Leverage 2.0 - How will you leverage ?

How will you use the power of leverage ?

LEVERAGE 1.0 : I have $1 and I know how to earn $2 from it.  But earning $2 is not interesting to me.  So I found a way to borrow $30 to do it.



My debt ratio is 30:1

Supposedly after it is done, I earn $60, pay back the $30 and $5 interests/fees.  I could have earned $25 instead of $2.  This is the power of leverage, amplify my earnings.

But when things go south, I haven't earned the $60 yet but I have already owed someone $35.  I just needed more time and I CAN get more time by just paying more interest/fee.  This time its another $8.  So I will need to pay back $43 but if I could earn the $60, I still have a profit of $17.  Not as good as $25 but still better than $2.

Just in case my $60 still hasn't come in yet, I could extend my time again by paying another $10 interest/fee.  By then my potential profit is $7, much worse than $25 or $17, but still better than $2.

However eventually the interests add up so much that I don't get any profit even if I get my $60.  So it is NOT exciting again.

time            loan    interest  potential earning
1st round : $30 +    $5         $25
2nd round : $35 +   $8         $17
3rd round : $43 +  $10          $7
4th round : $53 +  $15         -$8
5th round : $68

What happened above is considered a 'traditional' scenario.  I thought I could earn $2 from $1 but I was wrong.   I use leverage to amplify my earnings, however after 5 rounds of trying I still fail and I ended up amplifying my lost!  So I have to pay $68 tuition fee to learn a lesson, both on my business skill and also on the power of double edge leverage.

LEVERAGE 2.0 : What could also happen is that when I first get my $30.  I put $15 aside.  So it would look as if I have $15 and I have borrow $30, although my $15 is actually from the $30.  So my debt ratio is only $30 : $15 or 2:1.

When I realize I couldn't get my earning in the first round, I could borrow another $60 because my debt ratio is low.  Then I pay the earlier loan and interest ( $60 - $35 ) so I still have an extra of $25 to do more business.

I can continue borrow more and more to cover my previous loan and yet I have more money to do more businesses.

time            loan   ratio  interest  buyStock  potential earning
1st round  :  $30   2:1    $5          $15              $10
2nd round :  $60   4:1    $9          $25              $26
3rd round :  $120  8:1   $17         $51              $60
4th round :  $240 16:1  $33          $103           $130

As soon as I hit my debt ratio limit, I can set aside some money as if it is my capital/earning like how I did the first time.  Says I add another $15 to make my capital to $30.  Borrowing $240 is only a debt ratio of 8:1.  This can continue indefinitely.

With this method,

• it appears as if I pay off my loan on time, every time. = good paymaster
• I gets lower interest because of my good records and higher loan amount
• I always have some extra money even before my real earning comes in = strong cash flow
• my potential earning actually increase every time as I keep turning = good strategy
• as long as I eventually realize one earning , I offset ALL my previous risks and I still make a REAL profit.

Don't get me wrong.  Although many people did the above illegally with the wrong methods.  But there are actually perfectly legal and legitimate ways.  As a matter of fact, almost ALL big businesses or even governments are doing exactly above.

As you may have observed, the risk is much higher now.  By the 4th round, I owe $273 instead of just $68 comparing to the earlier traditional method.  But with all the great benefits mentioned above (better strategy, stronger cash flow etc), this increased risk could still be justifiable.

Things still haven't really gone wrong yet with above creative strategy assuming it was done legally.

Things go wrong when

• I didn't really know how to earn $2 from $1 = it was a bluff and people found out
• I didn't really try hard at all to realize any earning 
• I didn't use the extra cash flow to grow the business
• I use the extra cash flow for new house, cars etc. = corruption

So the 'finance system' has opened a whole new world to us but at the end it is 'ourselves' who collapse it.  Don't blame the system, blame the greed and ignorance within ourselves who are playing with the power of leverage for the wrong reasons.

How will you use the power of leverage ?

Personal Loan, Business Loan

More and more people are asking about personal or business loans recently. Many do not know where else to get one except from loan sharks (Ah Long). Hence they were left with 'no choice' but to take the risk to venture into whatever their dreams are. Actually there are quite a bunch of legitimate sources ...

Below show a list of sources who can give you a loan without any collateral ( tak payah cagaran )

just click on the image to view the big detail image

Some of them may not offer the loan as stated in above list anymore but they usually have other similar alternative products replacing above. So you can just call and let them know what your needs are. They should be able to offer something as they have been 'requested' by the government to 'assist' local entrepreneur.

