Money Tips V - Amazon S3 · Money Tips Volume 2 ... If you prefer to read a REAL book, I have...

Money Tips Volume 2 How to Invest Profitably, Save More Money and Retire Early in Malaysia, Even if You are in Heavy Debt Now

by KCLau http://KCLau.com

The electronic version of this book can be downloaded free of charge. Feel free to republish excerpts from this book, as long as you link back to http://KCLau.com for attribution. And it’s also okay to share this ebook in its entirety with anyone you think might be interested. In fact, I’d be delighted. If you missed Volume 1, download it here: http://KCLau.com/lp/ebook

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Published by KCLau Dot Com Sdn. Bhd. Email: [email protected] Website: www.KCLau.com Copyright © 2016 by KCLau All rights reserved. Third Edition June 2016 The strategies outlined in this book may not be suitable for every individual, and are not guaranteed or warranted, whether expressed or implied, to produce any particular results. The advice, ideas and suggestions are written as a general guide and specific professional advice may be necessary. No warranty (whether expressed or implied) is made with respect to the accuracy, adequacy, reliability, suitability, applicability or completeness of the information contained herein, and both the author and the publisher specifically disclaim any responsibility or liability for any damages, lost profits, losses or risks, whether personal or otherwise, which is incurred as a consequence, whether directly or indirectly, of the use and application of any contents of this book.


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A Note to the Reader What’s Your Time Worth? Relative Value of Money Should you focus on Increasing income or reducing expenses? Get Rich with Excessive Debt Are you trading? Gambling? Speculating? or Investing? Don’t spend the money you don’t have, to buy the thing you don’t need, to please the people you don’t like! The Most Important Payee of Your Entire Life Top 5 Regular Monthly Expenses We Don’t Need How to Quickly Evaluate an Investment using the Rule of 72 Time Value of Money: Computing the Value of Single Sum Investment Time Value of Money: Finding the Rate of Return to Meet Financial Goals Time Value of Money: Computing the Value of a Fixed Sum Invested Regularly Time Value of Money: Computing the Retirement Fund in EPF Account of an Employee Time Value of Money: How to Calculate the Effective Annual Rate (EAR) How to Calculate Your Investment Portfolio Return? Withdraw EPF Money for Home Loan Installment: How it affects your Retirement Fund How Recession Happens? 8 Tips to Prepare for it! Knowing your enemy – Inflation! Financial Security: How you feel it? Do you have the assets to pay for your liabilities? What Do You Know About Bankruptcy?



Financial Consideration for New Parents in Malaysia Cloning Your Life Values via Trust Top 4 Methods to Enjoy Tax Relief for Education Purpose



A Note to the Reader This book is a compilation of the articles and ideas I’ve published online, on my website, or on other people’s website, newspaper, magazines or other types of publication. You might have come across some of the ideas in this book. The purpose of making this book is to give you the convenience to access my writing in a more organized format. That’s why I’ve made the electronic version freely downloadable. Meanwhile, there is no physical version available at this moment. If you prefer to read a REAL book, I have several books published and you can find them in major bookstores. Also for your convenience, I’ve made the size of this book small enough to fit into your mobile device screen, so that you don’t have to do excessive horizontal scrolling to read the pages. I will be updating this book from time to time, since I am writing new content on a regular basis. I really urge you to subscribe to my emailing list in order not to miss out any future updates. for many years. This is Volume 2. If you missed the previous Volume, which contain entirely different money tips, you can download it here: http://KCLau.com/lp/ebook .


http://kclau.com/lp/ebook


How to Make Wise Financial Decisions Based on your “Time Worth” Value of money is always tied to time element. If you work, you need to understand the basic concept that you’re trading your time for money. Time is a nonrenewable resource, but money? You will be able to make much more money if you understand the relationship between time and money. That’s why one of the fundamental subjects of financial planning is “Time Value of Money”. Simple Method to Calculate Your Hourly Wage without using the Calculator Take your total gross income per year, remove the last three zeros and halve the result, so RM100,000 becomes RM100, which halved is RM50. So your wages is RM50/hour. This is a very simple way to calculate your hourly rate in a blink. It is based on 8 hours workday, 5 days work week, and 4 weeks of working month. Try calculate the real number, it won’t be too far away. RM100,000 / (12 months x 4 weeks x 5 days x 8 hours) = RM52.08 Hourly Rate = Annual Salary / 1000 / 2 Considering Tax



However, some portion of the money you make is contributed to the Income Revenue Board (IRB) (Income Tax). If you hourly rate is RM50 and your highest tax bracket is about 20%, your actual hourly rate wages is RM42 only. It will be more practical to use your net income to estimate your time worth. Knowing the Application 1. Should you outsource, or do it yourself (DIY)? People love DIY. But we can’t be expert in every field. If you DIY, it might cost you more than hiring an expert to do it for you. In Malaysia, a house cleaning foreign maid costs about RM8/hour. Let’s say you are trying to save money by doing all the cleaning yourself. You spend the whole day from morning till evening, 8 hours in total to complete the job. If your hourly rate is RM50, you have just spent RM400 to keep your house clean. On the other hand, you can employ a temporary maid and pay her RM8/hour. She might get the job done in 4 hours. She is a professional housekeeper and probably she can do a better and faster job than you can. You only spend RM32. If you make use of your time for productive job, you might have earned the difference of RM368. Most of the time, I would hire someone else to do the low value job and free myself up to do the things I love to do. So ask yourself these questions:

should you cook or buy takeaway packed food?



should you wash your own cloths or send it to laundry service?

should you type the letter, print the invoice or hire a secretary?

Forget about all those noncore function that you hate to do. Stop it immediately. There are people who are much more skillful. By outsourcing them, you will have more resources to be better utilized. 2. How many hours it worth? When you buy something, you’re trading minutes or hours or days of your life to possess that thing. So before you buy that nice cloth, do a simple calculation using your hourly earning to see whether it is worth your time spent (on working for it, not the time spent buying it). If you make RM10 an hour and something costs RM50, you can figure that it takes five hours of your life to pay for that thing. Next time when you are making a decision to buy something, ask yourself, “How much time is it worth?” Beside that, the hourly rate also apply to other things you do that’s not productive. Example:

You spend one hour waiting for your turn to get that free toy

You drive 30 minutes to a supermarket to get milk that is 50 sen cheaper than the groceries store just nearby your area.



You spend an hour contesting a RM10 mistake on your Celcom phone bill.

3. Increase your hourly rate, and build income on top of others people’s time. Since time is a limited resource, you should try hard to increase your hourly rate. Tiger Woods earned $111 million in 2006 alone. His hourly wages is $55k per hour! However, there is always a limit on a person’s earning. In order to grow your income further, try imagine that you have a bunch of associates that make money for you. Let’s say whenever they make RM10, they will make another extra RM1.00 for you. I can see that now you are starting to think “rich”. Indeed, helping others make money is one of the fastest way to get rich. I’ve been working hard to help others make money. The more people I help, the more money I will get. When your perspective change, it is a whole new world waiting for your exploration.



Relative Value of Money: When, Where and How Your Money is Valued? The value of money relatively differ depends on where, when and how you measure it. It boils down to the following question to relatively determine the value of money. #1. Where is your money? Where you put your money determines how much value it has, in the future. Put it in bank, your money is relatively lower compared to putting it in investment. If you have your money set aside long term in a great company, or in a real property located at prime areas, the value of your money is relatively higher. For example, you have RM1000 in a fixed deposit giving you 4% return p.a., after 10 years, the value is RM1,480.24. If you invest it wisely now, in an investment vehicle that gives you 15% average return p.a., the future value is RM4045.56. It is much higher than putting your money in FD. So, where you put your money really matters. The poor remain poor if not poorer, just because they don’t know where to put their money. #2. Where do you earn and spend your money? Let’s say you have RM1,000 in your pocket to spend. You can do many things or purchase many stuff in certain parts of China. But



for merely RM1,000 in Australia, you may spend it all on food within a few days. That’s why you know some people work hard at other more developed countries, and save hard so that they have more money when they go back to their home countries. Indonesians work in Malaysia as maids. Some Indians workers are willing to work 12 hours a day, 364 days a year in Malaysia nasi kandar restaurants. Some Malaysians work illegally in UK as kitchen helpers. Filipinos, Indonesians, Indians and Sri Lankans work as domestic helpers in Singapore. Thais, Indians, Chinese work in construction industries in Singapore and Malaysia as construction workers. IT professionals from India, China, etc work in US, Singapore, Europe for a number of years before moving back to their home countries. That’s why it is great to free yourself, and being mobile while at work, so that you can earn US or Europe dollar, while living in China. The relative value of money is giving you a high purchasing power. #3. When do you earn and spend your money?



Money’s value is correlated to time. That’s why there are textbooks and courses about the time value of money. RM1,000 now may be many folds more in value than RM1k 20 years later. The longer you can defer, or afford to defer, it is better in terms of increasing the value of your money. The rich know that you need to earn money as early as possible, and spend it as late as possible. There is no secret indeed. You just need to make and save a lot of money now, and spend just a little portion of it. Later on, you will have more money to spend even though you work less than you used to be. #4. How do you earn and spend your money?

John’s income is RM500/hour. But Lim’s income is RM10/hour. John is better paid than Lim. So John can easily afford a new RM2500 mobile phone. But to Lim, it is 250 hours of hard work to have the

purchasing power for the same phone. So if you increase your earning ability, you relatively have better value. On the other hand, if John spends 150% of his income ( the additional 50% on credit card debt), but Lim only spends 10% of his total income, the value of money is different relatively. For



Lim, RM1000 made is equal to RM900 saved. For John, RM1000 earned equals to RM500 owed to the credit card providers. Now, what do you know about the value of money? Now you’ve learnt the relative value of money. If you want to be rich and feel financially secure,

put your money at a better investment vehicle, that gives you better returns in the long run

earn money of greater value and spend money at places with lower living cost

save your money now, and spend it later. (Later means when you really need to)

stop living from paycheck to paycheck. Live frugally and earn abundantly.

Should you Focus on Increasing Income or Reducing Expenses? Cash flow chart involves simple mathematical calculation: Saving = Income – Expenses. Savings is the priority since it appears first in the equation. To increase saving, you either increase income, reduce expenses, or doing both at the same time. Which option requires your most attention?



