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Wednesday, May 28, 2014

Are you ready to have a baby?

Starting a family is always a beautiful story and a new adventure. Recently I've been to a few of my friends' wedding. It was great to see this newly wed couple planning ahead together, about having baby and getting a home etc. 

The question remains...how easy is it to have a baby? Oops. I don't mean the process...of course that's easy. but how affordable are you to have a baby? 


Ready to have a baby?


Married couple....this is for you! Well, at least, it's based on my reading and also from the information obtained from my friends who are with babies (P.S: I'm not married and don't plan to do so any time soon...please do not misunderstood it from this post)

Having a baby is expensive...consider it from all of these: food, clothing, education, hobbies, healthcare, entertainment and caretaker costs...all of that will cost you more than just love, fresh air and water. (I know some people are deceived by the easy doing it from Korean drama...please don't watch those too often...reality is very much more difficult).

First of all, before the baby is even born, the cost has already started....

1) PREGNANCY CHECK-UP

Assuming a normal pregnancy, a pregnant mom would probably have to go for regular check up once a month and even more frequent from the 36th weeks onwards. At private hospitals, you can expect RM200 for each visit. 

A rough estimate would be about RM2,400 until the delivery week. 

Of course, there is an option of the government hospital. I'm not so sure how many would go for the government hospital though, especially for the first baby.

2) Your baby is coming out, and that will cost you a BOMB as well...

The cost of delivery is not going to be cheap. A natural delivery could cost about RM3,000 depending on the kind of hospital that you decide to go to (inclusive of 3 days and 2 nights of stay). If it's a caesarean delivery, it could go up to RM6,000 or more.

Estimated budget: RM3,000 to RM6,000.

3) MEDICAL CARE FOR THE BABY

Honestly I never thought of this before until a friend told me. The baby would need to go for immunizations and regular check ups from 0 month to about a year. 

An estimation budget of about RM2,500 is required for this period.

Well, you may think that the problem is solved, but it's only about to start...

4) CHILDCARE

While both the husband and wife work, someone has to take care of the baby. If you're lucky like a friend of mine, you can save on this. (His mother in law helped to take care of the baby). If not, you should read this.

Most people will send their baby to a nursery. This nursery center operates on weekdays and on working hours only. It will cost you about RM800 to RM1,000 per month. Total spent in a year: RM9,600 to RM12,000. There are those who would take care of them overnight and you only take care of the baby on weekends but the price would be more expensive.

5) OTHER EXPENSES

This is a long list of other expenses.

Stroller

You will need a good quality stroller that can usually last at least two years to bring your baby out. An average stroller with a baby carrier that doubles as car seat costs about RM1,000.When your baby is slightly older (depending on weight), you will need to get a separate car seat that costs about RM500.

Food

Breast feeding. If the mom decide breast feeding is the best for the child, don't think it's free. You will still need to get a breast pump. Gonna cost you for about RM700. 

Formula milk. This will depends on the brand of your choice and the stages of your child. Normally, for newborn baby, it will be more expensive. Expect about RM100 for a tin.

Solid food. As your baby reached 6 months old and older, it's time to get some solid food like porridge, puree food, or baby cereal. It's fair to expect about RM100 to RM200 for this.

Diapers.

You're lucky on this. If you're on budget, you can choose the cheaper ones but don't expect it to be kind to your wallet anyway.

A mid-range diaper brand can cost about RM30 per pack. The number of diapers in a pack depends on the size.

A more premium diaper brand can cost about RM50 per pack. These can be used at night as they can last longer without leaking.

Clothes and toys.

Expect to get something for your child. I'm sure you would regardless of how tight your budget is. The amount spent really depends on you but most people told me they spend about RM300 to RM600 on this.

Alright, we are only talking about the expenses for your child when they are still babies. Ever thought of what happen as they go into school...Tuition fees, monthly allowance etc. Alright, on average, you may expect about RM25,000 for the first year (from the time of pregnancy) if you choose to send your baby to nursery. If not, you probably save about RM10,000 to RM12,000...an estimate of about RM15k. So, if you want to have a baby, start saving for this first.
 


Monday, May 26, 2014

MRTA or MLTA?

There are a lot of people who are not aware on the existence of MRTA and MLTA. Basically, when you buy a home, it is encouraged that you get yourself the mortgage insurance of either Mortgage Reducing Term Assurance (MRTA) or Mortgage Level Term Assurance (MLTA). 

Protect your home....
Buying a Home is always a great thing. It's always great to buy a Home for your loved ones as well but it's a purchase that takes a huge commitment and takes up to 35 years to settle the purchase. Providing a home for your dependent is a good thing, but if the home loan is not settled in full, it can turn into a burden for your loved ones in the event of death or total permanent disability (TPD).

