Father Sez

Picture Credit: Google Images 

I have often commented on the pf blogs that the fuel prices in our country are one of the cheapest in the world. After all, we are a net exporter of oil. 

We were assured by our political masters earlier this year that there would be no fuel price increase, despite the regular news on the spiralling costs in the international market.

Our Government has often talked about the humungous amounts the Government was bearing in the form of this subsidy. A sort of “we are looking after you at great costs” kind of PR mumbo jumbo.  

On the stroke of midnight, the 4^th of June 08, the prices were raised by 41%. 

Some people may say that this is still cheap by international standards. In fact our Government takes great pains to compare fuel prices against those of neighbouring Thailand and Singapore.  However a large number of Malaysians have different views.  

For one, we pay huge amounts in car duties. Our mouths water when we compare our car prices with car prices in other countries except Singapore (which has an excellent public transportation system.)  

The opportunity cost per annum due to these duties should be enough to pay for fuel costs, without touching the principal.   

Secondly, when the prices were increased the last round, we were all promised that the “subsidy saved” would be used to improve public transport. If I am not mistaken, the savings were in the region of RM6 billion. That’s a lot of money! I have not felt or seen this improvement yet. 

Maybe the fact that, at the last elections held on March 8, the ruling Government lost its customary two thirds majority in Parliament (which gave it a clear run to amend the Constitution and pass any law they wanted with impunity) had something to do with this. 

The Malaysian political blogs are full of comments by readers giving the Government a public cyber flogging. The 3 main blogs that I read have part of their views here, here and here. 

This act has also unleashed a horrendous tsunami of price increases all around. Transportation costs, food costs, any costs for that matter will be raised in the coming days. Needless to say, it started immediately and will continue for some time to come. 

I think that many Malaysians have grave misgivings over this drastic increase and the likelihood that the savings from these subsidies would be frittered away on wasteful projects. I share this view. 

This Government is just 3 months into its term. Nevertheless, I suspect that memories of this increase will remain in the minds of most of us for the next 4 odd years, when the Government will next face the electorate.  

Luckily my family and I have some shelter as we have the main family car running on NGV, the price of which has been left unaffected. I have written about fitting our second car with a NGV kit but have yet to do so. For now, the fit out shops will be overflowing with business and there should be long waiting lists. I have to revisit this a little later.   

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I have written about the sale of one of our investment properties, i.e. our former home.  

We signed the S & P Agreement for the house in late April 08. The sale has to be approved by the State Authorities, before it becomes effective. We had provided for a 6 month period in the S & P Agreement for the securing of this approval. (Yes, this doesn’t speak too highly of our State Government’s efficiency.)  

Lo and behold, the approval came out late last week. Whether this is due to the change in our State Government in the last elections, or just a general improvement in the delivery system of the State Government, I don’t really know. But the speed of the approval surprised everyone when I told them. 

This morning, I met with our tenant and the buyer at the house. The house was handed over to the buyer, with whom I’ll now have a landlord-tenant relationship till the full payment is made. (Our previous tenant has moved into another house not too far from this house.) The deadline for the balance payment is late August 08.

The buyer came with his wife, his 4 children, his parents in law, and his brother in law and one of his nieces.  

I felt an intense feeling of nostalgia, when I walked them through the rooms. Our three younger children were born in this house and their antics will always remain etched in our memory.  

It seemed like an era has ended in our lives. And a new era begins for the buyer.          

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This is a guest post by Tisha Kulak who is a writer for Creditorweb.com, where she writes about credit card offers, personal finances and credit card matters.

Economically times are getting harder than ever. Nearly every aspect of a person’s basic needs have gone up in price and those living paycheck to paycheck may be considered lucky to make it from one paycheck to the next. Due to the increasing costs of so many things, consumers are being faced with tougher financial decisions.

Many families no longer have the cash needed to buy basic grocery items and necessities and ultimately turn to their credit cards to survive. Utilizing credit cards to maintain daily life is not a financially healthy situation.

However, many consumers have no other choice. They are using credit cards to keep the lights on and food in the refrigerator. The trend is becoming increasingly popular and equally dangerous. Credit card balances are going up but family income is staying the same. Many consumers are not able to even make the monthly minimum payments. By not paying more than the minimum each month, people are digging themselves in even more debt. Balances will take many years to pay off in full and average consumers typically have more than one credit card with an existing balance. Add into the mix a missed or late payment and the balance grows even more outrageous.  

