September 2021

How do you know whether you can borrow more money from the bank?

Debt service ratio (DSR) is an important ratio to determine whether one can get more loans. Generally, different banks have different debt service ratio threshold. Before applying for a loan, firstly the debt service ratio first shall be checked.

Debt service ratio = Debt/Net Income x 100%

Debt = Total of monthly loan re-payment instalment for the housing loan, vehicle loan, education loan, credit card, etc.

Net income = Monthly gross income minus EPF contribution minus SOCSO

DSR is a ratio used by banks to measure our capability to pay off the debt based on our income. The lower the ratio, it means we have more disposable income, hence more capability to pay off the debt.

For example, Ben has a gross salary of RM 10,000 a month. After 11% of EPF contribution (we will ignore SOCSO contribution because it is too marginal), the net salary will be approximately RM 8,900.

Ben has the following monthly loan commitments: –

Housing loan – RM 2,000
Vehicle loan – RM 1,000, and
Education loan – RM 500.

The total monthly loan commitments are RM 3,500.

The DSR for Ben is RM 3,500 ÷ RM 8,900 x 100% = 39%

Most banks in Malaysia can accept DSR up to 65% – 70%. In the case above, for Ben’s DSR to reach 65%, Ben can afford to have RM 5,785 (RM 8,900 x 65%) as a monthly loan commitment. Thus, Ben can borrow further as long as the new loan commitment stays below RM 2,285 (RM 5,785 – RM 3,500).

As you can see in the formula above, there are two ways one can reduce his/her DSR: –

Decrease the loan instalments, and
Increase in net income.

Decreasing the loan instalments is not easy, hence excellent planning is needed when taking up a loan. One can increase his/her net income by having more side hustles.

Also, different banks do have slightly different calculation methods. Some banks choose to calculate DRS based on gross income, and some banks have different treatment on rental income or commission income. So, it is recommended to check with the respective loan consultants before applying for a loan. In a nutshell, a lower DSR indicates that one can pay his/her loan instalments on time hence lesser risk in defaulting the loan. Therefore, having lower DSR based on net income before loan application will enhance the loan approval probability.

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5 things we can teach our kids about finance

Financial illiteracy is a major global challenge. When the coronavirus pandemic struck in early 2020, the first problem that surfaced was the financial issue. Do we want this issue continues every time when we have global crisis? No! Then we need to educate ourselves and kids about finance.

Think about this – if you have a time machine that can bring you back to 10 years ago, what would you do differently? Many said that they wish they have saved and invested more. We want our kids to know saving and investing earlier for sure. Let’s see what the 5 things are we can teach our kids about finance.

The purpose of money

We need to teach kids that money is a tool to help us do what we want. When we have enough money, we feel financially secure. With money, we have more choices in life. We need money for almost all aspects of life, i.e. house, car, food, clothes, etc. We should not worship money. We should not ignore the importance of money too. If we ignore the importance of money, our kids will feel that. They might ignore money matters in the future. This might lead them to not being able to properly manage their money.

How can we earn money?

Parents are working hard to bring back money so that there is food on the table. However, kids might not understand why parents need to work and have lesser time to spend with them. The kids needs to be educated on how money can be earned through exchanging time for money, business and through investment. This will help them appreciate your hard work.

Needs and wants

When parents are busy working and have lesser time with kids, it is easy for parents to feel guilty and tend to buy what the kids demand. The kids need to be educated about the needs and wants and this will give them an idea how to spend wisely. The spending on the wants can be reduced which will develop their habits to think before spending. This will reduce the debt crisis when they grow up. Many youngsters are stuck in debt because they spend too much on luxury items.

4 basic money jars

Basically, there are 4 basic money jars. Spend, share, save and invest. The 4 basic jars can give the kids a rough idea how they should allocate their monies when they are given some allowances. They need to understand that they cannot spend all their monies and it is important for them to share some monies to people who are unfortunate. We need to let the kids know the importance of saving and investing for the future. We have only limited time to work if we want to retire at the age of 55. If we don’t save money, we need to work forever. We also need to let the kids know that the value of money will shrink every year due to inflation. With the low saving interest rate, we will be losing a lot of money value without investing.

