In the last article (read here), you know that debt is the backbone of the current economy. We cannot live without debt. On the other hand, do you notice where is the source of the wealth? Who is creating the biggest wealth? Please refer to the last article (https://evainvestmentjourney.wordpress.com/2020/11/06/debt-is-money-our-current-monetary-system-is-debt-based/) for the illustration below.
It is Bank X. Bank X did not come up with the initial deposit. It had no cash at all initially. It is A who contributed the cash. Through lending money to B and D, Bank X received interest income out from nothing.
A and C are savers. They received some deposit interest from Bank X because they contributed their cash. However, for sure, what A and C received will be lesser than Bank X.
B and D are the borrowers. Are they the losers in this scenario because they need to pay off loans? B borrowed money to buy a car. There is no income generated from the loan. Hence, he needed to work harder to earn more money to pay off the loan.
D borrowed money to do business. The more loans he got, theoretically, he would be able to buy more products to sell. Hence, his profits will increase. Through this example, I hope you understand that the one who is borrowing can be in the better position than the savers if the loan is used to purchase the right thing.
I will write more about this in the coming weeks. Stay tune!
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
When it comes to debt, many people think that debt is a bad thing. Many are trying to avoid it. Is it true? If it is, why we are still having debt in our economy. Why this bad system is not being abolished? In fact, it is important for our economy.
On 15 August 1971, the United States President Richard Nixon announced the change of the rules of money and suspended the link between money and gold. Since then, the US dollar (money) is no longer defined by gold. The money becomes debt-based which is the current monetary system. This decision has not just affected the United States but the whole world. The money is then supplied based on Fractional Reserve System which requires more debts all the time.
Fractional Reserve System is a system whereby the banks can take most of the deposits from the depositors and lend out to people and institutions which require loans, after reserving some portion of money (as reserve). For example, when A deposited $ 100,000 to bank X. Say the reserve requirement is 5% for easy calculation, the bank only required to maintain $ 5,000 in the bank as reserve. Then, the bank lent out $ 95,000 to B to purchase a car from C. C received the money from the bank and deposited the $ 95,000 to bank X instead of keeping it at home. Next, bank X had extra $ 95,000 as deposit which it lent out $ 90,250 ($ 95,000 x 95%) to D for him to buy some products from E to run his business. How much money has been created through the scenario?
Debt B – $ 95,000 D – $ 90,250 Total $ 185,250
Money A – $ 100,000 (hard cash) C – $ 95,000 (new money created) E – $ 90,250 (new money created) Total $ 285,250
Through the system, you can see extra $ 185,250 is created in the market using $ 100,000 hard cash. The above is just a simplified version of money creation. The process can go on and the money creation can even reach millions. As long as people are depositing money into the bank, the bank can lend out the money, the money creation process will keep going. In conclusion, there is no way debt will get abolished. We all need it for economy growth.
No debt, no money creation. Debt is in fact money!
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
Many are interested to make more money, no doubt, who does not want to be rich? But, do we need to be rich to retire?
In the past, I thought that I need to be having a lot of money for me to retire. In fact, I realized I don’t need to have a lot of money to retire, I just need to have sufficient money to retire. How much money is considered as sufficient? It depends on your lifestyle and monthly expenses. If you need RM5,000 a month for monthly expenses, you must have sufficient money to generate RM5,000 a month for you to retire.
If you are putting you money in property that gives you 5% rental income a year, if you have RM 1.2 million property portfolio, it will have given you RM 60,000 rental income a year (5% x RM 1.2 million). Similar to your retirement pot, such as EPF and PRS, if EPF and PRS is generating 5% dividend income, you only need RM 1.2 million to earn RM 60,000 dividend income. Hence, the sufficient money in this case is RM 1.2 million. When you have RM 1.2 million, is it rich?
According to Forbes magazine, rich means having $ 1 million or more a year in income. As such, while having RM 1.2 million worth of assets is no way to being rich yet. However, it can make a person retires if his expenses are only RM 5,000 a month.
