Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Archive for the ‘Savings’ Category

Can a windfall really change people’s lives?

Monday, February 18th, 2008

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!!!

This should be a no brainer, shouldn’t it?

Thursday, February 14th, 2008

Petrol prices are terribly, terribly cheaper in Malaysia than in almost everywhere else in the world (except maybe the Middle East). The Gomen keeps telling us how much they are spending on subsidizing the cost of petrol to users, and how much a financial burden it is.  

Our general elections have just been announced and we are all gritting our teeth expecting a fuel rate hike soon after the new Gomen is safely ensconced for the next 5 years.  

Sometime ago, I wrote about having fitted out our car, a Toyota Camry with NGV capability This has reduced our costs of the Camry’s utilization significantly, and I should be able to recover the cost of the NGV fit-out costs in about 2 years. 

We also have another car, a Toyota Innova. This is larger and is more suitable when we travel as a family. This car is also used by my wife for her grocery shopping, kids to school and other activities, errands etc.

So generally, this car is used a lot less than the Camry. We keep a car log book, tracking daily travel, km when we start and when we return, cost of servicing, and fuel pumped etc. 

The average petrol cost per month for this car over the last 7 months is RM 213.90, or say RM214.  The estimated cost of NGV fit out is RM 6,800. In addition, I have to install overhead racks for baggage as there would be no more room at all in the car for stuff. This is another estimate of RM 1,500, making a total of RM 8,300. 

Assuming I can save 50% of my petrol bills per month (which is the savings rate I get for the Camry) or RM 107.00 per month , this investment will take 77.6 months to be recovered or 6.5 years. 

Or an investment rate of return of 15.38%. 

And, of course, if there is a petrol rate hike, the rate of return will be proportionately higher.  

I have been undecided on this for some time now.  I am now revisiting this issue a lot more analytically.  

One 

Should I go through all these trouble to save RM107 per month? (Ever since I started reading the pf blogs, I have decided to be a lot more careful with cars, basically maintain them well and run them to the ground. So this car is going to be with us for quite, quite some time.) 

Two 

Should I ask my wife to try better planning the usage of the car? For example, Lynnae is working on with 3 days a week of no driving at all.   

Three 

Would I be able to take the RM107 savings and chuck them into a savings / investment vehicle and watch it grow? Or would I just waste it away? 

FMF highlighted as one of his favourite money saving tips on cars, a comment from a Yahoo reader. 

In 2001, I bought a five-year-old Jeep Grand Cherokee with 40,000 miles. I paid cash for it and decided to invest what would have been a “new car payment” of $400 a month into a mutual fund. Five years later, I have nearly $40,000 in the fund. It was easy and a lot of fun watching my money grow. My Jeep is still running great, and I’m now trying to figure out what that to do with some of that money when I retire!”

Looking at the reasoning, the answer to my dilemma seems to be a resounding YES.  

a) I should pay for the NGV fit out. And if necessary take out part of present savings in Unit Trusts to pay for this. 

b) Set up standing instructions from my bank to pay in RM107 per month back into the Unit Trust. 

c) And quietly let my savings grow and reduce my carbon footprint at the same time. 

What do you think? Is there something else I can do to make the whole thing even better?

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. 

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.    

“Frugal” things I did in 2007 and plans for 2008

Tuesday, January 8th, 2008

Sometime ago, the Simple Dollar wrote a series of one hour projects to improve our finances.  I found it inspiring.   

So I did what he suggested and cut off some waste in my finances, or rather things which I could do away with, without affecting the quality of my life in any way.  

a)  Cancel one credit card 

Ever since I got my first credit card so long ago, I have always paid the bills in full. My cards have never carried any balance. Since 2006, I have been carrying two cards for which I pay yearly subscriptions.  I have now received a card with a life long waiver of fees, so I have cancelled one of the earlier ones. 

b)  Earn points by paying bills using the credit card 

Many of the bills which I used to pay by cheque, I have now converted to paying using the credit card. In addition to the accounting trail, I also earn points which I would not have gotten otherwise. And I use less cheque leaves now. 

c)   Convert the car into a NGV car 

Petrol and diesel are a lot cheaper in Malaysia than in most other countries. Despite this, my fuel bills were getting a little heavy since I have commute almost 150 kms daily. In addition, the Gomen is making frequent statements that the country has no choice but to live with a higher pump price. We are all expecting another jump in fuel prices. 

So I spent about RM 6,000 fixing a NGV kit so that the car now runs on petrol or NGV. Though there is the inconvenience of having to fill up daily, and NGV stations are not that common, the savings are adding up. 