The interest rate will NOT be LOW as it does not have collateral. But at least they wouldn't come paint your house red I suppose. It is their job to assess your ability to repay. Should things really go south and you have problem repay this loan later, you can try get help from AKPK.

The loan amount is not big in term of business sense. So you may really want to ask yourself why do you need a loan for whatever you want to do. Why haven't you had a saving that is enough for you to start a few thousand ringgits business ? If you are honest in answering that question to yourself, you may find a better way to finance your business.

Else whatever happened in the past may most probably happen again and you may face a lower success factor. Perhaps that is why you will need to pay a higher interest rate to learn the lesson the harder way, again !?

Don't forget credit card is a kind of loan too at 15-18% interest rate. Do get offer from as many sources as possible before considering which one to go for. NEVER NEVER NEVER go for the first one you encounter with.

Mortgage vs Loan

Very often the terms mortgage and home loan are used interchangeably. Although it might not cause big harms but understanding the difference may bring positive impact to your personal finance ie. in Property Investment.

In fact, mortgage is the opposite of loan.

When you need extra money, someone can lend you some and in return they gain profit when you repay them. The lender may ask for collateral like your house so that if you don't repay them, they can take possession of your house, sell it and still earn a profit by doing so. They give you a loan.

If you have something valuable and you want to exchange it temporary for some money, you can prove to people how valuable your possession is and why should they give you money for it. You get your money if the lenders are satisfied their interests will be taken care of. You have just mortgaged your belongings.

Loan is a lender's contract,

mortgage is a borrower's contract.

At one instance, it may seems the same. Its just a story told from different angles. But if you think for a moment as a borrower, do you want to follow your lender's contract or should you come up with your own's ?

If you start thinking the whole money borrowing thing from your own angle and for your own interest, you may just come up with some unique and interesting arrangements.

Items that can be mortgaged are not limited to your own properties. If you are holding some collaterals from other people, you can mortgage them to higher bidders.

You don't have to mortgage 100% of your property. Since it is really up to you, you can even split a single property to 4 different mortgages and borrow money from different sources. However, you would need some very good reasons why people still want to lend you the money. But if it is a 4 sections building, it wouldn't look that ridiculous anymore, would it ?

Item that can be mortgaged does not even need to be mortar. An idea or a method can be mortgaged too. As long as someone believe in your value judgement and their interests taken care of, they can lend you money. So you can literary mortgage your property for money without giving it out as a collateral at all. Especially applicable when you are earning revenue from such properties.

Loan or Mortgage ?

Borrower or Mortgagor ?

Lender or Mortgagee ?

As mentioned earlier, this is just a matter of how the story is told. Do you want others to control your story or do you want to tell your owns ?

http://homebuying.about.com/cs/mortgagearticles/a/deedoftrust.htm

Loan is disadvantaged to Cash but Limited !

In an earlier article, a myth was broken where it says "getting loan will Decrease your liquidating options" so if you have the cash to buy the whole thing, you should go ahead and buy it and NOT getting a loan. Because once you get a loan, you will end up disposing your item Slower and get back Less worth - which is the opposite of liquidation.

That message has disturbed a lot of old friends who have been using loan successfully in their property investment. They have been borrowing loan in their investment for more than 10-20 years and almost always successful getting back a bigger return as a result of the loans. If loan is not a good thing or not liquidating, what has happened in the past 10-20 years, they just got lucky ?

Loan or any form of effective borrowing,

is a leverage tool.

Lets take a look at the same example used in last article; You have the option to buy an property for $100,000 and you could also get a loan where the interest is 5% for the next 10 years. Below spreadsheets show a few calculations;

The left most column in bold under "sell direct" mean if you bought with cash earlier and sell now, you would have get back this much money after the appreciation or depreciation.

The right most column in bold under "sell with loan" mean if you got the loan in the beginning, then this is what you get back in net after deducting the remaining capital.

The most important column in this article is the 2nd column from the left under "no loan - loan". It shows the difference of buying with cash vs buying with loan. If it is a positive number, it means buying with cash has an advantage earning or saving against buying with loan.

Below show 2 cases where the property could have appreciate or depreciate 10% a year ...

Case 1 : Item "appreciate" 10% a year

Case 2 : Item "depreciate" 10% a year

If you focus on the numbers in 2nd columns, they stay the same. It doesn't matter if your item increase or decrease in value, the differences between buy with cash and buy with loan are the same.

