Of Credit Card Limits and Malaysian spending habits

Starting Jan 2012, Bank Negara will impose new rules to credit card usage. This is to manage the debt of credit cardholders earning RM36,000 and below per annum.

Below are the rules:

1. The maximum credit limit extended to a principal card holder in that category cannot exceed twice the holder's monthly income (RM3,000 x 2) per credit card issuer. 
2. They will only be allowed to be a principal card holder from a maximum of two credit card issuers. Combined credit limit will be capped at RM12,000.
3. They have 24 months to repay the outstanding balances on their cancelled credit cards, if they have more than 2 cards.

How NOT to Lose Money in Unit Trust (a case study)

I am not a close follower of the unit trust industry in Malaysia. But if you are, you should have read that RHB Islamic Bond fund NAV plunged overnight 8.323% on 24 October 2011.

News here at FundSupermart

The reason?
Total write down of Tracoma bonds held by the fund portfolio. The value is RM 4.52 million
In layman terms, that means Tracoma defaults on its bond; on its obligation to pay bond holders.Its bond market value drops to ZERO.

Fixed Income Fund NAV determinant: Simplified

Assume last year inflation rate is at 3%. You bought a 6% coupon bond with $ 10,000 which repays you in 2 years. So your real net return was (6-3) = 3% annually. 


This year, inflation rate goes up to 6%. . No one wants to buy the same bond you have now for $ 10,000 because the real net return is 0%. 

The layman's explanation of: Why Switch to Fixed Income Fund during Recession

Assume that I wish to borrow a lump sum of money from you, which I am going to repay 2 years later. In return, you think you need 10 percent return for the trouble.  On top of that, you require a bonus payment of $ 1,000 at the end of each year to sweeten the deal.


We put this in a contract. To recap, the conditions are:
1. You lend me a sum of money for 2 years. 
2. I will repay this principal amount in full, exactly 2 years from the date you transfer the money to me.
3. I will pay you $ 1,000 for the 1st year, and another $ 1,000 for the 2nd year.

A Tale of Middle Class Millionaire

This is a pretty inspiring story for school teacher Andrew Hallam, a self-made millionaire investor in Singapore. Here's some of his simple personal finance principles which we all could relate to.

Signs of 2008 economic recession approaching?

BCI for Q2 2011

The Final Verdict: ESPP Part 3 - Employee: 0, Company: 1

A recap on previous post: Part1 and Part2

Due to the change in Malaysian taxation system on ESPP, some companies restructured their ESPP (known as "Scenario 2" outlined here) with regard to the applicable subscription price.

Recall,however, that "Scenario 1" is the norm, and it is as such from previous example in Part2, as below:

*****************************************************************

Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50



Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225
*****************************************************************


Of course, if you are aware of this, first thing which comes to mind --> your company is short-changing you, and the next thing you will do is to call your HR to complain. Then HR will probably need to explain to you it's not their mistake but it is due to LHDN. But HR doesn't have that much time to entertain the same enquiry by all "self-aware" staff. Issuing a memo highlighting LHDN new idiotic implementation isn't their cup of tea. HR is always the good guys *Cough*


A smart C&B director will instead, alter the ESPP policy regarding the applicable subscription price. What happened now is this: Your company will fix the rule that, for any purchase period in question, the corresponding last trading day stock closing price, less 15%, IS the Purchase Price.
In this case, it is $42.50


However, remember that, previously, if you were to purchase 50 shares at the price of $25.50, it means your accumulated salary deduction allocated for ESPP is $1,275. 


With the purchase price now fixed at $42.50, you can only purchase 30 shares units with $1,275, compared to 50 units previously.


Now, your total taxable income here is 30 x (50-42.50) = $225 !!!


Do you see the play of numbers here? Your taxable income is similar to the previous taxation scheme, but you, as an employee, still loses out because you just purchased the shares at a relatively higher price in this new company ESPP scheme. Not that you have a choice anyway!


This is what my (ex) company ESPP prospectus says:

Oopss...I mean, this.

Indeed this takes into effect starting Nov 2008.


In ChampDog's words, "...you hide a problem without people realizing it."


