Low Interest Rate Environment: Buy Buy Buy?

The chart above shows Overnight Policy Rate (OPR) of Malaysia since it was set in year 2004.

Current OPR of 1.75% is at its historical low.

As Malaysia's economy is expected to recover from this year onwards, Bank Negara has decided against lowering the OPR further last week.

I'm not an economy expert but I think 1.75% will be the lowest we can get from this pandemic-induced global recession.

I'll be very happy if the OPR can drop to 1.5% though.

What happened when Malaysia's interest rate dropped in such fashion last time?

Better Late Than Never

I feel fortunate to realize the importance of financial planning just before I started working.

As we all know, schools do not teach us financial planning, be it in secondary schools, colleges or universities.

My parent did not teach me about it either and we definitely did not talk about it among friends during our school days.

I knew about it after reading a book regarding financial planning while waiting to start my working career.

When you know about it and start to practice it, it doesn't mean that you are already good at it or you can do it in a right way.

It takes time to understand and perfect the art of financial planning.

Should You Invest In Unit Trust?

After I started my working life, my first investment was unit trust.

Unit trust or mutual fund is a pool of money collected from individual investors and managed by fund managers, who invest the fund in various investment vehicles either locally or/and abroad.

I didn't have any idea regarding financial planning and investment until I graduated from university in 2004.

While waiting for employment, I read a book "Financial Freedom" published by Public Mutual (formerly KL Mutual) and there was no surprise that I bought unit trust first.

There was also no surprise that my first unit trust was bought from Public Mutual.

Can RM13,000 A Month Make You Rich?

Just imagine that your household earn RM13,000 per month. You are in the median of T20 group. Perhaps to some people, this is nothing to shout about but at this level, you already earn more than 90% of the households in Malaysia.

		Household Income per month (RM)
		Range	Mean	Median
	B40	<4360	2848	3000
	M40	4360 – 9619	6502	6275
	T20	>9619	16088	13148

You are now 36 years old. You are married and have 2 young children, a 6 years old son and a 3 years old daughter. Your wife is a full-time housewife and you alone take home RM13,000 after tax income every month.

You must be a top person and leader in your company!

Being top 10% in the country, can you imagine the lifestyle you will enjoy in this scenario? 

What kind of house will you live in? 

How tasteful your house will be renovated?

What car will you drive?

What smartphone will you buy?

What brands will you wear from top to bottom?

Where will you dine often?

Let's say you just wish to lead a moderate lifestyle. You don't need a million dollar house and luxury cars.

With such a good income, you will buy a house for yourself. It is everyone's dream and you definitely can afford one.

You need a safe living environment. You choose either a gated & guarded landed house or a condominium. 

In certain areas such as Klang Valley and Penang island, a landed property will cost you close to a million Ringgit if not more. However, you just want to spend RM600k the most.

So, it's either a high-rise unit in hot property area, or a landed house in a not-so-hot area.

You decide to purchase a RM600k "luxury" 1200 sq.ft condominium in a decent location. You take a 35-year RM540k loan with 4.25% interest rate. You just need to pay RM2500 installment per month.

Besides, you have to pay maintenance fee every month, as well as fire insurance, assessment tax & quit rent every year. This might add up to be RM350 every month.

You need 2 cars, one for yourself and one for your wife. Let's say you are lucky because your parent has gifted you an 8-year-old Toyota Vios. You give it to your wife and you have to buy a new one.

With RM13,000 take home pay a month, which car will you choose?

OK. You realize that car depreciates with time. You don't want to spend too much on it. It sounds brilliant.

However, remember that you are a top person in your work place. You don't wish to drive a Proton or Perodua. 

At last you buy a RM130k C-segment Honda Civic. Not luxury but not bad.

You take a maximum 9-year car loan and pay RM1400 per month.

You still need to take care of those 2 cars. For your new Civic, annual insurance premium is around RM2800. Let's say you move the Vios NCD to this Civic, and end up paying just RM2400 car insurance for 2 cars in a year. It's average RM200 per month.

Your cars need routine maintenance and service. You are not going to use a non-synthetic engine oil for your new Civic for sure, but you just choose a semi-synthetic oil in order to save some money.

Let's say you spend an average maintenance and repair cost of RM1200 & RM600 a year for your Civic & Vios respectively. The average is RM150 per month.