I should recover the cost of the fit out in about two years, and then it would be savings all the way.       

d)  Cancelled Club Membership 

I have been a member of a club for a number of years, though I hardly ever used or use the facilities.  I discussed this with my wife and then cancelled the membership. 

These changes have had zero impact on my lifestyle and I am now happily encouraged to go deeper. 

The plans for 2008  

a)  Phone Bills  

I am one of those silly consumers (whom telcos just love) who do not study the plans available. In fact this has caused a lot of tension in my household. (I’ll write about this later.) 

I have now researched the plans and it looks like some of the plans will reduce our bills substantially.  

b)  Cable TV 

This has just been cancelled. The children spend all their time watching cartoons and I hardly have time to watch cable anyway. In a week or two, my household would have forgotten all about cable.  

c)   Medication 

I spend a fair amount of money on this. I am now on the lookout for the generic versions.  

With my newly reawakened enthusiasm for exercise and this conversion to generics, I am confident that the 2008 bill for medication will be substantially lower than 2007. 

The net financial impact of all these may not exactly be the stuff that fortunes are built upon. Like an old school friend once told me about waste, “Even if you throw something into the sea, it makes a “pop” sound, but this one does not”.  

This is the waste that I want to cut. The waste of expenses incurred or benefits overlooked, just because I did not look a little harder, ask around a little or did not make one or two phone calls.  

Koottus, Tontines, Arisans and Peer to Peer Lending

Wednesday, December 26th, 2007

My Deals Blog wrote a story on him joining the Lending Club, where he mentions his reason for signing up as the $25 bonus the LC gives when you sign up.

  

Get Rich Slowly has also written about what is it like to borrow money with  Prosper. JD’s reasons appear to be more substantial. He was looking for lenders to finance his credit card debt at a rate lower than that of the credit card company. This he got, and as an additional bonus, he had his lending club encouraging him on as he worked to repay the loan.

To me, the LC and Prosper look a lot like “mini banks”.

If I could simplify their business model, they collect money from people, and they lend it to others. There are people at the centre to coordinate / facilitate all these, and they get a small cut somewhere along the line. Effort is made in trying to match the lenders and borrowers, hence causing a peer-peer relationship.

The key drivers are that people who have extra cash lying around and earning bank/ CD interest get a better return, whilst the borrowers get   loans with interest rates lower than what they would otherwise pay.

These two examples are from the US.

Let’s look at what people in our part of the world do.

We have koottus, tontines and arisans.

All the three have the same basic modus operandi, though different from the US model.

Someone (“the leader”) forms a group of between 5 – 20 people. All are known to each other, possibly even relatives, hence a real peer group. The leader is someone everyone in the group acknowledges as being a person of integrity.

They each contribute an agreed amount say, $50, $100 or $1,000 a week or month. The group draws lots to decide the order of receiving. The leader always gets the first draw (no expenses are charged to the pool). The 2nd onwards will be decided by lots.

The advantages to the koottu pool members are that:-

-         The weekly or monthly payment ensures forced savings. The peer pressure makes sure of this.

-         They get a lump sum when their turn comes. These are used to meet expected big expenses like weddings, birth of a child etc.

Some people call the koottus tontines, though the Wikipedia definition seems to be a lot more ominous, and does not seem reflective of a koottu.

A variation to this koottu formula is the auctioning of turns. The leader as usual gets the first turn. The right for the second, third turns etc. are auctioned. The winner will receive the amount reduced by the amount he/she is willing to forsake for the right to the said turn. This amount is shared amongst all the other members.

In some parts of Indonesia they call these schemes “arisans”. Sometimes, an entire village takes part, hence the rotation may be over a couple or more years. Local “shamans or bomohs” are consulted by people to help assist in their turns being amongst the earlier ones. Also children draw the lots, as they are “less susceptible” to manipulate the draws.

These informal arrangements have existed for years. Many a wedding, purchase of house, children education etc. has been financed by the “koottu” draw.

Shopkeepers also have their own koottus. Textile shop merchants have their pool, restaurant owners have their pool and so on. Like a shopkeeper told me, “How else can we get a big lump sum?”

Integrity being such a scarce commodity these days, there have been cases of the pool money posing too much of a temptation to the leaders, and they run away, with the money of course.

And the Malaysian Government has long banned such schemes.

But the koottus live on. And I think they do serve a useful purpose.

I am not sure of the sustainability of a system of Peer to Peer Lending, when you personally do not know the members and know them well. Having a central team to coordinate / facilitate the whole system, will give rise to overheads that have a strange way of steadily increasing. Then straining either the borrower or lender, or both.

Koottus, despite their warts, have existed for centuries and still flourish today.

I am not sure if such systems exist in the West. If they don’t, it maybe

worth considering.