Focus on Reducing Expenses If your main focus is on cutting down your expenses, it is all about frugality. I found that many of the personal finance blogs preach about how important it is to live frugally. Is it worth your effort? When you don’t know how to increase your income, cutting down expenses is the easiest

route to increase your net worth. 50 things you can do to reduce expenses

1. eliminate mobile phone (I know you can’t live without it, me too)

2. cancel newspapers, magazine and other periodicals subscriptions.

3. use energy efficient lamps 4. purchase generic prescriptions when possible 5. buy in bulk when shopping for grocery 6. terminate your gym membership 7. read books at library instead of going for movie 8. cut your vacation 9. stay at home whenever possible 10. stick to your budget 11. cancel your TV subscription 12. use email instead of phone whenever possible



13. compare before you make any purchase 14. plan menus for the week before you shop grocery 15. prepare shopping list to avoid impulse buying 16. go to the store just once a week 17. do not go to restaurant when you are hungry 18. plan the use of leftover food 19. buy clothing at the end of the season 20. shop at discount stores 21. buy used item whenever possible 22. use public transportation, if available 23. have good health habits 24. avoid smoking 25. avoid drinking alcohol. 26. play board and card games, they are cheaper 27. attend concert only if it is free 28. make your own home accessories 29. consider less expensive housing 30. Pack school and work lunches 31. review insurance coverage. Are you over insured? 32. reduce trips outside the home 33. use 10% less than usual 34. stop shopping… not even window shopping 35. change to cheaper brands 36. look for discount coupon 37. buy only when you are offered rebates 38. drink plain water only whenever you dine out. 39. don’t keep more than ten buck in your wallet 40. cut all your credit card except one 41. do your own car maintenance such as changing oil 42. stop going to a hairstylist



43. rides bike instead of car 44. avoid silly bank fees 45. don’t buy a car 46. just rent a small room to stay 47. share room and split the rent 48. stay with your parents 49. start blogging and it will cut all your other entertainment 50. ask for discount every time before you pay for something

Hard work and no fun! Wow !!! There is a lot of hard work. But do you really have fun doing all those frugal things? I can only agree with item no.49, which had saved me a lot of money. How much can you save? It is limited. No matter how hard you try, you can only cut down your current expenses completely. Most people will celebrate if they can cut 10%. 30% is already too much for most people to compromise their lifestyle. The crux of the matter is, by concentrating on reducing expense, what you get is hard work, no fun, and only be able to save as much as the amount you didn’t spend. Focus on Increasing Income If you change your focus to increase your income instead of reducing your current expenses, you will see a whole new world of opportunities. 25 things you can do to increase incomes

1. invest in stocks 2. invest in real estate



3. increase your knowledge 4. sell items you no longer need 5. get a parttime job 6. rent out spare room 7. join MLM 8. start a business 9. learn how to sell 10. make money online 11. get a raise or a second job 12. change your thinking 13. raise your rates 14. get extra work 15. get money from public aid or charities, if you are qualified 16. go back to school to acquire additional skills 17. buy an established small business 18. arrange a better feng shui at your home and your work

place 19. start a make money online blog 20. invest in unit trust funds 21. take your company public 22. pay less tax 23. learn forex trading 24. invest in ETF 25. get sponsorship from family members, if you dare.

Tough job but a lot of fun! How much can you probably earn and save? It is unlimited! The sky is the limit. Are you a great saver or an income pursuer?!



So, how much time do you spend in a day to increase your income? 8 hours? 12 hours? Is it viable to cut down the effort to live more frugal? And spend the time saved to actually work out some plans to increase your income? I am definitely an income pursuer. How about you?

The Non‐Risky Way to Get Rich with Excessive Debts Baddebtfree makes you a freeman. But if you know how to leverage with good debt, that’s the exact secret of wealthy people. Paying debt is like a nightmare to ordinary people. Most people hate when it comes to the due date for mortgage installment, car loan installment and credit card debt. Probably the reason debt gets so much hatred is because it is associated with bad consumer debt most of the time. Those are really bad debts that we should hate and avoid. In order to get rich, make friends with good debts instead. How Good Debt Makes You Rich For illustration purposes, I will show you two different scenarios how a person handles debt that affects his financial situation. John earns $10,000 each month, spend $5,000 and save the other $5,000. Figure below shows his current cash flow and net worth charts.



For easy illustration, let’s assume John’s only asset is his house worth $200,000. His outstanding mortgage is $150,000, leaving him a net worth of $50,000 Scenario 1: Buy a bigger house John found a great deal to buy a bigger house which is worth $500,000. So he sold his existing house, and use the $50,000



remaining cash for down payment. After buying the bigger house, his mortgage installment increases. Moreover, all other home related bills also increase because a bigger house needs more electricity energy supply, more maintenance works, more quit rent etc. This resulted in higher expenses – $8,000 per month. His surplus dropped to $2,000 per month only. The figure below shows his new cash flow and net worth charts.

Scenario 2: Buy another house for investment purposes Instead of moving into a bigger house, John decided to invest in real estate by buying another house for rental income and capital appreciation. The new house is worth $300,000 and he got a deal that doesn’t require any down payment. His monthly expenses rise and in fact it is just the same as moving into a bigger house shown in Scenario 1. However, because the new house is rented out



for $3,000 a month, his income rises to $13,000. This allows him to continue to save $5,000 per month. The figure below shows his new cash flow and net worth charts after the investment.

Simply looking at the net worth chart, Scenario 1 and Scenario 2 are identical. But Scenario 2 will definitely makes John a wealthier person because he has increased his cash flow. After 1 year, his saving is double of the case of moving into a bigger house. This is the reason why you shouldn’t be afraid of debt. As long as you can generate better return with the money you borrow, you should get more loan to expand your investment portfolio. BadDebtFree vs. GoodDebtFree Good debt works for you. Bad debt makes you its

slave.



Good debt increases your income. Bad debt decreases your savings. I know some people think that mortgage of the homes they are staying in are good debts. But in fact, it is a bad one because it doesn’t increase your income. I want to be baddebtfree. At the meantime, I want to learn how to leverage my investment with good debt. Please note that if John’s houses appreciate by 10% a year, it is calculated from the total assets of $500,000. This means he gets $50,000 return a year. But if he didn’t buy the house, how much can he get for 10% return from other investment such as unit trust funds? He can only invest with the monthly $5,000 surplus, which is just a small fraction of $500,000. If John prefers to be totally debt free, he reduces the chances to get rich faster. If you want to be totally debt free, it might cost you a great fortune!

Do You Have the Income‐Generating Assets to Fund Your Money‐Sucking Liabilities? As most people understand, the mortgage of their home is the liability. You owe the bank money. In return, you need to charge your house title to the bank as collateral. So you think you



actually have an asset to pay for your liability. You think your actual home is the “asset”, that when you can’t afford the installment, it can pay off your mortgage by being auctioned to third parties. You are right, but it won’t get you rich. For the rich people with higher financial IQ, they know that the house they are staying in is actually a liability. It is a luxury item. It takes money out of your pocket! In fact, it takes more money than you think. Beside the mortgage installment, you are paying for the renovation, electrical appliances, household bill etc. Now, let’s come back to the golden question: DO YOU HAVE THE ASSETS TO PAY FOR YOUR LIABILITIES? A local entrepreneur in preschool education wants to have a new Sclass Mercedes Benz. That’s a liability. He recruited a new talented business partner and opened up another kindergarten. In 3 months time, the child care and education centre is giving him RM5000 net profit every month. His partner is taking care of the centre, while he is shopping for his new luxury car. That’s an asset. I have some down line insurance agents who are very independent and making sales week after week. I trained them in the first few months in business, and they can practically do business on their own after that. I got overriding commission from every sale they make. They are my assets. They help to pay for my car loan, my liability. So, do you have the assets to pay for your liability?



Are you trading? Gambling? Speculating? or Investing? When you are speculating or investing, it involves trading. Trading is the process of buying, or selling. We don’t know your purpose behind the trade. Gambling is an activity that may or may not involve trading. In trading, a commodity can be bought and sold. In gambling, the ticket or the bet you wager can’t be sold. Gambling usually gives greatest outcome in the shortest duration if it succeeds. Trading Definition: buying or selling securities or commodities Gambling Definition: The voluntary risking of a sum of money on the outcome of a game or other event. Speculating Definition: Trading with the purpose of making profits. Investing Definition: The act of using money to make more money When I buy a company share, I can sell it at any time and it is called trading.



When I buy a share without knowing anything about the company, just based on mere rumors, it is called gambling. When I buy a share and would definitely sell it weeks or months later when it has appreciated in value, it is called speculating. When I buy a share after understanding the company’s business model, future planning, cash flow management etc and I am very confident that it is undervalued, and will buy more when the price drops, it is called investing.

Are you trading? Gambling? Speculating? or Investing?



Don’t spend the money you don’t have, to buy the thing you don’t need, to please the people you don’t like! Do you find yourself spending more than you earn? Yet when you look back, you find that you actually spent that money on something that you could have done without. Worse still, you spent that money on someone you did not necessarily have to please. How can you avoid spending the money that you do not have, thus reducing incidences of overspending? Read on to find out.



10 Examples how you can overspend unnecessarily 1. A fresh graduate decides to buy an imported Japanese car. As a result, he uses up 50% of his salary for the monthly installments, car maintenance and petrol. He is then left with another 50% for his other commitments and expenses. 2. You impulsively swipe your credit card to pay for the latest Apple Macbook you always had an eye on. At the end of the month, you find that you are unable to pay the amount due. 3. Your colleague just moved into a semidetached house. You sold your entire investment portfolio and existing apartment, took up a bigger mortgage to buy the house next to his. 4. An office lady uses her entire month’s salary to buy the Louis Vuitton hand bag, just because her colleague shows off one to her. 5. You want your boyfriend to propose only if he presents you with a Tiffany’s ring. 6. A father took up a personal loan of RM10,000 so that he can take his family for a vacation to Australia. Although he did not need to take this holiday given his financial situation, he did so because his neighbour just came back from New Zealand. 7. Have a breast implant to impress the man you are interested in although he is not interested.