This includes any repair cost especially on the out-of-warranty Vios. A car battery cost above RM200 and need to be changed every 1-2 years. Any spare parts replaced can cost between hundreds to thousands ringgit. 

Tyre service (balancing & alignment) cost you about RM40 each time and you do it 2 times a year for each car. It's RM160 a year.

By right every 2-3 years your car's 4 tyres need to be replaced. One piece of your Civic's R17 tyre might cost you around RM500. Cheaper ones are between RM300-400 per piece. Your Vios's R15 tyres might be around RM200-300 per piece. 

So, let's assume you spend an average of RM1200 a year or RM100 a month just on tyres.

You pump only RON95 petrol, and both cars consume RM300 petrol a month. You need to pay road tax, toll, parking fee and sometimes car wash fee. Let's give a moderate amount of RM100 a month for all.

Where will you eat if you earn RM13k per month?

Let's say you and your wife spend RM30 per person per day for breakfast, lunch, tea, dinner, supper all combined. 

This should be a moderate amount as sometimes a cup of Starbucks coffee, bubble tea cost you more than RM10. A meal of Western food, Japanese food, Thai food, Nyonya food, Chinese restaurant will easily cost RM30 per person per meal. 

Your two kids need to eat too. Sometimes baby food is more expensive. You might buy good quality organic stuff for them!

Just to be moderate, you spend ONLY RM10 for each of them each day. 

So, your food bill will be an average of RM80 per day, or RM2400 per month.

You might spend less if you cook at home. However, with the level of income, you tend to get more expensive rice, meat, fish, prawn, sauces etc. The cost of cooking one meal for 4 might not be less than RM20.

You need to buy groceries & consumable household items such as milk, cereals, Milo, cheese, bread, biscuits, chocolates, jam, ice cream, sauces, cooking oil, detergent, diapers, shampoo, toilet papers etc.

You are not going to get a Tesco brand or some never-heard-of brands for sure. You are going for more branded & better quality things.

Lets say you spend RM500 a month for those things. This is a conservative assumption. Don't forget that you have 2 kids who are still taking formula milk and one is wearing diapers everyday.

You buy clothes only once a year for new year. One working shirt RM60, two T-shirts RM70, one long pants RM80, shorts RM40, two pair of shoes RM150 (either slippers, sandals, leather shoes, sports shoes).

Your wife buy one dress RM80, two T-shirts RM70, a skirt RM60, shorts RM40, two pair of shoes RM150 per year.

Kids' clothing are not cheap, sometimes they are more expensive than adults'. They grow up fast and will need to change the size frequently.

Anyway, you only spend RM200 per child per year. This makes total spending on clothing to be RM1200 per year, or average RM100 per month.

Is this budget enough to spend in Uniqlo? I doubt so.

This does not even include things like belts, ties, handbags, wallets, socks, underwear, inner wear, sportswear etc.

Every adults must have a smartphone with data. You subscribe to Maxis postpaid RM98 with a share line RM48. 

You also need a home WiFi for your computer and smart TV etc. You only get the slowest Maxis 30Mbps for RM89 per month. RM235 is paid to Maxis every month.

You have to pay utility bills such as Electricity, water & sewerage. Lets assume all of them added up at RM250 per month. 

If you have RM13k per month, would you subscribe to Astro, Netflix or Spotify? Would you subscribe to magazines, newspaper, online news portal or your favourite football clubs? Would you consider to become a member of gyms or recreational clubs?

I bet you will put your money into some of these things, perhaps RM100 for Astro and RM100 for others per month. So the money spent for entertainment and subscription membership is RM200 per month.

At some point you and your family members can get sick and need to see a doctor. You yourself might not want to see a doctor even though you are half dead, but you will bring your kids to see a specialist even with a slightest of cough. 

Each visit to a clinic might cost you around RM50-100. Even if you won't get sick frequently, you might be taking some health products or supplement, and buy some over the counter medicines from pharmacies. 

Good health products are not cheap. With your income, you surely think that you can afford better products. You and your family members may take multivitamins, omega 3, probiotics, B complex, liver tonics, fibers, essential oils, traditional herbs, whey protein, slimming products etc.