Spending and investing

Kids should be taught about the concept of delayed gratification. We need to tell the kids that if we spend too much to get instant enjoyment, we need to work harder and harder for the future. They need to understand the concept to invest for a longer duration to see the delayed benefits. Even though they cannot enjoy now, their life will be easier at the later stage. Researches show that people admit the reason why they cannot save is because they spent a lot on lifestyle including shopping and entertainment. If the kids can appreciate the concept of delayed gratification, they are more likely to resist the temptation for excess shopping and be able to save more to secure better financial future.

Let’s use the 5 financial concepts above to teach our kids to create a better generation in the future! Read the full blog here and watch the Youtube video here on this topic.

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Delayed Gratification? A habit that you want to instill for yourself and your kids for great wealth

Instant gratification is the habit of wanting to enjoy now and not having the patience to wait for the future benefits. This is what keeps most people from great wealth as they have the habit to spend now for instant enjoyment.

What is the problem of instant gratification? People who are looking for instant gratification spend a lot more than they invest. They would tend to spend more on new car, new television, new big house. Whenever they have more savings, they will upgrade their lifestyles. When it comes to investing in investment products, books, seminars and courses, they will think twice as they cannot see the immediate benefit, they do not wish to wait for the future benefits.

If you think carefully again, those things that can create instant enjoyment normally cannot help in multiply in wealth. Everything that can increase wealth, e.g. education and assets, takes time to see the results. But, once it is done correctly, wealth can be multiplied with time.

This is also same to business. People who want instant gratification will always look for fast way to get customers. They do not build long term relationship and add value to customers. They tend to cut corners to get fast sales and as a result the profits rarely last for long time.

Another point people do not realize is people either spend or invest. If they spend RM 1000 to buy a new television, the product is there, the money is gone. The value of the product will not grow over time. When the RM 1000 is used to invest in a course, even though the product is invisible, the impact remains. With better knowledge, one can earn better, more money will then flow in. It just needs to take some time.

Hence, we need to start to have the patience and adopt delayed gratification in order to grow our wealth better. We also need to develop this to our children. This is a habit that can be built. We can explain more to our children that delaying the instant enjoyment can bring them better financial future. Then, they will have the mindset to be patient in everything and never take shortcuts.

Instant gratification: Spend > Invest

Delayed gratification: Invest > Spend

So, develop the habit of delayed gratification – spend wisely and you will see your money multiplies.

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7 Things You Should Do to Manage Your Finance in Your 40s

When you are in your forties, you have roughly 15 years to go for timely retirement if you want to retire at age 55. If you want to retire early, perhaps you might want to retire in just few years’ time. This is the stage which you have a stable career that gives you stable income streams. You should be able to save better as you have higher salary. How are you going to manage your finance better?

First – review your retirement saving goal and ensure you are on track to your retirement goal. There is not much time left until your retirement age, so it is critical to ensure saving and investment are in place in 40s to have enough retirement fund when you want to stop work. Saving and investment work best if the time is in favour of you. The shorter the time you have, the harder it is to make saving and investment work for you. If you have no idea what your retirement saving goal is, you can click here to watch the video teaching you how to identify your retirement goal.

Second – build more passive income streams, when you have higher income at this stage, your saving amount shall increase too. This is time to look for more investments and business ventures to get extra passive income streams for retirement. When you stop work later, you do not want to use up the money saved so far, hence, it is recommended to have streams of incomes from various businesses or investments. The passive income streams can be built by investing into mutual funds that give regular distributions, Real Estate Investment Trusts which give regular dividends, investment properties which give regular rental incomes or even annuity insurances which give regular annuity payments. If you have higher net worth, you can also look for special business venture investments that give regular preference share dividends.

