Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Archive for January, 2008

People who have given me a helping hand - My primary school friends who gave me the gift of “loving to read”

Wednesday, January 30th, 2008

I went to school without attending preschool. In fact, I did not know there was such a thing as preschool. Hence when I entered Standard One, I could not read or write a word of English.

The first year was quite miserable. My father could not afford any tuition for me, and I just made do. Slowly I started understanding words and learnt to spell. By the end of Standard Two, I could read and write English reasonably.

My classmates in school, WYK, AL and OHT came from better backgrounds and their parents bought them story books. And WYK, AL and OHT were very generous in lending me their books to read.

And, boy, did I read. I loved the stories and read them voraciously. I think even in these early years, I started speed reading just because I had to return the books the next day.

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Business (and investment) opportunities arise when technology meets and improves on an old business practice

Tuesday, January 29th, 2008

I have written about our goat farm. The land is being developed now and our target date for “opening” the farm is 5th April 08. 

In some lesser developed countries like India, people with extra funds would buy goats and hand them to goatherds to tend. The goatherd would take care of the herd, feed them, give them medicine if needed etc. The offspring were shared 50:50. 

It was a win-win situation for both the investor and the goatherd. The difficulty was in matching goatherds with investors. This was done by word of mouth as trust was a very important factor in this equation. 

In Malaysia, a group of people have brought technology to this age old practice. 

They have set up a website, offering matchmaking services for the investors and the goat farms. (The website is in Bahasa Malaysia.) They have prepared a “prospectus” showing the indicated rate of returns on investment, risks involved, minimum investment required etc. 

This is a great idea, as it takes away the nitty gritties of running the farm for the investors interested in goat rearing and provides capital for others who are keen to physically embark on goat rearing. 

As in any other investment, there are risks. The returns quoted  of almost 1300% per annum over 6.75 years appears to place the risk level at a high level. 

This is a great example of creating a business opportunity. Using technology to improve or facilitate an age old business practice.  

My wife and I will be registering our farm with e-pawah.com.my and offer to act the role of the traditional goatherd for the investor. Let’s see how this works out.

It would be interesting to hear the views of readers on this investment.

  

Thank you, a little less belated than the last time

Tuesday, January 29th, 2008

When I grandly (over grandly in fact) announced my Most Audacious Goal for 2008, I promised to follow the advise given by the more established bloggers that I should be polite and thank bloggers who give me a link that results in a large flow of traffic.  

Well, it happened again. 

This time, Free Money Finance, made a mention of my financial blunders in his roundup for the week of 21 January 08, and there was a spike in traffic. 

Thank you, FMF!  

And a warm welcome to all FMF readers, who are dropping by for the first time.  Please look around and make yourself at home. 

I’ll appreciate your views and comments. 

The costly PF mistakes and blunders I have made, and why you should not repeat my mistakes – Part 4

Monday, January 28th, 2008

The five mistakes we have talked about so far are:- 

-         Not paying myself first  

-         Not forming or joining a correct peer group

-         Not having a written budget  

-         Not managing my career properly and

-         Not getting the best deals on my mortgages 

There is more.

The next one is “foolishly selling my long term investments without proper evaluation and soul searching”. 

Ever since I realized that I should start savings for retirement and for our children’s education, I have made monthly contributions to a unit trust or mutual fund as some people call them. My wife and I chose the UT reasonably carefully. We did not delve into diversification and asset allocations and such. 

In Malaysia, we have something called the Employee Provident Fund, where all employees and employers are required by law to contribute 11% and 12% respectively of gross salaries. This EPF is administered by a body set up under the Ministry of Finance and the Fund pays yearly dividends. 

You are allowed to withdraw a part of your EPF savings and invest them in approved UT’s. I also withdrew from my EPF account and invested in UT’s. (When we sell these UT’s then the money has to be reinvested back with the EPF). 

So over the years we had built up a reasonable nest egg.  

The mistake I made 

We had what can only be called a mind blowing bull-run in equities in 1992/1993 which as per text book rules ended in a spectacular collapse. The market then drifted slowly upwards and downwards.  

In 1997/1998 there was another equally mind blowing collapse due to internal political uncertainties followed by the famous Asian currency crisis. 

