PRACTICAL FINANCIAL ADVICE

PRACTICAL FINANCIAL ADVICE

These days, we so often have calls from the bank offering personal loans and attractive credit card balance transfers. Retailers are quick to offer payment by installment for goods over 12 months. There is very heavy pressure on the consumer to buy, to borrow money, to spend more than they have. Many, many people fall into this Debt Trap, and end up paying thousands in interest. Credit Card debt has caused many, many bankrupts in the last decades and so many of these are young professionals.

Another common occurrence is that people who withdraw their savings from EPF quickly finds that it disappears very quickly, and they do not quite have enough for retirement. For most people, upon receiving a huge chunk of money, they would immediately buy a new car or renovate their house. In accounting terms, both are spending on assets, yes, but do they really add value to your overall financial position. Cars depreciate very quickly, from the day you drive off and incur lots of maintenance expenditure. One gets no income at all unless they are willing to rent it out, or turns it into a taxi. Renovating the house adds a certain amount of value to the home, but usually not the full cost. For instance, a RM50,000 renovation may only add market value of RM30,000. Hence, it is little wonder that money is so easily frittered away with little return, if any.

Authors like Robert Kiyosaki have done a world of good by writing to educate the general public on better financial understanding. For him, the only assets that are true assets are assets that put money in your pocket. Everything else are liabilities, because they take money out of your pocket.

What are common assets that put money in our pocket? Properties that we rent out. Shares that pay dividends. Bonds. Interest Bearing Fixed Deposits and of course our Skills and Knowledge. What does not put money in our pocket? The house that we stay in ourselves. All cars and vehicles. Hifi Systems, Big LCD TVs, Handphones, Iphones, Ipads and other expensive gadgets. Yet where does our money commonly go? Naturally, to the latter, which fulfill our immediate wants and cravings but do not help our long term future at all.

The correct financial plan for us is therefore to delay immediate gratification, but channel our excess funds to income-generating assets.

Of these classes, the most important one is property. It is said that the rich either make their money through property or hold their money in property. Property has proven to be an excellent hedge against inflation, and tends to appreciate significantly over time. However, not all property appreciates, but a lot depends on location, access, supply and demand. Hence, it is important for us to educate ourselves further in this area before making any investment. In general, a property will appreciate if the area grows in population, with businesses continuing to thrive in that area. Visibility and access is also very important. There is a common fear in regard to property is that they cost so much, and one has to borrow so much, and it is a genuine concern. However, the principle is that we are to rent and let the rental cover the installments. Before any property investment, we should have enough planning to at least cover 6-12 months installments in case we cannot get a tenant for that period.

A property guru often says we should look at 100 properties before investing in 1. The main reason is that by looking at 100, we would have a better idea about the market rate, and not overpay as profit is best made when we buy, not when we sell. For residential properties, we can often get better financing, but more challenges when dealing with tenants while for commercial properties, we usually have to settle for a lower margin of financing but tenants are usually easier to deal with and can even enhance your property at their cost with their renovations. In terms of appreciation, generally, commercial property has better appreciation but residential properties in areas with very high demand and short supply also experience very good appreciation.

The second major class are shares. Shares are far more dangerous than properties as you can lose everything if the listed company tanks and goes under which is possible. One can only imagine how much investors lost in “solid” shares like Enron, Worldcom and Citibank in those terrible financial years. Still, one can make money much faster if their chosen company grows very fast or rakes in huge profits through market conditions. It is a double edged game, but before investing, it is important to look at the company itself and see if it gives you confidence. The timing of investing is also important as there are cycles of booms and busts. Generally, it is better to look at the share market when everyone is getting out, and selling at whatever price. Still because of the risk, its not everyone’s favorite method.

Unit trusts hold less risk in a sense, as the fund managers buy across a wide diversified portfolio of shares. However, you need to pay the fund managers a hefty fee, and not all are as trustworthy as you would hope, as some may manipulate the market for their own benefit with investor funds. Still many people have lost money or got unsatisfactory returns through unit trusts. A lot depends on the timing of when we purchased the unit trusts. It is better to educate ourselves to invest on our own if possible rather than rely on others.

Real Estate Investment Trusts which you can buy like shares on the KLSE are interesting as they are required to pay off 90% of their profits as dividends. It is a way of investing in property managed for you by professionals. At in Unit Trusts, there is a hefty fee to pay for the management. However, REITs are generally quite stable, not fluctuating as much as shares, but giving good dividends. So it is a good choice for the more risk averse, but again it is probably more profitable to learn and invest ourselves directly.

Some speculate in commodities, high risk penny shares which give no dividends or FOREX, but these are high risk with no fixed returns. If we wish to invest in these areas, it is important to spend more time in learning and understanding these markets. Gold in general has been rising over the years, and could well be the way to go in the end days, as the power of money is expected to grow weaker and weaker.

For some, MLM has also been a very profitable investment. Those who enter this do not need much capital but rather a lot of time. Again, this is not everyone’s cup of tea, but it is a good source of regular income for those who are willing to spend the time and effort and manage to succeed

Investing in ourselves is also very important. Increasing our knowledge and skills makes us more valuable in the job market, and also by our current employers. If we are business, learning only increases our ideas and potential to grow further.

In conclusion, I encourage each one of us to rethink our current spending patterns and priorities but instead think more of investing, and building a solid financial base that will put us in good stead for our retirement and also for our future generations. May God bless you and give you wisdom.

Regards

Jason