Third – get ready the education fund. If your children are almost time for higher education, you need to start identifying the source of fund for their tertiary education. If your fund is in the investment account, you might need to start planning to switch to more stable fund so that the amount is not affected due to market condition.

Fourth – review your insurance and EPF nominees. By this time, your children might be bigger. It is time to relook at the nominees for your insurance and EPF (employee provident fund). You might want to include new family members as your beneficiaries.

Fifth – have will and trust. At this stage, you have more assets so it is crucial to will away your assets when you are not around. For will, you need to decide the executor of the will who will help you to distribute your assets when you are not around. Choose someone you can trust and competent to do the work. If you have young children, you need to have guardians named in your will too. Also, will alone is not sufficient if you have young children. When death event happens, all the assets will be frozen. You might need to set up living trust to ensure your family has liquid cash to sustain while waiting for the assets to be unfrozen. Having will does not ensure the assets to be distributed within short period of time, it still needs time for the executor to get the grant of probate from court, gather the assets and distribute it. Before this is done, a living trust will ensure the spouse and the children have some monies to live on.

Sixth – Maximise the tax benefits. When incomes are more, the tax payment will increase too. It is important to understand the tax relief announced by the government every year and maximise the tax benefits. In 2020 tax year in Malaysia, you can get tax relief up to RM3,000 for life insurance premium, RM3,000 for private retirement scheme, RM 3,000 for medical and education insurance, RM 8,000 for SSPN which is the children education contribution.

Seventh – spend more time and money on health. Health is wealth. At this stage, health might start deteriorating. It is important to not over work and balance the relaxing time and work. Ensure you don’t fall sick easily that will affect your ability to work.

Watch the Youtube video here on this topic.

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I want to get rich fast. What should I do?

Getting rich fast is many people’s dream. How can you do that? The followings show the list of things one can do to get rich fast.

If you want to do thing extremely well, you need to focus. “You get what you focus on!” Perhaps you need to start focusing only on wealth and your business. Be prepared that you won’t have time for your spouse, your kids and your parents. All these are the distractions.

The fastest way to get rich is based on either luck or extreme effort.

Take the money and gamble and you can get 100% or 200% within seconds. You often hear this, if you keep doing the same thing again and again, you will succeed one day. As long as you are consistent in this, one day, you might get the jackpot and become a millionaire.
Bet on a few stocks based on the “hot tips”. This can give you multiple return within few days to few weeks. You always hear that “hot tips” can earn big money. You can earn 100% in a month, why try value investing or mutual funds which are too slow.
Quit your job and start to sell something. When you are stuck in the job, you have endless excuses on why you cannot get the wealth you deserve. So, you can burn your bridge so that you can go all out to get what you want. If you are desperate, you will find things eventually work out for you.
Build your business. You always hear that entrepreneurship is a fantastic journey. Many businessmen become billionaires via business like Jack Ma and Mark Zuckerberg. Take all your saving and venture into a business. Ignore the fact that most businesses fail within the first 5 years. If you never try, you never know. Do you want to regret not trying? If the business can earn you millions of dollars within a short period of time, it can save you long time working hard to get the money you deserve. Why stuck in a 9-5 jobs and get paid little?

Don’t be angry after reading the above. I’m writing the above because most people want to get rich fast without realizing that there is no magic pill for fast success. If none of these strategies seems logical for you, perhaps you don’t really want to get rich fast by risking a lot or ignoring your families.

Certain people might get rich very fast through “luck” or they need to work very hard to get them to the path they want. It takes certain efforts and sacrifices. Getting the balance of the gain and effort is crucial in reaching financial success and satisfaction.

The fast way to get rich is never think about short-cuts. Ignore the extreme success story from others because they never tell you how much effort they have made to get there. If you are not ready to work, you might not get the same results. Start to plan your finance and execute better and properly based on your timeline.

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Financial management in your 30s

When you are in your thirties, you probably have just got married or have a very young kid. How you want to do well in personal finance, you must manage your finance better when you are 30s if you have not started during your 20s. How are you going to manage your finance better?