You and your wife might go for annual medical check up. Basic blood test is around RM100-200 per person, while more advanced and thorough health-related tests such as ultrasound, X-ray, CT scan, Treadmill stress test etc might cost RM1000-2000 per person!

As such, it is possible to spend an average of RM500 a month on 4 persons' health, including seeing a doctor, using health products and doing health check.

You have to pray hard that you and your wife will not have those chronic diseases such as hypertension, diabetes mellitus, high cholesterol etc which require daily medication.

You must have life and medical insurance for sure. As you are the sole bread winner and earn big, you have to have higher life insurance coverage to protect your spouse and children. 

Assume that you pay monthly premium of RM600 for your own insurance. I think most insurance agents will see this amount as under-insured. Your wife and two children are mainly insured for medical needs which might cost RM400 + 200 + 200 per month. 

Altogether you pay RM1400 per month for life & medical insurance.

Your 6 years old kid will go to kindergarten, which easily cost RM600 a month nowadays. If you need a more special one, be ready to fork out RM800-RM1000 a month.

Never mind, you want to save and just choose the RM600 one. Your 3 years old daughter can go to nursery as well, but you prefer your wife to look after her first so that you can save RM600 of nursery fee per month.

Luckily your wife is willing to take care of your daughter, and doesn't need a maid. If she is sent to a caretaker, it will cost another bomb.

Most parents want their children to excel and learn some special skills such as piano, violin, ballet, swimming, badminton, tennis, taekwondo, drawing, singing, English language etc.

Your children might be sent to learn something which withdraw another RM200 from your pocket a month. 

You have to give some pocket money to your parent, since you're not staying together. RM500 a month to your parent is not a problem for you.

Despite already having most furniture and electrical appliances in your house when you move in, you still need to add or replace something year after year.

You might get a new or replace or upgrade a desktop computer, laptop, laser printer & ink, smartphone, vacuum cleaner, iRobot, smart TV, speakers, washing machine, airconds, air fryer, bread maker, oven, sofa, mattress, pillows, wardrobes and other home appliances.

Your airconds need to be serviced every year for RM100 each unit as well.

If you ONLY spend an average RM2400 on those items a year, it's RM200 per month. 

Buying a computer or smartphone might already cost some people more than RM3000. 

Of course it is a must to have water filter in your house. You earn so much and wish to have a nice all-in-one water filter with cold & hot water dispenser at home. Such water filter system in your kitchen might cost you more than RM60 per month.

You must have another filter at the point of entry as well. Either you buy in lump sum and replace at interval, or pay monthly fees, it can be around RM40 per month.

Water filters alone can cost you RM100 per month.

If you don't travel overseas, who else will? However, you wish to save more so you decide not to go as far as Europe or other Western countries which can easily cost RM10k per person.

You set aside a budget of RM6000 per year for holiday. It means a travel to South East Asian countries for two persons. The kids are being left to someone else to take care of. You have to save RM500 a month for this travel plan.

There are lots of other expenses such as money you give away while attending a wedding or funeral, compounds or summons, hairdressing, hobby (playing badminton can easily cost you more than RM50 a month), watching movies in cinema, buying toys for kids, bicycles, books, house cleaning service, house repair or minor renovation, care for your pet and the list goes on... For eg:

Jan: Buy a few investment books RM100

Feb: Your wife goes for hairdressing RM100

Mac: You buy toys for kids RM100

Apr: Tomb-sweeping fee RM100

May: Call a plumber RM100

Jun: Attend a relative's funeral RM100

Jul: Call house cleaning service for a day RM100

Aug: Make a donation to charity RM100

Sep: You knock on somebody's car and settle with RM100

Oct: Your son's piano performance fee RM100

Nov: Attend a friend's wedding dinner RM100

Dec: Christmas gifts for children & wife RM100

Looking at the list above, we know that it is almost impossible to spend an average RM100 a month for those special expenses. 

By the way, you are lucky and somehow manage to spend just RM100 a month.

Altogether, in this scenario, do you and your family lead a good life? Definitely Yes, although with some limitation here and there.

You have your RM600k condominium, a Civic and a Vios. You use higher end smartphone, have a above average computer and all kinds of branded electrical appliances at home. You have enough phone data and WiFi at home. Your kids attend decent kindergarten and are able to learn some skills. Your family members take quality health supplement and do annual health check. You can travel to South East Asia once a year.