Against this backdrop, you may have guessed that my UT did not perform particularly well. There were years when no returns were paid and there were also years of losses. 

In 2003, I did something that I still regret. I sold off the bulk of the UT’s. 

The balance UT’s that I still held have performed as follows:-

As at:-

31 December 04 -       Taken as base 

31 December 05  -       Increased by 21%

31 December 06  -       Increased by 40%

31 December 07  -       Increased by 54%

The above returns include my monthly contributions (which I continued, thankfully). I am still astonished at the returns after even accounting for my contributions. Even though the last few years have been spectacularly good years for equities, the returns are nothing to be ashamed of.

What I should have done

Equities have their cycles of ups and downs. I was well aware of this, having been through a number of them. I also knew that these cycles could take years but just like clockwork, sooner or later the markets would move up again. And the time to turn around was not too far off.

UT’s offered a great way to diversify amongst a number of stocks.

In addition the UT company managing the fund we had selected was one of the better operated ones.

Since we were using the “dollar averaging method”, we had been bulking up on cheaper units as the markets languished.

I should have weighed all these factors and made an unemotional decision on whether to stay invested or to sell out.

Instead, I got influenced by the fact that there were no returns, without objectively analyzing the reasons why. I also never revisited the reasons why I had invested in UT’s in the first place.

Don’t repeat my mistake, please

Long term investments are just that….long term. They should not be influenced by the market fluctuations that happen daily, monthly or even the bigger swings (like what we are going through now) every once in a while. 

Investments in UT’s have the advantage of professional management and diversification amongst a wide array of stocks. Dollar cost averaging does give us an advantage in down markets, as we end up buying more units.  

Had we maintained our investments, my wife and I would be very, very much further ahead in our quest for retirement savings.  

Though I am not losing any sleep over it now, this selling off decision is something that I have regretted and will regret for a long time.  

And it is something I’ll keep repeating to my children never to make! 

My personal motivation and guide on “charity”

Monday, January 28th, 2008

All of us have our own reasons to contribute to charity.

How much should we give, how we should give and to whom we should give are matters which are quite personal to each and everyone of us.

In a world where spending less and less is become a mantra, charity is quite a misfit. What corresponding value do we see or get when we give to charity? How should we allocate scarce funds for charity?  When even paying down a punishing debt requires self discipline, what kind of motivation and self discipline does giving to charity need? 

I think my earliest introduction to charity was watching my eldest brother make donations to roadside beggars. My original motivations were, I suppose, also from the concept of “being good.” Being good means we should help people and one way is to make donations.  

As I grew older, my motivations changed. It changed from the vague concept of “just being good” to specific guidance from our Holy Book.

Though I am no religious expert, some verses from our Holy Book have really struck some chords in me.  My favorite guiding verses on charity are:- 

Verse 274 of Surah 2 

Those who (in charity),

Spend of their goods

By night and by day,

In secret and in public,

Have their reward

With their Lord:

On them shall be no fear,

Nor shall they grieve      

Verse 18 of Surah 57 

For those who give in charity,

men and women,

And loan to God,

a beautiful loan,

It shall be increased manifold,

(to their credit)

And they shall have (besides),

A generous reward.  

Verse 9 of Surah 76 

Saying, we feed you

For the sake of God alone

No reward do we desire

From you nor thanks. 

These 3 verses (I am sure there are many other verses extolling charity) are my favorites. They are my guiding lights and give me my strong motivation to give and to expect nothing in return from the recipient(s), not even a word of thanks.  

I am sure that all the great religions of the world, Christianity, Judaism, Buddhism, Hinduism, Sikhism, etc., have equally compelling messages on charity. 

For people with strong religious beliefs, the motivation for contributing to charity may probably come from religion.  

What about those without strong religious beliefs? Where does their motivation and discipline come from?

The costly PF mistakes and blunders I have made, and why you should not repeat my mistakes – Part 3

Thursday, January 24th, 2008

The four mistakes we have talked about so far are :- 

-         Not paying myself first

-         Not forming or joining a correct peer group

-         Not having a written budget and

-         Not managing my career properly  

There are more.

The next one is “not getting a better or the best deal on my mortgages”. 