During this stage, you have new family members, expenses will increase too. If new house has been purchased, you have even bigger commitment.

First: take care of your family and wealth protection. Family protection becomes very important because there will be more commitments. If you are a bread winner, you need to have adequate insurance protection to cover the liabilities – the car or house loans. When death happens, the family do not need to bear your loans. Critical illness coverage is also important at this stage because when the bread winner suffers critical illness, the family needs more monies for supplements and treatment, the bread winner might not have the ability to work anymore. Hence, the family income will reduce tremendously. One needs to protect the income via critical illness insurance payout. How much is adequate? In general, the death coverage shall be 10x of the annual income and the critical illness coverage shall be 5x of the annual income.

However, at this stage, you will find that you have much more family expenses than when you are in your 20s. To save money, you may consider buying just term life insurance. Keep the insurance cost within 10-12% of your annual income.

Second: start preparing for retirement fund. In 30s, it is critical to start investment if you have not started investment before. Channel 20% of the income to investment for retirement fund. Watch the previous video I recorded for calculating retirement sum here. The later you start, it will be more difficult to accumulate enough funds for retirement.

Third: if you have children, you need to put aside extra 5% of your income for their children education fund. Education is the best gift parents can provide for the children. Hence, always prepare some monies for children’s higher education when the children are still young. The more time you have, the easier it is to accumulate the fund. You don’t want to regret not having enough money for your beloved kids when they are ready for tertiary education.

Fourth: scrutinize your tax and maximise the tax benefits given by the government. In 2020 tax year in Malaysia, you can get tax relief up to RM3,000 for life insurance premium, RM3000 for private retirement scheme, RM 3,000 for medical and education insurance, RM 8,000 for SSPN which is the children education contribution. As a smart person, you shall maximise these benefits because you need to protect your family, save more for your retirement and children education fee. While doing the necessary things, you save more taxes concurrently.

Fifth: Work smart and not hard. You cannot work harder and harder when the expenses keep increasing. You need to balance your family time and work time. Start to increase your sources of incomes, ideally some passive income streams. Expenses will start increasing until your retirement age. To maintain your saving rate, your need to have more income sources. You can also consider upgrading your professional skill so that you get higher pay hourly. Alternatively, you can start to have more investment properties, creating a business or intellectual properties which can bring you more passive income at the later stage.

Sixth: watch the saving and loan interest rates. You shall invest more than saving because saving rate is low. You need to schedule paying a little more loan payment every month so that you can finish paying off the loan faster. Pay the one with the highest interest rate first.

What if you cannot allocate the above-mentioned amounts for retirement and children education? Then, perhaps you are spending more than what you can afford. You shall try different ways to increase your income, understanding the 7 types of income streams here. You can also understand how you can spend wisely through this video here.

Watch the Youtube video here on this topic.

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Tapping into technology sector to increase your investment yield?

Do you know technology sector is the best performing sector for the recent few years? Due to the current pandemic, the demand for technologies has increased even more which contributed to higher revenue for the technology companies.

Source: Google: XLK sector fund performance

Based on the above, you can see the technology sector has been growing steadily since 5 years ago. The sector has grown nearly 150% for the past 5 years. If you are a potential investor thinking which fund you can tap into to increase your investment yield, here is the suggestion – TA Global Technology Fund managed by TA Securities (this is for education purpose and talk to your investment advisor before investing). Why this fund?

This is one of the oldest active managed funds available in Malaysia which can show consistent return over the past 10 years. In the recent few years, there are few more funds being introduced in Malaysia such as Principal Global Technology Fund launched in 2018 and United Global Technology Fund launched in 2017.

Part of fund fact sheet for TA Global Technology Fund: Up to July 2021

As shown above, the TA fund has grown more than 400% since the inception about 10 years ago, this translates to 18% annualized return. This is a fantastic return. For the past 5 years, the return is 173.53%, it is above the XLK sector fund.

