Archive for May, 2008

Is Financial Freedom just a dream?

Posted on May 21, 2008. Filed under: Financial Freedom |

No one likes to devote their whole life trying to make a living. Stuck working in a job that they would not want to do if given a choice, missing time with family, and/or with absolutely no flexibility to do what they want to do.

Surely I don’t.

That’s why we often see many valuable articles showing ways to achieve financial freedom. Financial freedom goal, might sound too far to reach at times but the path there surely isn’t a mystery. I believe it can be achieved with certain proven formulas and steps. Good news is, whatever our family background or education level doesn’t play a part.

Almost everyone who starts his or her own journey to financial freedom begins with earned income, i.e. employment salary. However, relying solely on earned income often can’t bring us far no matter how hard we work and how well we can save. The path to financial freedom requires the change from relying on earned income, to passive income.  I did post an animated clip to illustrate the difference between earning an employment income and building a passive income.

Passive income is our key to financial freedom. Passive income are payments that we receive from the assets we have created. The more passive income we generate, the less dependent we are on our job. At one point, when our passive income exceeds our expenses, we can stop working anytime we want and still live the lifestyle we desire. That is financial freedom.

But passive income takes time to build. We can’t expect to start working on it now and be financially-free next year unless we are extremely lucky. Hence, the earlier we start working to build our passive income, the sooner we will reap the results. Take an example of the business I am in now – Unit trust consultant. I see many successful agents enjoying 5 digit passive income per month, and many of them are of my age or younger than I am. Are they a lot smarter or better than I am? Well, I am sure some of them are :). But most of the time, it merely due to the fact that they started in this business 10 years earlier than I had.

Becoming financially free is no an easy task. To become financially free, multiple streams of income need to be created. These streams of income take hard work and time to setup. There is no easy way of becoming financially free (that’s why I find it hard to believe articles that bear title “Simple Steps to achieve financial freedom”), and surely no shortcuts available. If we ever want to start working out the path of financial freedom, start by gaining knowledge on the many different ways where passive income can be created. Learn how to use our money to make more money. Learn about the wonders of compound interest. Learn the cost of procrastination if you have the vision but don’t plan to start your dream anytime sooner.

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excuses OR results

Posted on May 14, 2008. Filed under: Something good to share |

I am attending our yearly convention in KL today. Valuable thoughts were passed on. I truly enjoyed every minute of it. One of the valuable lessons I was reminded today was the choice between giving excuses or having results (I used the word “reminded” because it is not new knowledge but is often conveniently forgotten). I love this word – “OR”. It simply means if I start to give excuses, the alternative is I will never see desired result. So if I want to see desired results, I have to STOP giving myself excuses. It makes perfect sense!

This YouTube clip comes to my mind ~ “Amazing Living Without Arms” If she can move on with her life with no excuse and make a perfect wife and mum just like a normal woman, if not better, how could I allow excuses to hinder me to achieve what I planned to achieve?

Excuse OR result…

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Debts are all Bad!?

Posted on May 12, 2008. Filed under: Debts |

 
I was always very skeptical about debt and preferred to remain debt free. Until one day a friend of mine told me that he LOVES debt if it is a ‘good’ debt. His statement became a wake up call for me.

He is right! Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put us in a better overall financial position

The problem is it’s far too easy to spend more than we can afford, especially when we pay by credit card. And the risk would be we let debt get out of hand. On the other hand, avoiding debt at any cost is not smart either if it means depleting our cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not and then wisely managing the money we do borrow.

Generally, good debt is debt that might be considered an investment. Well, it might sound absurd that anything as ‘evil’ as debt be considered an investment! But if we look on the debt to purchase something that will increase in value, or generate return higher than the interest payable and hence contribute to our overall financial health, then it’s very possible that debt is a good one.

For example, a home purchase can be considered to be a good debt. Since homes usually appreciate in value, the mortgage loan you take out to pay for the home is an investment.

Another example of good debt would be debt which produces cash flow. For example, the purchase of a tenanted property as investment. If the rental income covers the costs of interest, it means someone else is paying our house installment for us and also putting some cash in our pocket.