Do you live a luxury lifestyle? Definitely No.

You don't have a BMW or Mercedes or Vellfire, not even a Honda Accord. You don't have an over a million Ringgit property. You don't have membership of golf club or other upper class recreational clubs. You don't have a maid. You can't have luxury watches & jewelries. Your kids are not in international school. You don't have the budget to travel to places further from Asia more than once in a year. 

Are you considered "RICH" then?

It depends on how you define "rich". For me, it's about the NET assets you own in long term, and how much you can save in short term.

Driving a BMW 5 series doesn't necessarily mean that someone is rich.

In the scenario above, have you calculated how much you spend a month? 

	Monthly Expenses	RM
	Property loan	2500
	Maintenance fees	350
	Car loan	1400
	Cars related expenses	850
	Food & dining	2400
	Groceries & Consumables	500
	Clothes	100
	Telecommunication	235
	Utility fees	250
	Entertainment	200
	Health	500
	Life & medical insurance	1400
	Children education & tuition	800
	Parent	500
	Household items	200
	Water filters	100
	Travel	500
	Others	100
	Total	12885

The total expenditure is RM12,885 a month!

You take home RM13,000 and spend RM12,885 a month. So, you save only RM115 a month.

Can saving RM115 a month enough for educational fund of your two children, buying an investment property or investing meaningfully in stock market?

It is not even enough to buy cigarettes if you do smoke.

How many assets do you have? The house belongs to the bank, and you may end up paying RM1.2mil for your RM600k house. It doesn't generate any income and you probably need to refinance it later to fund your children's education. 

Your cars are worse, which keep on burning your cash.

Finally, can you achieve early financial freedom and retirement? It's almost impossible even with good income and EPF money.

Most people might see you as successful and enjoying a good life. It's true that you are enjoying life even though not an extravagant lifestyle. 

Nevertheless, you are definitely not RICH. 

You are a middle class that pay the most tax but get zero financial aids from the government.

Are You B40, M40 or T20?

Department of Statistics did a survey on Malaysia household income in 2016. It shows the income level of B40, M40 & T20 groups in Malaysia.

B40 = Bottom 40%

M40 = Middle 40% (what we refer as middle class)

T20 = Top 20% 

Household income means combined incomes of husband & wife if both are working, and I suppose it is take-home income (after income tax).

		Household Income per month (RM)
		Range	Mean	Median
	B 40	<4360	2848	3000
	M 40	4360 – 9619	6502	6275
	T 20	>9619	16088	13148

According to the statistic, if both of your wife and yourself earn a combined income of RM5000 per month, you are classified as "middle class". 

Wow, it sounds great to be a middle class right? However, can RM5000 a month give you a middle class lifestyle especially if you have children?

These are 2016 figures, which are 4 years ago. I'm sure that in general, our income level has increased whereby RM5000 household income might be categorized as B40 now. 

The numbers below compare household income level of 2016 (in blue) and 2014 (in orange). The mean household income of M40 has increased RM840 from RM5662 to RM6502  in two years time.

But, please don't forget that inflation has caused the cost of living to increase throughout the years as well. 

So, our quality of life might not change much even though our income increase, as we also spend more at the same time.

If your household income is RM13,000, you are at the median level of the top 20% which means only 10% of Malaysian households earn more than your household.

Then you must be rich. If not you, who are those people who stay in million dollar houses and drive Mercedes, BMW, Lexus and other luxury cars? 

Is RM13,000 a month really considered "rich"? Well, I'll discuss this later.

Which group are you in, B40, M40 or T20? 

How's Your Business Acumen?

"Buying shares in a company is like doing the business with the company". This is what I try to practice in stock market investment in the last 2-3 years.

Any business needs time to bear fruits, so I believe that I need to hold for longer term.

Even though I have rather good "results" from speculating in stock market in the past, I have told myself not to do this again, as advised by Buffett & Cold Eye.

I think I will make money rather than lose money if I continue to speculate in the last 2 years while the stock market is in its uptrend, because most of the stocks that I'm keen to speculate on went up in share price.

Nevertheless, I manage to resist myself from speculating, even though there are a few occasions which I nearly do so.