8. You bought an expensive set of home theatre system. However, you rarely watch any DVD at home since you are too busy at work. It is just to impress your friends who visit your house once a while. 9. Bought a Rolex watch during your trip to Switzerland just because your boss said that it was a great investment. 10. You spent lots of money on your wedding ceremony and serve the best food, although all your wife wanted was a honeymoon in Europe. What is the money you don’t have? Credit card – If you can’t afford to pay it in full when the charges is due, it is the “future money”, not “current money” that you already have Mortgage – you use the bank’s money to buy a house and stay in it, as long as you are able to pay it back to the financier. Personal debt – getting a personal loan to spend on something is the stupidest thing to do. Loan shark – those who don’t have credit card, without proper documents to borrow from banks will look for “favours” from loan shark. Easy installment plan to purchase consumer product



What are the things that you don’t necessarily need? Car, a plush house, gadgets and other things that do not fall within your budget. The rule of thumb is to spend less than one third of your income on these items. Who are the people you don’t like?

Friends, colleagues and relatives who like to show off, those who look down on you, those who slap you on the back.

You can have a thousand reasons to hate and dislike somebody, but you don’t have to hurt your wallet. Have you ever done something like that? We sometimes, unknowingly, spend money on instant gratification, only to regret much later. We sometimes also give in to our temptations to buy things that we don’t have much use for or things that are impractical. The next time, before you decide to blow your cash on something, try to think about how many hours of toiling at work that money equates to. This does not mean you need to stinge on everything that you wish to buy. Only buy something if you really need it. Although this may sound like easy advice, we always end up faltering. We spend more than that we can earn and in the end, find ourselves struggling to make ends meet.



The Most Important Payee of Your Entire Life That Most People Forget Until They are Too Old Your money comes in regularly as long as you are earning money actively, or investing and getting money passively. That’s called inflow of money. As many other people on planet earth in this capitalist world, we pay for something regularly in our life. Which one is your priority? Your credit card debt? Your mortgage? Your car loan? Your parents? Your children? Your meal? Your insurance premium? Your astro bill? Your electricity bill? Your phone bill? ……………… The list goes on and on. Most people have a very long list. Mine is one of the longer one too. But most people omit the most important payee of their entire lives! The most important payee



Who is the most important payee? You as the payer, who should you pay first? The answer is you! The future you! The retired you! The old you! A more healthy list of payees should consist of and not limited the items below, as top priority:

Your regular investment Your retirement accounts Your saving accounts

Please by all means, keep as much as 30% of your total income for the future you.

Top 5 Regular Monthly Expenses You Don’t Actually Need It is undeniable that the living expenses in Malaysia are getting higher at a much faster rate, although inflation reports that the rate is low. Feeling the pressure of petrol subsidy cut, and rising cost of almost everything, from toll charges to hawker food – life is definitely getting harder. Humans are extremely flexible. We can cope with the situation with some compromise and sacrifice. When money is no longer enough, we can always find ways to cut some expenses. Being frugal simply means living below your means. However, less money spent does not indicate lower quality of lifestyle. Because of the advancement of technology and the



Internet, you can even spend less to enjoy the same benefit, if not better than we used to have. If you are living in Malaysia, here are top five monthly expenses that can be cut from your budget: 1. Monthly Astro bill I know most of us Malaysians have the Astro installed in our home. I used to subscribe to Astro too a few years ago. Now the cheapest package is more than RM50/month!. After having it for a while, I found that it is really a waste of money and time. To get your value back, you spend hours of time watching TV. But in fact, time is wasted for unproductive activities, that’s for pure entertainment. If watching movies, TV series or live sports is so important to you, there are many alternatives that’s free of charge. Youtube has tons of entertaining videos and short films, even though the video quality is not as good as other service providers. But with the broad range of users and content providers, you can find a wide variety of videos for your pure entertainment. Some even provide video tutorial and educational materials there. There are also new service like iflix (the Netflix of SouthEast Asia) and the IP TV boxes like 1OTT. Check them out just for a fraction of the cost you pay for Astro. 2. Monthly Newspaper Subscription



Do you still have the newspaper sent to your house every morning? Newspapers in Malaysia publish controlled materials and news. A typical Chinese newspaper is more than 100 pages! This includes advertisement, world and local news, but most are reporting bad news and crimes. Moreover, you need a place to stock your old newspapers and wait for the recycle team to drive by and sell them of a few ringgits. This is a pure waste of paper, and trees. I opt for a more environmentally friendly option. I read the news and articles on the Internet. 3. Monthly Fixed Line Home Phone I am using the Unifi package now on the 20MBps plan – costing RM250/month, due to business needs. Comparing this to other developed countries, we are still paying a relatively very high fee for broadband service. Nevertheless, I still use TM Unifi because there are really no competitors all these time. However, recently some mobile connection service providers such as Maxis and Digi have come up with broadband plans. Now, at least we have some choices to switch to mobile broadbands, which provide unlimited usage anywhere, anytime. If Streamyx is not going to absorb the fixed phone rental, I don’t see any attractiveness in its broadband package anymore. 4. Credit Card Insurance Bank telemarketers call you from time to time asking you to subscribe for one scheme or the other. (hospitalization income



benefit, accidental plan, etc) Have you ever signed up for one? I never do. But there are some who will sign up eventually, if not, the telemarketers will be out of jobs. Those who signed up probably are sold because of the seemingly better benefits and limited offer. But don’t forget that there are terms and conditions that you might have overlooked. Every time you get this kind of sales call, ask for the black and white of the terms and conditions. Ask the following questions:

What are the terms and condition? How do you cancel it in the future? Who is going to help you, give you personal service when

it comes the time to make claim? Another type of credit card insurance is one that helps you cancel your credit card liability. This means that when the cardholder passed away, the liability will be cancelled off. This benefit requires a premium of a few ringgits depending on what your credit card balance is. But do you really need this? When you charge the purchases on your credit card, you are supposed to have the money ready to pay it off in the first place. If you say it is for the estate creation, for the protection of your family, it should be properly done with insurance planning, not through a telemarketer who sells you this stuff. They probably never purchase these protection for themselves. 5. Trips to the Banks



This is an activity that costs you petrol, parking fees, and most importantly, a complete waste of time. Here is how I handle my bank accounts, monthly bills, and also credit cards.

Set up auto debit instruction to charge my credit card for recurring bills, such as electricity, mobile phone, broadband, life insurance policies etc.

Use internet banking to do intrabank transfer (free of charge), and interbank transfer ( cost RM0.11). Internet banking lets you pay your bills and transfer money from anywhere as long as you are connected to the Internet.

So, the only trip to banks is to withdraw a few hundred ringgits cash for the whole month expenses, plus depositing cheque payments that I receive. These two tasks can be done using the ATM machines and cheque deposit machines. However, if your transaction requires a personal service at the counter, you can do it during OFF office hours too. How? Some banks have branches inside shopping malls that open from 11am to 7.30pm. Just plan your trip and you don’t have to squeeze yourself in the long queue anymore.



How to Quickly Evaluate an Investment using the Rule of 72 The Rule of 72 is a basic investment rule that estimates the amount of time it will take to double your money. It is generally used as a simple and straightforward method for estimating an investment’s doubling time or halving time. How to apply the Rule of 72 These rules apply to exponential growth and decay respectively, and are therefore used for compound interest as opposed to simple interest calculations. Years to double = 72 / Interest Rate



Take the percentage of interest on your money and divide it into 72. For example, an interest rate compounded at 9% percent would double in eight years (72/9 = 8). If medical fees increase at 8% per annum, the “rule of 72″ gives 72/9 = 8 years later, your medical bill will double; an exact calculation gives 8.0432 years. After another 8 years, you will need to pay 4 times of the medical bill compared to present situation. When your unit trust consultant told you that a particular fund gives 100% return in 6 years. You roughly know that the fund’s annualized 72/6 = 12% return per annum. If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years. A stock you bought 8 years ago is only worth 1/4 of its previous value. Using rule of 72 twice, the share shrinks at a rate of 18% p.a. (For the initial 4 years, it falls to half of its value. Wait another 4 years, it falls further to only a quarter remaining) When to use the Rule of 71, 70 and 69.3 The rule of 72 provides a good approximation for annual compounding, and for compounding at “typical rates” (from 6% to 10%). But there are situation where other rules will give more accurate answer.



low rates – for lower rate than 6%, Rule of 69.3 will give a better result than Rule of 72. daily compounding – Since daily compounding is close enough to continuous compounding, for most purposes 69.3 – or 70 – is used higher rates – a bigger numerator would be better (e.g. for 20%, using 76 to get 3.8 years would be only about 0.002 off, where using 72 to get 3.6 would be about 0.2 off). This is because, as above, the rule of 72 is only an approximation that is accurate for interest rates from 6% to 10%. Outside that range the error will vary from 2.4% to 14.0%. For every three percentage points away from 8% the value 72 could be adjusted by 1. Millionaire’s Estimation Felix’s Corollary provides a method of approximating the future value of an annuity (a series of regular payments), using the same principles as the Rule of 72. The corollary states that future value of an annuity whose percentage interest rate and number of payments multiply to be 72 can be approximated by multiplying the sum of the payments times 1.5. As an example, 12 periodic payments of $1000 growing at 6% per period will be worth approximately $18,000 after the last period. This can be calculated by multiplying 1.5 times the $12,000 of payments. This is an application of Felix’s collorary



because 12 times 6 is 72. Likewise, 8 periodic thousand dollar payments at 9% will result in 1.5 times the $8000, or $12,000. The millionaire’s estimation is a simple savings calculator, posing the question “How much must I save per year to have saved $1,080,000?” Of course, the annual interest rate is a factor. In the original challenge, the number $1,080,000 was chosen due to its multiplicative relation to the number 72.

Using Felix’s corollary, one can estimate that by saving twothirds of the total, in periodic deposits, the interest will take care of the rest (since 1.5 times twothirds will equal the desired goal). So the goal becomes to set aside $720,000 in equal periodic deposits, such that it grows to approximate the target amount of $1,080,000.



If you want to be a millionaire in 12 years, just save $60,000 a year in an investment vehicle that gives you 6% a year. If you want to be a millionaire in 6 years, just save $120,000 a year in an investment vehicle that gives you 12% return per annum. Summary for Action The ‘Rule of 72′ is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. I bet you don’t want to bring your financial calculator wherever you go. Just apply the Rule of 72 to quickly make a rough estimate of a particular investment. Try estimate the route your friends or family member can become a millionaire using the Felix’s Corollary and the Rule of 72.



