General Money Tips

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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How investing in fundamentally good companies can help you grow your wealth?

Investing in paper assets is not a gambling game. In fact, it should be treated like a business. Real paper assets investment like stocks and unit trusts are like putting money into companies. The potential of the growth of initial capital depends how good the companies do over time. If the companies are operating well, earning good money, the valuations of the companies will increase over time. The share prices of the companies will increase as well.

Not too sure how true is this? Have a look at the following:-

Apple: price increases from USD 0.22 to USD 148 in 30 years (24% return per year)

McDonald’s Corp: price increases from USD 4.08 to USD 238 in 30 years (14% return per year)

Nike Inc: price increases from USD 5.20 to USD 169 in 20 years (19% return per year)

Facebook: price increases from USD 105 to USD 368 in 5 years (28% return per year)

The above 4 examples above show that in long term, a good company share price will increase tremendously. That’s how investing in good companies can grow our wealth.

Despite the above, if you notice carefully, the share prices never move in a straight line up. They are going up and down while moving slowly upwards. This is what scares many retail investors away.

Hence, always remember that investment needs time to grow. Volatility is part of the investment journey. As long as the companies that we invest in are good, the chances of the share price going up in long term is very high too.

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How to find more money?

This week, let’s discuss about “How to find more money?” Basically, there are 2 categories of people who will ask this question. The 1^st category is those who have not had enough money and are seeking for ways to get to enough. The 2^nd category is those who have enough money but are looking for ways to get more money.

Majority people in category 1 do not need the answer to this question. In fact, they have asked the wrong question. They should ask “why can’t I do the thing I suppose to do so that I can find more money?”. As human, we have the instinct to know how to earn enough to survive. Survival skill is available since born and we do not need extra knowledge.

Let me share with you a scenario here. One day, you go out without your wallet. Luckily, you find a RM5 note in your pocket. You are hungry and you want to eat. What will you do? Instinct will tell you to go to find something that is less than RM5. Will you go to take Mc D that will cost more than RM 5? Will you go to ask around how you can get more money as you need to take Mc D? This is similar to asking “how to find more money for survival?”. People know the answer. But they don’t admit.

If you really want Mc D, you know you can borrow money from people surrounding you and promise them you will pay them back when you get back your wallet. And you will find creative ideas how you can get their money. The real issue is whether you dare to borrow money from others? The choice is clear, either you lower down your expectation to survive or you take better action to meet your expectation.

So for people who are not able to survive, the key issue is not “lack of knowledge” but in fact “lack of action”. They know what they need to do to get more money, but, there are fear within. To solve this issue, they must figure out the fear that causes them being unable to take action. Remove the fear and they will soon find enough money to survive.

For category 2 people, it is to do with the knowledge and skill expansion. Not just fear. When we first graduate, we can get certain income. When our experience has improved, we will get salary increment. Hence, the easiest way of getting more money is to keep improving our knowledge and skill. A general doctor with no experience might be earning RM 2k+ a month, but a specialist doctor with extensive experience might be able to earn more than RM50-100k in a few hours complicated surgery. When we are willing to spend time improving our skills and knowledge, our income will increase too. This is how we can find more money!

Watch the Youtube video here on this topic.

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You must know this if you don’t want to get stuck in your job/business!

In today’s world, majority of us are spending more than 50% of our time on work. Why? We need the income to pay our monthly bills and expenses.

The key issue here is that we all need income to survive. However, most of us end up being stuck in our work, busy working to get more and more income. To get out from this, we need to understand how we can get income without working.

First of all, you need to be aware that there are 3 sustainable ways to earn money. The first way is to exchange time for money. In this case we are either working for others or become a self-employed. Through this way, the longer we work, the more money we get. The second way is we build a business. Business owners provide products, services or platform to help others to solve the public’s problems. Hence, they are compensated for the solutions provided. The last way to earn income is investment.

You will notice the first way is an active way. You don’t work, you don’t get the money. If you don’t want to get stuck in your job, you got to find ways to diversify your income sources. The longer you wait to diversify, the harder it becomes.

Many people are now looking to build business believing that it can generate huge income / fortune. Thanks to the multi-billionaires’ stories that many successful business owners earn billions. This motivates people to start their own business thinking that they can get out from the rat race by building a business.

