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Tuesday, July 31, 2012

Avoiding Personal Financial Crisis

Two weeks ago, I posted an article on the survey that reveals many Malaysians do not settle their debt in full every month, so, I guess I need to keep the momentum in posting articles that will create the awareness on the importance of financial management in the adult life. This is even more important to many Malaysians as the purchasing power in Malaysia is not so high compare to even our neighboring countries like Singapore, so, every penny counts and important.

From the article, I found that there are a lot of the given examples are quite true and I can even find those among my circle of friends - mainly splurge to have holiday outside of Malaysia and using a big portion of the retirement fund to fund their children's education oversea.

The article is as follows:-

Avoiding Personal Financial Crisis

ANECDOTAL evidence seems to suggest that there are still many Malaysians, especially the young adults, who do not really practise sound financial management.

Consider the case of 28-year-old Albert Tan (not his real name). Having worked for only five years as a marketing executive, Tan has already amassed credit card debts amounting to RM50,000. He holds at least five credit cards from five different banks.

Tan does not see the importance of settling his credit card loans as soon as possible to avoid high interest payments. He prefers to repay only the minimum amount required each month for each of his credit cards. And thinking that personal loans can help ease his “financial burden”, Tan has taken up offers by his credit card banks for personal loans amounting to RM40,000.
Foo: ‘Sometimes people with low income have no choice.’

One might be thinking where has he been spending all those money? Well, besides using some to pay part of his debts that are due, Tan likes to spend it on the latest electronic gadgets, entertainment and leisure.

Tan draws a monthly salary of RM5,000. Not too bad for a person his age, and he is lucky he doesn't have to pay rent as he is staying with his parents in the suburb of Kuala Lumpur. But he has been living beyond his means, amassing big debts through credit cards and different types of loans, including personal and car loans.

Sujatha, a 26-year-old writer, also has credit debt problems. She owes two banks around RM20,000 after having splashed the money on traveling overseas last year.

But what sets Sujatha apart from Tan is her resolution to settle her credit card debts within the next 12 months through a disciplined installment programme, and she's not tempted by banks' offers of personal loans.

“I've learnt my lesson. It hurts to see a huge sum going to repayment of my loans, so next time, I'll be wiser,” Sujatha says.

Experts tell StarBizWeek that Tan and Sujatha's cases are common among many Malaysians. And for an unrepentant debtor like Tan, experts fear he is flirting with financial disaster.

Last month, the Insolvency Department recorded 116,379 bankruptcy cases in the country between 2005 and April 2012. Of that number, about 20% involved individuals below the age of 35, while 32% involved those between the ages of 35 and 44, and 18% involved those aged between 45 and 54.

Most of the bankruptcy cases were due to debts over vehicle loans (25%), personal loans (13%), housing loans (12%) and business loans (11%). Bankruptcy due to credit card debts was around 5%.

If Tan does not change his ways, experts say he will become part of statistics.

Consider what Prime Minister Datuk Seri Najib Tun Razak said over the week about managing the country's economy to prevent any form of financial crisis, and one could draw a parallel between the four main aspects that he highlighted and the basic principles of personal finance management.

Najib said the most basic thing to do to avoid a financial crisis in an economy was to ensure that expenditure did not exceed income (for an individual, it means not living beyond one's means).

Najib went on to say that an economy should have ample operating surplus to prevent any borrowings to finance management expenses (for an individual, think building one's wealth, and not simply take on unnecessary loans to finance personal and unproductive expenses).

The third rule that Najib highlighted was that a country's fiscal deficit should be on a progressive declining trajectory (for an individual, this means working towards reducing one's debts). And the last rule was to have a balance between revenue base, which ought to be large, and the capacity to provide incentives and stimulus to certain sectors or sub-sectors (for an individual, this sounds like proper planning and working towards one's ultimate financial objectives).

“Planning is important. Failing to plan is planning to fail,” AmBank wealth management head Joshua Lim asserts.