It is with these unfortunate circumstances in mind that most mortgage officers offer mortgage life insurance policy to home buyers. In the event of death or TPD, the policy frees the borrower’s dependents from any debt as it is designed to pay off the remaining debt on repayment mortgages.


Some people feel that MRTA is better while others prefer MLTA. What say you?

MLTA is a slight variation of MRTA and offers the borrower an addition to the life coverage....savings and in some policies, there might even be returns on the premium. In short, MLTA appears to be much better, offering both protection and cash back plus interest comparing to MRTA. 

Here is a summary of the difference between MRTA and MLTA. 

MRTA and MLTA
There are those who felt that MLTA is a much better option given the possible return from it. However, I think it's not so much of a better option but more on suitability. Which one is more suitable for you?

Personally, I would prefer the MRTA. For a property of about RM500k, the premium that I paid for the MRTA is about RM11k at one lump sum while if I were to buy the MLTA, there is a commitment of RM4000 annually for 30 years. While there is a certain cash back with MLTA, I always believe that insurance should just be insurance. For protection. An overvalued protection is equivalent to a waste of money, as there is so many other investment tools that one could utilize. (Of course, this is because I'm actively investing in other investment tools that rake in better return in my point of view).

Understanding what you are purchasing is important. So, when it's your turn to buy a property, make sure to understand both the MRTA and MLTA and then only decide which one is more suitable for you.



Saturday, May 24, 2014

Weekly Investment Term #4

Well I was really busy lately and that's why the failure to maintain the update on this even though I believe it is important. In the world of financial and investment, it is best that we learn the language right.

Anyway, today I'm gonna share a key part of investment, in strategy and planning on the suitable investment plan for oneself, it is first important for us to find out about ASSET ALLOCATION.

Asset allocation

In one of the dictionary, asset allocation is defined as a financial strategy for reducing risk in an investment portfolio in order to maximize return. So how do you really reduce risk and maximize the return in your portfolio? Asset allocation aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. 

Depending on the amount of your investment, it is important to look at the few key investment types...equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time. If you need your cash flow to be liquid, it may not be appropriate to put into fixed income or maybe equity. Investment like real asset should also be considered in proportioning the amount of your investment in each of these different asset types.

There is no easy way to find the best return at the lowest risk but in asset allocation, where it is commonly used among professionals, where the selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.

Monday, May 19, 2014

Manage Lifestyle Inflation

The other day while I was talking with my brother, I realized that in life, most of the time, it has to do with Lifestyle Inflation, and not inflation alone that cause the struggle for Malaysians to live in our time today.

How many of you remembered how you spent when you were still in your university days? As I studied in local university, I have the option of staying in the university residential for an amount of RM300 (inclusive of food, broadband and utility). We would still go for movie, Starbucks and also entertainment, but most of the time, we would take the public transport. (save on parking).

After graduation, some of us would opt for RM300 a month room rental...I remembered some of my friends would even shared a room but fast forward a few years, we would take room that cost us RM700. The old apartment might be in good condition, great location, nice neighbours and a lot of good food....but the new ones are in exclusive neighbourhood....it is not because there is a need...it is because one could afford it.

WHY LIFESTYLE INFLATION HAPPEN?


If you have never asked this question, you should do so by now. 

People have a tendency to spend more when they earn more...especially in our world today, where marketing rules. It’s not uncommon for people to feel pressured in keeping up with their friends’ and business associates’ buying habits. If everyone drives a BMW to the office, for example, you might feel compelled or pressured to buy one as well, even if your old Honda Accord gets the job done just fine. The same goes for your house....but lifestyle inflation goes beyond just your car and accommodation and that is the scary part. Most people end up spending more for vacations, dining out, entertainment, boats, private school tuition and wardrobes, just to keep up with peer pressure.

It is important to know that a lot of people serve a lot of debt over a period of decades. Just because they look rich doesn't mean they are rich.

Another contributing factor to lifestyle inflation is entitlement. You’ve worked hard for your money so you feel justified in splurging and treating yourself to better things. While this is not always a bad thing, rewarding yourself too much for your hard work can be detrimental to your financial health now and in the future.

SOMETIMES, SPENDING MORE MAKES SENSE

Even though lifestyle inflation might not be good, sometimes, spending more makes sense. 

For example, the upgrade on wardrobe could be important in order for one to dress properly for work following a recent promotion. Or if there is an additional member to the family, a new born baby, there might be a need to move into a new house with an additional room so that the grown ups could have proper sleep. A certain amount of lifestyle inflation is to be expected as your work and family obligations evolve. Spending a little extra to improve your quality of life might also make sense – as long as you can afford it.