Time Value of Money: Computing the Value of Single Sum Investment In order to be smart and calculative in personal finance matters, understanding the time value of money is an essential part of the learning process. Now, we will start with learning the calculation of the value of single sum investment. Common Problems #1. You have RM10,000 in a fixed deposit account, giving 3.7% return annually. If you don’t cash out the interest earned, how much if the total money accumulated after 15 years? #2. Ali borrowed RM5,000 from a loan shark 5 months ago. He agreed to pay compounded interest of 3% per month, calculated based on total amount owed. But Ali never made any payment until now. How much should the loan shark claim from Ali? Theory Before I learn the theory of time value of money (TVM), I used to create spreadsheet using Microsoft Excel to automate the repetitive calculations. Now, save yourself the trouble. Use this formula:



FV (Future value) = future value of investment at the end of period PV (Present value) = present sum of money set aside for the investment i = rate of interest n = number of periods Solutions Example #1: You have RM10,000 in a fixed deposit account, giving 3.7% return annually. If you don’t cash out the interest earned, how much if the total money accumulated after 15 years?

PV = RM10,000 i = 3.7% per annum n = 15 years FV= ?

Using scientific calculator, substitute the values into the formula FV = RM17245.72 The easier way is to use a financial calculator. You don’t have to buy a physical financial calculator. There are many mobile apps application. You can also search online with the keyword “future value calculator” to use some free resources already put up there. Example #2:



Ali borrowed RM5,000 from a loan shark 5 months ago. He agreed to pay compounded interest of 3% per month, calculated based on total amount owed. But Ali never made any payment until now. How much should the loan shark claim from Ali?

PV = RM5,000 i = 3% per month n = 5 months FV= ?

Substitute the values into the formula, you will get FV = RM5796.37 You should never mess with a loan shark. Exercise 1. A unit trust agent told you that Fund A give a return of 10% per annum. If you invest RM50,000 now, how much would you expect the total fund value of your investment after 8 years? 2. The current inflation rate is about 3.5% per annum. Now you pay RM10.80 for a cup of Starbucks coffee. How much would it costs when you retire after 23 years? 3. Let’s assume the US dollar is depreciating at a constant rate of 1% per month. Now, USD1 equals to RM4.20. After 8 months, how much US dollar can you get from RM5.00?



Time Value of Money: Finding the Rate of Return to Meet Financial Goals Now, we will learn to find the rate of return required to meet a financial goal. Common Problems #1. You have set aside RM10,000 for your future dream home down payment. You want to have at least RM15,000 after 5 years time to purchase your dream house. What is the rate of return required if you were to invest the initial RM10,000 in order to get RM15,000, 5 years later? #2. You invested RM5,000 in a balanced unit trust fund that gives an average of 10% return per annum. How long you must keep the money invested in order to have RM10,000 to fund your child’s tertiary education? Theory Use this formula:

FV (Future value) = future value of investment at the end of period PV (Present value) = present sum of money set aside for the investment i = rate of interest/rate of return n = number of periods



It can be modified to determine the rate of return required. In this case, we know the value of FV, PV and n. What we want to compute is i. You can use the interpolation method or the trial and error method using excel spreadsheet. But I would prefer the easiest route using financial calculator. Solutions Example #1: You have set aside RM10,000 for your future dream home down payment. You want to have at least RM15,000 after 5 years time to purchase your dream house. What is the rate of return required if you were to invest the initial RM10,000 in order to get RM15,000, 5 years later?

PV = RM10,000 FV = RM15,000 n = 5 years i= ?

i = 8.45%



Example #2: You invested RM5,000 in a balanced unit trust fund that gives an average of 10% return per annum. How long you must keep the money invested in order to have RM10,000 to fund your child’s tertiary education? PV = RM5,000 FV = RM10,000 i = 10% p.a. n = ?

n = 7.27 years Exercise #1. A unit trust agent told you that one of his customer who invested 5 years ago had achieved 200% total return this year. What is the rate of return per annum? #2. Your mother told you that a cup of coffee at the local kopitiam costs RM0.10 only when she is 20 years old. Now she is retired



at age 55. The price of a cup of coffee now is RM1.00. What is the average inflation rate per year? #3. Let’s say you have RM100,000 in your investment portfolio. Due to consistent monitoring and investment research, you are able to get an average return of 15% p.a. for the past 5 years. If everything goes according to plan, how long will it take for you to become a millionaire?

Time Value of Money: Computing the Value of a Fixed Sum Invested Regularly For instance, when you are setting aside a regular and fixed amount for saving, or unit trust dollarcostaveraging strategy, there will be a constant sum of money invested at regular intervals. This series of cash flows is also known as an annuity. Common Problems You initiated a bank standing instruction to deduct RM200/month from your bank account for unit trust investment. The rate of return is about 15% p.a. How much is the total of your investment value after 5 years? You bought an endowment policy, paying total premium of RM988 per annum. Your agent told you that the insurance policy will mature in 25 years just on time for your retirement fund. The



maturity benefit is projected at RM50,000. What is the rate of return per annum? You apply a housing loan to fund the purchase of your first home. The house value is RM200,000. You paid RM20,000 down payment and finance the rest. Assuming the bank is offering you a fixed loan rate of 5.8% p.a., how much is the monthly installments for loan tenure of 30 years?

Theory This formula gives the Future Value of an annuity (assuming compound interest):

where r = interest rate; n = number of periods. Payment amount is normally indicated using “PMT”



For annuity calculations, we must first understand the timing of the payment. Annuity due – An annuity with payments made at the beginning of each period. Also called advance payment annuity. Examples:

unit trust dollarcostaveraging strategy paying regular insurance premium paying tuition fees every month

Ordinary Annuity – A series of fixed payments made at the end of each period over a fixed amount of time. Examples:

housing loan installments car loan or hire purchase installments periodic interest on bonds where the coupon rates are

fixed Solutions Example #1: You initiated a bank standing instruction to deduct RM200/month from your bank account for unit trust investment. The rate of return is about 15% p.a. How much is the total of your investment value after 5 years?

PV = 0 Beginning Mode n = 5 x 12 = 60 months i= 15% p.a./12 = 1.25% per month PMT = RM200/month



FV = RM17,936.34 Example #2: You bought an endowment policy, paying total premium of RM988 per annum. Your agent told you that the insurance policy will mature in 25 years just on time for your retirement fund. The maturity benefit is projected at RM50,000. What is the effective rate of return per annum?

PV = 0 Beginning Mode n = 25 years PMT = RM988/year FV = RM50,000 i = ?



i = 5.066% p.a. Example #3: You apply a housing loan to fund the purchase of your first home. The house value is RM200,000. You paid RM20,000 down payment and finance the rest. Assuming the bank is offering you a flat loan rate of 5.8% p.a., how much is the monthly installments for loan tenure of 30 years?

PV = RM180,000 End Mode n = 30 years x 12 = 360 months FV = 0 i = 5.8% p.a. = 0.48333% per month PMT = ?



Monthly installment is RM1056.16. Exercise You want to be a millionaire in 15 years time. Now, you already have a lump sum saving of RM50,000 in cash. After some deep consideration, you decided to invest the RM50,000 in a singlepremium investmentlinked insurance policy, which has a past history of giving 12% return per annum. Beside the insurance policy, you will also set aside RM1000 per month for unit trust investment using dollarcostaveraging method. What is the minimum rate of return of the unit trust portfolio, so that you can achieve millionaire status in 15 years time?

Time Value of Money: Computing the Retirement Fund in EPF Account of an Employee



To calculate the total retirement fund in the EPF (Employee Provident Fund), we have to make some assumptions in order to compute the value

the amount of deposit will increase over time at a constant rate (the normal salary increment rate)

interest are paid at year end and always at the same rate Common Problems You started your career as an engineer at 24 years old with a starting pay of RM2500 per month. Contractual bonus is one additional month. The average salary increase during your lifetime is estimated at 7% per year. EPF pays an average annual dividend of 5% p.a. Your contribution to EPF is 11% of your salary and 12% is contribution from your employer. How much will you get when you retire at age 55? Theory Use the formula below:

where

i = EPF dividend rate; n = number of years; A = initial amount of deposit g = rate of salary growth FV = future value of EPF account



Solutions You started your career as an engineer at 24 years old with a starting pay of RM2500 per month. Contractual bonus is one additional month. The average salary increase during your lifetime is estimated at 7% per year. EPF pays an average annual dividend of 5% p.a. Your contribution to EPF is 11% of your salary and 12% is contribution from your employer. How much will you get when you retire at age 55? First step is to find out the various variables.

The initial amount of deposit, A = RM2500 x (12+1 months) x (11+12)% A = 2500 x 13 x 0.23 = RM7475 The number of years, n = 5524 = 31 years The EPF dividend rate, i = 5% p.a. = 0.05 The salary growth rate, g = 7% p.a. = 0.07

Substitute the variables in the formula above. The total fund in EPF, FV = RM1.379 million In order to give you convenient tools, there are several webbased EPF calculators developed. Just google for it.





Exercise Tan started his career as an executive in a local firm at age 18 with a starting pay of RM1200 per month. The average salary increase during his lifetime is estimated at 5% per year. EPF pays an average annual dividend of 5% p.a. His contribution to EPF is 11% of and his company contributes 13%. How much will Tan entitled to withdraw at age 50? (Assuming EPF withdrawal rules still remain the same as year 2007)

Time Value of Money: How to Calculate the Effective Annual Rate (EAR) This is probably the most important lesson everybody should learn about how to calculate the actual effective annual rate (EAR). Common Problems If you have deposit money in a Fixed Deposit (FD) account, the banker will ask you about the term of your deposit – 1 month, 3 months, 6 months, 1 year or longer? The bank gives different rate for different tenure. Let’s say Maybank is giving 3.7% for 12 months FD, and 3.4% for 6 months FD, what is the EAR for 6months FD? Is it better than 12months FD? Theory Scenario 1 – 12month FD



Referring to the situation above, let’s say you are depositing RM10,000 in FD for 12 months tenure. At the end of the term, you will get your initial investment (RM10k) plus the 3.7% interest (RM370) Return = 3.7% p.a. , which is also the EAR. Scenario 2 – 6month FD If you opt to put the money in 6months FD, after 6 months, you will get Return = 3.4% x (6/12) = 1.7% , which is equal to RM170 interest earned. Then you renew the FD without withdrawing the interest earning, you will have RM10,170 in the FD for another 6 months. At the end of the year, your will get another earning of 1.7% x RM10,170 = RM172.89. So your total return is RM170+RM172.89 = RM342.89 The Effective Annual Rate (EAR) = RM342.89/RM10,000 = 3.4289% To easily calculate the EAR, use the formula below:



where

i= nominal annual rate (normally stated); n= number of compounding period (compounding frequency);

For the above example EAR = [(1+ 0.034/2)^2] – 1 = 3.4289% Nominal Interest Rate Nominal interest rate is what we usually see on financial products. Most of the time, these rates may not be the actual annual rate. An interest rate is called nominal if the frequency of compounding (e.g. a month) is not identical to the basic time unit (normally a year). Example: interest rate on housing loan (EAR is higher when it is daily rest) published FD rates for different terms (1 month, 2 months, or 12 months etc) The more frequent you compound, the higher the EAR.