It is true that this might be a workable solution. However, statistic shows that 45% of businesses fail within the first 5 years. This statistic shows that only very low percentage of successful businesses. Majority are struggling to survive. It takes effort to make a business successful. If the business does not provide great solution, no one will pay money for the service or the product. Hence, this way of earning money can be quite active as well if the business owner does not think how to systemize the business. At the end, even if the business is earning huge money, the business owners might be stuck in work as well if he does not plan well.

The last way, investment, is the obvious passive way of earning money. Passive here doesn’t mean it doesn’t require effort. It requires some skills to select the right investment in order to make money. For example, one wants to invest in property, he should survey the location, inspect the unit before making decision. This principle applies to all types of investments including stock investments. Many people are thinking that stock tips can help them to make money. If it does, many people would have been rich. It doesn’t work that way. It requires some kinds of research and understanding of the investment too. Buying based on tips are dangerous and it has no difference from gambling.

So, in conclusion, in order to escape from rat race, you need to diversify your sources of incomes and have more passive incomes. Let’s build a passive business or venture into investments to get your passive income and reduce your reliance on active income. Only through these, you can slowly stop working for income. Watch the Youtube video here on this topic.

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3 things relating to finance that you can do with your family to enhance relationship

The above news raised concern for Malaysian families. Kids become the victim if families are broken. It is hence important for families to find ways resolving financial issues so that families are being protected.

The followings show 3 things you can do with your families to increase family relationship and enhance the family finance.

Have your spouse to discuss the family financial goals with you. Make sure his / her financial goals are aligned with what you want for the family. Financial goals include retirement goal, children education fund goal and lifestyle goal. How much money you both anticipate for each of the goal and by when you need to achieve the goals? Having these to be discussed will reduce misunderstanding and arguments at the later stage.

Following the goals setting, both of you should start discussing about the budgeting plan and the saving plan. Who should save for what? How much to save per month to achieve the goal? How much to spend to enable the saving required.

Family financial planning doesn’t just end with goal setting and budget setting. It is suggested that the spouse can sit together to discuss the actual implementation and the plan. Monitor and discuss about the progress. Better communication about finances can help to deepen the couple’s relationship which in turn strengthen the family tie.

Involve the kids on simple finance matters. The parents should start having money talks with the kids since young. Many Malaysian families tend to avoid the kids from financial issues thinking that it is good for the kids. However, kids should know the family financial situation so that they don’t bother the family with more financial commitments, or if possible can contribute financially. They should be educated on the basic things such as the costs of the toys, activities, classes they were enrolled into. Let them understand the impact of the cost and have the choice to make decision to select what is best for them. This will also help raise the financial literacy of the kids and they can better manage their money in the future.

Have the whole family to plan for family activities with a budget in mind. It can be a family vacation with a bigger budget or just an evening activity with a small budget say RM 150. Let the kids or spouse to discuss what to do with the small budget. It can be a meal or a movie.

Having the whole family to plan for the vacation including discussing and determining the hotel, places to visit will enhance the relationship and it gives more chances to the family to have conversation. Less arguments will occur pertaining to the selection of hotel and trip packages. Sometimes, when there is a budget set, some elements within the vacation package need to be compromised. Having the family to discuss together can help the family to identify the priorities and spend more effectively. If we want to be happy, having a loving family is important. We do not hope that the financial issues will affect a loving family relationship. Let’s implement the above 3 suggestions for better family relationship.

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3 top questions about saving and emergency funds

These are the top 3 questions I received regarding saving and emergency funds.

Question 1: How much should you save in your emergency funds?

Answer: The suggested emergency fund would be 3 to 6 months of the basic living expenses. This is to allow you to have enough fund to cover the basic living expenses in case any emergency event strikes you. Basic living expenses covers your food, basic transportation cost, rental and utility bills. If you have kids, you need to cover their basic education fees too. During this current pandemic, it is suggested to have at least additional 3 months fund in additional to the basic 3 to 6 months emergency fund. This is because it could take longer for the economy to recover and if you lose your job, it could take longer time before you resume working again.

Emergency fund is crucial to maintain the financial security. If there is no emergency fund, you will feel insecured!

Question 2: Where you should place your emergency fund

Answer: Emergency fund should be 100% liquid. Hence, it shall be put into saving account or fixed deposit account which you can withdraw anytime. Alternatively, you can place the emergency fund into money market fund. Placing your emergency fund into fixed deposit or money market fund will allow you more interest than the normal saving account. You can choose to split your emergency fund into several fixed deposit certificates to allow more flexible withdrawal.