Again, HS Ooi's remarkable comment on this


From company standpoint, a company will save more by using the average window closing price because they only need to pay you the 15% discount of market price. Of course, when a company is using the lower window price, most probably the company will buy some call options to make sure that in case the market is going up very high(hence the call options are in-the-money) their ESPP cost is still fixed. But this also means that the company have to pay additional premium for the options position they are taking. In a downward market when the call options are out-of-money, they will lose all the premium of the call options position. I think companies will have to spend more if they choose to use the lower window subscription price instead of window closing price. You will probably see more and more companies change to window closing price. So, enjoy the extra benefits while you still can :-)

It is a win-win for company and government to use the window closing average price instead of lowest price of the windows. This move make smart sense for them, though it is not good for employees. 


As a employee, the only control you have over this situation is to set a reminder 2 weeks before the purchase period last share trading day. Pull out your accumulated salary deduction from ESPP to be refunded back to you if the current stock price/trend shows possibility of dropping in short term. Even if you let company purchase the stocks for you, it is not worth to hold ESPP stocks for long term unless huge potential of capital appreciation (but there's always market risk which you cannot foresee). One cannot be a passive "investor" anymore in this! Understand that the system (company + Government) works against you if you are not smart in managing your own money! At the end of the day, you will likely end up in a higher tax bracket and your net gain could be negative!!


SHARE THIS INFO WITH YOUR COLLEAGUE AND FRIENDS IN MNCs. ALL OF US DESERVE TO KNOW, THE LAST TIME I CHECKED, NO ONE TOLD ME AND NO INFO CAN BE FOUND ONLINE, EXCEPT CHAMPDOG'S ORIGINAL POST.

Employee Stock Purchase Plan Part 2 - Employee: 0, Government: 1

In my previous post on differing implementation of Employee Stock Purchase Plan, I quoted on an amendment in Malaysia taxation system on ESPP being the probable reason behind the change in the determination of applicable stock purchase price and date from Scenario 1 to Scenario 2.


Quoting ChampDog's original posting on this, lets assume the following constants.


Your company practises Scenario 1
Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50
Number of shares purchased: 50 units


Previous Tax Scheme for ESPP
Taxable gain is the total discount in purchasing the shares. This is straightforward.
In this case: (30-25.50) x 50 = $225


Current Tax Scheme for ESPP
Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225


Regardless whether you realize your capital gain (sell the shares) or not, you will be taxed upfront for the paper gain. This may not appear on monthly pay slip but it will show in the EA form.
However, we knew that capital gain is not taxable in Malaysia, so isn't this just plain idiotic? 


Abso-fucking-lutely

And what if the share price drops a lot after the purchase date, and you are still holding onto your shares purchased via ESPP? Doesn't matter, LHDN already locked onto your $1,225 worth of taxable income.
If so, it makes ESPP much less an attractive, especially if you plan to hold onto your stocks for long period, and the share is prone to price drop in the short term. It is very likely that you will be taxed more in this case for the Year of Assessment in question. Of course, if the share price appreciates further after that, you will feel less of an impact.


In the same posting at Journey to Become Financially Independent, financial consultant HS Ooi explained this well in his comments to this.


The government is finally getting smarter in catching up with the loophole of ESPP. It shows that how much lost revenue the government had suffered in the past!


In the past, when the government was taxing the "profit" of 15% subscription price discount enjoyed by employees, the government treated the discount as benefits received by employees. However, they forgot to take into consideration of "market gain" enjoyed by employees. You may argue that the market gain is a capital appreciation which shouldn't be taxed by the government. However, who is actually giving the employees the "market gain"? Is it truly market gain or employees compensation in the form of market gain?

If a company is giving out ESPP at a lower price of the offering window, in an upward market, the company is actually have to "compensate" employees for the gain. You haven't actually owned the stocks yet but you are able to buy the stocks at a lower price (plus 15% discount). The company is selling you the stocks at lower price when market price is higher at closing of the offering window. So, by definition, you are receiving "extra benefits" from the company. You are not getting capital appreciation from the stocks you owned. By taxing you based on the average price on the window closing day, the government is maximizing their tax revenue, which is a smart move by them. :-)

Key takeaway - LHDN screwed us big time. No surprise, though.

Stark Reality: Child Education Costs & The Endowment Policy

Create Now, Save Later
So I read a reader contributed article (Personally Speaking by Hazel Leong) in Personal Money Sept issue, on why she felt that generic endowment insurance plan is insufficient to meet her child's education funds requirement in 20 years. 


The key takeaway here: Guaranteed lump sum rate of return in 2 decades time is even less than the current risk-free rate of return for Fixed Deposit of 3.15 percent.

In Excel, use the formula: Rate(20,4800,0,-120000) and you get 2%. 

