire?
Would you like to maintain the same lifestyle as you have having now when you retire?
Would you like to know how to eliminate your credit card debt?

Message me if you would like a free consultation on how to manage our finances and the answer to the questions above, at no obligation.

5 Golden Rules in investing in Unit Trusts:-

1. Dollar Cost Average (save monthly)
2. Value Cost Average (top up when prices are low)
3. Invest long term (at least 5 years)
4. Have a balanced asset allocation
5. Reinvest your distributions (No service charge, brings down your average cost, helps in compounding your returns)

I also give free seminars on areas of financial planning, ie debt management, managing cash flow, education & retirement planning, how does inflation affect our lives, etc. Please message me for more info.

Financial planning is the process of meeting your life goals through the proper management of your finances.

“You cannot control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you.” - Brian Tracy

Are you looking for a career in the unit trust/financial planning industry? 
Do message me if you would like to join my team of finance and investment professionals who enjoy flexible working hours and great support amongst other benefits.

How many years will the tenure of your loan increase if the BLR increases? (assuming instalment payment remains the same)

A Sensible Approach on When to Redeem Your Fund

There is no lack of advice on why and when we should buy unit trusts. However, when it comes to selling or redeeming them, getting the right timing and the reasons for doing so may prove to be a difficult task.  

Unit trusts are excellent vehicles for individuals and corporate financial planners due to their affordability, liquidity and flexibility. For medium- to long-term investing, unit trusts are an undeniably attractive option. Chosen with care and supported by qualified advice, unit trusts can earn you healthy returns at acceptable levels of risk. 

However, just like any other investments, we should follow certain sensible guidelines on when to hold and when to let go.  
The most common advice is to start investing early, and to give your investment enough time to reap its returns. 

But what if a volatile market causes you to consider switching your 
equity funds into bond and money market funds? The decision you make will depend on the state of your investment portfolio, financial goals and risk tolerance. 

Nevertheless, it is important to first establish sound and sensible reasons for doing so. Here are some issues one should consider when deciding when to redeem a unit trust investment. 

A Fund’s Performance  
The most common reason for redeeming a unit trust fund is when the fund has registered a loss for investors. 

However, many investors make the mistake of redeeming on the basis of a fund’s poor performance over a short-term period. 

Volatility exists in the market and judging a fund’s performance over short-term periods is a mistake as unit trust investors 
are required to take a medium- to long-term view in order to reap the full potential of their investments.

If your fund’s performance has been affected by adverse market conditions, you should remain focused on the long-term prospects of your investment and avoid the temptation to panic.  

“Unit trust investors should remain focused on achieving their investment goals over a medium to long term period of three to five years rather than worry about the daily, weekly or monthly movements of their investments,” says a fund manager. 

Deviations in Fund Style or Objectives 
After having carefully done a detailed asset allocation plan, investors should choose a fund (or funds) that best matches their strategy, taking into consideration the return objectives, time horizon and risk tolerance. 

Making the right choice of funds is important because if 
the fund takes more risk than what you can tolerate, you may have to redeem the fund and buy a more suitable fund. 

In addition, if a fund  deviates from its original investment 
objective or investment style, such changes can almost assuredly affect your asset allocation plan and require a relook. 

A fund  that significantly changes its investment objectives could cause its performance to deviate from your  desired objectives and risk profile. 

Thus, it is vital to remember the original reasons for buying a fund. 


A change in fund managers can also be a cause for a change in investment style. 

However, it does not require an automatic sell response. On the contrary, what is more pertinent is to ensure the new manager has a good track record in managing funds with similar objectives 
and will maintain a similar management style. 

A fund managed by a stable and reputable management team will tend to adhere to its objectives and investment style.  

In case of emergency 

Because unit trusts are easily liquidated, unitholders may redeem all or part of their units on any business day and the unit trust manager will purchase them. 

This means that should you need cash, you can easily sell the investment. Most unit trusts will allow you to redeem your investments on any given business day. 

However, it is important to look for alternatives as redeeming could hurt you in the long run – you lose the benefits of Ringgit-cost averaging and compounding interest. 

For those who really need to liquidate their investments, consider the “average-cost method” which entails selling in stages. 

Investors moving out of a particular asset class can then slowly 
move into cash to prepare ahead of a financial commitment such as education expenses.  

The bottom-line is that if you have been  contemplating about redeeming your fund, do consider the reasons and ensure that they are based on sound considerations. 

Rebalancing your portfolio based on your changing needs or situation should of course, be done on a regular basis of at least once a year. 

If you plan to redeem just to switch to another fund or 
because you are nervous about market conditions, take control over your impulses and remember the principles of an appropriate asset allocation strategy. 

A wisely selected fund that is well-diversified should help you achieve your long-term investment goals.  

Source: http://www.publicmutual.com.my/LinkClick.aspx?fileticket=ri4x4--Dh40%3d&tabid=86