The best thing for any consumer with credit card debt is to really understand how much they owe. When family budgets are stretched to the maximum and there is no good outlook for paying down the debt, turning to a professional financial counselor may be beneficial to avoid falling behind and ruining your credit score. Once you have fallen behind, it becomes all the harder to catch back up. It is also bad for the economy as a whole because consumer spending ultimately decreases as there just isn’t enough money to go around.  

For those who feel they can not survive without using credit cards to maintain daily life, there may be a need to seek financial support from the community or local welfare office. Check out programs to help with utilities, buying groceries, and other necessities in order to stay on track  Debt management companies may be able to help you pay down your credit card balances in a shorter period of time. They may also be able to work with you on a realistic budget to get your through the worse of your financial situation. Not seeking help when you need it will eventually make your debt even worse and it will stick with you for a long time.  

Credit cards were not designed to keep your family going each week. Responsible credit card use dictates that anything you can not pay off at the end of the billing period should not be charged on your credit card. Before you turn to credit to help you make ends meet, consider all other available resources first and only charge what you can afford.

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Last week, I wrote about my present position vis-a vis my aims for retirement.  

Today, I shall show my idea of where I want to be when I retire and my intended action plan to get to where I want to go.

And the map above is the position I want to find myself in when I retire.    

With this, I sat down to think about where should I focus? The important areas are:- 

a)    The elder children’s personal finance education. My wife and I want to try and make sure that the elder two girls are financially literate and that they would not be a financial pain in anybody’s necks. They should be able to take care of themselves and be a sterling example to their younger siblings. As the formal education sector does little to prepare children for life, my wife and I have to do our part.

Thankfully, I have tons and tons of resources from the pf blogs on this.  

b)    The younger children’s education should be the biggest costs that we expect to face in the future. Their studies should be nurtured so that their grades are good enough to qualify for good scholarships.  

Not withstanding the support given by many commentators to Mighty Bargain Hunter’s “Worried about paying for college, then don’t”, my wife and I rate our kid’s education as our duty. 

We shall do what we can, in fact all we can, to ensure that the children get a better chance in life than we got.  

I also hear Flexo’s comments whilst debunking yet other retirement myth. That children cannot be 100% depended upon to support the parents in retirement. 

My wife and I just want to pay it forward. We are not expecting anything from the kids, anyway.  

c)     Health. This is an item that is “so, so important, but not urgent”. So it is usually left somewhere at the bottom of the pile. Exercise is one item that is left out when other so called more urgent things crop up. We shall focus on exercising and learning Chi Qong. This is an ancient Chinese art, geared towards guiding its users to gain tranquility, better health, fitness and also some self defense. 

d)    Take the businesses from the incubator level, nurture them and organize them such that my time involvement will be minimal. This has to be something like a 2 – 5 year plan, but should be started now.  The goat farm is in progress. The planned launch is in July 08, the critical outstanding issue being the bringing in of our farm workers.  

Another business is in the field of the leasing of telecommunication towers in Indonesia. This plan suffered a setback when the Indonesian Government issued a decree deeming this business to be closed to foreigners. However, we have come up with a workable alternative and are actively pursuing this now. 

e)    Clear my liabilities, leaving only the mortgage. Tackle the mortgage last. My family can achieve this by selling off one of our assets. This plan is currently in progress. 

f)     Nurture and grow this blog. I am not making any money from this blog. However blogging has made me really focus on the important areas of my life.

g)    Generating some passive income. I may have missed the boat in socking away some good dividend paying stocks in earlier years. It’s my loss that I did not run into people like Dividends 4 Life when I was much younger. 

I have to use all the skills I have acquired in my corporate life and put them into effect to systemize the operations of the businesses I am incubating. Much like what Michael Gerber has written in his book, E-Myth. The operations should be “engineered” in such a way that my time involvement would be minimal.  

Then I came back to the other rule of thumb that I read from Plonkee’s comment to Flexo’s post that started off all this thinking. The need for us to have about 25 years of spending money during retirement. 

The options are quite clear. Either  

-    Increase my income and get the 25 years nest egg, or 

-    Decrease my expenses. 

I shall keep working on these two very sensible things to do.  Nevertheless, the focus would be on the second option.  

Now I have a nest egg of $X. This should grow to say, $Y, by the time I retire. This should have to last me say, 25 years. So per year I can spend $Y/25. 

Where can I have a life that I want with this amount? Aha! More options fall on the table.  

I can move to the country side in my own country. We already live well away from the Federal Capital. I can still go further rural. Or I can check out other countries.