Do remember not to place your emergency fund to investment. Investment has some risk and fluctuate in price from time to time and when we need the money, it might be the worst time to sell our investment.

Question 3: What is the difference between saving account and money market fund

Answer: Saving account is operated by banks while money market fund is managed normally by investment institutions or banks. Saving account has lower interest than money market fund. Money market funds are mutual funds that invest solely in cash or cash equivalent securities. They mainly invest in Certificate of Deposits (Fixed Deposits). Money market funds have no maturity date and hence allow withdrawal any time.

The interest generated from the retail money market fund is not taxable for corporates. Interest generated from saving / fixed deposit accounts is taxable for corporates.

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Why you should not delay your investment decision

Investment is one of the key things in wealth management. When we have saving, we shouldn’t just save due to the inflation effect. When it comes to investment, people always want to wait for them to have more capital before investing. Is it right to wait? Let me explain.

First, for me, having cash is dangerous. When we have cash, it will soon be used to buy something. Most of us love shopping. When you see more and more cash in the bank, you will think that you can afford to buy more things. Without realising, it can increase your lifestyle and soon your expenses will increase. If you like to spend, saving money in the bank is definitely not a good idea.

Second, if we do not invest, inflation will eat up the value of our money. Published inflation rate is 2%-4% per year and the real inflation rate can be as high as 7% as prices of things are doubling every 10 years.

Third, early start and late start of investment will have huge impact on our accumulated investment amount. Let’s have a look at this example.

A is planning to invest for his kid education fund when the child was born. He started to invest only RM200 per month, which is equivalent to RM2400 per year for a 10 years’ period. I think everyone can save RM200 per month. After 10 years, he stopped his contribution and let his money grows by itself. Assuming the rate of return is 8% per year, when his child is 20 years old, his accumulated investment amount will be RM 86k +.

B on the other hand, postponed his investment decision for 10 years. He started to invest when the child is 11 years old. However, because he started late, he decided to invest RM 400 which is RM 4800 per year for 10 years. Assuming the rate of return is also 8% per year, when his child is 20 years old, his accumulated investment is only RM 69k +.

Look at the final figures for both!

Why A accumulated RM16k+ more than B even though he invested only half the capital of B? This is what we call the opportunity cost for late start. This example illustrates the impact of early start and late start of investment. It does not matter you start small, the key is to start early.

What if you can start with RM 2,000 per month? What if your rate of return is more than 8% per year? The final figure will be much more. Do you think your life will be easier or more struggling?

Start to invest as soon as possible. Learn how to invest and you shall grow your wealth in no time.

Watch the Youtube video here on this topic.

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How to spend wisely and save more?

Saving is crucial to retirement planning. If we cannot save, we are not able to achieve financial stability and for sure, we are not able to retire as well. Imagine, if we have no saving, when an emergency event happens, how are we going to deal with them? We will be panic, we are not financially stable in that case. If we want to retire, we will need stop work in the future, so we will use the saving to fund our retirement expenses. If there is no saving, how to stop work?

The key to saving is wise spending. The culprit of not being able to save is the inability to control spending. Well, we are all human beings. We have desires and wants. We want comfort, we want freedom, we want fulfilment and many many things. But, seldom we sit down and rank the list and check what are our priorities. In fact, we have one important purpose in life – we all want happiness in life. I assume happiness is our top priority.

By knowing this, whatever money that we spent on things that don’t make us happy is wasted. This concept is powerful if we want to spend wisely. Some simple questions to let you know the real meaning of this.

How many of you have purchased things after seeing the advertisement without evaluating whether you need the items?
How many of you have purchased something expensive and found it to be too precious and you keep it rather than use it?
How many of you have things turning expired and unused?
How many of you have bought something because of your friends or family members?

There are in fact many things that we buy which we don’t use, hence they are not contributing to our happiness level. And worse, we found out that we have lesser money to do the things we want – we are sad. But, why are we buying these things in the first place?

This is what I call “the mismatch of the priorities”. We overlook the reason why we buy them. Shopping will normally increase our happiness for a while but they are not permanent. Our desire is being manipulated by advertisement and our environment.