If your item appreciate, buying with loan will earn $5,000 less.

If your item depreciate, buying with loan will less $5,000 more.

It may still seems like a disadvantage to some readers up to here. But it actually is limiting the strategical cost of a transaction. No matter how the market goes, the person who got a loan will only lose $5,000 comparing to those who bought with cash earlier. In order words, the strategical cost of getting a loan is $5,000 for the 1st year.

You may also observe that this strategical cost is decreasing over the years. 2nd year the difference is less than $10,000 ( $5,000 x 2 ) and 3rd year is even less than $15,000 etc.

Limiting strategy cost no matter how the market goes is a very powerful situation in investment.

Is Loan really Better than CASH ?

You may have heard people are claiming its better to get a car loan than buying it with cash even if you could, especially from those car salesmen. Likewise, property investment gurus say that its better to get a home loan. These are some of the key reasons why they say loan is better than cash;

• Liquidity - keep your money with you, you may need it in future.
• Income tax department may come 'disturb' you seeing that you have loads of cash.
• buying stuff with loan usually gets more gifts.

It shouldn't be too hard to realize the main reasons why people pursue you to get a loan is because they may get a share of the interest you are paying. For example, car salesmen earn double the commission when they sell you a car with loan. Property agents want you to buy more property with the limited money you have hence they can earn multiple commission instead of just once. Other than that, most others who pursue the same are most properly are just due to ignorance.

This situation is exceptionally terrible when you are buying a new car. The car salesmen will literally give you a bad service if you mention you will buy the car with cash. They will try their worst effort pursuing you to get the loan no matter what. Else they would rather NOT sell you the car at all.

Getting a loan simply mean Pay Less NOW AND Pay More at the end. To be precise, you will have to pay interest to the loan you are getting.

Loan = Cash + interest

So you will definitely be paying more when you buy something with a loan. If you do not need the facility of 'Pay Less Now', you are basically paying the interest for nothing but ignorance.

Lets clear away the simpler excuses first;

• Income tax only penalize those who earn income illegally so unless you DO have something to hide else there is really no reason to worry about any audit.
• All 'gifts' come from your own money, the more gifts you receive in a deal, the more suspicious you should worry about the real value you are receiving.

Now the toughest part is the liquidity. It will be very hard to say keeping some money with you is NOT a liquidity option. But it is not necessary always the best liquidate option.

First of all, when you buy something with cash, its just between you and the seller. However, when you get a loan to buy the same thing, there is at least an additional party involved ie. the person who gives you the loan. Its has not just become a 3 parties complexity, its actually a totally 2 different transactions and a 4 different roles play.

( with Cash )

Buyer and Seller

vs

( with Loan )

Buyer and Seller

Borrower and Lender

So in addition to the interest, you will also pay more fees when you get a loan. When you want to sell your item, you will need to pay this fees again and perhaps also getting approval from this lender. Relatively a cash purchased item can be sold off immediately. From this perspective, doesn't cash purchase sound like a more liquidated option ?

Lets say you could buy something with cash at $100,000. You may also get a 5% loan and pay $1,060 monthly for the next 10 years.

Lets say half way down the road on the 5th year, the item has depreciated to $50,000 (13% depreciation rate). If you bought it with cash, you would end with a net cash $50,000 after selling it. If you got a loan, you would have paid $63,639 in the past 5 years, meaning you still have $36,361 cash at hand. Together with the $50,000 you may think you have more than $80,000 but you still have to repay the capital left in the loan, so at the end you end with a net cash of less than $40,000 which is less than the cash purchase option.

On the other hand, lets say your item appreciate 10% a year. On the 5th year, you could sell it for $161,051. But if you got a loan in the first place, you may get back about $140,000 net, which is still significantly less.

So no matter if your item appreciate or depreciate, if you sell off your item earlier or later, buying something with loan will only end you with ;

1. slower to sell off your item because it involves 2 transactions and it cost more fees too
2. getting less cash back at the end

The last I check, disposing something off slower and getting back Less cash is NOT exactly a liquidating option at all.

Guest Post: Student Loan As An Investment and Student Loan Debt Consolidation

Sharell Crawford is currently working for Debtconsolidationcare. Having a lower debt amount will mostly improve your chances of getting lower interest rates for most of the purchases you made.