When you want to compare plans, first you must calculate the respective EAR for each plan. Then compare the EAR. You can search Google for EAR convertor

Exercise You have RM7,000 in Fixed Deposit with CIMB Bank. Your FD is renewable every month and CIMB bank provides 3.2%p.a. interest. You let the FD renewed for 2 years. From the 3rd year onwards, the bank lowered the FD interest rate to 3.0% p.a. But you don’t need the money, so you leave it there for another 3 years. What’s the final amount you will be able to withdraw at the end of 5 years?



How to Calculate Your Investment Portfolio Return? Investing in various asset classes and never bother to track and monitor its return, is like flirting with several girls at the same time and never bother whom will ultimately be your wife. Don’t blindly invest and forget. It is like flirting without knowing what you will get. You just need an extra step to calculate the return of your investment portfolio. Let’s say you invest in several asset classes. Your gold investment gives over 100% return last year. Your stock investment turned sour after the recent General Election. The apartment you rented out gives you a consistent return month after month because of your loyal tenants. Many type of investment, all with different return. So how do you know your overall investment portfolio is doing? Is it on track? This is a simple tutorial on how to compute your portfolio return. Return of portfolio = (W1 x R1) + (W2 x R2) + (W3 x R3) + …..(Wn x Rn) Where W1, W2, W3 and Wn stand for the weightings in % of assets, for asset 1 to n, in the portfolio. Whereas, R1, R2, R3 and Rn are returns for the respective assets, 1 to n, in the portfolio.



Example 1: More than half is invested in real estates.

Weight of stocks = 50k/293k = 17.06% Weighted return of stocks = 25% x 17.06% = 4.27% Overall portfolio return = 4.27 + 0.44 + 1.01 + 4.10 = 9.82% Example 2: This is a very conservative asset allocation. about 73% invested in fixed deposit.

Example 3: This is an “balance” portfolio, invested in four asset class with equal share.



Download the excel spreadsheet: investmentportfolioreturn By tracking your portfolio return, you will be able to construct a proper asset allocation to get the desired return.

Withdraw EPF Money for Home Loan Installment: How it affects your Retirement Fund EPF was started for the sole purpose of forcing employees to set aside a certain percentage of their income for their retirement. It was generally perceived that if the contributions were to be used for other purposes, this would have a detrimental impact on the size of the retirement nest egg. However, using these contributions to finance outstanding housing loans is also another form of long term saving as the property is likely to appreciate after the mortgage is settled. How it Works? This type of withdrawal involves you withdrawing money from your Account 2 to finance your monthly installments for your housing loan, which was taken up either to buy a new house or build a new one.


http://kclau.com/image/investment-portfolio-return.xls


Contributors need to go to the EPF to apply for the monthly withdrawal only once, and subsequent payments would be directly credited to their personal accounts every month. Please note that this type of withdrawal is credited to your personal bank account. It is not a lump sum withdrawal that is paid directly to the financier, which is also another option of withdrawal. How Does Withdrawing EPF Affect Your Retirement Fund? If contributors withdraw their EPF for housing purposes, they will in turn have fewer funds for their retirement. However, at least they can be sure that they have a roof to live under. For now, property is affordable in Malaysia, but one never knows what will happen to the property market in the future. Looking at Korea and Taiwan, it is almost impossible to own a decent home at big city if you are not rich. In Singapore, 100% of their CPF (the Singapore equivalent of EPF) can be withdrawn to pay the down payment of house purchase, and the installment can be paid using CPF too. The move to allow withdrawal of EPF to finance housing loans would benefit most EPF contributors. Contributors who previously found it monetarily tight to buy a property can now consider doing so with this new withdrawal scheme. This way, some contributors would be able to own better houses and yet be able to lessen their monthly financial obligations.



Contributors who are currently homeowners and are paying mortgage can also experience better cash flow as less money is spent out of hand for the loan. This new withdrawal scheme is also good for those who know how to manage money. They can use this facility to grow their wealth. For instance, consumer debt in the form of credit card loans, personal loans can be paid off; they can invest for better return or even fund higher education. However, for those who are financially illiterate, more money equals more trouble. They will spend for instant gratification without thinking of future needs. This may cause a social problem in the future when retiree has inadequate funds to live on. 5 Suggestions to channel EPF withdrawal back to your retirement fund With proper knowledge, you can take advantage of this withdrawal facility and grow your retirement further. Here are 5 suggestions to channel your EPF money back to your retirement fund:

1. Buy unit trust fund that will outperform EPF dividend – by applying ringgit cost averaging strategy

2. Invest in shares – buy undervalued stocks with good dividend payout

3. buy another property – to receive rental income after retirement

4. buy an annuity plan – to receive yearly income during retirement



5. Pay towards the principle of your housing loan, thus shorten the loan tenure and save on interest charge.

How Recession Happens and 8 Tips to Prepare for it! An economic recession is simply defined as a significant decline in the economic activity spread across the economy that usually lasts more than a few months. More economically speaking, a recession is a decline in a country’s Gross Domestic Product or a negative real economic growth for two or more successive quarters in a year. The latter is a widely known definition of recessions as well as a widelyaccepted one. A severe or long recession is referred to as an economic depression. A devastating breakdown of an economy (essentially, a severe depression, or a hyperinflation, depending on the circumstances) is called an economic collapse. Is Malaysia heading towards a recession? We’ll never know until it happens. What causes recession? The reasons behind economic downturns remain largely unsolved. However, there are several traditional explanations to the phenomenon.



The traditional explanation – Economywide changes The traditional explanations postulate that recessions are caused by events that have an economywide impact, such as an

increase in interest rates decline in consumer confidence. Firms reduce output and lay off workers, which further

decreases demand, and the economy slows even more. Caused by events that hurt particular firms or industries

Economic recessions can be caused by events that would have an impact on specific companies or industries. For instance, a major innovation can adversely affect some firms, causing them to reduce production. This would in turn lead to a retrenchment of workers. On the other hands, positively impacted companies would need extra hands and seek additional workers. It naturally takes time for the displaced workers to find new means of employment. During this phase of “reallocation” a situation of recession may occur.





What happens during recession? #1. Rise of Unemployment rate During a recession, there is a general trend of rising unemployment rates and decreasing overall output. With fewer people contributing to the economy, the overall economy is bound to be affected. Income growth would be stalled. While there would be more people in the market looking for employment, the demand for recruiting people is far lesser. When people are earning lower incomes, their spending power decreases. As such, there is a reduction in spending. Businesses are limited in their ability to pass along any increases in expenses in the form of higher prices. In order to move goods off the shelves, businesses are more likely to reduce prices. This eventually causes deflation. With prices drifting downward and commodities becoming more affordable, consumer spending will once again kick off and increase. The increase in consumer spending, over time, leads to an increase in industrial production. This in turn improves corporate profits leading to increased employment and improved earnings, etc. This is how the economic cycle takes place. That’s why people say economy won’t growth continuously without recession. #2. Stock market plummet People are generally conservative during recession. Those who lose their jobs because of recession start selling off their investments because they need money to sustain while they get



another job. The increased number of people selling their stocks causes the stock market to fall sharply #3. Real Estate plummet During a recession, people turn to fiscal conservatism. This affects the real estate industry as well, as there is lesser demand in the real estate market. People put off buying and selling of property during the periods of economic recession. Another scenario is where the increasing levels of unemployment during a recession cause affected homeowners to sell their home to accommodate changing job demands. On the other hand, because of the higher supply of houses on sale as compared to the low demand, an economic recession will forcefully reduce the selling prices of homes. As such, the economic recession has a positive impact on potential homebuyers. This is also because there are lower mortgage rates that are caused by changes in interest rates. How A Recession Impacts Your Daily Life? #1. Lose your job Newspaper columnist Sidney J. Harris distinguished terms this way: “a recession is when you lose your job; a depression is when I lose mine.” #2. Can’t afford to pay back your mortgage A sudden loss of job can cause retrenched employees to experience a negative monthly cash flow. A similar situation can also happen if your employers go bankrupt suddenly. Arrears on



mortgage can also causes homes to be auctioned. In a worstcase scenario, sometimes, even after the homes are sold forcefully, people still owe the bank, money. #3. Watch your investment portfolio shrink in value High exposure in equity will result in a sharp fall in the stock market. When people are Investing too aggressively in a bubble economy, it is extremely risky that one day your stock portfolio just shrink 50% within a few days. How to prepare for recession? #1. Create a worstcase scenario Create a worstcase cash flow forecast. Predict how bad it could be if you lost your job or if your business dropped in sales by about 50%. #2. Build up an Emergency fund Prepare an emergency fund with enough money to cover at least 6 months of expenses. #3. Have a consistently rebalanced investment portfolio This ensures that you lock the capital gain of certain asset classes when it is booming. #4. No matter what field of your profession, always strike to be the best Always strive to be the best. Avoid becoming redundant or “fat” in your company. If you do not prove your worth, you will be the first to be led to the exit door during a recession.