My first mortgage was taken sometime in the late eighties. At that time, I was holding a key management position in a PLC.  The bank officers came to my office and took my particulars. A week or so later, they returned, this time with a solicitor. They had the documents all prepared and all I had to do was to sign on the dotted line.  

Which I did. 

The only things I remember about this mortgage :- 

a)    The Bank

b)    The amount borrowed

c)     The term and

d)    The monthly installment  

In the rush of the feeling of importance, I did not know then nor did I find out what the interest rate was, or whether it was a competitive one. And I did not even read the loan agreement and the other documents that came along with it.  

This loan was prepaid in full about 75% or so into its term. 

One would have thought that I should have learnt from this experience. Unfortunately I did not. 

With this house now free of loans, our family shifted to another town. We took another fresh mortgage on this first house and used the funds to pay for the second house in the new town + the renovations.  

As I was no longer holding that so called “important position”, this time, I had to join the queue and apply for the loan.        

Again the only things that I bothered about were same 4 things mentioned earlier. Now, having learnt a lot more about PF from the blogs, I have calculated the “losses” from this second misadventure. 

Had I shopped around for rates, I would have reasonably easily gotten a 10% reduction. If I had taken the lower interest rate loan and paid the same installments, I would have a year less to go. 

What I should have done

a)    I should have done comparison shopping for rates and terms of the loans. This should not have been too difficult an exercise as we do not have too many banks in our country. 

b)    I should have read every document carefully before signing. Though in this case, no surprises have come up so far, I have given the bank powers to raise rates at their discretion etc. (Though my loan is a fixed rate loan).

PS:

I tried to refinance the loan sometime last year, but the bank’s lawyers again came up with clauses allowing them to raise rates at their discretion, despite the ads promising an absolutely fixed rate loan throughout the length of the loan period.

My wife and I have since then decided to sell off the house and pay down our liabilities.

Don’t repeat my mistake, please

The purchase of our home is usually one of our biggest commitments. Hence the mortgage would be one of our biggest and longest liabilities. This liability has to be shopped for carefully, comparing rates and terms.  

If we are a good credit risk, we should make the Bank work for its money. 

The costly PF mistakes and blunders I have made, and why you should not repeat my mistakes – Part 2

Wednesday, January 23rd, 2008

The three mistakes we have talked about so far are :- 

-         Not paying myself first

-         Not forming or joining a correct peer group and

-         Not having a written budget 

Another mistake that I have made and beseech you not to make is “not managing our career”. 

I got my first job,with one of the then big 5 accounting firms, almost immediately after graduating with a Bachelor’s Degree in Physics. It was as an articled clerk. Most of my fellow colleagues then were school leavers.  

This was “my first formal job” and I had no thoughts about being paid well below what was a graduate’s starting pay. (Thank God for this.) The firm gave us study leave for the accounting exams, and I qualified as a CPA within the given 4 years. By then my salary had also risen to be slightly above the graduate entry levels.  

At this point of time, I should have thought deeply about the choices available and how I should maximize the earnings from my career.  

I didn’t. 

Instead I just joined the first company that made me an offer. (They called me.) It was a bank and I spent only 5 months there. The job which involved reporting to our Central Bank and filling up rows and columns of figures was about the most boring job I have ever done in my life. The only good thing was that I met my future wife here.   

Based on a friend’s suggestion, I joined another company where I stayed for 6 years. Basically after that my career consisted of joining companies at the invitation of friends. Each move resulted in higher take home pays, greater responsibilities and opportunities to travel etc.

There was a brief period where I resigned hoping to do something on my own. This was done with no planning and was a disaster. Luckily another job came along. 

I should have “managed my career better.” 

The best blog resource I have seen on this is Free Money Finance’s series on careers. (He proclaims our career as our biggest asset and it is not surprising that he has a whopping 270 posts under the category of “careers”.) 

Let me compare what I have done against FMF’s great post on managing our career 

Two aspects of a career should be evaluated.

o       Quantitative measurement of salary and employee benefits.

I did not pay enough attention to employee benefits. Benefits like subsidized housing loans, training schemes, and share option schemes would have a mighty big difference financially, even if the take home pay had been lower.

o       The second is a set of qualitative measurements which are even more important. These consist of new skills learnt, social connections we make and harmonization with the rest of our life and goals. I have only gone for those short 1-2 day courses as part of continuing education. Most of the new skills learnt were on the job and reading up on my own.