A student loan is considered to be a good investment since it is taken out to establish the career of an individual that helps him earn his livelihood. However, sometimes it becomes impossible to prevent debt arising from student loans. Debt consolidation plays an important role over here. Student loan debt and mortgage loan debt are considered as “good debts” because of their positive aspects. On the other hand, credit card debt and car loans are regarded as “bad debts’” since they signify lavishness. You don’t acquire student loan debt by extravagance. These loans can be obtained more easily from federal sources than private lenders. You can get useful returns from utilizing a student loan. The more you become educated, the more is your earning capacity. However, you must not forget that you have got to pay it off.

The anxiety of paying back multiple student loans can be annoying on certain occasions. In addition to this, procrastination is a normal feature of the college life of a student. This does not spoil your results but not paying your loans when they become due for payment would certainly have a bad impact on your financial future. The most effective option for a student to drive away his financial concerns and get pleasure from his college life is a student debt consolidation loan. This type of a loan combines all your student loans into one loan that is simple to handle. You basically take out a bigger loan to manage your various smaller student loans. As a result of the affordable and competitive interest rates, you can save some money. By stretching out the repayment terms, your monthly payments are reduced considerably. You also have the opportunity of locking in an affordable rate.

At present, the last thing that you want to happen to your finances is piling up a huge amount of student loan debt. A student debt consolidation loan can be the right solution to conquer your debt problems. You have to keep in mind that private student loans cannot be consolidated with federal student loans. If you’re suffering from student loan debt, you have to consolidate your federal student loans and private student loans separately.

notet from Doroth, Financial Helpdesk.

OCBC uses Mortgage Lending Rate instead of BLR

Its not new actually, CIMB has been using Base Finance Rate instead of Base Lending Rate (BLR) as well. OCBC starts to use MLR as in Mortgage Lending Rate (MLR) instead of BLR.

The concepts put forward is really interesting. BLR consists of cost consideration of the whole banking industry and operations. While MLR is calculated for mortgage related costs only. Hence MLR is usually lower than BLR.

But if you really put the numbers together, you may realize its just another looks-good but pratically almost everything stays the same. For example, the typical BLR in the market now is 5.5% and the common offer is BLR - 2.2% so

BLR 5.5% - 2.2% = 3.3%

While MLR is lower at 4.7%, their offer is MLR - 1.3%

MLR 4.7% - 1.3% = 3.4%

Doesn't look like there is a whole lot of difference isn't it ? Not to mention the lowest BLR at 5.25% and the best offer of BLR - 2.3%

OCBC folks or anyone more well verse in housing loans please do leave comment if this is not entirely true.

A Wrong Way in Gold Investment - Pawning

Recently I came across a blog that teaches people in gold investment. Basically it is asking you to buy gold, then pawn it to get back 65% (Arahnu) cash, then use the money to buy more gold. It then shows you if the gold price goes up a little bit, you earn a lot more than just simply buy once. At the very end it also mention there is 'a bit risky' but absolutely in a misleading way.

Basically this is a method called Leverage. You have $10 and you know you can earn $1 out of it but if you apply Leverage techniques you can get more than $1. It is also the same way how Bank can lend out 10 times more than what they actually have. ( currency turns evil story )

However, his teaching is one of those 'seems cool' but Absolutely 'Digging your own grave' case! Which also shows how absolutely a nonsense fool can spread knowledge to make more fools. Also exactly the reason why there are still 90% of world population will NEVER achieve true finance freedom, while digging deeper to their own graves.

This so called Gold Pawn is a very common pratice among one of Malaysia's ethnic group. There is even a standard govern policy for it. Basically you can pawn your gold with them, get back 65% cash. Then you need to pay about 0.75% safekeeping fee per month. Usually You will need to repay your borrowed amount in 6 months.

If you have been following malpf, you may have known one key preaching topic is that 'you must look at the real numbers and NOT just the general concept'. To simplify this discussion, lets ignore the normal 4% price gap in gold trading. Lets just assume we only need to pay 0.75% for one month and the price move up down 10% in one month.

Case 1 : Buy Gold

You invest $10,000 and price moves up 10% in one month, you earn 10%

Case 2 : Buy Gold, Pawn Once and use the pawn money to buy gold again.

The price moves up 10% only, but after minusing the safekeeping fee and repawn back the gold to sell all, you will get 16.46% net return. (sample calculation)

Case 3 : Pawn twice so its as if you have 3 golds, but 2 at the pawn shop, 1 at your hand.