#5. Diversify your income source Please beware if you are in a business that serves just 12 major customers. You will be at a great risk during a recession. For employees, work out some forms of alternative income besides the main employment. #6. Know your funding sources and manage the relationship properly Another way to prepare yourself for a slowdown is to know your funding sources and manage the relationship properly. Remember, when funding sources tighten they do so selectively and this applies to their sources of business as well as the credits. #7. Learn to live on less than your income You may see pay cuts in your job during an economic recession, so look now for ways to trim your budget as much as possible. #8. Last resort – compromise on your lifestyle When everything doesn’t seem to work out for you, go for the last resort: try reducing your lifestyle dramatically. Sell that luxury car. Move to a smaller house. Cut down on expensive dining. Cash is King Cash is king during recession. It is only in your best financial interest to acquire assets (stocks, real estate) during a recession. Changes in interest rate levels are made by the central bank regulator (Bank Negara, Federal Reserve etc) as a way to regulate the economy. In a period of economic downturn, interest



rates are reduced in an attempt to revive the economy. This is because reduced interest rates are usually attractive to businesses and for people who want to borrow money or refinance existing loans at a reduced level. Consequently, lower interest rates will result in lower mortgage rates, which produce monthly mortgage payments that are advantageous for home buyers. Conclusion There is a possible recession looming. Some people will be harmed and subsequently, the economy will be blamed. They are probably right now maintaining the status quo and simply hoping it doesn’t happen. Prepare now and you will find that you will not be affected very dramatically. This will leave you in a better edge. Preparation for a recession will enable you to react to changing times and take advantage of select opportunities.

Knowing your Enemy – Inflation! After a heavy meal at a local nasi kandar restaurant, I bought 10 sen of Hacks (yes, the candy). I still remember that I could get 3 candies for 10 sen. Later on, it is 5 candies for 20 sen. It has been a long time I didn’t spend money on candy. So I asked the cashier in case it is more expensive already. And it is lucky that I asked, because it is selling 2 for 10 sen nowadays. The price rise



50% after 20 years. That’s inflation! However, Hacks candies are still very affordable. Inflation is the rise in the general level of prices of goods and services in a given economy over a period of time. It may also refer to the rise in the prices of some more specific set of goods or services. In either case, it is measured as the percentage rate of change of a price index. In layman terms, several explanation of inflations is how fast prices rise, or how fast your money becomes less valuable. What cause inflation There are two camps that disagreed strongly on the main causes of inflation

Monetarists – argued that money supply dominated all other factors in determining inflation

Keynesians – argued that it is real demand that causes inflation

But economy is such a huge subject that there is no one sure thing that causes the other. How to calculate inflation A variety of inflation measures are in use, because there are many different price indices. Two widely known indices for which inflation rates are commonly reported are the

Consumer Price Index (CPI) measures nominal consumer prices,

GDP deflator measures the nominal prices of goods and services produced by a given country or region.



Inflation is causing your money to become less valuable, if you do nothing about it. Based on US CPI, what cost $1000 in 1997 would cost $1309.22 in 2007. Also, if you were to buy exactly the same products in 2007 and 1997, they would cost you $1000 and $785.20 respectively. How to outstrip inflation For sure, if you do nothing to prepare for inflation’s effect, your buying power may drop in the future. #1. Living below your means Human being is a very flexible creature. When the certain products get more expensive, and it finally hurts our wallet, we will be flexible enough to use less of it. You can either buy less of the more expensive stuff, and more of the less expensive stuff OR let your standard of living fall #2. Invest for better returns You just have to get your money to work harder, and get a return that’s higher than inflation rate. In the area of wealth accumulation, inflation is an enemy that approaching you step by step quietly. By the time you notice that and feel the pain of its attack, it is probably too late. The last resort is to see your standard of living fall underneath.



Financial Security: How do You Feel It? Does financial security simply mean not having to worry about money? That’s too simple to define such a broad meaning of “financial security”. You might not have to worry about money during a great time where jobs are everywhere, and your country’s economy is doing very well, and earning money is so easy. But will you start worrying when it is recession time? Would you worry about money if your family members were hit by a deadly disease? Would you worry about money if suddenly you are unable to climb off your bed in the morning and need to stay on bed for the rest of your life? Financial security is about knowing and feeling safe that whatever disaster arrives, you know you won’t have financial trouble. Except for some extremely rich folks, financial security does not seem to be that simple. Can we define financial security simply by putting up a number? Would a million dollars give you security? Or you won’t be feeling financially secured unless you have 10 million dollars assets? I think merely giving it a number doesn’t define it fairly neither. Ask These Questions to Test Your Financial Security Level

What happens to my children, my parents, my spouse and my family if I passed away suddenly?

What if both you and your spouse passed away at the same time? Will everything be well taken care of?



Am I prepared for the next recession? What happens if I lose my job today?

If you are able to answer all the questions above in a positive manner, congratulations! You are definitely financially more secure than 80% of the population in the world. Five Statesofmind of Being Financially Secured Financial security consists of four things:

Being debtfree Being in control of your expenses Consistently increasing your savings/assets/net worth on

a monthly basis Not being forced to work at a job you dislike just to pay

the bills For a broader and more comprehensive definition of being financially secure, I would like to add another important stateofmind: being well thoroughly protected. When you know and feel that you are financially secure, here is what happens: #1. Never worry about debt You don’t have to be debtfree to feel secured. But knowing that no matter what happens, you will be able to pay off your debt makes you feel safe. Let’s say you still owe a lot of mortgage payment. If you lose your job today, can you still pay the mortgage for the next 24 months? The answer is yes, if

you have a substantial reserve fund.



you are a capable person and finding a new job just require a few weeks time

you have other source of income What if a car hits you today and you lose your ability to

earn an income? Can you still afford the loan installment? The answer is yes if you are well protected with life insurance.

#2. Being in Control of Your Expenses It is a very dangerous statement if you say “I can’t control my expenses”! Yes, I know you can control your expenses. Some people say:

I need to spend the money to please my wife I need to buy those things to please my kids I need vacations because my jobs is too stressful

If money is spent on anything that’s not within your budget plan, you have lost control over your spending habit. All the above are just cheap excuses. Another situation is when a family member needs that money which is not within your budget. For examples:

your mother need medical aid your child needs a lot of money to study overseas, but all

you had saved for him is just enough for local colleges. your brother needs to borrow from you because his

business is going south. These are problems that cannot be tackled easily. But with proper planning, wise decisions can be made to prevent that.



Why should your brother risk your money to rescue his company? Why can’t your child compromise to enter local colleges? Why didn’t you buy medical insurance for your mother in the first place? #3. Consistently Increasing your Net Worth The best reward of proper budgeting is to see your net worth grows day by day. When you know that you are getting richer every minute, it just motivates you to do even better. #4. Not being forced to work at a job you dislike just to pay the bills Work takes up 1/3 of your weekdays. If you are stuck with a job you hate, I can imagine how miserable your life is. If you want a joyful life, you should have a job you are passionate about, beside having a spouse you are deeply in love with. The freedom to do whatever you want (legally) is so precious. I am not yet rich, but I feel secured in this area about jobs. I have a full list of what I can do to make money, and none of them are things that I dislike. The fact is that I don’t worry about losing my job, because I have many jobs that I like to do. Here is my list:

Financial planning services – I really can’t see how it may fail because I have hundreds of clients. This business is a long term relationship between the planner and clients. My customers are so diversified that some of them are engineers, lawyers, businessmen, managers etc.

Music production – I do music arrangement. Sometimes I am selective about the projects I want to work on.



Making money online – This has become my full time business now.

Live performance – one of my best friend, who is a professional pianist often asks me to play gigs. Now I seldom perform because I want to spend more time with my son and wife at night. But if everything turns into a disaster, I can still go out to perform, and give music lessons.

Please don’t feel that I am bragging. I am certainly not earning a lot at this moment. But I have fun all the time, during work and out of work. I just want to urge you to build up your own financial security, in your own passionate fields. You should turn your passion into money making machines, and never worry about losing your job anymore. #5. Being well thoroughly protected When you are well protected, you can be rest assured that all your dependents can still live on at the same lifestyle if you passed away suddenly. Some areas that people often overlook:

Have your Will well planned and written up Have a living trust set up to provide education,

maintenance, guardian allowance in case of double tragedy

Have your business well protected with key person assurance, liability cancellation plan, and also a funded buy sell agreement if necessary

Have your own insurance properly planned, and get the best benefit with the most affordable premium



Have all your dependents insured as well. Please realize that a seriously ill family member will eat up your nest egg too.

Would you feel financially secure after doing all the above suggestion?

What Do You Know About Bankruptcy? Bankruptcy is a word that immediately brings a negative vision to our minds. It happens everywhere in the world and is not partial to a certain country, race or nationality. In Malaysia, the total number of bankruptcy cases nationwide has risen over the year to hundreds of thousands individuals. Bankruptcy law exists to help both the bankrupt and the creditor. It will stop the creditor from harassing the debtor and it safeguards the rights of both parties. What is Bankruptcy? Simply said, it is a legal process initiated by an individual or a company due to the inability to settle his debts. Bankruptcy happens when a person is unable to settle his debts (known as a debtor) owed to the people or party who loan him the money. The people or party who gave out the loan is known as the creditor. Creditors can be a banking institution or even a company giving out hirepurchase schemes.



To protect himself against possible harassment or from any other legal actions by the creditors, the debtor may file for personal bankruptcy. On the other hand, the creditors may take action first against the debtor by serving him a bankruptcy notice to recover the money owed by the debtor. Before filing a bankruptcy petition either by the debtor or creditor, the following criteria have to be met:

The sum involved is RM30,000 or more The sum of money must be ascertainable (liquidated

sum) There is a default period of six months for the act of

bankruptcy to have occurred Before the petition date, the debtor must have reside in

Malaysia for at least one year How Does a Person Become a Bankrupt? Generally, a person falls into bankruptcy due to several reasons. Those mentioned below are not uncommon in Malaysia. #1. Taking Up a Loan There are various loans available to cater for different needs and wants. These loans can be personal loans, study or education loans, housing loans and even buying a car under a hirepurchase scheme. #2. Acting As a Guarantor



A guarantor can be a social guarantor or a corporate guarantor. A person who stood as a guarantor for loans like education, house, car hire purchase, scholarship and also thirdparty loans is known as a social guarantor. A corporate guarantor is a person who stood for loans relating to business loans, for example in a business partnership. A guarantor is also liable to face bankruptcy when summoned by the creditors. The creditors will go after the borrower first and if that fails to recover the amount owed, they will go after the guarantor to settle the debts. #3. Defaulting On Credit Card Payment The inability to pay up the amount owed in the credit card account is also one reason to go bankrupt. What Does It Mean To Be a Bankrupt? When a person has declared bankruptcy, the court will appoint the Director General of Insolvency (DGI) to administer over the bankrupt’s assets in order to settle the outstanding debts. The DGI will initiate an investigation to find any assets or properties that belong to the bankrupt and to sell or dispose them to repay the creditors. For a Malaysian, being a bankrupt is tough for the individual. Among other things, the individual faces the following hurdles or restrictions:

He has to give up all his belongings and assets. He is not allowed to open a bank account without the

approval of the DGI.