Bad debt includes debt we’ve taken on for things we don’t need and can’t afford (a fancy overseas trip, an expensive BMW, for instance) or goods that are disposable or that depreciate in value. To me, credit card debt is still the worst form of debt one can engage in since it usually carries the highest interest rates. For eg, new clothes are worth little in value, if being not worthless from an investment point of view, the moment we walk out the shopping mall with them. If we buy these clothes on a credit card, and don’t pay off the balance on time, we’re losing money. Interest is added on the unpaid debt, therefore increasing the amount that we owe, the value of our purchase decreases. That’s bad debt.

Another bad debt would be purchasing of a car. Most people go into debt to buy their cars. In fact, for many of us, that is the first big loan we take. That is possibility that we see the car we drive as a status symbol (thanks to the power of advertisement), and often try to finance much more than we can afford.  And of course, everybody knows that cars, like clothes, lose value immediately once it is brought on the road (20% perhaps?). Car loans used to be three or four years. Now in order to make the payments more affordable and encourage people to buy more car than they can afford, loans are extended to as long as 9 years!! By the time we’ve made all the payments, our car has lost most of its value. Of course, a hefty down payment helps, but it also means depleting our cash reserves. 

Generally, to be classified as good debt, the following two elements need to be fulfilled:-

1. Whatever is being financed should last longer than the loan. Hence, since a house lasts longer than the mortgage, paying off our house as quickly as possible may not be the best use of our money

2. Financing should provide positive leverage. The positive cash flow generated from the rented property is one of the example

Whenever we can invest money at a higher rate of return than it costs to borrow it, it is to our advantage. Plus, with a fixed-rate mortgage offered in the market now, we are protected against future inflation. If inflation increases, our rate remains fixed; if interest rates drop, we can also refinance or re-negotiate with the bank for a better rate. And of course we can pay off our mortgage anytime we want to.

I did mention that loan for cars are mainly bad debt. However a car loan (more…)

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Compounding vs Procrastination

Posted on May 9, 2008. Filed under: Useful Knowledge |

 

Great videos, using simple illustration to show us the power of compounding interest vs the cost of procrastination.

“the most powerful force in the universe is compound interest” – Albert Einstein

 

(the following video is a “silent” clip. Do pay attention to the wording shown at the bottom. It is informative)

 

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Do we need a Will…now?

Posted on May 7, 2008. Filed under: Estate Planning |

I was doing some reading on the Net and came across a forum where this discussed title caught my attention : Have you written your will?

I don’t have the time to read through the many comments in there, but some of them are quite interesting indeed. Different people have different ideas on if its needed or not. Those who say its not needed are those who think that:-

1. Come on, I’m still so young?

2. I only have RM 10 in the bank, so why do I need a will (this made me laugh)

3. If I die, my property automatically transfer to my family member….eerrr..it would right?

4. Never thought of it at all

5. Too costly

Personally I don’t have a will as yet. I am working on one now because I know I should and I have to in order to make sure my assets are to be distributed according to my wishes. Let say, if one doesn’t have a will, his/her assets would be allocated according to the Distribution Act. Per my understanding, according to the Act, if you are single, your parents would get 100% of your estate. That is fine. If you are married, your surviving spouse gets 25%, your children gets 50% and the parents get 25% of the estate. That is fine too. But a scenario that could unfold may be if your parents were to pass away, again without a will, then your parents share of your assets, would be given to their children, ie, your siblings. That might be a cause of some disruption to your own family, eg the house your spouse and kids live in suddenly is 25% owned by your siblings or from your spouse’s perspective, his/her brother or sister in-laws.

The choice of your guardians of your children if you and your spouse passed away together; money and assets being frozen for years during the probate process; are some of the common complications I have heard of. I have an ex-colleague back in Singapore whose brother was tragically killed in an accident, leaving the poor wife and young children. If I understand correctly, the family took close to 5 or 6 years before the family of the deceased could claim the ownership of the assets. Not to mention the stress on the poor wife during all the years waiting….

So, it is vital to have a clear understanding of the implication of not having a will done. Without a proper will done, it could lead to the distribution of your assets in a manner significantly different to your wishes and creates unnecessary complexity for those left behind especially the minor dependents.

I surely am not qualified to share with you my limited knowledge on will content or the Distribution Act in Malaysia, but it is advisable to talk to a professional or read up material regarding the topic to ensure information obtained is valid and updated.

For those whom still think that having a will done is beyond the budget, perhaps you can practice the following to at least minimize the risk of your assets being frozen:-

1. Try to open a joint account with your spouse which allows each party to sign singly. So that your spouse can have access to your funds without going through all the tedious claims processes.

