Family Finance

8 things individuals should note for budget 2022

Budget 2022 has just been announced. What are the things you need to take note as an individual?

First – As an employee, if you are suffering cash flow problem currently, you can choose to contribute lesser to your EPF. Before year 2021, the minimum employee EPF allocation is 11%, this was meant to end in 2021 but the government has extended the period to June 2022. The 9% minimum contribution is the default mode. Employees who wish to maintain the statutory contribution rate at 11% are required to apply via Borang KWSP 17A.

Second – SST exemption for cars will be extended to 30 June 2022. This means buyers of locally-assembled (CKD) cars will be exempted from paying the 10 percent sales tax upon purchase. However, do note that other taxes like excise and import duties still apply. This SST exemption does not apply to commercial vehicles like commercial vans and pick-up trucks. If you need a passenger car, this is the right time to buy a new car, it will be cheaper. The saving of 10% sales tax is equivalent to about 2 to 4% of the total car price. Using the example of Honda Civic, you shall save roughly about RM 4 to 5K.

Third – The real property gain tax is now removed for house sales from 6^th year onwards. Real Property Gains Tax (RPGT) is chargeable on the profit gained from selling a property. Prior to this budget, individuals and companies will be charged 5% and 10% respectively for RPGT on sale of house exceeding RM 200,000 and more than 5 years. Now, you get more net return with the tax removal. So, if you want to have more gain from property investment, you need to plan to hold your properties for at least 5 years from the purchase date.

Fourth – RM 2500 is given for the income tax relief on purchase computer, handphones and tablets until end of 2022. You can take the chance to use this relief to buy these for children, yourself or your spouse. Take note that this is not for business use.

Fifth – Special individual income tax relief of RM 1,000 is given for domestic tourism expenses. This would be extended until the year of assessment 2022.

Sixth – There will be an excise duty imposed on nicotine-based gel or liquid products for vapes and electronic cigarettes, The government is also introducing excise duty on premix drinks containing sugar. For example, chocolate, malt, coffee and tea-based premix drink. This means these drinks will now cost more. You may consider spending less on these items. A stronger reason for you to promote healthy lifestyle.

Seventh – If you are still having PTPTN loan, it is a good news that you can get 10 – 15% discount. The discount comes into effect from 1^st November 2021 until 30 April 2022. If you wish to fully settle the PTPTN loan, you will get 15% discount. 12% discount will be given to those who wish to settle at least 50% of their loan balance in one payment. The 10 per cent discount is for those who wish to repay their PTPTN loan by scheduled salary or debit deduction.

Eighth – the government has increased the limit of the income tax relief for up-skilling and self-enhancement course fee from RM 1,000 to RM 2,000 to encourage Malaysians to pursue training programmes and acquire new knowledge. This limit will be extended to year of assessment 2023.

In addition, those who undertake courses with any professional bodies will be eligible for a tax relief of up to RM7,000. Approved courses include professional courses in accounting, finance and ESG-related. ESG stands for Environmental, Social, and (Corporate) Governance.

The above are the 8 things individuals should take note to enhance their personal finance.

Watch the Youtube video here on this topic.

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How can you control spending?

Money only speaks 1 language. If you save money today, money will save you in the future.

People know we all need to save, however, it does not seem to have enough saving. Researches show that the saving is limited due to overspending. To save more, we need to be conscious about spending. Let’s understand how to control spending.

You can curb spending by understanding why we like to spend despite we know we need to control spending. Human has the tendency to avoid pain and seek pleasure. While shopping and spending, pleasure hormone, i.e. serotonin will be released. While doing online shopping, there is an anticipation for the items to be delivered, so another pleasure hormone, i.e. dopamine will be released. We are craving for the pleasure feeling, this is why shopping and spending are so tempting and additive.

To curb spending you need to understand how our body works leading us to spending. The following process was obtained from James Clear’s book titled “atomic habits”.

Cue –> craving –> response –> reward

We don’t spend automatically, there will be some cues leading us to spend (Cue). If we go shopping, it leads to tendency to spend. We crave for the pleasure feeling after spending (craving), that’s why we spend (response) to get the pleasure feeling (reward).

If we want to control spending, we need to make the cue invisible. If we can reduce the frequency to window shop, the spending will be reduced. If we know what items we spend more, we just need to make sure it doesn’t appear in front of us.

Craving sense can be curbed by understanding the impact of spending. Once the pleasure feeling is being replaced with the pain feeling (the impact after spending), you will feel less addictive about spending. The greatest way to increase the pain of spending is to understand your financial goal and the impact of not reaching it. Visualising the impact will help you replace the pain feeling with the pleasure impact of spending.

We can also make spending more difficult so that we will spend less. For example, if we like to spend using credit card, just not bringing the credit card out while window shopping. If we like online shopping, just disable or limit the daily e-payment. If you want to buy more, you need to change the limit, it requires some effort to do so. We will tend to think deeper before spending. When the cue is not visible, there is no more craving or you make spending so difficult, you can control your spending much more easily.

