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Tuesday, July 29, 2014

Costly Financial Planning Mistakes to Avoid





A lot of us think that financial planning is difficult, and thus relying on financial planners to plan on our behalf, but financial planning is something that is different from one individual to another individual depending on age, risk tolerance, plans and many more; thus relying on financial planners who usually have certain templates of financial plans for financial planning is one of the costliest financial planning mistakes that one should avoid - although getting the advice from financial planners as reference is strongly advisable.

The next costly financial planning that one should avoid is to treat retirement fund like EPF in Malaysia or CPF in Singapore as savings. I come across many who told me that they do have savings and give the example like EPF which is a financial planning blunder. Retirement fund should be treated as the fund for retirement (as the name already suggested), and one should somehow allocate a portion of the income as savings for rainy days. IF this is not do-able, it just mean that he or she is not supposed to commit more to loans or other fixed expenses and should come out with a plan to have fixed savings. Without savings, one will not have free cash flow (FCF) which will enable him or her to invest or grow the savings to at least combat inflation.


Not revising financial plan according to the environment and situation is also another financial planning mistake which one should really avoid. We tend to think that financial planning is a one time thing, but if we were to fully utilized the tax benefits and economy news, we stand a better chance to have higher returns. Also as we gets older, we need to reduce exposure to risky investment and go for fixed-income investment like REITS, dividend counters or even higher rate fixed deposit by becoming premier banking customers. 


Finally, having too many accounts doesn't seems to be an issue for most people, but having too many accounts actually be one of the costliest mistake that one have in financial planning. As mentioned previously, by becoming premier banking customers, we stand a better chance to have better fixed deposit rates; which doesn't seems much but as time goes, the extra compounded value can make a different. Having too many accounts also makes planning more difficult and the limited resources will end up in different accounts; thus harder for one to become premier banking customer and to make use of all the benefits of becoming one. Having more than one account is advisable, but certainly not to the extend of 10 to 20 accounts where monitoring becoming more difficult.

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Saturday, July 12, 2014

OPR Hike: How will it affect Malaysian?


Bank Negara Malaysia (BNM) has raised the overnight policy rate (OPR) by 25 basis points to 3.25%. This is the first hike in the OPR since May 2011. The decision was made at the Monetary Policy Committee (MPC).

BNM also released a statement, saying "The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively."

OVERNIGHT POLICY RATE? WHAT IS THAT?


Have you ever wonder what is this OPR that these people are talking? I used to have big difficulty understanding the business and financial vocabulary.

In short, OPR is the interest rate at which a bank lends to another bank, which is set by the BNM. 

This rate has an effect on the country's employment, economic growth and inflation. Generally, it is an indicator of the health of a country's overall economy and banking system.






WHY IS THERE A HIKE?

There is a lot of reason for the increase in the OPR but there are a few reasons on how the economists view the hike.



Economists generally view the hike in the OPR is an attempt by the Monetary Policy Committee of a country to tackle the inflation, based on the scenario where growth is too strong and fear that imbalances in the system could occur because of it. 

Latest economic data has showed that Malaysia is continuing to grow and there is strength in the exports and private sector in the country. There is an increase expectation on the sustainability of the growth in the country.

The increased OPR is aimed to normalize the current monetary conditions and to mitigate the risk of the broader economic and financial imbalances that could jeopardize and hurt the country's economic growth.

According to AllianceDBS, the increased of 25 basis points should be manageable and not affect the borrowers' ability to service higher interest cost, but a higher increase could create risk of a higher non-performing loan (NPL) and provisions. Therefore, many welcome the increase of the 25 bps in the OPR at this time as a good move by Bank Negara. 


NOW THE BIG QUESTION: HOW WILL IT AFFECT YOU??

Well, it will definitely affect the interest for your loan.

Any changes on this will definitely impact the floating rate loans which are common for mortgages. While the effect of the new lending rate framework is still unknown, an increase in OPR will likely have the same effect, as banks would normally adjust their lending rates by the similar quantum when OPR changes. 

Historically, bank will normally raise about 20 to 30 bps for a 25 bps hike in OPR. Here is the difference on your mortgage loan, assuming the bank increase by the same 25 bps. (I understand that the BLR will increase by the same 25 bps and will take effect on 16 July...don't take my word for it. Wait for the announcement).

The old rate at BLR: 6.6



If you look at the old rate, with a BLR-2.4, your monthly installment for a RM400k loan with a tenure of 30 years: RM1,956.07

After the increase:




With the new rate, your monthly installment will be RM2,014.88. There is only an increase of RM58.81, which is not a lot. But if you look at the overall interest paid. There is an increase of about RM21k. Of course, the amount is not a lot over the period of 30 years.

Borrowers generally will not be impacted by this increase severely. 

THE IMPACT ON MALAYSIA will be a positive one. Raising the OPR rate gives confidence to the foreign investors to come to Malaysia. This move should benefit the banks as well. Some reports show that Alliance Financial Group (AFG), Maybank and many others will benefit most from it. The exception would be the Ambank and Affin which has a large share of fix rate loan.

It is expected that the OPR will remain unchange for the rest of 2014. This increase will definitely pinch consumers' pocket slightly (myself included) but I believe it's the right move taken at the right time with the right rate that is not too heavy to Malaysian.

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