Price moves up 10% a month, your net earning would be 20.66%

As you can see, the total amount of capital is the same, $10,000 but you could earn 10% - 16% or 21%. That is the power of Leverage. But wait, lets see what happened when the price goes DOWN 10% instead.

Case 4 : Buy Gold once

Price goes down 10%, you lost 10%.

Case 5 : Pawn Once

You lost 16.54% (sample calculation)

Case 6 : Pawn Twice

You lost 20.79%

You may already observe that there is a slight difference between winning and losing ratio.

When you win, you win less and

when you lose, you lose slightly more.

Pawn Once : Win 16.46% Lost 16.54% Difference 0.08% Disadvantage

Pawn Twice : Win 20.66% Lost 20.79% Difference 0.13% Disadvantage

Basically there are 2 facts you can get out of this :

1) The longer you use this Leverage technique, the more you will lose.

2) The more number of times you pawn, the more you will lose.

Back to the beginning of this article, the Risk of this technique is NOT a bit but the Risk is DEFINITELY higher than the Reward. The best argument he can legitimately comes up with is the disadvantage rate is not that high. Ie. compares to casino gambling where the disadvantage is at the range of 4%.

Think you found a golden goose ? Look carefully next time ....

You want to buy a car, NOW ?

Thanks to the new PM effect and various new policies in place including the RM 5,000 rebate, almost ALL of my Average income friends are Really interested to buy new cars.  Although soon they find out a lot of inconviniences because there are too many rules about the RM 5,000 rebate which make stuff not that practical but now friends still want to buy new cars no matter if he can gets the rebate.

If you also have a property 

that you can refinance, 

you should seriously think about

 refinancing your property 

to buy that car

 instead of getting a car loan.

Car Loan rate is 3.5% now.  Following the rule of thumb that car loan rate is 1.9x house loan rate, the 3.5% car loan is almost more than a 6% house loan.  With today's BLR-2.X offer, your house loan is most probably serving at 3.X% only.

6.X %  to 3.X % is a HUGE difference for crying out loud !

There are even some level term loan offered by insurance companies at 4.75% now, which is still so much BETTER than the 3.5% car loan ( which is 6% ) no matter which angle you look at it.

Despite the fact that car is the biggest personal finance killer in Malaysia, and if anyone buy a car NOW by taking a CAR LOAN while having the choice of refinancing his property .... Please ... at least share with me here why you do it, why do you want to spoil your own personal finance plan while I am already feeding you nice food near your mouth ?  Why do you still split it out ?

I will start with the most common excuse, "I scare income tax will find me if I pay my car in full as if buying it with cash!"

True concern but only valid for those illegal drug dealers etc.  If you Really have a property that can get Approval from banks to refinance, there is Absolutely no concern at all on tax filling.  Upon enquiry by tax department, simply submit your house loan documents and declare no other income whatsoever un-declared in the past.

Assuming all people start to do exactly what I share here, there is only one person they will go after - me!  They will blame me for causing them and the banks to lose so much more income.  Bank may start reducing the amount they lend to a property, they will ask if you are using the extra money to buy a car and then they may deny your loan application in future!

But I doubt that will happen at all, truth for the past thousands of years show that human just like to stay in their own shell even if it has been hurting them for so long, they get used to it and they will just refuse to walk out even one step to the more comfy zone.

What ?  You want to buy a car nOW !?

Get Out Of Bad Debt

I briefly touched on how to reduce bad debt in a case study about a middle income guy.  And most of us are the Average Joe, so no doubt the questions of How to Get Out Of Debt persist.  Furthermore, there is a book saying that 21st century is all about Debt.

Ok, lets start with the boring, "You shouldn't have got into bad debt at the first place !"

Sorry but Honestly, personal bad debt is a pure mistake on greed and ignorance.  Bad debt is not a personal finance problem.  Its the opposite of personal finance.  As mentioned before, the only thing you MUST do in Personal Finance is to setup an automated saving system right after your income.  Bad debt is the reverse !  By using up more than your income even before the income comes in.

That would be the FIRST thing one must understand, realize and FEEL it !  Else it is not going to be any helps in reducing bad debt.  It will just come back again and again.

Secondly ofcourse we can blame it on the education we received.  Off the 12 long years of FREE and compulsory education, we didn't learn a single thing about bad debt, not to mention automated saving.  Although its not a personal finance problem, it is a global trend and it becomes a national problem where it affects our daily social life.  Crimes rate increase.  You lose job, I die.