The purpose of illustrating this is to make you realize that sometimes you don’t need to be rich to retire. Retirement needs a plan. If you do not know your retirement figure, it is very hard for you to even achieve it. It is a long journey, if you know you number earlier, the chances of achieving it is higher because you have more time to accumulate the figure. Start to understand you figure and work out a plan to achieve it. Read this blog to calculate your figure.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
According to Wikipedia, a rat race is an endless, self-defeating, or pointless pursuit. The phrase equates humans to rats attempting to earn a reward such as cheese, in vain. It may also refer to a competitive struggle to get ahead financially or routinely.
Since young, we were being taught to study hard, to get a good job with good income. We were being trained to be a good employee. Since graduation, many of us start to work to earn income in order to pay the bills (responsibilities). Because of the recurring bills, stress comes in, instant gratification comes in to lure us to enjoy better lifestyle after hardwork. If we are not careful, we are easily living beyond our income. Hence, no saving! Worst, we get into financial debt which forces us to work even harder for money.
Are you in such circle? If yes, then you are stuck in the rat race. If you feel that every month you need to work to get income to pay off your bills or debts, you are in the rat race!
How to break free? The key is to work on each element that are within the rat race circle (see the picture above). We should reduce debts so that we don’t work every month just to pay off the debt or the minimum monthly debt repayment. We need to practice delay gratification, balance between spending and saving. We spend only within our means. All these effort will result in more saving.
Most of us know this, why it seems harder to implement and to take action? The reason is lack of clarity. Some are unaware how serious is the situation. Some are unsure how much they have overspent, how much saving is required to escape the rat race.
You can start to track your expenses to check whether you have any saving every month end. This will be the starting point for you to break free the circle. If you don’t have saving, you need to find some by increasing your income or reducing your expenses. After having more saving, make the extra money working harder for you, i.e. invest! When the money flows in through investments (or any other method without working hard) is sufficient to cover your bills and debts, you have the choice to stop working. Yeah, you escape from the rat race!
The beginning is always the hardest. The key is to START, after starting you will realize doing it is not that hard anymore.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
One recent article on CNBC (read here) mentioned that financial planning can improve health. Financial fitness does affect physical health. So, how do you know you are financially fit? I’m going to share with you 3 important financial ratios to determine your financial fitness.
Debt / asset ratio: Debt ÷ asset x 100%
This is the ratio determining whether your debt level is healthy. The benchmark for this should be less than 50%. When the ratio is higher than 50%, it means that you are leveraging too much. Exceeding 100% indicates you are borrowing more than what you own. It does not mean it is good to be 0. Good debt can help you to grow your wealth faster. However, extreme debt will expose you to unnecessary borrowing risk. You could be exposed to insolvency if you are not carefully managing the borrowing risk.
Saving ratio: Total monthly saving ÷ gross income x 100%
This ratio determines whether your saving habit is good. The benchmark for this ratio is 20%. The higher the percentage, the better it is. Generally, one should save at least 20% of their gross income. If your saving ratio is less than 20%, it is time for you to relook at your monthly expenses to make sure you cut some to maintain the minimum 20% saving rate. The lesser saving rate you have indicated you need to take more time to achieve financial freedom.
Liquidity ratio: cash available ÷ total monthly expenses
This ratio shows how long your available cash can sustain if you do not have any future income. The recommended benchmark is 6 months. It means your cash can last you 6 months if you stop working. Low liquidity is not good because it means your sustainability towards job loss or revenue drop is low. You will easily feel stress if your number for this ratio is low. High number does not necessarily mean good because it indicates you are keeping too much cash which you can use for investment for wealth growth.
If you are still unsure about how you can calculate the financial freedom, do contact me via Facebook to ask for financial health check.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
The automatic moratorium programme which started on 1 April 2020 to assist Malaysians affected by COVID-19 will come to an end on 30 September 2020. Prime Minister Tan Sri Muhyiddin Yassin announced on 29 July 2020 that banks will offer a three-month loan moratorium extension and assistance to targeted groups in view of the current tough economic times. Individuals who have lost their jobs in 2020 and remain jobless are eligible for the targeted moratorium extension of three months.