“You see, people always have unlimited wants, but the truth is, they only have limited resources, so they have to make choices, and proper financial planning is key,” Lim argues.

For a start, Lim advises individuals to assess their current financial situation, and then identify their objectives, and start to analyse ways and options to achieve those goals. He, however, stresses the importance of being practical and realistic about setting financial objectives based on one's projected financial standing.

Using a budget to manage one's inflow and outflow of money is important, according to financial planning experts, as it gives a clear idea of how one's money is spent.

“It is very important to track the usage of money, and to ensure that one does not use the wrong funds for the wrong purpose,” Lim says.

He points to using one's money in the Employees Provident Funds account that is meant for one's retirement being used to finance children's education as an example of using the wrong funds for the wrong purpose.

For MyFP Services Sdn Bhd managing director Robert Foo, the most basic principle for an individual is never to spend beyond one's earnings. In reality, though, Foo reckons it is very difficult for many Malaysians to observe this basic principle.

“Sometimes, people with low income have no choice. The tendency to overspend is because basic living expenses are rising faster than their income growth,” he explains.

“One should defer spending on discretionary items, for example, if one can't really afford it,” Foo says.

So, financial experts advise individuals to assess their needs objectively to evaluate whether it is necessary to take on debts to acquire goods and assets.

“Simply taking on debt will result in one not optimizing one's resources,” Foo points out.

Lim concurs, saying that taking on too much debt could result in one finding it difficult to meet one's financial obligations later on.

As for building one's wealth, experts say seeking new sources of income and making the right investment choices is the way to go.

Foo preaches “dual income. He says, “It is important to find ways to earn extra income. We live in an uncertain world, so one needs to have something to fall back on if one income stream was to be suddenly cut off.”

Financial experts also advocate having a diversified investment portfolio to build one's wealth.

Source: The Star BizWeek

Monday, July 16, 2012

How The Richest 400 People In America Got So Rich

It's been like a while since I last update this blog, but finally I intended to update this blog with an article that I found which suits the blog very very much. It is about how the richest 400 people in the United States of America got so rich, and basically the summary of the article is stocks will outperform any form of other investment.

The article is as follows:-

In 1992, the 400th richest person in America made $24 million.
In 2007, the 400th richest person in America made $138 million (or $87 million, inflation-adjusted).
Now, that almost certainly wasn't the same guy. There's a lot of churn at the top of the money pyramid. In all of the 1990s, only 25% of the Fortunate 400 made more than one appearance. But the overall message is the same. The rich keeping getting richer.
According to the IRS, which recently released 2009 data from the 400 richest individual income tax returns, the real runaway growth in wealth has come from capital gains. In the last years of the bubble, the "Fortunate 400" made nearly half their income from capital gains (a.k.a.: profit from the rising value of an investment, such as stocks or property) and less than 10% of their income from old-fashioned wages.
The average income of a top-400 earner grew by 650% between 1992 and 2007 to a whopping $344 million. Over that time, the average salary barely doubled. But the average capital gains haul increased by 1,200%. How do the richest get richer? Not from their wages. From their investments.
Here's a look at the average salary and average capital gains income of a top-400 earner since 1992. Y-axis is labeled in thousands of dollars and all-time highs are noted in the graph.

Three last things:
(1) Who are these people? As Tim Noah explained on our business page, a 2010 study studied the top 0.1 percent, who currently make at least $1.7 million. That's 45-times less than our Fortunate 400 group in 2009, but it's the closest we've got. Four in ten in this group were executives, managers, and supervisors at nonfinancial firms. Eighteen percent were financiers. Next came law (7 percent), medicine (6 percent), and real estate (4 percent). My guess is that the top 400 skews toward finance and chief exec even stronger. A lawyer/doctor making $2 million I can imagine. But $77 million?*
(2) Capital gains absolutely dictate the wealth of the richest Americans. As Matt O'Brien graphed for us, that's why the income of the top 0.1 percent hugs the S&P so closely.