Ok, now that we take responsibility of the problem and we get someone to share the burden, we can now look at it face to face.

The problem originates from Income, so the real solution is within income as well.  But before that, lets review some of the common advices :

1.  categorize debt by different interest rates

12-18%  Credit Card or Ah Long debt

4-8%  Car Loan ( car's actual rate is 1.9x of published rate )

5-7%  House Loan

2.  work on the highest interest rates category first

including transfer all the high interest rate loan to lower rate like using house loan to pay for credit card debt

3.  within the same category, pay off the smallest amount first !

4.  call up banks and ask for waiver or reduction

other than that, there are some uncommon methods and services offered by private agency.  Basically they work around these methods:

1.  Pay a little more monthly, cut down total number of years to save on total sum

2.  Instead of paying 18% to credit card, borrow from them and you pay only 16% etc.

3.  Changing interest calculation method from daily rest to monthly rest etc.

It is possible to have some businesses out there sincerely come up with plans to help people reduce debt.  Afterall, the ultimate benchmark for world best stock investors is only 15%.  So it makes more sense to run a Ah Long business than starting a company like Warren Buffect's  BERKSHIRE HATHAWAY

However there are more businesses out there taking opportunity out of these ignorant debtors and further exploit them to the limit by squeezing every penny out.  So my advice is approach these agencies with care, only work with those who can provide you clear figures / numbers how the system works and then you send the figures to me for verification.

Most countries have also setup proper agency to provide similar helps like above private ones.  That is a must know for poor debtors.  In Malaysia, you must go to AKPK personally and ask them to help you face to face.

Ok, lets get back to this blog.  Just a reminder that all above are the common methods debt adviser would have shared with you.  They are effective ... to contain the problem, not really solving it.  This blog stresses that personal bad debt is NOT a personal finance problem.  Its problem is from income and the solution is to work on income.

So what you really need is to focus on Getting More Income to pay off the debt.

No one can go back and change a BAD beginning 

but everyone CAN create a successful ending !

And you bet double the effort is needed to correct a small mistake.

Some may curse by now what a stupid recommendation. 

"If I could earn more money, I wouldn't be in this debt at the first place !!"

Well, thats why and how this article is written.  You must first admit and take resposbility for your own mistake, then you can also blame someone for it and now you should face it to solve it yourself.  Including thinking positively how every single suggestion comes in, despite how stupid some of them may sound.

Fortunately, there are proven methods on how to increase income to solve debt.  All you need is as mentioned above, expect double extra effort to come.

Statistically 3-5% of people who started a business end with great finance success.  The unique difference in this 3-5% of people is their smartness and ability to adapt to changes.  Lets face it, how smart we are is something imprinted within us.  Its not something we can change overnight.  By the time we are as smart as we should be, debt rate has already compounded to sky level.  Afterall, if we have the smartness in us, we wouldn't have reach this bad debt situation anyway, would we ?

On the other hand, people who 'join' a human network business has 20-30% success rate.  Off the other 70% who didn't make it even though they are in the same human network business as those who make it, is because they didn't spend enough effort on it.

A Human network business that you can 'join' includes multi level marketing, insurance and mutual fund agents.

If you are serious about solving your bad debt which you admit was a mistake on your part.  Then you better focus on increasing your income.  And if you don't know how to increase income on your own.  You better temporary forget about all your preception on MLM and insurance agents.  Join them and really spend a good amount of effort on it for 2-3 years.  I guarantee you will solve your current debt problems.

Forget about morale, forget the right thing to do, forget about helping others, you have to even forget about finance planning as a matter of fact.  Your focus should be on solving your debt and you are just 'working' toward it.  You don't have to 'like' your work in this case as long as it can get you off this bad debt which is killing you.  You probably don't like your current job anyway.  And since you are already in bad debt, you probably been brain wash by some incorrect ideas.  So what's wrong being brain wash by this MLM and insurance ?  While your brain is already filled with get into bad debt procedures.

After all, both income and bad debt is NOT a part of personal finance planning.  One is the pre-requsite and another is the oppositive.

Among the 3 choices above, insurance is the safest and best choice if you don't know which to pick.  

Although MLM is  perfect in concept but in practical world, MLM is still new and there are still a lot of bad apples in MLM industry.  Since insurance industry is older and better regulated, there are really no BAD insurance companies out there, there are only less good choices.  Mutual fund is more toward finance planning or investment ideas, immediate and short term reward on mutual fund sales are less encouraging.  So to sum all up, insurance industry is the most suitable human network business for people to join to reduce their debt.