The question now is, if you are eligible, should you opt for further loan extension? It depends on your current finance situation. If you are capable to repay the loan with your extra saving and have your emergency fund in place, you should not opt for further extension. Loan extension may incur more interest. While you have your extra saving (not your emergency fund) which does not attract high interest in view of the low interest environment, it is better to be used for loan repayment. In addition, allowing yourself not paying the loan payment for longer time might set yourself up for bad habit which will hurt your finances in the long run.
Having said that, if your cash flow is tight, then the loan extension can help to ease your financial burden temporarily. However, while applying for the extension, you shall also consider the following:-
Reducing your expenses to save more money in the near future to avoid the same issue again after the end of extension period.
Restructuring your debt. It is a good time to consider perform loan consolidation while the interest rate is low.
Refinance your existing properties to ease the cash flow problem.
Remember, the applying for the loan extension is only a temporary measure. There will be an end to this, the best thing to do now is to get prepared financially and save up more cash to ease the cash flow issue.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
Health director-general Dr Noor Hisham Abdullah advised the public to stay at home following a surge in the number of Covid-19 cases in the past week. If the Covid-19 cases kept increasing, there is a chance that the strict MCO is to be imposed again.
The followings are the 5 things you should do for your finances if this happens:-
Make sure you have at least 6 to 8 months emergency fund – economy is going to get worse if the lock down happens again. Jobs and businesses will be hit again. Therefore, larger emergency fund is required to cater for the unexpected events.
Postpone all big purchases – if you are thinking to upgrade your car or house, please re-consider the big decision. Even though the interest is low at the moment, things might happen that can reduce or stop your future income streams. Assess your finances well before any big purchase.
Track and reduce expenses – cash is king during the pandemic period. The more cash you have, the more secure you will be. While being lock down at home, you shall start tracking and reduce your expenses to save more cash.
Look out for good investment opportunities – if the strict MCO is to be imposed again, the share market will most likely drop drastically too. Look out for good fundamental stocks / unit trust funds to invest during the market crash. Property market may lag compared to share market, hence the property price movement may come later.
Upskill – the workforce / business market is going to be competitive during tough time. Hence, it is important to equip yourself with more knowledge and skill so that you can sustain better. Take the chance to learn some new skills if you are forced to stay at home again.
In conclusion, prepare more cash in hand for better investment opportunities and for security. Stay safe always during the difficult period.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
Recently, I received a call from a bank mentioning a saving product which can offer me 20% guaranteed payout for the initial years if I save with them. No doubt, this is the feature of the insurance saving plan. Does the 20% payout (interest) sound too good to be true?
Well, a lot of people do not understand how saving insurance plan works. Let me illustrate using one of the sample from X company.
The above is a 5 years’ insurance saving plan. The client will need to pay RM 6,000 premium every year for continuous for 5 years (total premium paid is RM 30,000). The guaranteed cash payment from year 1 to year 10 will be RM 660 yearly (11% of the annual premium) while the guaranteed cash payment from year 11 to 20 will be RM 1,200 (20% of the annual premium).
Many insurance agents used the 11% and the 20% Guaranteed Cash Payment as the motivation for the clients to buy the saving plan as the “interest” is much more higher than the current fixed deposit. However, the truth is – the 11% or the 20% is based on the yearly premium of RM 6,000. At the end of year 5, the client would have already paid RM 30,000 (RM6,000 x 5 years). Hence the “interest” is not 11% (RM 660 / RM 6,000) but 2.2% (RM660 / RM 30,000). In addition, if the clients are receiving the guaranteed cash payment every year, at the end of maturity (after 20 years), the client will receive RM11,970 – RM 30,897 as the maturity benefit. Why it is a range and not the exact RM30,000 total payment paid? Because the final amount depends on the performance of the fund. Normally the insurance companies will invest the amount into largely bond funds for higher return than fixed deposit. Hence, at the end of maturity, the client is not guaranteed to get back the total payment paid, if he chooses to withdraw the guaranteed cash payment every year.