AVOID LIFESTYLE INFLATION

Lifestyle Inflation

While some level of lifestyle inflation is unavoidable, sometimes, it might be possible. It is important to ensure that every spending you make today affects your financial tomorrow. 

Even with a substantial pay increase, it’s possible (and quite easy) to end up living paycheck to paycheck, just like you did when you were making much less money. That’s because the increased spending that results from lifestyle inflation can quickly become a habit: the more you earn, the more you burn. You buy more things than you need just to maintain your new (inflated) standard of living.

Assume you splurged and bought that $800 pair of Jimmy Choos when you were 25 years old. Imagine you had invested that $800 instead. When you reach age 65, your $800 would be worth $5,632, assuming no additional investment and a 5% interest rate return. Even though the shoes are awesome, would you rather have great shoes for a couple years or almost $6,000 extra entering retirement? While some purchases are necessary, it always pays to separate needs (things we have to have for survival, including shoes) from wants (things we would like to have but don’t need to survive, like the Jimmy Choos). Keeping needs and wants in mind – and making realistic, honest assessments about whether a potential purchase is a need or a want – can help you make better financial decisions and avoid excessive lifestyle inflation.


Sunday, May 4, 2014

Effect Of Inflation On Loan Installments

“RM5 for a bowl of curry noodles? In my day, it was 50 sen!” Sounds familiar? No doubt you hear your parents and grandparents griping about today’s prices more often than not.

This phenomena does not happen miraculously only in Malaysia, but rather throughout the whole world. The reason for the price differences is simple and straightforward: inflation. We won’t go into the mechanics of inflation and its causes here; all we need to know in this context is that it devalues a currency over time by increasing the prices of goods and services.



Many of us were taught that when it comes to housing loans - paying them off whenever you have spare cash and the more the better because you will be done with them earlier; and you "save" a lot of interest. But is this true? It is only true if and only if inflation is at 0%, which we all know not possible. With inflation, the opposite could ring true simply because RM10 thirty years ago has higher value than a RM10 today simply because of inflation; and with this logic 30 years later the RM10 definitely has lower value.

Eg. RM1 today might get you 100 candies, but next year the same RM1 will get you 96 candies if the inflation is at 4%.

Next year: RM1 = 100/(1+4%) = 100/1.04 = 96 candies
Following year: RM1 = 100/(1+4%)^2 = 100/1.08 = 92 candies

From the above, you can see that every year you are getting less candies from the previous year, with the same amount of money; simply because of inflation.


If this is the case, is it advisable for one to pay more for housing loan; just to pare the interest? Will we lose out by paying out more and shortening loan tenure? One major argument against this logic is that while you might save some money by outsmarting inflation, you would end up paying more anyway due to the huge amounts of interest over the years.

To gain a clearer understanding of the impact of inflation here, we have to get a little technical.

Let’s take a home loan of RM450,000 paid over 30 years at a steady Base Lending Rate (BLR) of 4.2%. Your monthly repayment would work out to RM2,200.58


For argument’s sake, let’s compare two hypothetical scenarios.

Scenario 1 – Standard repayments made to bank throughout tenure length
Scenario 2 – An overpayment of RM100 is added on each month throughout the tenure length


Monthly Installment 2200.58 2300.58
Tenure 360 331
Total Repayment 792208.8 761492 30716.82








From the table above, it can be noted that overpaying your monthly installments consistently throughout tenure will save you RM30,716.82 in total.

But does that value reflect the actual value saved when taking inflation into account?

Let’s now look at the two different inflationary scenarios to get a picture of how much value you actually stand to save from repaying earlier. All calculations are based on the discounted cash flow of the mortgage amortization.

* Discounted cash flow payment = Payment/[ (1+ (inflation rate)) ^ number of months]

Assuming the average inflation rate in Malaysia is at 4% throughout tenure:

The amount saved after taking inflation into account = Only RM157.17 in today’s Ringgit

This is the value of the amount saved based on present day value.
However if the average inflation rate in Malaysia is at 5% throughout tenure:

You actually don’t save any money but end up ‘losing’ money in a sense.
The total amount LOST after taking inflation into account = RM 2,790.50 in today’s Ringgit

From here, it becomes clear that by overpaying and saving that additional RM
30,716.82 in the future, not necessary translate into savings but might ended up "paying more" or "losing" just because of the effect from inflation! I've attached the sample calculation as well.


The above-mentioned scenarios were based on certain assumptions. What is more likely to happen over the duration of thirty years is a random fluctuation in BLR and inflation rates over time