Whilst almost all my jobs allowed me great contacts, I have never learnt how to strengthen my network.

o       A third issue that I would add is evaluating the employer as one who truly seeks to attract and retain talent.

We are a developing country. Many of the companies in the corporate sector paid only lip service to the fashionable tagline of “people are our biggest asset.”

I have had some “good”, “not so good” and some “not good at all” experiences in this area.

What I should have done

a)     I should have learnt how to write a proper “winning” resume that would have highlighted what I had and could offer to a prospective employer.

b)     I should have identified, screened and shortlisted my potential employers with my list of “must haves”, “good to haves” and “wants”. Then I should have designed my plan for getting my desired position, and worked on it.

c)      I should have learnt about the usefulness of networks and put in a lot more time and effort on this aspect of my life.

d)     I should have considered and evaluated employee benefits a lot more carefully.

e)     With my career properly addressed, I should have crafted proper plans for moving on to the next stages of my life. 

Don’t repeat my mistake, please

Our career is certainly one of our biggest assets.

We spend a lot of time on our careers, often sacrificing once in a lifetime family events like our kids graduating from preschool, their school concerts etc.  

Proper planning and management should be accorded to maximize both financial and non-financial gains from this investment.  

Properly managed, our career may well take care of all our financial requirements, including retirement.

The costly PF mistakes and blunders I have made, and why you should not repeat my mistakes – Part 1

Tuesday, January 22nd, 2008

The lessons that I so wish I had learnt and mastered much earlier in my life are :- 

-         paying myself first and

-         forming or joining a correct peer group.

I have now set myself on a crusade, mostly through this blog, to ensure that my children learn these two lessons much earlier in their lives. 

There have been other mistakes. Lots of them. Perhaps writing about them may help others. The costlier ones will be covered here, in no particular order. 

Mistake – Not having a written budget 

I have never been “broke” since I started working, Thank God. This has not been due to adroit financial management, but thankfully, as a direct result of my background. I come from a poor family. And the early difficult years have been embedded deeply into my psyche.  

Though I have always spent less than I earned, there was no system to it. There were no investments systematic or otherwise.  

I started saving I think, around the time, my second girl was born. Not saving what I should, rather an amount that I thought I could “afford”. I have never done a spending budget, personal or family until recently. 

I now see and have started enjoying the advantages of having a budget 

We may think we know where our money is going, but believe me, we are only fooling ourselves. Though payments like mortgage payments, insurances etc., can be tracked, it is the expenses in the “others” category that end up draining us.    

By drawing up a budget, our expenses can be broken up into several categories and tracked category by category. This way, the management is less complicated and drainers can be identified and tackled.   

For example, my family now knows the amount we spend on phone bills. It is unduly high and is being reduced now. 

Club subscriptions that we have paid for years while hardly using them have been cancelled. 

Petrol bills have been cut down by converting the car into a NGV. 

And so on. 

The danger of not having a budget is that you don’t quite realize where the money is going and blame the wrong people or look at the wrong reasons.   

I used to have some quite messy quarrels with my wife over this. Only after the budget was drawn up and discussed have we both realized where our biggest drainers were. 

We had debt levels that were too high. This led us to seek cheaper financing sources that did not work out. So now we are disposing off our investment property.

I do believe that the actions taken since drawing up our budget will have a lot more positive impact on my family’s financial well being than the steps taken in the last 3 years! 

As an additional bonus, now there is so much better alignment between my wife and me, and in fact, the children in managing our finances. 

Don’t repeat my mistake, please draw up your budget. Monitor your spending. Even if it is only for keeping you informed, do it. 

And if it is “how to budget” or more “why must budget” information that you need, please read this excellent and most timely post by Free Money Finance.  

How can we nurture and reap the fullest dividends from our greatest asset

Monday, January 21st, 2008

Patrick at Cash Money Life wrote that our greatest asset is an intangible, i.e. our ability to generate income. I am in complete agreement with this view. 

In fact, almost all the methods of valuation of businesses are tied, in one way or another, to the ability of the business to generate income.  Even if we do have an asset that generates income by the busloads, it was “our ability to generate income” that resulted in us owning the asset in the first place. 