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5 golden rules to follow to escape from rat race fast

5 golden rules to escape the rat race fast

Rat race is common in this capitalist world. People work day in and day out. The financial situation does not seem to change much. There are 5 golden rules you need to know before you can escape from the rat race.

First – understand what most people do for their finances that are not right. According to a new Credit Suisse report, 45.8 percent of global household wealth is in the hands of just 1.1 percent of the world’s population. Those 56 million individuals control a mind-boggling $191.6 trillion, as can be seen on the following pyramid.

Only minority of the population know the right way to gain wealth. If you want to retire faster, you cannot just rely on working hard, spending less and saving more.

In the current world, the governments are supplying money at a fast rate, printing money and causing the inflation rate to be higher. You will notice that your cost of living keeps increasing and the increase rate is faster than your earning increment rate. If you only do the normal thing, you might properly retire at the age of 60 or 65 with reduced lifestyle to cope with the increased living expenses, like other normal persons.

Second – You need to decide when do you want to escape from the rat race. Many don’t realise that if there is no decision made to stop work, nothing will happen. Decision will steer action. If there is no decision, there will be no action. Ask yourself whether you really want to escape from the rat race or you simply hope that you can escape from the rat race. Recognize that wishing is not enough to push you beyond comfort zone to do the hard things to achieve what you want.

Third – Increase your income stream. If you rely on normal salary increment, the chances to escape from rat race earlier will be slim. In most of the circumstances, the increment will still be slightly lower than the inflation. Do something to increase your skill or knowledge on what you do. Get higher promotion, challenge yourself to reach a better position. Also, consider to get more income by exploring the business opportunities.

Fourth – Properly invest. Most of the riches put their money at work. We have only 24 hours a day and it is not possible for us to work for money. Our income will increase up to a certain stage due to our time limit. We need to think of a way to create a system or leverage on other businesses to get more income. Stop thinking that investing is gambling. The major investing rule is to bet with higher chance of winning. If you are gambling, your chance of winning is only 50% or less. However, if you invest in good companies which have high demand or good property which can fetch rental, the chances of winning will be high. This is what we call taking calculated risk.

Warren Buffett advised that investing in the productive assets is a good way. Look for stocks that can generate income years after years. Many people argued that investing in gold or crypto currency is a much faster way. I cannot comment on this but what I’m sure about is these assets are not productive assets. The intrinsic value for gold and crypto remains the same throughout the period. What you see is the price changes based on the supply and demand. Remember that these assets do not give you income. The intrinsic value for stocks can change based on its ability to get revenues. So, the potential of the capital gain is much more reliable. In addition, you will receive dividends too if the company decides to distribute the profits to the shareholders. For example, Coca-Cola had been producing an annual net profit of more than 20% for the past decade and because of this, it allows the company to pay dividend every year.

Fifth: Risk management – many people are skeptical about the investment risk. Yes, it is true that there is always risk in investing. If you want to avoid risk at all cost, the truth is your freedom will be kept in prison. You have the highest security with no freedom. In view of the risk, risk management becomes a key if you want to escape from rat race. No one can be sure you won’t lose money in the investment. Hence, never invest more than what you can afford to lose. Never borrow money to invest, never sell you house to invest and never go all into 1 single investment. Diversification is the key when you have accumulated certain wealth. Regardless how good does the investment seem, there is no guaranteed win. It is a fact that all successful investors have bet wrong and they never bother about the loss as this is part of the game. Your investment can stay concentrated when your capital is small because you can get bigger win by staying concentrated in investment. However, when your portfolio is big, your investment shall stay diversified.

Watch the Youtube video here on this topic.

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4 life risks that you need to consider planning

Risks come to us on our daily life. We cannot avoid risk totally. The best method to deal with the risks is to be aware of the risks and manage them accordingly via strategic contingency planning. These are the 4 risks:-

A) Health risk: if we do not take care of our health, the risk will appear soon. We should have plans on exercise / diet to make sure we stay healthy. When we fall sick, we will need substantial financial resources to cure the illness. Currently, the cancer treatment will cost easily RM 200K – 300K. Do make sure you have a health medical card to cover all these hospital expenses when you need it. In fact, health medical card is the first protection one must seek before any other insurances.

Something to take note is that the medical card covers only the hospitalization expenses and it does not cover the loss of income, cost incurred for supplements, natural treatments, etc. Check your annual limit of your coverage to ensure it is enough in view of the inflation of the medical expenses. Also, this coverage is best purchased when one is healthy. When there is any sickness discovered, the insurance companies will reject the application or impose loading on the premium which might make the premium becomes unaffordable.

B) Mortality risk: no one can avoid the risk of dying. But what we are afraid is that we die too soon. Hence, we need to have a contingency plan to decide:-

Who will be affected if we are dying too soon?

What would be the arrangement for the affected individuals?

To manage this risk, we can transfer the financial risk to the insurance company. A good and adequate life insurance plan should be able to cover the financial commitments (loans) and future living cost for our dependents. How about other non-financial arrangement? This can be done via a will and a trust with power of attorney which we can list down who will be responsible to do what. For example, if one is leaving behind a company, it is better to identify a potential successor to take over the company in case anything happens. This can be done via a business succession planning.