Take an example to solve a $20,000 bad debt.  You probably need to make a total sales of $60,000.  Assuming each sale is $2,000 then you will need to make 30 sales.  In order to make 30 sales, you may need to make 150 attempts.  Assuming each attemp needs 4 follow ups, then you need to prepare for 600 sessions of work.  Assuming each session is 2 hours, you will need to spend 1,200 hours in order to solve your $20,000 debt.  Now, if you spend 3 hours a day, 7 days a week, your debt can be settled slightly after a year. 

If above example is not acceptable, then you will need to have the smart in you to entrepreneur about how to get the extra income you need.  But just to beware, the 'smart' you think you have in you may be is the 'smart' that gets you into bad debt at the first place.  Just beware ... but don't let any wild imagination stop you when pursuing income.

Lastly, if you setup an automated saving system, then you are more likely to solve your bad debt problem too.  Exactly why would probably require another long topic on human psychology.  But in short, setting up such a saving system implies you already solve the 2 most original fault in bad debt, greed and ignorance.

Good luck all, I know this is a tough topic and not many people will agree but nevertheless its already proven solving many bad debts again and again.  Although these people never come back and help me propagate the right finance planning ideas, but they did get their debts solved.

Case Study : middle income group

This morning I over heard a case study from radio station 988 :

A young man earning $4000-5000 a month. $1000+ pays to house loan, $500+ pays to car loan etc and every month he has a remaining of $500 for saving. His question is what he should do with all his loans. He also has some credit card debt.

The answer given by the expert on radio is :

Use the $500 to clear all credit card debt, then car loan and then only start talking about money earn money.

While the answer given is typical and 'correct' by the standard of Personal Finance Planning, but I would want to add a few points :

1. The way the guy asked the question has a flaw. He deducts all the payment and then only come up with a saving of $500. The correct mentality is to Save First Use Later ( see old post ) If he HAD the Right mentality at the first place, he would most probably not getting into the credit card debt he mentioned. A very small difference made in approach can bring a whole different result, and that is why all I want to emphasize ( and the only thing ) is to setup a System to Automatically do saving for yourself without you having any control over it.

2. The answer given shows one of the common limitations of Finance Consultants. He also said,

Credit card is charging one of the highest interest in the market, NO finance consultant CAN GUARANTEE you ANY FINANCE return of 15% or above. Therefore, you can NEVER get any tool to over take this Credit Card Charges, therefore you HAVE TO settle it ASAP.

Again, first of all above statement is correct and what I am going to say is only an addition to it. What he was referring is FD, Insurance and Mutual Fund would probably NOT ABLE to provide you a return of 15% Consistently. If you refer back my Finance Pyramid, there is a "Stock" or share market on top of the pyramid. I leave it there to break this 15% barrier.

Many finance consultant leaves Stocks out of their portfolio due to its speculative nature and leave those to the stock broker. But

we are in charge of our own life,

and we get any 'tool'

that we can handle

to achieve any target

we want to set,

else there is really no point planning if 15% is the 'proven' limit.

The 2nd thing the finance consultant missed is ... Income. Below is one of the VERY FIRST picture I posted in this blog. This same picture is actually printed on my name card too ( coz I think all the answers are all covered in this simple picture )

Credit Card Debt is something one shouldn't get into at the first place. If you do the ONLY first 2 things I stress everybody to do ( earn an income and save automatically ), you would have a much less chance to get into credit card debt.

If you already get into such debt ...

Actually Ah Long's Debt

is the SAME as Credit Card Debt,

both are charging at 18% a year

and calculated Daily !!

Ok, if you already get into such debt, you should very well realize its a Personal Finance MISTAKE. Most often, the mistake is made because you have a GREED to be satisfied - you wanted to own something first BEFORE you have the ability to own it -

a Personal Finance Mistake is not necessary a Personal Mistake

A mistake like this DOES NOT eat into the "Automatic Saving" system I setup. It actually eats into your income. Basically if you use your future income, then you will have less income in future. Therefore,

If you get into credit card debt,

you MUST increase your Future Income

IMMEDIATELY !!