If I continue to speculate in the past 2 years, may be I will earn less by owning less shares in Latitude, or may be I will earn more by selling Tambun earlier above RM2.40 to take more cash. So it's hard to know whether I'm better off by not speculating in stock market.

It seems like it's easy to earn money in stock market. You just need to follow the theme.

What are the hot stocks at the moment? Technology, furniture, poultry, export-orientated etc. If you have your portfolio laden with these stocks, then you are surely doing extremely well.

Are you going to invest in property, oil & gas, plantation, finance etc at this time? It doesn't mean that you will certainly lose money in these stocks. They just need more time and patience perhaps. Remember being a "contrarian" as advised by Buffett & Cold Eye?

To be successful in stock market investment, apart from luck and homework, I think that business acumen or foresight is very important.

Investment in a stock is exactly investing in the company's business. Thus we normally consider a company's:

• past records (how was the performance of its business & management team)
• future prospect (the demand of its products or services in the future)
• stock price (is it worth to pay that kind of price to be part of the business)

To check a company's past record and to determine its value are not that hard actually. The most difficult and important thing is to predict the company's future prospect.

Most famous and successful investors certainly have this either "gifted" or "acquired" business "sixth sense" or acumen. They will see the business opportunity earlier that other people.

When I first started investing in stock market, past financial records are the most important thing to me. I believe that if the company is doing well in the past, it should have a good enough management team to do well in the future.

As I gain more exposure to stock market, I find that future prospect is the most critical aspect which can "overwrite" past record and stock price (current value).

If you follow this blog long enough, you should have known that I have "Four Heavenly King" that made me lost a lot of money.

Just look at KNM's revenue and net profit from 2003 to 2008. Isn't the past records magnificent? It has billions worth of contracts on hand as well!

I didn't look too much into its balance sheet, cash flow or general market sentiment. I bought its shares just before its revenue and profit fell. So I got trapped.

The others are Notion & Masterskill which produced great earning reports too before they collapse. 

Notion was doing fine until the emergence of tablets and smartphones which seriously eroded the demand of its hard disc drive and camera parts. If my business foresight was good enough, then I would not put my money into it.

The old MEGB's management was not good enough I think. They was slow to react when PTPTN loan was reduced and nursing course requirement was raised. Why was it suffering while its direct competitor Mahsa seems to do so well?

It's hard to explain why I didn't add stocks like Hevea, Homeritz, Pohuat, Mitra, Prolexus, Magni, Teoseng, LTKM, VS, Vitrox, MPI, Unisem etc into my portfolio, even though they are under my radar and I know these are good stocks with good potential.

Instead, I chose to buy stocks like HHGroup and Johotin which are not following the "theme play" at all.

Perhaps I have a tendency inside me to buy stocks which are not "hot" and are relatively unknown.

When I started to invest in Inari, Latitude and Tambun which are my best investment so far, they are all relatively unknown.

Anyway, business acumen is very important, but I don't mean that I possess good business sense. I still made a lot of bad decision until today.

Bad decision does not only mean buying the wrong stocks, but also missing the good opportunity.

Many of us do not grow up in an environment that gives us this skill. So, no choice, we have to read more, try more, and fail more in order to make more correct decision.

Emotions In Stock Market Investment

I came across a short article from yiyezhifu regarding some kind of emotion in investment. I find it quite interesting. If you can't read Chinese, here is the point:

• In investment, the hardest thing to swallow is not losing money, but seeing other people earning more than you.

Your investment portfolio may have generated handsome return, perhaps achieving your target. However, when you browse the investment blogs and find out that there are other people doing better than you, you become unhappy & think that you don't do well enough.

You do a thorough study on a stock and decide to invest in it. This stock performs well and you make a good paper gain. Then you see someone recommends a stock in his/her blog and everyone rushes to buy except you, and that stock gains more than yours in a short period of time. You feel emotionally "imbalance" and frustrated, as those people who do not do their homework seem to be more successful than you.

These feelings may affect you negatively, even though in fact, you have done well and are on the right track.

So why do you need to compare with others?

There are lots of emotion in stock market trading, happy, sad, excited, angry, regretful, frustrated, greedy, fearful, anxious, depressed etc. I guess every investors will experience all these at certain stage.

For most people, when their shares go up, they will be happy & greedy. When their shares go down, they will be sad, anxious & fearful.