2. Make sure you check your insurance policy and EPF nomination to ensure the chosen beneficiary remains valid. Please make sure your beneficiary is aware that they are the chosen one! If you had done a nomination some years back already, good to check it up again as EPF has/is undertaking an exercise to transfer their manual records into their computer database and I’ve heard and know (one of them my own brother) a few people who upon checking found that their earlier nomination was no longer recorded.

3. If you do invest in Unit Trust, it is strongly advisable to appoint a joint holder. A joint holder is able to manage the investment upon the death of the first holder. (do check with your agent on your desired levels of authority of your appointees).

There should be more than the above 3. Any idea to share?

One point to note is that the above 3 points would only assure your assets are not being frozen like what had happened to my ex-colleague’s brother’s family. It will not hinder the potential complication of the deceased’s family members claiming their entitlement to a share of the estate.

I will be talking to a professional on this issue, but meanwhile, I will be doing my own further research to have a deeper understanding of this topic.

P/s: This link provides a clear distribution schedule as per the Distribution (Amendment) Act, 1997, Malaysia, Section 6

~ http://www.malaysianwill.com/malaysia_distribution_act.html

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Investment linked insurance – 2nd post

Posted on May 6, 2008. Filed under: Investment Linked Insurance |

Continue from what I have written on Investment linked insurance products

Minutes ago, I was just chating with a close friend of mine whom is very senior in the insurance industry. He was just sharing with me that discussions are on-going with Bank Negara that may allow all insurance companies in Malaysia to cease offering traditional insurance policies and only provide investment linked insurance products

Well, from business point of view, it make good sense to the insurers. Investment linked policy is passing 100% of the risk to the policy holders, whereby for tranditional insurance policy, due to the guaranteed portion of returns or cash-back (ie dividend declared each year by the insurer), the risk is shared between the policy holder and the insurer.

For investment linked policy, the whole cash value depends on the performance of the funds. There is virtually no risk on the insurers. If the funds do not perform, they will just ask you to top up. If you failed to, they will just let the policy lapse and refund you the balance cash value.

For traditional policy on the other hand, once the dividend is declared, it stays with you regardless the market condition. So, if the insurer is hit by the market downturn after declaring the dividend, they can’t ask back from the policy holders from what they have declared. So, the risk is shared in that sense

I sincerely hope that we as a policy holders are given a choice to choose from and not to just be presented with one choice, ie. investment linked insurance products.

p/s: just an additional note to share from what I have missed out from my last post on this subject. I did mention that the yearly insurance charges are paid via selling the fund units. From what I understand from some insurance agents I spoke to, when you pay your premium, the premium will first be used to purchase the units based on prevailing market rates. A relevant portion of the units will then again be sold to pay for the insurance charges. As you might be aware, you need to pay a transaction fee, usually 5% or so as service charges when you buy or sell the fund units. So if the units needed to pay the insurance fees are sold immediately, you are in other words, paying an additional 5% above the cost of the insurance fee. This 5% hence, effectively reduces the portion that would have been invested for you. This 5% is an indirect income to the insurer but is your instance a loss. Paying 5% for investment purpose, yes! Paying 5% for insurance charges?? Mmm……

p/s 2: Just a disclaimer, here   I am merely share with you my personal point of view based on my knowledge of the topic. I am not a qualified insurance agent. Hence, do consult the professional for any of your decision made.

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Investment Linked Insurance or Unit Trust ??

Posted on May 3, 2008. Filed under: Investment Linked Insurance |

A close friend of mine asked me to write about the option between unit trust and investment linked insurance. It seems to be a common question to many. My personal view on this would be whatever choices we made, be it unit trust investment, or insurance product, we need to have a good understanding of the underlying nature of the product, so that we can select products that best meet our needs.

First of all, before we get excited over the variety of products offered in the market, we need to always go back to the basics. As a basic guideline, we need to first remember why are we buying insurance in the first place? Primary objective of insurance is for protection. If you have dependents, it is vital that you are protected with adequate insurance policies like life/critical illness/medical insurance, before you think of other investment option like Unit Trust. Investments take longer to accumulate to the level that may be required by your dependents, whereas insurance benefits can immediately meet those needs if required.

I suppose that’s what has made investment linked insurance products grow very rapidly- trying to kill two birds with one stone, ie. having insurance protection and at the same time not missing an opportunity to participate in investment. However, it is vital to be aware that insurance and investment are two different things. People buying such investment linked products should have a clear understanding how the product works.