(3) Remember that as this is happening, the long-term capital gains tax rate has fallen from 28 percent in 1990 to 20 percent for the latter half of the 1990s to 15 percent under George W. Bush.


Saturday, July 14, 2012

Survey reveals many Malaysian do not settle their debts in full every month

I just started to blog about the cons of using credit card in Credit Card - Friend or Foe (Part 3) and to my surprise, I read news that a survey done reveals many Malaysians do not settle their debts in full every month - the debt here meaning the credit card debt.

The news is as follow:-

PETALING JAYA: A global survey has revealed that Malaysians are among the worst credit card repayers in the Asia-Pacific region.

According to the survey, less than half of the local respondents polled online say they repay their credit card debts in full every month.

Given this, Malaysia has one of the lowest repayment rates among the developing markets that were surveyed.

About 15% repay more than the minimum requirement while 18% of Malaysians repay only the minimum amount required.

This is although two out of five Malaysians polled claimed to use credit cards for shopping, dining and entertainment.

In contrast, the highest repayment rate was in Taiwan, where 89% of respondents service their credit card bills in full followed by Japan (87%) and South Korea (85%).

Neighbours Singapore and Indonesia also fared much better with 80% and 59% respectively, while only Vietnam came off worse than Malaysia at 27%.

The Nielsen Global Survey of Investment Attitudes also showed Malaysians are generally one of the top 10 savers in the world, but 45% of the online respondents also have various loans and insurance payments.

Meanwhile, two out of five Malaysian consumers are investing their money via various channels.

“Of those investing, 67% prefer mutual fund/unit trusts, 49% prefer stocks, 27% invest in gold, silver and other precious metals, a quarter in structured investment products, 15% in foreign currencies, 10% in bonds and 8% in derivatives,” said Nielsen in a press release yesterday.

The survey also disclosed that less than 19% of respondents rely on financial planners or advisers when deciding on personal finance or wealth matters.

On the other hand, 43% of the respondents make their own choices without anyone's advice while 21% seek advice from friends, relatives and colleagues.

Just one in every 10 persons rely on investment tips from commentators, experts or spokesmen broadcast over television, radio or the Internet, and six per cent make investment decisions on impulse.

“Knowing consumers' attitudes towards wealth management while creating relevant opportunities to engage with consumers and manage their needs is still a challenging task for financial planners and investment institutions, especially when four in 10 consumers do not trust others when making financial decisions,” said Nielsen Malaysia's head of Customised Research Luca Griseri.

The Nielsen Global Survey of Investment Attitudes was conducted from Feb 10-27 this year and polled more than 28,000 online consumers in 56 countries throughout Asia Pacific, Europe, Latin America, North America, the Middle East and Africa.

Source: The Star

Sunday, July 1, 2012

Credit Card - Friend or Foe (Part 3)

My first two posts, Credit Card - Friend or Foe (Part 1) and Credit Card - Friend or Foe (Part 2) on credit card were slightly bias towards the pros of using credit card rather than the cons of doing so. While I can think of the many pros of using credit card, not every one can fully utilized the benefit of swiping this plastic without ever getting deeper into the pit of debt.

Credit card debt is one of the most feared debt as the interest charged by the financial institution is high, I'm not sure other countries, but in Malaysia the interest charged on credit card normal retail usage are range from 15% (up from previous 13%) to 18% per annum and the amount is accumulated until you fully paid off.

Aside from the high interest rate, there are quite a lot of hidden charges or so call penalty for not paying the credit card on time, or in full amount. There is a grace period of 20 days interest free after the statement closed for the previous month, but still there are a number of people who ignore it and finally pay the price of being ignorance.

See from the above examples, we can easily identify two cons of swiping this plastic money. There are more of the cons, but I will leave it on another post. As it stands, credit card can be friend, and at the same time it can turn against us. Use it wisely, you will find that there are more benefit in swiping credit cards.