Principal Global Technology Fund has delivered return of 117% over the past 3 years (as of June 2021) and United Global Technology Fund has over 105% return over the past 3 years (as of August 2021). Both these 2 funds have slightly better return than TA fund. However, these 2 funds have been launched only recent few years, the consistency of fund performance over longer term cannot be assessed.

Part of fund fact sheet for TA Global Technology Fund: Up to 30 July 2021

Part of fund fact sheet: Principal Global Technology Fund (up to June 2021)

Part of fund fact sheet: United Global Technology Fund: Up to August 2021

By looking at the above, TA Global Technology Fund and Principal Global Technology Fund focus more on big and established companies while United Global Technology Fund focuses more on emerging companies. Hence, United Global Technology Fund has higher volatility compared to TA fund.

Principal Global Technology Fund is quite a country focus fund with more than 88% of investment in US while TA Global Technology Fund has near to 80% of exposure in US with slightly more diversified regional portfolio.

By investing in the TA fund, investors can invest in the big and expensive companies like Google (Alphabet), Microsoft, Apple, Facebook, Amazon, Visa, Adobe, etc. easily without needing a big capital.

Amazon share price now is USD 3500

Google share price now is USD 2800

Microsoft share price now is USD 300

Apple share price now is USD 150

Facebook share price now is USD 370

Adobe share price now is USD 660

If we are to invest 1 share of the companies above, the total capital required will be USD 7780. It shows it will be more affordable for retail investors who want to start with lesser capital. The minimum investment for this fund is RM 1,000 or RM 100 monthly investment.

Charge of this fund is up to 5.5% for front end sale charge. The management fee is 1.8% per annum. Even with considering the management fee, the fund is performing better than the Technology SPDR fund for the past 5 years.

If you are interested to know more about this, you can contact me.

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What should you do with your finance if you are in your twenties?

When you are in your twenties, you just came out from the university or college. Are you supposed to work for others or build a business?

Building a business without any financial backup can be a challenge. So, if you want to build a business, you need to be mentally prepared. In order to do this successfully, you need to upgrade your business skills very fast. These include your networking skill, your leadership skill and selling skills. If you are not able to do this fast enough, your earning capability can be affected. You won’t have enough earning to sustain or even you can sustain, your saving can be limited. Make sure you have the skills and mentor to guide you to build a successful business.

Another way is to work for others. Working for others can ensure you have stable income every month. You can start building the skills that you need to manage your finance and building a business at the later stage.

Hence, personally, it is better to work for others or working as freelancer to prepare your financial backup before you start to build your business. This can ensure you can sustain during the early phase.

Let’s say you’ve got a steady job and have some savings every month as your commitment is not high. What should you do on your finance?

First is to look at wealth protection when you start out in the career. When there is not much net worth, the most valuable thing is your ability to earn income. When one suffers from critical illness, one’s ability to earn income will lose. It also takes more money to pay for the medical bills. Hence, it is always important to ensure you have the medical and critical illness insurance plans. Medical plan will prevent you from spending huge money on medical bills when you are sick and the critical illness plan is to replace your income when you suffer from critical illness. The rule of thumb is to not spend more than 10% of the income on the insurance plans. Ideally, you need to have around 5 years’ income as the critical illness coverage. If you are earning RM 40,000 a year, then your critical illness coverage shall be RM 200,000. Make sure you are getting reasonable coverage at affordable price. Never spend too much on insurance plans so that you have reasonable saving left for investment.

Second, set up 3 to 6 months of expenses as emergency fund for your rainy days.

Third is to look for investment plan after emergency fund is set up. Inflation risk is definite. Our money is losing its value every day. To hedge it, investment is needed. You shall set up 2 investment accounts, one is for long term goal and another one is for medium term goals such as purchasing a new house or new car.

It is always better to start investment before any commitment like purchasing a big car or big house. If you need a car, you can buy a second-hand car, and this can help you to save more money and channel the extra money to investment. Buying a big car or big house during the early stage of life will increase loan commitment and reduce monthly saving. It will be harder to reverse this situation after the decision to have loan commitments. It is recommended to have some investment assets, i.e. stocks, properties to fund the own stayed house loan commitment.