However, some people might also feel sad when their shares go up, because they think they don't buy enough!

You hear from a friend that stock X is a good buy. You decide to put your hard-earned money into it.

After you buy stock X, its share price move sideways for months. You feel frustrated and sad, especially when you see other stocks soar in price. 

After a while, you are used to it and claim that you are lucky because you don't put too much money into this lousy stock X. You decide not to invest further in stock X and just let it rot by shifting your radar to other stocks.

Soon after that, share price of stock X fell drastically. You feel anxious & fearful as you lose money. You are reluctant to sell because you don't want to make loss. Your mood is down, you can't concentrate on your work and suffer a few sleepless nights.

Weeks later, stock X makes a recovery in share price to your entry level. You feel optimistic and lucky that you don't sell earlier at a loss. However, you are fearful to put more money in. You plan to sell as soon as there is net paper gain.

After this, stock X suddenly jumps in share price. You make 20% paper gain in a week. You are excited but you don't feel too happy because you think that you don't put enough money into it. You regret that you don't pick up more shares especially when stock X is trading at a low.

You make good paper gain and is supposed to sell for profit. However, greed takes over and you think you should not sell this time as it can go higher. You then buy more shares of stock X as it goes further up.

Unfortunately, stock X retreats and your paper profit shrinks from 50% to 20%. You feel frustrated and regret again. Why don't I sell for a 50% gain? You earn less and are not happy with it. So you decide to hold or even buy more to average down, hoping stock X will rebound to its previous high again.

It turns out that stock X's share price falls further. You see your gain wiped out and turns into paper loss. You go mad as a 50% profit turns to a loss. You are angry, you have bad mood all day long and eventually become depressed.

So you decide to let it rot again, and again and again.

What actually do you want???

I think it is not easy to keep our emotion in check while investing in share market. It takes a lot of time and experience.

The best way to minimize this emotional risk is to buy fundamentally strong stocks, have a clear plan no matter it is for short term or long term, and be disciplined enough in executing the plan.

While it is good to compare our performance with others to see how well we have done, we should not take it too seriously. 

In everything that we do, there are always someone who will do better than us. Besides, there are also many others who perform poorer or are less fortunate than us.

Anyway, it is always easier said than done.

Net Worth: Individual or Household "Balance Sheet"

To achieve financial freedom, we need to know how much money we must have at the time of retirement.

But first, we need to have an idea of how much money we have at the moment, so that we can calculate from there how much money we need to save & how much return our investment should bring.

So it's important to figure our our current net worth, which is total assets - total liabilities.

I have started to record my monthly net worth and cash flow since 2009. The net worth chart is very useful to me as it shows the up & down of my financial position which gives me a clue on how to improve it.

I regret that I didn't do this since the first day I started to work. However, it's never too late to start.

Previously I only recorded liquid assets and liabilities, but recently I have added in illiquid component as well.

Below are the examples of components of net worth.

Liquid Assets		Fixed Assets
Cash		Property
Bank Savings		Vehicle
Unit Trust		EPF Savings
Shares		PRS/Savings Plan
Other ST Investment		Valuables
		Insurance SV
Current Liabilities		Non Current Liabilities
Credit Card Debts		Property Loan
Personal Loan		Vehicle Loan
Other ST Debts

ST = Short Term

SV = Surrender Value

PRS = Private Retirement Scheme

The popularity of internet banking has made the retrieval of banking information easy. At any point of time, we can check our bank savings balance, unit trust/shares value, EPF, credit card debts, personal / property / hire purchase loan outstanding etc online.

For property value, we can check from property agents/lawyers regarding recent transaction price, or get a rough estimates from new launches of similar type of property in the proximity, or check the asking price of properties from internet.

Vehicle value is easier to get from online marketplace or from the most recent vehicle insurance card.

I will check these numbers on the last day of each month but I don't include insurance surrender value in my net worth.

By subtracting total liabilities from total assets, we can get our net worth. If the net worth is negative persistently, then it indicates poor financial health.

Only when we know our net worth then we can realize how much we need to do to achieve financial freedom - should we save more or put more money in higher-risk investment vehicles?

We can allocate our assets to lower or higher risk investment accordingly to have a sensible chance to achieve our financial goals.