Pinyo over at Moolanomy has also given his views on how to protect this “greatest asset” of ours. 

How then should we nurture this asset so as to reap its fullest dividends?

Our ability to generate income is largely dependent on :- 

Our educational levels 

This is pretty much self explanatory. Having said that, we have to take proactive steps to ensure that our education is in tune with current day market requirements. This does not just apply to those of us in careers, but also to our ability to generate income from investments, trading, arbitraging etc. The informal part refers to knowledge gathered from books, blogs, trade shows etc. 

And of course, our continuing education. Many Internet entrepreneurs are products of this.

Our Past Experiences 

Our past experiences will have a direct impact on our ability to generate income. Almost all higher level jobs require “experience”.  And we all value the advice of experienced experts in the fields of investing, money management, real estate etc., over the inexperienced ones.  

Mistakes made and the lessons earned hone our skills and ability to generate income. 

Our network of Friends and Family 

Our ability to generate income would be almost directly proportionate to the strength, depth and coverage of our network. A person who has a network of close and trustworthy friends in the banking, real estate, stock broking and investment banking fields would most probably have a far better success rate in investing than one who starts out alone.  

Our travels 

Travel broadens the mind. Even though globalization has made the world a smaller place, not all parts of the world are the same. For example, certain parts of Asia may be comparable to that of the UK, say, 25 years ago. So if someone from the UK visits that particular part of Asia, he / she may think about how the UK has progressed and bring those changes to Asia.  

Let us think MacDonalds in Kuala Lumpur, Starbucks in Jakarta, etc. 

To nurture our greatest asset, we have to nurture these four areas continuously.

Where should we focus our reviews 

When we draw up this list for our personal individual situation and seek to identify a unique opportunity, we should remember the following.   Business opportunities are created when we have a service or product that :- 

a)    makes people money, 

b)    saves people money, 

c)     makes people feel more secure, physically or emotionally,  

d)    makes people feel better, physically or emotionally,  

e)    saves people time.

I am sure, there are others, but these broad areas should be good enough. When you put these two together, we should be able to see that a job or a career need not be our only option.  

Whether we take a job and work on the other options part time is not the issue. The fact is that the door is now open wider, and we should be in a better position to, at least see, how we can generate more income.

For me, this exercise has given me ideas on two book projects.

How my wife and I “frugalized” a sensitive item, telephone bills

Sunday, January 20th, 2008

I have earlier written about doing our family budget for the first time in our married life and our intention to work on paring the budget further. 

One item, telephone bills, was a bit of a bother. My wife and I have between us 3 cell phones, 1 landline, 1 fax line and an Internet connection. The monthly bill comes to a handsome sum. 

Can we do something to reduce this bill? 

My wife and I are quite, no, very, different in character. I am a numbers and logic person. Seeking order and organization in everything I do. I have one checklist for this and another checklist for that. (And usually end up check listing myself to a standstill). I would most probably be classified as “unfriendly” at almost every first meeting with anyone.  

My wife, on the other hand, is a people’s person. She is bubbly and has something nice to say about almost everyone she meets. She knows all the people we deal with in our lives - our grocer, the children’s teachers, the school principal, the school canteen operator, the local police station people, our doctor, the pharmacist, the bank tellers…….well, you get the idea.  

This is on top of her 12 uncles and aunts from her mother’s side and another 12 or 13 from her father’s side, and a serious busload of nephews, nieces, grand nephews and grand nieces.  

Then there are her former colleagues, my colleagues…. 

I shall not even try to complete this list. 

And in line with her people personality, her one weakness is the phone. Maybe weakness is too harsh a word; I should perhaps use “her one necessity”. 

We have had some arguments on the telephone bills. However, since the “budget day”, she is a lot more tolerant of my arguments on the need to cut down the bill. 

We have now realized (yes, I know, I am quite a peabrain) that the phone companies have various plans.  My wife and I have done some research on the plans available. Plans that would suit our requirements and help bring down the damages somewhat.  

As I may be traveling this week, my wife has agreed to drop by our phone company’s office and sign up for the new plan. 

This is indeed a very comforting sign of our financial alignment getting better.    

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