What if the client does not withdraw every year? Well, based on past record, the return would be roughly about 3% to 5% per year. It might be higher than fixed deposit considering the low interest rate currently. However, there is no liquidity of the premium paid. Client will definitely suffer loss if early surrender of the policy, i.e. before maturity date.
So, in term of return, saving plan is not something that generate high return. It might be worst than fixed deposit considering the paid premium cannot be withdrawn easily (without loss) before maturity.
In conclusion, one may ask – what is the benefit of this plan?
Saving plan provides liquidity of fund in case the death of the life assured. The saving plan is an insurance plan, hence, it will trigger immediate payout on life assured’s death to the nominee(s). Fixed deposit is not liquid upon the death of the owner. The amount saved in fixed deposit will be frozen until the grant of probate issued in this event. So, it is a plan to be considered in lieu of fixed deposit when one needs to pass down some money to the next generation without the need of will.
Saving plan is a forced saving effort which is good for retirement saving effort. Based on research, more than 50% of Malaysians have insufficient retirement saving. As early withdrawal will incur early surrender penalty, the money is not easily assessible to the payer. Hence, the payer is more likely to continue paying the premium and not easily withdraw the saving. The saving becomes part of retirement saving after 20 years.
So, with the above, understand your reason of buying. If you need liquidity during your lifetime, saving plan is not something that provides that. If return is important for you, you might consider investment instruments rather than insurance plans.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
Saving is very important for financial planning. Expert recommends one should save at least 10% to 15% of his / her salary. This is why in Malaysia, there is a compulsory EPF saving (Employee Provident Fund) which forces the employees to save at least 11% for their retirement. Thank you for EPF authority who forces the employers to contribute another 12% of one salary to the retirement pots.
However, is it really enough? According to EPF, 70% of Malaysians who withdrew their savings at age 55 used it up in less than 10 years. Our life expectancy is also steadily increasing to about 75 years . Hence it shows that it is important to build enough savings to last our retirement years. If contributing over 20% is also not enough, then how much is enough? Many do not realize the sufficiency of the saving actually depends on the following:-
How long you work (how long you contribute to EPF)?
How long is your retirement life?
Your retirement lifestyle
The rule of thumb is you need to save 30% of your saving for 40 years to pay for your 20 years’ retirement life, considering your expenses during your retirement life is only 60% of what it costs during your working life.
So if you want to save less every month:-
You need to save longer / work longer (delaying your retirement is a need if you want to save less)
Reduce your spending during retirement life
You need to invest so that your saving grows
The next question is “Are you ready to work more and reduce your current lifestyle during retirement?”. If the answer is “no”, investment becomes a necessity if you wish to save less.
Don’t know how to start investment? Feel free to contact me via telegram or Facebook.
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
Many people are having the problem of saving. They want to save and they know the importance of saving but in reality, they could not save. I once learn this from a motivation guru that if we want to change, we must target to change our action, then our behaviour and our attitude will change eventually. In order to start saving, don’t think about how hard it is. Start with the simple step. Once you start action, you will no longer think that it is hard. This is how our action changes our attitude and behaviour.
One tool that is available on Maybank website is “Goal Saving”. I found out this from one of my friends 2 years back and I have since been using this tool to automatic save the money that I won’t normally save. It looks something like this.
I hardly save money for leisure, hence I created a goal called “Play Jar” so that I will use the money for my holiday plans. I have another goal called “FFA” which stands for Financial Freedom Account. Once the small goal is reached, the money will be removed and transferred to my investment account. New goal will then be created again. The process will repeat.
To create goal, you just need to click the top right hand corner of “create goal” button, then the following box will pop up.
Select the type of goal and how you want to achieve it, either using a fixed amount every month or a fixed duration (which means your goal amount divide by the duration you set). Remember, the goal is to start the saving habit, once you have it, you will continue it. Happy saving!
You can receive constant broadcast message relating to wealth creation to financial freedom through Telegram. Click here to subscribe to the telegram for the weekly newsletter.