Countries, where culture, food, transportation, housing, health facilities, education for the younger children and other normal barometers of living are acceptable to my family and me. This I can do now, the checking out I mean. India (where I have worked for 3 years and still have family there), Vietnam, Cambodia and the Philippines are countries that come to mind. 

Suddenly the prospect of retiring as a semi derelict is no more seen as a possibility. 

Life seems to be so much rosier, the sun so much brighter, the birds singing so much sweeter and I do feel a bouncier step as I walk. 

Why not try a mind map yourself?

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A while ago, Flexo wrote in his blog a story titled, “Retirement Income Rule of Thumb Debunked.” In it, he quoted a mysterious Mole of Money Magazine, who came up with the assertion that we should estimate our full current expenses now and add 10% to that. Then we have to come up with that amount for each of our retirement years. 

This effectively debunked the previously held wisdom of needing 80% of our pre-retirement income per year of retirement.

This post was actively debated in the comments. And in her comment, Plonkee added in another rule of thumb that she was aware of. We should have about 25 times our estimated yearly expenses. (This rule was not debunked by anyone, not in the thread anyway).  

Man, is this depressing or what? 

We have rules of thumb that say, the maximum house we should go for is 1.5 - 5 times our yearly income, and another rule of thumb that says the biggest purchase of our lives would usually be the house. 

How on earth do we get 25 times of our yearly income, sorry, 25 times of 110% of our yearly income as our retirement nest egg? This is 5 – 17 times our biggest purchase.

I can hear people telling me…..Yeah! That’s why we asked you to start saving early and let the power of compunding work for you. 

Well, unfortunately, I did not hear clearly enough these wise words earlier.  

I sat back and asked myself exactly where would I stand, given all these rules of thumb. I have the fear that I may not achieve this retirement rule of thumb.

So what would be my downside, and if I were to plan to do my best and start now, where should I direct most of my energies.  

A post I read in Problogger gave me an idea of how to do this evaluation. Giving ideas on how to excite the minds of new bloggers to come up with ideas on posts, he suggested the using of mind maps.

So I drew a simple mind map of my current position.   

So, this is where I stand now.  For the next post, I shall look at where I want to be and how and what are my thoughts on what should I do to best bridge the gaps.

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This issue has been argued and debated to death in the pf blogs.

Nevertheless it’s an important topic and I am sure sooner or later every one of us will have to make a similar choice. 

Well, my second daughter was recently at this cross road. 

My elder two girls both have, what we call in Malaysia as investments in Amanah Saham Bumiputra (ASB). This is a type of unit trust managed by a Government owned body and the principal and annual returns are guaranteed by the Government.  

It’s hence not surprising that banks freely give out loans to people to buy these investments. After all, these unit trusts are sovereign rated. So since they turned 18, my two elder girls have loans and investments in ASB.  (The yearly returns are sufficient for the yearly repayment and I do a small top up yearly. My wife and I hope that this will help them to continue and maintain the savings habit only they start their working lives.)  

Recently my second girl received some money and the issue of using the money for investment or paying down loans came up. 

For me, it was simple.  

I showed her the great article written by Mighty Bargain Hunter under the heading of “How strong is your piggy bank?” 

Azah went through the story and decided she wanted to keep 50% of the money in a titanium-reinforced Kevlar® piggy bank inside a force field. That is to pay down the ASB loan. 

The balance will be kept in a steel piggy bank by buying additional ASB units. 

I am happy with the choices she has made. What do you think?

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During my younger and much more financially and life ignorant days, my wife and I purchased a Timeshare.  

Then, the logic sounded good. For this one time payment + another yearly payment, my family had a choice of 7 or 8 properties in Malaysia where we could go for family holidays. As a large family we usually had to take 3 or even 4 hotel rooms. The Timeshare offered facilities like kitchen, a hall and 2 – 3 rooms. Perfect…it seemed.  

Alas! That was then! 

Now I think about the opportunity cost of the capital invested. This plus the yearly maintenance fee could pay for much more than what I was getting. 

Now I think about the resorts being booked solid during the times when my family would want to use it the most, i.e. school holidays, festive seasons and during other National holiday seasons.  

Now I think about how silly I was to have bought the Timeshare in the first place. 

Now I think about it being no wonder why there are so many ads for selling Timeshares at discounted and often deeply discounted prices. 

My wife has started renting out the Timeshare to her friends and other family members who may want to use it. The money received is used to defray the yearly maintenance charges.  Though the whole process is also quite cumbersome, at least part of the yearly outflow is being taken care off. 