I will continue to compile my liquid net worth monthly like usual, and only include the illiquid part quarterly (every 3 months).

The line chart above shows my liquid net worth (liquid assets - current liabilities) for the past 5 years since July 2009.

We always say that in order to achieve financial freedom, we need to put our money in investment that generates x% of return annually for n years.

So basically we expect our net worth to increase with time towards our financial target.

However, in real life, this might not be the case as sometimes we might spend more than we earn and see our net worth falling even though our investment return is on target.

For my case, my liquid net worth was trending down from 2009 to 2011. Basically it was due to high expenditure and so-so stock market investment result.

The expenditure is mainly due to property & car purchase. Anyway, I treat property purchase as "capex".

In the end of year 2012, my net worth fell quite substantially because of house renovation. If not because of this, I will have more cash to put into stock market...

From mid 2013, I started to change the style of stock market investment and the outcome so far is good. Furthermore, my "capex" in 2009-2011 has started to yield some result since 2014.

Anyway, my current net worth level is still very far away from my retirement figures.

I think everyone should record their household cash flow & net worth every month, as it can make us more disciplined in our financial planning.

Good Debts Bad Debts

In term of investment, I think I am more like a high-risk taker.

You may not agree with me as looking at my stock investment portfolio and transaction, you can hardly see spectacular punting and call warrants.

But, my cash ratio is close to zero. I'm throwing everything into it.

Because of the aggressive investment since year 2009, I am debt-ridden at the moment.

At any point of time, I have approximately 10 groups of debts which include credit card, property, car, personal & family loan.

Financial adviser will definitely advise us to restrict our monthly committed loan repayment to not more than 50% of our monthly net income. Ideally it should be less than 30%.

However, for my property & car loans combined, I have already exceeded 50% to quite a great extent. If including other smaller debts from credit cards & personal loans, I almost use up all of my monthly take-home pay.

If there are special big sum expenses in a month, my cash flow will be negative and I need to sell shares or unit trusts.

Currently Malaysian are talking about the high possibility of interest rate hike after Bank Negara's next meeting in 10th of July 2014. 

It is widely believed that BNM will act now by increasing the OPR (Overnight Policy Rate) by 25 points. This means that the OPR will increase from current level of 3.0% (since May 2011) to 3.25%. It is possible that the rate may rise further to 3.5% at the end of 2014.

Thus, BLR (Base Lending Rate) may also increase from current 6.60% to 6.85%, though BLR will be replaced by a new system later.

This is no good news for me because this means that the interest of my property loans will increase as well. It is said that a 0.25% increase in BLR will result in 7% extra interest repayment for a house loan of RM500,000 with 30 years tenure.

I bought my first property in year 2009 and after that there were a few upward adjustment in BLR. However, I can't really feel the difference may be the property was still in construction stage. 

I am not too sure how will the BLR hike affect me this time. Seems like it is still manageable, and hopefully so.

Loans with fixed interest rate like hire purchase and personal loan will not be affected though.

For those with low debts or without debts, then they will be least affected at the moment and can enjoy higher savings and fixed deposit interest rate.

However, if they wish to get any loan in the future, they have to face the higher interest rate as well.

    

Actually I don't think my debts are bad debts, so I'm not too worry.

First, my credit cards debts are only short term as I will settle the bills each month.

For property loans, I am actually glad to have bought them early without much hesitation as I will not be able to buy them now. They are for own occupation and investment purpose.

For car loan, I have actually saved quite a lot as I decided to give a miss to my "dream car" that costs RM120k and went for a cheaper alternative that costs RM80k. I need a more reliable car as I travel quite a lot on the road.

I have a few personal loans. One of them is for buying shares. I didn't use margin account as I still don't understand it completely and I am not comfortable with it as well. This personal loan interest is 5.9% per annum for 12 months and I am glad that I put most of it into Inari.

Another personal loan with interest rate 7.9% is for full settlement of my wife's PTPTN loan. My wife's PTPTN loan has been dragged for more than 10 years. Previously repayment was made sporadically but it ends up that she still owed more than RM12,000. As there was a 20% rebate for full settlement last year, I took the opportunity to remove this never-ending thorn from my household balance sheet.

Do I manage my money correctly? I'm not sure. Everything looks fine at the moment mainly because our economy and stock market are sailing nicely since 2009.