To avoid this, we need to be more careful when we spend. We evaluate the purpose first when we spend. If we understand our priorities that make us happy, we will be able to select things to buy more meaningfully. The following shows the list of items for you to consider to decide your priorities:-

Mental health
Physical health
Spouse
Kids
Parents
Friends
Colleagues
Communities
Freedom
Comfort
Status
Recognition
Social contribution
Hobbies
Personal growth

Spend more on the things in the top priorities. If our health is on higher priority than friend, we should buy a sport equipment for better health than spending on social event with friend. Product itself does not increase our happiness level, the experience will. Spend only on things that can create the experience that can increase our happiness level.

Start to understand your priority and you shall be able to make informed decision on spending. Have less thing or nothing being wasted. Increase your long-term happiness level by wise spending and you shall be able to save more. Watch the Youtube video here on this topic.

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Hacking the bad habits for managing personal finance

According Nir Eyal, habits are formed based on the hook model as follow, with 4 elements, i.e. trigger, action, variable reward and investment.

Triggers: Triggers can be external or internal. It is the spark of an habit.
Action: Following trigger comes the action, the behaviour done in anticipation of a reward.
Variable rewards: Human have desires and wants. Right rewards will be able to suppress the areas of the brain associated with judgement and reason and activating the parts associating with wanting and desire.
Investment: Investment phase increases the odds that the user will make another pass through the Hook cycle in the future.

While understanding how a habit is formed via the above 4 stages, it would be easier for us to break the bad habit and form a new good habit.

In order to have stabilised personal finance, we need saving and investment habits. The reason why many of us cannot save is because we are spending. We can either suppress the habit of spending or we build the saving habit.

Based on the above “hook model”, to build the saving and investment habits, we need to start by introducing the trigger. The suggested trigger will be the income credit into the saving account. We need to start the habit of transferring portion of the saving out from the salary to investment when we see the money comes into the bank account. When we have done this enough time (about 66 times to 90 times), a new habit will be formed. We also need to install the rewards into our brain by doing the action. Suggested rewards would be the picture of our happy family with stabilised financial situation or happy retirement. If we have built strong emotion tie associated with our habit, it is highly likely we will follow through.

Also, simultaneously, we need to break the spending habit. The trigger for this habit is “seeing beautiful things” and the reward is the pleasure of having the item(s). We can break the habit by being aware about the triggers and eliminating the chances of seeing those triggers. Also, we can re-adjust the “pleasure of buying the things” to “pain of having lesser money after buying the things”. Having a better personal finance stability is indeed beyond just managing finance but to master the psychology. Hope the above can help you to understand how habit is formed and let’s break the bad habits.

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How this concept helps me to acquire more than 10 properties

In order to retire early, we need to know about this important concept – assets and liabilities. The wealthy people often spend more on assets than liabilities. A lot of people think that saving is important but spending on the right thing is equally important. The wealthy people don’t just save, they use the saving to spend on assets.

I learn the concept of assets and liabilities from Robert Kiyosaki’s book. For him, assets mean things that can put money into our pocket and liabilities are things that take our money away from our pocket. The following shows the cash movement:-

Another thing you might not be aware is assets can generate automatic inflow for us while liabilities will generate automatic outflow from us. The more assets we have, we are more relaxed as we do not need to work that hard. The more liabilities we have, we are more stressed because we need to work harder to pay for the automatic outflow.

Because of this concept, I make sure more of my money goes into assets. I only save enough for my emergency and the rest of my money goes to assets. One of the assets for me is property which can generate rental income for me. I prefer to buy more properties to rent out than upgrading my own stay house. So, my most expensive property is not for own stay but for investment.

I will try to reduce my liabilities by reducing spending on things that cannot generate income for me such as car and credit card loans. Credit card interest is high and I will never pay late, I will ensure the full payment is made on the last day of the due date.

My friends often ask me, why not I buy a bigger house or bigger car? But, I really cannot justify the decision. For me, a bigger own stay house will take more money out from my pockets. For example, I need to pay more electricity bills because I need to install more air conditioning units. I also need to pay more maintenance fee because the house area is bigger. I do not like fancy car as I don’t enjoy driving. The bigger car I have, the more I need to pay for insurance and the fuel. It keeps taking money out from my pocket.

Investment properties are different. If the property is the right one, it gives good rental yield and the income is regular. It might not be a fancy or beautiful property but it gives rental monthly income.

To be able to retire faster, this is the basic concept that you need to understand. Let’s start to buy more assets and reduce liabilities. Before that, understand also what are considered assets and liabilities. Never treat your own stay house and own used car as assets anymore!

Watch the Youtube video here on this topic.

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