We have often thought of selling off the Timeshare. Our local classifieds often have advertisements of these for sale. There are also some international web sites that claim to sell or rent Timeshares.

This situation of having to pay the yearly outflow whether we use the facilities or not is clearly an unnecessary financial pain. Something that is not in line with my present thinking of eliminating outflows that do not add any value. Something that should be taken care off immediately. 

I am going to advertise our Timeshare for sale. After all my investment is already sunk, if I can stop the continual bleeding, it should be enough. 

I have no back up plan.  However there seems to be an option to be able to donate the Timeshare.

My wife and I may donate this and hope that the recipients make more productive use of this Timeshare. 

PS:  

If any of my readers out there have any interest in a discounted and deeply at that,   Timeshare, please get in touch with me.   

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There is a growing chorus of predictions that we are about to have or may already be in a recession of a strength and depth not seen since the 1930s’.  

Seeing the events unfolding all around us, this is not surprising.   

- Oil prices are predicted to hit USD200 per barrel.   

- Food prices have been on the way up and are not showing any signs of stopping their climb. 

- Corporations are tightening belts and as usual one of their first targets would be reducing employment costs by way of mass layoffs. 

-  A number of the big banks are walking around with hat in hand seeking infusions of capital to stay afloat.

Many of the personal finance bloggers (myself included) and probably many of the financial journalists around would not have gone through or were too young to fully appreciate the difficulties of the 30’s Depression. I guess the best lessons would be scenes from movies as opposed to books or articles. After all a picture does say a 1,000 words.

For me, reading JD’s post on his review of the book “A Tree Grows in Brooklyn” transported me mentally to the time of 1901. I would strongly recommend that we should all read JD’s excellent post again and soak in very sound financial advice.

You may have heard the story of a frog which was put into hot water. It immediately jumped out. When the same frog was put into room temperature water and the water slowly heated up, it stayed there till it died. An economic recession also works in much the same way. Slowly it envelopes us and before we know it, we are down and out!

I think there are enough experts saying that this depression scenario is a given, and enough saying that times are different now, so the recession won’t be so bad.

Whatever the final expert opinion may be, rather than being the frog in slowly heated up water, it should be mandatory for us to prepare and run through a checklist to see how well prepared we are.

Going through the blogs and other articles on preparing for a recession, a reasonable checklist seems to be :-

a) Cut down fixed expenses, especially debt payments

My family has already taken the first step towards achieving this by selling of one of our assets, a house we have had for the past 16 – 17 years. The proceeds of which are earmarked for some serious debt reduction.

b) Practice frugality to the hilt.

Blogs like Lynnae’s Being Frugal (see her post on frugal tips to survive a recession) and other posts like GLBL’s suggestions on how to save on groceries should become staple reads for all of us. Tips learned should be applied to bring down the cost of meeting our needs. Of course all wants should be postponed to a later time.

c) Aim for and become as indispensable as you can at your workplace

d) Cultivate skills that will be in demand.

We have started a goat farm. Though it has been said that handyman skills like plumbing, electrical repair work, etc will be of particular use, since people will try to stretch out the useful life of their property, I think being a vendor of food products via our goat farm will be useful.

e) Reduce the dependence on the money economy.

I particularly liked this statement I read in Wise Bread. Growing some of our own food, making our own clothes, doing our own cooking, own laundry, barter etc may be classified here. We intend to grow our own vegetables and raise chickens also on the farm. I think this should help bring our monthly food bill considerably.

f) Have a healthy emergency fund

My emergency fund has been somewhat depleted due to some unexpected expenses as well as additional investment on the farm. My wife and I have made provisions to replenish it from the proceeds of the sale of the house.

g) Stockpile medications and Independent Health insurance

I have some ongoing medication costs. Since reading about the generic alternatives I have changed “brands” and the cost has gone down considerably. I don’t intend to seriously stockpile the medication, as I carry about 3 month’s requirements currently and will replenish once it goes to two months. We have always had our own health insurance, so there is no dependence on my employer.

Having never experienced the financial effects of a recession directly, much less a 1930’s grade one, I am not really sure how I’ll fare raising myself and my family, if one hits.

For now, I just want to prepare mentally for the worst.