Starting from now, I think I should seriously build up my cash reserve.

Be Moderate In Saving

There are some people who earn good money, invest the money wisely and become rich. Throughout their life, they try to maximize their wealth by saving and investing continuously.

Some of them don't treat themselves very nicely. They drive old car, stay in an old house & wear old clothes & old shoes. They don't travel too much, they rarely dine in expensive restaurants and they don't have any luxury personal items, even though they are actually millionaires that little people know.

When this type of people die, very often other people will say: "See, what for having so much money but never spend them to enjoy life? We should spend what we have, as we never know how long we can live."

What is the definition of "enjoy life"? 

Actually those people are actually enjoying their life by doing what they like the most - accumulating wealth. They may feel very happy to see their net worth rising year after year. If they spend too much of their money, they will feel bad.

So when this type of people die, there is no need to feel sorry for them just because they don't have a chance to spend their money.

Every person is different. Some people want fame, some don't. Some people like to travel, some don't. Some people like sports car, some don't. Some people like branded handbags, some don't.

Nevertheless, if you are the type of person who like to accumulate wealth like the example above, it is advisable to do it in a moderate way. Again, moderate is the key.

If you are keeping your money too tight, then it is called stingy, selfish or "kiam siap". 

I have seen and heard people doing a lot of tricks or making up all sorts of stories & excuses just to save a few ringgits.

Besides, if you are in charge of household finance, you have to take care of other people around you especially your own family members.

While you don't want to spend money on travelling which you don't like, your spouse may love travelling. You may want to go to cheap hawker centers every time when eating outside, but your spouse may need some romance while dining once in a while.

So, sometimes you have to spend in a way to make people around you happy.

Or better still, if you can, find a spouse that shares the same spending habit with you.

How Much Education Fund To Save For Children?

In financial planning, children's education fund is an important part of it unless you don't wish to have a child, or do not have a child for some reasons.

This education fund is for their tertiary education (pre-U & university/college) when they graduate from secondary schools.

How much should parent save for their children education funds? Is it RM50k, RM200k or RM500k?

Of course this depends very much on which courses and where the children want to study.

Here are some info from StudyMalaysia regarding average tertiary education cost in Malaysia's private colleges & universities.

       Pre-U studies in private education institution

       Bachelor's Degree (Undergraduate) in local private Uni

       Bachelor's Degree in foreign Uni branch

       3+0 in local private college/Uni

       Twinning Degree

       MBA in Public Uni

       Comparison of tuition fee & cost of living

To estimate the tuition fee, I think it is unwise to take the average value as there is 50% chance that the fund may not be enough to a great extent. However, it is also not practical to assume that our children will want to study medicine.

So for me, I will estimate the current pre-U tuition fee at RM25k and degree tuition fee at RM90k. However, there will be some other miscellaneous fees besides tuition fee. I'm not sure how much is it but I'll put in extra RM20k.

It is likely that the child will need extra living expenses as they will stay away from their parent during the study. They need accommodation, food, transport etc. If monthly cost of living for them is RM1000, then 5 years will be RM60k.

The total cost will be RM195k. If we follow the total cost of RM35k per year for Malaysia in the last table above, it will be RM175k for 5 years including pre-U. So it is quite close to my calculation.

Don't forget about inflation as well. How much are the tuition fee and cost of living 10-15 years later? 

I predict that more foreign universities will set up their branch campuses in Malaysia in the future. So this means more competition and hopefully the tuition fee won't increase too much.

     University of Nottingham Malaysia campus

As for cost of living, it will certainly increase at about 3% rate per year. I'll take 30% increase in overall cost in 10 years time.

So the overall cost of tertiary education + cost of living will be RM195k x 130% = RM250k for one child.

If you only have 10 years to prepare for RM250k, you need to save RM1200 a month in an investment that pays consistent 10% return annually, which is not easy at all.

If you plan early even before you have a child, you can save RM600 a month in an investment that makes 5% return annually for 20 years to generate RM250k, which is much easier to achieve.

If your child wants to study abroad, then you are expected to pay much more than that.

If you have more than one child, then there will be more headache...

If you have many children and all of them want to study abroad, then you better pray for scholarships or work til you die, unless you earn big bucks.