We have found our “How to Guide” to shaving our monthly budget

Monday, December 10th, 2007

For the first time in our married lives, we have done our family budget. And after only 23 years of marriage and 5 children. Whilst this may not be exactly Speedy Gonzales’ style, at least it will give us a chance to find out if the old adage “Better late than never” is indeed true. 

I must admit, I was pushed into this by some great posts that I read in the blogs on preparing for self employment.

Posts from blogs such as:- Get Rich Slowly Redomestication and  The Digerati Life. 

Then we sort of stress tested our budget. I thought we had it pretty much pared to the bone, when along came Clever Dude’s three parter on “What could you give up if you were in financial trouble”. 

The Dude classified the expenses as luxuries, semi luxuries and essentials. We can guess which would go, if push came to shove. The surgical, practical and unemotional cuts suggested by Clever Dude made me wonder if I could cut more. 

I also like Moolanomy’s useful idea to apply the Pareto Principle to rank our expenses and direct our focus on the bigger hitters. 

So it is back to the drawing board.  

Another 2008 financial goal is going to be cutting down our monthly budget. How, by how much and by when will have to be agreed upon after discussions with my better half. 

After all, we now have some great “how to” guides.  

Ribuan terima kasih, guys. (This is how we offer a thousand thanks in my country).

One of my goals for 2008 is to impart to my children the two most important PF lessons that I have learnt.

Thursday, November 29th, 2007

My wife and I have 5 children. The girls are, Along, 21, Azah, 20, Nana, 12 and Ain, 9 and our only boy, Abang, 13. 

We are just as concerned as any other parent that our children should grow up stable, well rounded, respected and respectful members of the community we stay in. And personal finance is one area we want to make sure our children, if not excel, should at least do well.

Imparting these lessons has been one of my wife’s and my goals for some time now, or rather a wish. A strong wish, no doubt, but still just a wish. 

I call it a wish, as it had no specifics, had no measurable metrics and no time limits.  

Not any more. Thanks to the knowledge learnt from the pf blogs I follow and some serious thought, this wish has now crystallized into SMART goals for my wife and me.  

This is my story. 

The two most important PF lessons that I have learned, are:- 

a)    Paying myself first or living below my means and 

b)    Having a peer group with PF as an “agenda item”. 

I believe that if a person masters or is comfortable with (a) and has a good peer group that avidly discusses personal finance, then he or she is well on his/ her way to financial independence. In fact having (b) should also lead to (a). 

My wife and I have set ourselves the following goals as part of our goals for 2008. 

i)      To ensure that the 2 senior girls, form or join a peer group with PF as a core subject, and  

ii) To ensure that the 2 younger children learn to pay themselves first. 

And our plan to achieve these goals:- 

i)      Goal (i)  

-         We have tried asking them to form a peer group themselves, it has not worked. They are in college now, and though they have made some solid friendships, none of their friends seem interested in this idea now.  

-         I have enjoyed great positive effects from reading pf blogs. Since my daughters belong to the generation that is very comfortable with the Net, I have given them a list 5 pf blogs that I think they may find interesting. It is possible that my girls may well decide that some other pf blog is more their type. This will be fine with us. 

-         We have offered them monetary rewards for every comment they make on these blogs. These comments must be accepted and published by the blogger.   

-         My children have to email me the URLs so that I can keep abreast of their comments. 

-         To comment, the girls have to read the posts. I am sure that some interest will be generated, from posts which should be close to their hearts now, for example those on career guidance, tips on facing the interview, etc.  

-         Over time, we expect (and hope) our children to start having an interest in the lessons these bloggers post, and for this interest to grow. These blogs will then become their peer group.    

ii)     Goal (ii) 

-         Give the younger children (except the youngest), a weekly allowance.  

-         Sign an agreement with them on this allowance. They have to keep accurate and neat accounts and save at least 10% of the amount, (they can save easily by taking packed lunches to school).  

-         Thanks to another pf blog, I have a great model to follow for this agreement. Used by none other than John D. Rockefeller himself, and edited to suit our purpose. I forget the name of the blog that pointed this out. I am sorry. 

-         Fixed targets have been set for their savings for the year. At the end of 2008, we shall go to the bank and deposit their savings in a bank account. I have agreed to contribute 300% of their savings as a top up gift. (So as you can probably guess, the targets are modest….baby steps, baby steps first) 

Do our goals meet the benchmarks for well set goals? Let’s run through the checklist.

Do we have a strong desire for the goals? But, of course! Our children’s education is very high in our list of priorities. 

Are the goals specific? Yes, they are. 

Are they measurable? Yes, the elder girls have to post comments, which can be counted. We have not set any numbers on the comments they should post. We believe we should leave it to the girls to decide for themselves.  