C) Disability risk: accident can happen anytime. Sometimes, death is not the worst scenario, disability is. Surviving with disability will no doubt create more financial and psychology issues for one and his / her family. This might also ruin a family. Having a thought about how to deal with it can help one get prepared for it. Think about the loss of income stream when one becomes disabled. Start to plan some passive income streams so that we are not solely dependent on active income. Have Total Permanent Disability Insurance / Partial Permanent Disability Insurance in place to ease the financial burden in case misfortune happens in life.

D) Longevity risk: risk 1 and 3 are not definite risk. Risk 2 and 4 are very possible to happen. We either live too long or die too soon. This is something that we definitely need to plan properly. We have to ensure we save for future as we cannot work forever. Diversify some of your savings to various investment to ensure you have enough money to sustain if you are still living at old age.

A lot of people might think that contingency planning is just for their family. If you look at the 4 risks above, only 1 risk (mortality risk) is happened without you. The other 3 risks you will still survive. Hence, protect yourself and your family when you can still do so. Start planning these risks.

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How to change your financial situation?

After checking your financial situation (check our this blog to check your financial situation), you might want to change your financial situation so that you can improve better. How can you change your financial situation easily?

There are 3 elements to be considered when we come to assessing our performance. The outcome is the results that we want. In financial term, we want to improve our finance, e.g. increase our passive incomes, increase our net worth. The middle ring (the process) is about how and what we do to get the outcome we want. If we want to increase our passive incomes, we need to add in more income sources. If we want to increase our net worth, we need to save more, invest more and spend less. These are the “how”. What about the “what”? Are we able to do the required action? Let’s review the action building.

Do you know that one study determined that over 40% of the “decisions” we make every day are not really decisions. They are habits. If you build enough good financial habit, i.e. save more, invest more or spend less, you will find that your financial situation will improve.

Never underestimate the small improvement due to the good financial habits. Based on James Clear’s research, if we can improve 1% a day, we get to improve 37.78% after a year. However, if our net worth become worse 1% a day, our net worth will be nearly 0 after a year (see diagram above).

So, aim to improve your financial habit every day. Aim small so that you can achieve small success everyday. For example, if you need to save 20% a month of your salary, you only need to save 0.6% a day. If you need to save RM 1,000 a month, you can start saving RM 34 a day instead. This figure is smaller and easier to manage and achievable.

The inner ring is the identity. It is the value and the belief that you have on finance. This can be harder to change unless you have decided to change. If you aim to be rich, you must first believe that you can achieve that. If you want to save more money, you need to believe that saving is important to secure better financial future. If you do not have the supporting belief, it is hard to change. For example, if one does not believe in saving, you can expect that he will spend away the money when he has money in the bank. Hence, the 2 elements that can affect your progress on your finance situation improvement are the identity and the process. If you want to improve your financial situation substantially, these are the 2 elements you need to work on.

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5 quick ways to check your finance

When it comes to checking whether your finance is good, most people always judge by how much one is earning or what car he is driving. When you hear that someone is earning 5 or 6 figures a month, you will automatically think that he or she is rich. When you heard one has a big car, most people will think his finance situation is good too!

In fact, it is not always true. When it comes to finance, it is not how much money you earn that matters, it is how much money you save that matters.

When a person is able to buy a big car, it doesn’t mean that he / she is rich. You do not know whether he is buying it with loan which he / she is struggling to pay off the loan installment every month. When a person can earn well, it does not mean he / she can save well. If he / she is spending greatly every month, there could be not much money left in the bank every month. Do you think this type of person have a lot of money after 10 – 20 years? I think the answer is clear.

You want to check whether your finance is okay, the followings are the 5 ways:-

First: Check whether you have at least 3 – 6 months’ emergency fund saved in the bank. Without emergency fund set aside there is no sense of financial security. How can you have good finance if there is no financial security?

Second: Check whether you are saving at least 20% of your income every month for medium and long term goals. We know that we cannot work forever, failure to save means we will need to work longer. We will not have enough retirement fund when we are reaching our retirement age. It is critical to save every month whether you like it or not.

Third: Check whether your monthly expenses (excluding the loan payment) are less than 40% of your income. If your expenses are more, it is time to review and re-balance back. Identify the top 3 expenses and start from there.

Fourth: Check whether you are able to pay off your credit card and minimum loan installment for car loan and house loan every month. Loan interest especially the credit card is super high. Missing paying or paying only the minimum payment for credit card means your money is working for the bank and working against you. This situation also means that your loan will roll into a bigger loan which you will soon really getting harder to pay off. Your finances will surely be affected in the medium to long term.

Fifth: Check whether you have extra monies for leisure activities, for example travelling, doing sports, watching movies, buying books, etc. Having extra monies for these means you have lesser stress with money. You have enough to do what you love to do. You do not need to take additional personal loan to pay your simple lifestyle.

So, how many of the items mentioned you have achieved? If you are unsure what is the percentage of your saving and expenses against your income, it is time to do some tracking. Find the worksheet here to track your expenses. You cannot improve without tracking the numbers. Let’s start doing it for better financial future!

Watch the Youtube video here on this topic.

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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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