He is not allowed to travel outside from the country without first getting approval from the DGI or the court. The DGI will hold his passport.

He is not allowed to do any business nor become a company director nor even be part of the company’s management.

He has to sacrifice a certain percentage of his monthly income to the DGI to repay his debts.

How To Avoid From Becoming a Bankrupt? A straightforward answer to avoid becoming one of the statistics is simply to take responsibility for one’s financial affair or wellbeing. It means not to take huge loans to purchase something if you do not have the ability to pay back the monthly installments. It also means being incontrol of one’s spending habits and not to overcommit on too many loans including hire purchase. The same goes for the social guarantor who does not have the resources and means to settle the debts on the borrower’s behalf. So think rationally (not emotionally) and act carefully before signing on the dotted lines. For those intending to open a business, do your research work properly and thoroughly. Ensure that you have enough financial resources and stamina for the startup and for the first few years. Most businesses do not make money initially and may take a few years to show a profit. Imagine the worst scenario happening and whether you can survive financially. Having just the startup



capital is not enough, you need to have backup plans and support available. There are cases however when illfate strikes and a person becomes bankrupt due to unforeseen circumstances such as a serious illness, a debilitating accident or being cheated in a business partnership. Then there are cases where a person willingly files for bankruptcy for the sole purpose of wiping off all his unsecured debts. These ‘nongenuine bankrupts’ take advantage of the legal process to ‘write off’ their bad debts and the amount can run up into the millions but is still living a luxurious lifestyle. How a Person is Discharge From Bankruptcy A bankrupt will be discharged from bankruptcy when

He has settled his debts in full to the creditors. If the creditors accept the repayment scheme offered by

the bankrupt, then the bankrupt can make an application to the court to get an order of discharge.

Certificate of discharge: The DGI can also use his discretionary power to discharge the bankrupt by issuing a certificate of discharge. This is possible after a period of five years from the date of bankruptcy even though there still remain unsettled debts. However, the DGI will have certain criteria to evaluate before making his judgment such as the bankrupt’s conduct or behavior, the age and the financial status.

Order of discharge:



The bankrupt can make an application to the court to request for an order of discharge. The court will refer to the DGI’s report before any decision is made to grant a discharge or not or to grant a discharge with conditions attached.

When faced with debts, a person should seriously consider before choosing to file for bankruptcy. There may be other better options to choose from. Besides the restrictions mentioned above, the bankrupt may face other personal challenges. His future plans and personal development may be negatively affected due to his “bankrupt reputation”. Society naturally will see him in a different light and treat him differently. In addition, it may affect his ability or opportunity to apply for future loans in order to advance himself in his career or business. Therefore, consider yourself to have been forewarned on this subject matter.

Financial Consideration for New Parents in Malaysia Only after being “promoted” to fatherhood, I got to learn that a child really takes up a lot of my time and also money. Pregnancy and delivery cost



The regular checkup during pregnancy is between RM50300 per visit at a private hospital in Malaysia, as frequent as once a month. My wife had to go through caesarean because my son didn’t turn his head down during delivery. I stayed in the hospital for about 10 days together with my wife and my son. To keep the story short, we spent about RM13,000 in total of hospital bill. Luckily her company covers the medical bill in case of complication during delivery, we ended up paying only about RM3,000. Usually, a normal delivery will cost about RM3000 at private hospital. It costs a lot less if you go to the government hospital which is fully subsidised. Of course the only difference is the level of service. You may only need to pay less than RM100 for delivery in a government hospital. Maternity Insurance Coverage In Malaysia, the normal Hospitalization and Surgical benefit insurance (a.k.a. Health Card or Medical Card) does not cover pregnancyrelated hospitalization. There are two exceptions: 1. Your company may provide group insurance benefits that covers maternity claim. Normally you can get these benefits if you are working for MNC (Multinational Corporation like Intel etc) 2. Some lady care insurance plans especially designed for ladyrelated illnesses and maternity may give some minimum



coverage for child delivery, neonatal death or some other pregnancy complication. But these insurance policies normally won’t pay the medical bills as charged. Confinement Month It is a tradition for a Chinese mother to be confined for 30 days after giving birth. This period of time allows the mother to rest and rejuvenate. 1. Staying at confinement centre A typical confinement centre charges about RM25003500. My wife stayed at Ai Xin confinement centre at Batu Maung, Penang. They employ local babysitters to look after your baby. You will be served 5 meals a day. 2. Employ a confinement lady This will cost about RM3000 and above. You will need to prepare a place for the confinement lady to stay. Normally she will help to take care of the baby and cook some special food for the mother. Most confinement ladies don’t do house works. If your mother or motherinlaw can replace the confinement lady, you will be able to save a few thousand ringgits. Insurance for the child The most important coverage for your baby is the medical insurance. For a standalone medical card, the premium may be a few hundred ringgits per year. Some people like to buy the packaged plan where there is life coverage, including 36 critical illnesses, medical card plus some savings for future education.



Depends on your budget, you can start a plan as low as RM100/month. Medical bills For a healthy baby, parents will still pay medical bills for: 1. Normal sickness RM25100. It costs more if you are seeking consultations from paediatrician. 2. Vaccination nowadays, there are so many vaccination needed to be injected into your baby’s body. It causes pain on our baby and also our pocket. Roughly over RM2,000 needed to be spent on full vaccination at a private medical centre. Of course, everything is likely to be free of charge if you bring your kids to government clinics or hospitals. New Tax relief for parents With a new born baby, you can pay less tax. Several tax benefits you can get include: 1. Child relief – RM1000 (only for one of the parent) 2. Child Education policy – RM3000 (for both parents) 3. Skim Simpanan Pendidikan Malaysia (SSPN) – RM3000 (for both parents) Family Protection Planning I have had many clients who top up their life insurance coverage after they have a baby. Most will write a will or rewrite their WILLs to include the newborn baby as the beneficiary. One thing most parents usually neglect is to set up a family protection trust. This is a very useful and powerful arrangement



in case of double tragedy (where both parents pass away due to accident). A normal private trust cost around RM1000. A simple WILL is around RM500. Financially, be prepared to spend about RM2000 one time fees for thorough protection, plus a few hundred ringgits a month to top up life insurance. Caring for the baby After the confinement period, you will have a new member at home. A baby needs a lot of caring. You will have to arrange one of the following: 1. Employ a babysitter You can send your baby to the babysitter. It will cost RM550800 for weekday daycare only, or RM8001200 for 24 hour care. I will prefer to have my baby sleep under the same roof with us. My baby is so cute and lovely. I wouldn’t want him spending most of the time at other people’s home. A baby will bring a lot of joy to your family. Why would you give most of the happiness to an outsider, right? 2. Being a full time stayathomeparent Some new mother will resign from work for a few years to look after their baby. This really makes sense because the first few years are very crucial. The baby grows so fast! If you go to work too early (when your baby is still asleep), and come back too late (when your baby already asleep), you will only see him/her grow longer, not taller.



3. Maid service Another possible arrangement is to employ a foreign maid, and have a senior at home to watch over the maid. Upfront fees of about more than RM10,000 needed to be paid to the foreign worker agency to engage a maid. Please expect the maid to arrive about 2 months later. You can choose maid from Indonesia, Myanmar, Vietnam, Cambodia, and Philippines. Some experienced maids who are previously trained or experienced to take care of baby requires more than RM1000/month wages. Prepare for leave from work In Malaysia, a new mother will be given two months paid maternity leave. But there is no such leave for the father. You may need to do the necessary preparation to be away from work for quite a long while. Another consideration is not to waste your annual leave. If you are an employee, somehow you will need to take emergency leave to bring your baby to the doctors from time to time. Things for the baby 1. Food Since my son was born, the milk powder has increased in prices several times. Some branded milk powder such as Enfalac A+ cost RM70/tin. One can only last about a week. Be prepared to spend over RM250/month for the best baby food if the mother can’t or won’t breastfeed. Later on, when the baby grows over 6 months, you can buy the “step 2″ milk powder and it will be a little cheaper.



2. Clothes I actually see clothes as a waste of money. If possible, get used clothes from your relatives and friends for your baby. Used clothes are not so nicelooking, but softer and more comfortable. If you buy too many pieces of clothes, most of them will be worn a few times only because the baby really grows rapidly. When your baby is 3 months old, buy the 612 months clothes. When he/she is 6 months old, buy the 1218 months clothes. 3. Diapers There are super cheap diaper like Tesco brand, and also the most expensive branded diaper like MamyPoko. If possible, you can use cloth diaper which will save some money in long term. We actually use all the diapers mentioned above. We use MamyPoko at night, which can absorb urine efficiently and last for 12 hours. We use the cheaper diapers during daytime when we can help my son to change regularly. Our babysitter uses the cloth diapers. 4. Toys I don’t know about other babies. But my son doesn’t really like his toys. He plays a new toy for a few minutes and he will be bored. What he likes the most is my iPhone and my books. However, some toys are worth investing. Inevitably, you will have to allocate some budget for toys. Prepare to sacrifice your own personal time



A baby is so demanding. My son needs a lot of attention. Last time, we used to work or enjoy some free time at night and weekend. But with a baby at home, all your nonworking time is devoted to your baby. Anyway, every minute is worth spending on your baby. You won’t realize the wonder and magic moment until you have a baby. Do you need a bigger home? We used to stayed in a single storey terrace house. But because of having a baby at home, we felt that there is not enough space anymore. We had moved to a semidetached house when he is 2 years old. Put it brief, if your current home is not babyfriendly, you might need to consider a more suitable house. You may need more rooms, more space, bigger garden etc. Some parents also purposely move to some better neighbourhood in order to give a healthy environment for their children. Some even consider the possibility of getting into a specific wellknown school. This is because the address printed on your baby’s IC is going to determine which public school he/she will go to in the future. Total cost of having a baby The numbers below is just an estimation. It is for the purpose of giving you a financial guideline if you are planning to have a new baby. One time cost:



1. Delivery RM3000 2. Will Writing RM1000 3. Living Trust Setup RM1000 4. Confinement period RM3000

Regular expenses (per month) 1. insurance for the baby > RM100 2. babysitter/maid > RM550 3. baby food ~ RM200 4. medical bills ~ RM100 5. clothes/diapers/toys ~ RM200 So, be prepared to have a net worth cut during delivery and confinement, and then a cut of at least RM1000 every month from your cash flow. It is true that raising a child might cause more than a million ringgits. But is it worthy? My answer is a big YES! You can’t buy the happiness of being a parent. It certainly can’t be measured in monetary terms.