The younger children have a target amount to save and a date by which to achieve it. 

Are the goals achievable? Yes, they are. All our children now accept that goals are something that they want to do, as opposed to being forced to do. (Or are they just saying it???) 

Are the goals realistic? I think they are. 

Do the goals have time limits? Yes, the target dates are 31 December 2008, and we shall have periodic reviews.  

Will we achieve the goals?  We feel well prepared and are looking forward to marking off these goals as done. 

Nevertheless, my wife and I have to delicately balance our wishes and plans against the comfort levels of our children. It is likely that many,  if not, most of our children’s friends’ parents would not be doing anything similar, so there might be some negative peer pressure from their friends at school or college.  

Time will tell. My wife and I just have to find their “switch”.  

We’ll appreciate any ideas, comments or advise from like minded parents out there, who have walked this path before.     

Cosmetics – Is there a way to lighten this outflow from many a lady’s wallet?

Thursday, November 29th, 2007

Sometime ago we talked about preparing our children for the onslaught of advertising that they would face daily in their lives.  

Billboards, newspapers, magazines, TV, internet ads – the advertising industry is a mighty formidable one.  The basic premise is that without using or owning the product being advertised, we are inferior in some way…..and their product would fix this. 

There are many ads for some really useful products, but, many, many more needless ones. 

One big sector is cosmetics, and as parents of 4 girls, my wife and I have to address this.  

In the days of old, almost all cosmetics were based on folk remedies and very light on the budgets. Not anymore.  For a young girl starting off in her career, where she would be mixing with mature men and ladies, the pressure to look good (as in air brushed cover girl good) is incredible.

A significant part of the monthly budget goes into buying cosmetics. What about going back to the days of old?  Those days when home  remedies and natural cosmetics were the norm. The ladies of old were as lovely as any of the models that we see today on glossy magazine covers. 

Even some doctors are advising us not to spend too much on personal care products. Read the Frugal Duchess’ story on this here.  

Will my daughters even consider this option at all? How do we start?  

There are resources such as Indian Home Remedies and books like Natural Beauty at Home, More than 250 Easy to use Recipes for Body, Bath and Hair. 

I suppose this is something they have to be comfortable with. As parents, we just want to point out to them that there are other cheaper and possibly better options to just buying the latest cosmetic that is advertised.

What turns you on – Expansion of income vs Reduction of expenses

Tuesday, November 13th, 2007

Many PF blogs explain various methods of saving money and reducing expenses. Some of these posts are really good, showing ways to reduce expenses without affecting quality of life in any way.

See The Simple Dollar’s series on “One Hour Projects.” 

Others need a lot more commitment, things like baking our own bread, cooking for a week and storing them, sewing our own clothes, etc. 

We all can agree that the Number 1 cause for a terrible financial position is “living beyond our means.” So managing expenses and controlling them is a must. 

The debate on “whether we should pay down loans (hence reducing interest expense or invest to increase income” is a hot one. I don’t think there is any one single “right” answer.

We have mathematical arguments, talking about comparing the amounts and % that we expect to save and make, and then making our call.  Others who appear to be more risk adverse take the position that interest savings are clearly determined, while investment income is risky and unknown. This, I call, the “bird in hand vs the bird in the bush theory.” 

The Simple Dollar argues that the answer depends on one’s own goals and lists some of the benefits a debt free life can offer. He also calls the debt payment a psychological investment.  

Yahoo Finance drives home the point that :-

First, no one ever spent a sleepless night because she had millions in the bank and stocks but didn’t have her home paid off. On the other hand, if you pay off your mortgage and deprive yourself of liquidity, you could be in for some miserable times. As I see it, if money is even the slightest bit tight, hold onto it and pay off the mortgage month by month. There’s nothing magically good about having a paid-off mortgage, but there’s something seriously bad about not having ready liquid assets even if your home is paid for. 

Others comment that women and men have different approaches to this. They take the view that women are more risk averse, so they would more likely than not, chose to get rid of debt as soon as possible.  

Yet another interesting version to this “save or invest” is that presented by KC Lau. He presents the view that we can only save “that much”, whilst investment income is theoretically unlimited. 

So exactly what should we do? Whilst there is no simple answer,

I agree with KC Lau and the Simple Dollar. There has to be alignment to one’s own goals and feelings, i.e. basically doing what we feel most comfortable with.

However, the basic principles would more or less be similar. 

a)    get our basics anchored down first,

       a.    spend less than we earn,

       b.    build up our emergency fund,

       c.     pay off all our high interest rate debt, 

and, after having made our financial foundation solid,   

b)    invest as wisely as we can.  

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