So other than paying it up, these are the potential solutions too :

1. Dispose the item to reduce debt if appropriate

2. Get a Pay Raise ( if the credit card debt is initially to increase the chance of this, then its a good call isn't it ? )

3. work 2 or multiple jobs

4. Become creative and innovative to earn more ...

In short, don't forget Income is the ENTRY stage into Finance Planning. When all else IN your finance plan can't earn you the 15% to cover up the 18% credit card charges, then you will have to RETURN to your Income and work on IT !!

Like wise if you are one of those who can never increase income, then you should very well know what to do with your scissors and credit cards. And come borrow money from me please, you may as well be my finance slave than others ... isn't it ? :)

Car Loan vs House Loan interest rate

This may be a little bit too technical for some but definitely useful for those who really care about their money and has something to do with or going to have car loan.

In Malaysia, vehicle loan rate is calculated flat, forward sum to the future.  For example,

You borrow RM 100,000 vehicle loan for 7 years at 3%.  Your total repayment for the whole period is 100,000 x ( 1 +  7 x 0.03 ) = RM 121,000.  There are 84 months in 7 years, so every month you have to pay 121,000 / 8 = RM 1,440

Don't get confuse with this 3% car loan rate with the Fix Deposit rate, or BLR or House Loan interest rate.  Because the calculation method is different, they are not comparable to each other.

In short, in order to compare your car loan interest rate to your house loan rate, you need to convert the car loan rate into a compound rate.

Table below is a reference for such conversion.

For example, the highlighted in yelow says that.  If your Car Loan interest rate is 3% and you are taking a 3 years loan, then it is equivalent to 5.68% house loan interest rate.

My rule of thumb on this topic is :  Simply multiply car loan rate by 1.9 to convert them into a house loan interest rate.

Have fun continue to be puzzled and confused by above table ..  have a great weekend !!

The above table and figures are one of the TOP SECRET in personal finance that even most 
Bankers don't have, not to mention your financial planner, insurance or mutual fund agent.  But if they do, please let me know ...

The Biggest Killer in Malaysia Personal Finance Planning

I did start this blog with Malaysia in mind.  All previous postings are general in concepts and may apply everywhere.  Now let's look at specific challenge in Malaysia.

Remember that the inflation I care about is MY OWN INFLATION, not any numbers released by goverment nor bank nor any other expert.  ( read last post )

So let's talk about CAR ... one of my daily routine item ...

I bought a 2nd hand car in 1995 for $10,000 and eventually scrap it in 2005.  

So $10,000 divided by 10 years of usage is about $1000 a year.  

Divide it further by 365 days is roughly $3 a day.

That means I had been paying $3 a day for that car.

Then I bought a Wira in 1998 for $55,000 and today its worths about $15,000.

Following similar calculation, I have been paying $11 every day for this car.

So I used to pay $3 for my vehicle back in 1995,

Now I have to pay $11 for the same in 2008.

This alone is more than 10% compounded infation !!

I haven't mentioned I bought a Hyundai for $90,000 in 2003 and now its worth about $20,000.  That is more than $38 / day !!

Ok ... some of you could be smart enough to see the flaw in above calculation.  I am still using my Wira and Hyundai.  So as time goes, the average cost of ownership should go lower.  It is TRUE BUT don't forget the car resale value also becomes lower as time goes.  So give and take, its still not much difference.

I haven't included car loan in above calculation.  The actual total price I paid is more than $68,000 and $110,000 for Wira and Hyundai respectively.

For every car you buy in Malaysia, you pay more than Double the car's value. That means at the moment you buy an imported new car, you lost half of your money instantly !

This is due to various ways how goverment increases the car price in the name of protecting national own pride, make of our own cars.  I was in Total Support IN THE BEGINNING !  And that was more than 20 years ago ...

Right or Wrong put aside.  Buying car in Malaysia is the #1 killer in Personal Finance Planning.  No matter how little your income is, if you do NOT own a car, you probably can still have a great solid finance ground.  And no matter how rich you are, the cars you own are burning big holes in your pocket, an easily 10%-30% depreciation rate.

Lastly, if owning car is a MUST like me, think of it as paying for the experience.  So the next time you get in your own car, be happy ... because you are getting more out of what you already paid.  Else you lost both your money and the enjoyment.  Drive Safely ... and Happily !!

How to Buy Car in Malaysia ( personal finance point of view )

1.  Try your best to buy car with CASH only

2.  Get the loan with the Smallest Amount and Shortest Time possible

3.  If possible, go for limited edition super famous car.  That way, it may become a capital that may appreciate.