For obvious reasons, this is a popular topic and other more knowledgeable bloggers have also written their views. Some examples are listed below. 

i) io9”s 12 ways to prepare for the next great depression. 

ii) Blunt Money’s Nervous about a potential layoff 

iii) KC Lau’s How a recession happens and 8 tips to prepare for it 

iv) Money Central’s How to prepare for a recession 

v) The Wastrel Show’s How I am preparing for the proposed Recession 

vi) Wise Bread’s Preparing for a recession 

vii) The Digerati Life’s Recessions and the State of our Economy

Picture Credit: Google Images 

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This journey, leading to the signing of the S & P last Friday, started shortly after my wife and I studied the first ever family budget that we had done. Not good! 

Then we did a review of the family loans and applied the DTI ratio that I read about in Moolanomy. (The Digerati Life has also written about this. Both are very useful pieces of information for would-be borrowers and others like me, who may never have run a health check on our loans.)  The results of the loan review were, needless to say, not good, and this was the final straw that led to my wife and me deciding to put up the house for sale.  

(We bought this house quite sometime ago. About ten years ago, we shifted and this house has been rented out since then.) 

I have read that some bloggers, like Brooke would prefer to handle the sale themselves. We appointed an agent and are very happy with her efforts. Still, I must mention that there was hardly any interest, until I followed FMF’s sound advice on not making the single biggest mistake of home sellers.   

I have now signed the S & P agreement, and the buyer has paid the 10% deposit. There are still a few formalities to be settled before the property actually changes hands, and we receive the rest of the money.  

My wife and I have agreed that the proceeds, after paying the costs of the sale will be used primarily for debt reduction. Our loan profile “before” and “after” our planned debt settlement will be as shown below.  

Some amounts are being set aside now for family expenses expected to arise over the next couple of years. (This was at the reminder of my wife and I think it is lucky that I did not overlook this.) 

At the time of the loan review, we figured our “after sale” DTI (Back ratio) to be 7.40%. The present estimates (after debt reduction and amounts set aside) are at 11.80%, still a fairly respectable rate, I think.  

The sale also marks another milestone of my plan to quit the rat race.  

Selling the house was not that simple a decision to make, despite the fact that we had not been living there for almost 10 years. The house is in the capital city (we now live in a slightly more rural setting, about 60 km away from the capital), and there were thoughts about shifting back to the capital someday.  

Even after making the decision to sell, signing the S & P was another toughie. There are emotional ties to the house.

I’ll write more about this tomorrow.  

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I remember reading in Readers Digest quite some time ago, that should all the money in the world be equally divided amongst everyone, in less than 3 years, the wealth would go back to the earlier distribution.

RacerX wrote about the “buy out packages” being offered by Chrysler to some of its employees. By taking a sum of money, maybe equivalent to about 2 - 3 years of salaries, the workers were expected to walk away and begin life anew. Without the safety net of the Chrysler salaries.

I am not sure if this offer has been completed or how many workers accepted the offer.

I believe most people used to receiving a monthly salary and spending it, attain a certain mind set. A mindset of spending what they have. To be sure, some of the money will go towards savings / investments. However, I dare say that a large amount will go off towards some sort of consumption or another.

And sooner rather than later, they will be left with no job, and no money.

The same has been demonstrated in Malaysia.

a) We have a Government regulated compulsory savings scheme. The employer pays 12% and the employee pays 11% into the Employee Provident Fund (EPF) which manages the funds and pays dividends yearly. The contributions are tax deductible.

EPF officials have been quoted saying that their studies indicate that the people who withdraw their savings in a lump sum upon reaching the age of 55, tend to spend their savings off in 3 years!

b) We also have a Federal Land Development Authority(FELDA). Set up in 1956, it was part of an ambitious plan by our country’s then leaders to create income opportunities for a vast number of underprivileged people. The Government parcelled off huge chunks of land in 5 acre parcels to families who wanted to grow cash crops, mainly rubber and palm oil.

See Wikipedia’s write up on FELDA.

The Government also made large investments in palm oil mills which provided a ready market to the farmers producing the palm oil fruits.

Over the years, some of these land parcels were seen by property companies as having development potential and enticing offers were made to the FELDA settlers. Not surprisingly, a number of the settlers took up the offers and became instant millionaires.

Our tabloids were full of stories of a number of these instant millionaires buying cars, building mansions, swimming pools, taking on second wives and the like. Basically squandering away the funds.

Those of us who are used to receiving regular payments as salaries and use that to manage our financial lives have to be very very careful, when we receive lump sums or windfalls. No matter how we may have planned the utilisation, a little by little the amounts may be frittered away

It would be good and very useful to revisit Mighty Bargain Hunter’s write up on piggy banks and choose the very best model available.

I am also expecting a significant part of my retirement to come from EPF. I must, must remember to follow this advice!!!

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