Cloning Your Life Values via Private Trust There is a movie about cloning human beings made in 2000 titled The 6th Day starring Arnold Schwarzenegger. In the nottoodistant future, when cloning plants, pets, and human organs is accepted, a sinister corporation has begun illegally duplicating entire human beings. Before that happens, cloning a person is still not possible no matter how much money you have.



Here, we will discuss the possibility of cloning your life values , which is an essential part of leading a person’s life. At the moment you leave this world — when it is unplanned and unexpected — your heirs’ understanding about your life values cease. Wouldn’t it be nice to have a series of life tutorial videos made and passed on to your children, so that they can watch it at the suitable time just in case you can’t make it? Before you turn on the video camera, let me show you how you can pass on your life values via living trust. A trust is an arrangement which you can set aside certain amount of assets to a party called trustee, to be used for the benefits of the beneficiaries. The beautiful part of a trust is that you can determine the “terms and conditions” which the beneficiaries must fulfill before they are entitled for the incentive. Thus, you can call these type of trust the “Incentive Trust” . Some examples: To Have Time with Family Trust provision: Each child shall receive a monthly distribution if she can engage in such a profession that allows her to work from home. To acquire knowledge and wisdom Trust provision: Each child shall receive a distribution indicated upon achieving tertiary education – Bachelor Degree $100,000, Doctorate $200,000. Personal Achievement & Hard Work



Trust provision: Each child shall receive an annual distribution equal to 50% of his earned income reported officially the previous year. To be creative and innovative Trust provision: Each child shall receive $100,000 for every successful patent filed. To appreciate music Trust provision: Each child can claim for reimbursement for all the fees with the proof of participating in music lessons Above are just a few examples. Be creative! And make sure you share about your life values when you are discussing the issue of setting up a trust with your estate planner.

Top 4 Methods to Enjoy Tax Relief for Education Purposes We all hate to pay tax. Ironically, the more taxes you pay, the wealthier you are. However, it might not necessarily so. Because a person earns more than you might be paying less tax money with proper tax planning. One of the area that you can get a tax relief is for education purpose. Education is a liberal concern because it is about empowering people with the skills, knowledge, attitude and aspiration to develop themselves. Some believe that in order to have a brighter future with better earning capability, higher education is a



must. Here, you will find the complete guide for a Malaysian on how to enjoy tax relief or tax deduction for education purposes. There are four areas that you can take advantage of tax relief for education purposes: 1. Child education insurance policy – Maximum RM3,000 2. Skim Simpanan Pendidikan Nasional – Maximum RM6,000 3. Post graduate education – Maximum RM5,000 4. Book purchase – Maximum RM1,000 #1. Child Education Insurance Policy A child education policy is a life insurance product specially designed as a savings tool to provide a lump sum of money when your child reaches the age for entry into college. If you opt for a payor benefit rider, an education policy provides the assurance that, in the event of an untimely demise of the parents or legal guardian, the child will have access to funds to help finance his/her education expenses. Under a child education policy, the child is the life assured, while the parent/legal guardian is the policy owner. Types of child education policies available



There are two main types, i.e. an endowment or investmentlinked policy. The difference between the two lies in the structure as well as the nature of investments. 1. Endowment Policy An endowment policy combines a savings component with protection coverage. Endowment policy may be either participating or nonparticipating . As the name implies, nonparticipating policy do not participate in the life insurance fund’s profits but all insurance benefits are fully guaranteed. On the other hand, for participating policy, a portion of insurance benefits are guaranteed. However, the ultimate amount of benefits at maturity are not guaranteed as these depend on the performance of the insurance company’s participating life insurance fund. 2. Investmentlinked policy An investmentlinked policy combines the elements of investment and protection based on your requirement as the policy owner. It offers flexibility as you are able to increase or topup your monthly premium contribution as your income improves. If you wish to be more aggressive with the instruments of investment, an investmentlinked policy will also allow you to choose the types of funds your money will be invested in. However, like any other similar investment, there are higher risks involved and there are no guarantees on the returns, which may be higher or lower than projected. Tax incentive of RM3,000 for Child Education Policy



One of the benefits of using life insurance as a savings tool for a child’s education policy is the tax advantage. Insurance proceeds are taxfree and you can also obtain an annual tax relief of up to RM3,000 for the payment of premiums for education insurance, subject to approval by the Inland Revenue Board. In order to qualify for tax relief,

the education plan must be taken up by the parent/legal guardian and it must mature when the child reaches the age of between 13 to 25.

It is also important that you opt for a payer benefit rider throughout the life of the policy.

Make sure the policy has a the word “education” printed in the policy title

another method is to purchase an endowment policy that the life assured is the parent, but the beneficiary must be nominated to the child and mature before the child reach 25 years old. Remember, if your wife elects for separate assessment, she can also claim the same amount of relief on her life, education and medical insurance premiums but not on the same child. #2. PTPTN Skim Simpanan Pendidikan Nasional



Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) introduced a savings scheme which puts emphasis on ‘Savings Towards Higher Education’. Besides ensuring annual dividend returns, the SSPN also provides special financial incentives in the form of Matching Grants especially for low income depositors. In addition, insurance coverage and payment of death compensation is provided free of charge to all eligible depositors. How to Open a SSPN Account To open an account, the application form must be submitted to PTPTN counter and any collection agent along with the following documents:

A copy of the depositor’s MyKad/Military/Police Identity Card;

A copy of the child’s MyKid/Birth Certificate/MyKad; and Certification of adoption (if the SSPN account is meant

for an adopted child). For a family whose household income does not exceed RM2,000 per month, the latest income statement of the family must be submitted along with the application form and a copy of the spouse’s MyKad/Military/Police Identity Card. The minimum total deposit for purposes of opening an account and increase of deposit is RM20 for each nominated beneficiary’s account. Deposit increase can be made as soon as the membership card is received. Eligibility to apply for PTPTN education financing


http://www.ptptn.gov.my/web/english/savings


For household income exceed RM2,000 per month, a minimum deposit of RM3,000 is required

For household income does not exceed RM2,000 per month, a minimum deposit of RM500 is required.

Benefits: Tax relief on savings up to RM6,000 per year. Free insurance coverage up to RM50,000 (dollar to

dollar) for depositors who have an accumulated deposit of a minimum of RM1,000 (Eligibility for insurance/death compensation is only for depositors between 18 and 65 years, whereas death compensation is awarded only to beneficiaries aged 1 to 28 years)

Matching grant with a maximum endowment of RM10,000 per family (A family whose household income does not exceed RM2,000 per month is eligible for a matching grant when the child is accepted into a higher learning institution)

Deposit as low as RM20 at any time deemed necessary and government guarantee on savings

Competitive dividend rate and tax exemption on dividend Withdrawal Withdrawal of savings can only be done after one (1) year of saving in the SSPN. The withdrawal of 10% of the balance in the account or RM500 (whichever is lower) once annually is allowed (after one year of becoming member). Withdrawal of up to 100% of the balance of the account is allowed if the beneficiary fulfills one of the following criteria:

Is accepted to any government recognised IPT;



Withdraws voluntarily from the education system or is terminated for specific reasons;

Chronic illness with no hope of recovery with doctor’s certification;

Permanent disability; or Death

#3. Post Graduate Education To promote a culture of lifelong learning among Malaysians, the Government proposes tax relief of up to RM5,000 on education fees be extended to all postgraduate studies (Masters and Doctorate leve), effective from Year of Assessment 2008. Every individual are eligible to claim a RM5,000 relief each in respective tax returns provided that the postgraduate studies are at institutions or professional bodies in Malaysia that are recognised by the Government or approved by the Minister undertaken for the purpose of acquiring law, accounting, Islamic financing, technical, vocational, industrial, scientific or technological skills or qualifications. #4. Book Hunting To further inculcate the reading habit and in line with lifelong learning, the Government provides tax relief on the purchase of books up to RM1,000 per year. All the textbooks for your children, or your own post graduate studies are eligible for tax relief. Even the Harry Potter And magazine you buy from book stores can be used to deduct tax. But you must keep the book purchase receipt for tax audit later, if you are lucky.



Some reminders buy books and magazine from chain bookstore, such as Popular, MPH, BORDERS etc. You will notice the receipt provided by Popular have [BK] printed for book items. You can even order your book via the internet – Amazon, Barnes and Noble. Normally, there won’t be any receipt produced when you buy magazines from local book stall. If you want your expenses to be tax deductible, avoid this.





If you fully utilized the tax relief for the above elaborated 4 areas: 1. Child education insurance policy Maximum RM3,000 2. Skim Simpanan Pendidikan Nasional Maximum RM6,000 3. Post graduate education Maximum RM5,000 4. Book purchase Maximum RM1,000 There is a total of RM15,000 tax relief to be claimed. I will definitely use up item no.1, 2, and 4. But for item no.3, there is no clear definition of post graduate study and list of courses that is eligible. It would be nice if colleges and universities can indicate the tax relief eligibility when promoting their courses for working adults. If your tax bracket is 21%, you will save up to maximum of RM3150 tax payable yearly. Last but not least, I would urge that you take advantage of them all during year end.

Purchase your child insurance policy and pay yearly in December the premium paid will be eligible for tax relief immediately. Do note that some insurance company have offer for certain credit cards that you pay yearly upfront with credit card, but pay back the bank in 12 installment without interest.

Open SSPN account in December, and max it up to RM6,000.

Consolidate the receipt of book purchase, and use up the RM1,000 if you enjoy reading books. If not, try buy books as gift to others whenever possible. Books are great birthday gift.



By using this "yearend" strategy, you have kept the money with you for a full year and already reap the full investment return. The End of Volume 2 If you find any error in this edition, kindly send an email to [email protected] Do you want to get the next Volume of this ebook series? Visit this page http://kclau.com/lp/ebook/ to post a comment and enter your emails to get on my emailing list, so I can send you Volume 3 when it is done! Hear from you soon. regards, KCLau


mailto:[email protected]

http://kclau.com/lp/ebook/


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