Fourth is to apply for a credit card to build good credit history. Credit history requires time to build. You can use your credit card to pay for utility bills or insurances and always ensure the payment is made on time. Doing it for a few years will help you to build good credit history for mortgage at a better rate in the future.

Watch the Youtube video here on this topic.

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China Investment? Which fund to choose?

Since the suspension of Ant Group’s IPO, China government has introduced unprecedented regulations to govern several sectors including the technology, food delivery and education sector. This does not seem to stop but continue for the past few months. Due to the regulatory crackdown, many retail investors have dumped the shares massively. The institutional investors have also reduced their exposure to the related shares to avoid the volatility.

As you can see the chart above, the MSCI China Index dropped 32.65% since the highest point. Does this freak you out?

If you have invested in Chinese equities, stay invested as the fundamental of Chinese equities remains intact. Subject to your investment portfolio, you can choose to top up to average down the price for the Chinese equities.

If you have not invested in Chinese equities, it could be a good chance to have some in your long-term investment portfolio. Be greedy when others are fearful!

So, what fund you can select for the China equities? You can look into Principal Greater China Equity Fund (this is for education purpose and speak to your investment advisor before investing). Why this fund?

Performance

Source: Morningstar

In terms of performance, comparing with other few peer funds, Principal Greater China Equity Fund has higher return short term and long term. As you can see from the Morningstar, the fund has been performing consistently above the benchmark since 5 years ago. It is also performing greatly compared to the similar category funds.

Return vs reward

Source: Morningstar

In terms of risk vs reward, you can see it has average risk compared to the category but with high return. It has high alpha compared to the similar funds, which is the excess return in relative to the return of benchmark index due to the active investment approach.

Others

This fund has been awarded 5-star by Morningstar and the fee level is below the average. Total assets are now approximately RM 2.6 billions so it is a good size for investors to consider.

If you are interested to know more about this, you can contact me.

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3 big concepts of debt

Before you start to borrow money from others and start leveraging using debt to build your wealth, you better know these concepts first.

What is good debt and bad debt? Good debt means a loan which can help you to build your wealth or increase your income over time. On the other hand, bad debt is a loan which does not contribute to your wealth. It will make you poorer over time.

How to differentiate good debt and bad debt easily? Good debt is used to buy asset, and bad debt is used to buy liability. Assets give you income, liabilities give you expenses.

Why people have more bad debts than good debts? These are the concepts of debt:-

Concept 1: Bad debt is easier to get into than good debt

Loan is an easy way for us to afford all major purchases. We as humans like to enjoy life while we are working hard. When we see beautiful and luxurious things, especially if those are being offered to buy them conveniently with credit, we easily fall into the debt trap. With credit purchase, it encourages one to spend more than what he / she can afford. All debts come with costs, i.e. the interest; if it is bad debt, he / she will end up paying more interest.

The good debt normally couples with investments where analysis is involved. Hence, works are involved. Bad debt is hence easier to get into than good debt as it merely involves pleasure emotion than analysis.

Concept 2: Bad debt makes it harder to get good debt

Banks lend money to one based on the Debt Service Ratio (DSR). Most banks in Malaysia can accept DSR up to 65% – 70%. When one has debt, he can borrow less in the future.

If the bad debts take up 65% of the DSR, one needs to finish paying off the existing loans to get a new one. As bad debt takes money away from the pocket as one needs to pay interest, it won’t be that easy to pay off without additional income.

Concept 3: Debtors can get rich faster than savers

If good debt is used to build wealth, one can invest without needing to have high capital. Good debts are debts used to fund investment assets. Through the assets, one gets more income, more income can be used to decrease DSR which allows one to borrow more good debts.

Based on the above, you can understand if you are using the debts correctly, your wealth can increase. Else, you will be stuck in bad debts. Differentiate the type of debts before you start borrowing!

Watch the Youtube video here on this topic.

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