There are benefits of buying an investment linked insurance such as a much lower premium layout and a chance to invest with the help of professional investment experts whilst enjoy life insurance protection etc. Here, other than the commonly shared benefits, I will try to list out a few main points which I think are important to be aware of:-

1. What is an investment linked product (ILP)

ILP is a life insurance plan that combines investment and protection. The premiums you pay provide you not only with life insurance cover but part of the premium will also be invested in specific investment funds of your choice.

2. How does it work?

A portion of premium payment is used to purchase units in the investment linked funds managed by the insurance company. The protection coverage is provided by paying the insurance charges, fees and other related expenses via the deduction of the premium or sale of units from the investment funds.

3. What are the risk of purchasing ILPs?

ILPs offer the potential for higher returns compared to traditional life insurance if you opt to invest in equity related funds. However, unfortunately, higher return always come with higher risks.

Just like unit trust investments, the investment returns are not guaranteed, the price of the units can rise or fall. Needless to say, the investment risk will be 100% borne by the policy-holder. It has no guaranteed minimum surrender value like endowment or term life insurance.  If a fund does not perform well, the cash and maturity values will be adversely affected.

One of the benefit of ILP is for the same protection given, the premium required tends to be much lower compared to a traditional term life policy and is meant to remain the same every year . However whilst premium is expected to remain the same, the insurance charges is subject to change! The insurance charges start off low when you are young and increase as you get older.

For most regular premium ILPs, insurance coverage charges are paid through the sale of units. For eg, if the insurance charges is RM 100, and the bid price of the fund is RM0.95. The number of units sold to pay for the insurance charges would be:-

RM 100/ RM 0.95 = 105 units

As you get older, your insurance charges get higher but the premium that you paid is expected to remain the same based on certain assumptions about the performance of the fund. However, if the fund performs poorly, the value of the units may not be adequate to meet the insurance coverage charges. For eg, now your insurance charge has increased to RM 500, and the fund price has dropped to RM 0.50, total units that you have to sell to pay for the premium would be 1000 units. What if, unfortunately, your total available fund units were less than 1000 units?

So, what would happen then?. You have two choices – 1. reduce your protection coverage, just when you needed it the most when age is catching up; or 2. to top up your premium to cover high insurance coverage charges.

Just a personal experience to share, my husband bought an investment linked insurance more than 10 years ago, and was under the impression from his insurance agent that he can stop paying his premium after 12 years of his policy. Unfortunately, to his surprise, after years of paying the premiums, he was asked to top up the premium instead due to poor performance of the fund! Such “surprises” can completely disturb your financial plans.

4. How much of the premium is used to purchase units?

Unlike unit trust investments, the full amount paid may not always be allocated to purchase units. Before buying the ILP, it is important to find out what percentage of your premium would be used to purchase units. Usually, from the beginning years a bigger portion of the premium paid is used to pay for the insurer’s expenses such as agents fees and administration costs. Hence smaller portion would be used to purchase investment units. These expenses decrease over time, the premium allocation increases to purchase units increases until it reaches 100% in later years. From what I gather, for most insurance companies, the 100% premium allocation takes place after the 6th to 7th years.

5. Will the level of protection affect cash values of the policy?

Yes, it would. It is needful to understand that for the premium you wish to pay, there will be a trade off between the amount of insurance coverage provided and the amount available for investment. The higher the level of coverage selected, the more units will be absorbed to pay for the insurance charges and the fewer units will remain to accumulate cash values under your policy.

6. Can you sell your units at any time like unit trust?

Yes, you may, perhaps with certain charges. However, if you sell some of your units, you may not adequate to sustain the level of cover that you need.

 

Conclusion

So, is investment linked insurance product a good choice? It can be especially to the younger person whom has limited budget to buy a traditional term life insurance, which might cost significantly more premium than for the same protection. However, if you can afford, and insurance protection is a significant objective, I will strongly recommend you to consider other insurance options in view of the potential risk of compromising the protection coverage due to poor fund performance. If your primary objective is for investment, then go for a 100% investment focus channel, like Unit Trust. Don’t let the attractiveness of having it all (investment + life protection + low premium) blind you!

p/s: Just a disclaimer, here   I am merely share with you my personal point of view based on my knowledge of the topic. I am not a qualified insurance agent. Hence, do consult the professional for any of your decision made.

 

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