And she further illustrates that an engineering degree currently costs about RM 150,000, with the assumption that the cost of education doubles every 10 years. I do not know how she came up with RM 150,000; but it could not be anywhere in local public or private institutions. An engineering degree at Multimedia University, my Alma mater, is currently tagged at RM 50,000. Therefore, let's take this as baseline for calculation below. Overseas studies are really, the privilege of the rich, and they are not any man on the street like the rest of us. Moreover, there are factors such as exchange rate fluctuation which we could not anticipate in the future, so let's be realistic and keep things simple.

*assume the education doubles every decade

Second key takeaway here: Endowment plan payout in 20 years can only fulfill one third of your child's education cost plus living expenses in the same timeline.

Now, the contributor advocates properties investment but I am not going into details of her plan here although it is very ideal if you have the cash for at least 10% down payment of the properties value, plus other closing costs.  Whatever the investment vehicle, everyone has their own preference. Just be prudent to balance the risk versus return.


Anyway, below are my estimation of the investment needed now to cover education cost of RM 370k.

Save  Now, Create Later

If anyone starts to allocate RM 10k today into investment vehicle of your choice with moderate return of 6 percent per annum, with yearly top up of RM 9.6k, he or she will be able to cover his/her child education cost in 20 years. 

RM 9.6k per year translates to setting aside RM 800 per month, with father and mother each contributing RM 400. Do-able right?

And you still have surplus of RM 14k, which can be used as down payment for your child's first car when he or she starts working after graduating.

Bear in mind this is only for one child. What if...

a) You have more than one child?

b) You child desire to study medicine, and he/she is capable of - you don't want to kill their dreams right?

Securing a scholarship though, is an added bonus. But I will only using EPF Account 2 for children education as last resort, because it will surely jeopardize my retirement plan.

The Downside of Active Self Investment

There is no insurance element in it, unlike endowment plan. The insurance component of endowment plan will provide the insured amount compensation to the proposer (parent) in the event of death or total permanent disability of the child. I do not think this is critical. On the other hand, if the proposer passes away/permanently disabled/suffers from any of the 36 critical illlness, the policy will sponsor the child until maturity.

To mitigate the risk of parent not able to provide financially to their child, any parent should be sufficiently insured. Like my previous CFP facilitator mentioned, if you love your family, and being the primary income earner, you should buy more insurance for yourself, NOT for your spouse/children. I am not expert in this, but probably after CFP Module 2 this semester, I could analyze total insurance needs more objectively.

Disclaimer: I am not an insurance agent.

Who am I?

An advocate of financial literacy :)

The Cause & Effect of Business Cycle

Coming from a non-financial background, it took me a while to put together all the pieces of what I knew. This should be the simplest flowchart to explain the business cycle if you are not an investment banker. Let me know of any blunders.

Click to enlarge

Lesson 3: AER - Truth Revealed! Fixed Deposits Annual Interest Rate

Again, please read the basic difference between APR and AER before continue reading the below.


Refer to the annual interest rate for Maybank FD rates.

Assume RM 30,000 placed as FD for period of 1 month. Principal and interest will be credited to savings account after maturity.


Your earned interest would be RM 73.97 by the end of the month


You asked, how come? If it's 3% per annum, monthly interest rate based on principal of RM 30,000 should (3/12)% x 30,000 = RM 75.

Employee Stock Purchase Plan Part 1 - Differing Implementation

Scenario 1 & 2 below are the past and present methods of implementation for Employee Stock Purchase Plan (ESPP) at a US multinational company in Penang, let's call it X. However, Scenario 1 is still practised in at least another MNC, let's call it Y.

*****************

In this purchase period, assume I have enrolled into the plan and accumulated a sizeable amount of money via monthly salary deduction. And according to company's ESPP plan, staff is entitled to purchase the share at 15% discount.

Scenario 1

At the end of Purchase Period, company will purchase the shares at the lower of these 2 prices - Entry Stock Price on 1 Jan or Last Day Purchase Period Stock Closing Price, at 15% discount.  

Here's an example, an actual screenshot of my own ESPP shares purchase calculation. See the phrase "Your purchase price is 85% of the lower price", which happened to be the stock price on 31 Oct 2008.

Scenario 2

See a different phrase for the below - "Your purchase price is 85% of the Fair Market Value on purchase price", which always refer to the closing stock price on the last stock trading date within the defined Purchase Period. In this case, it is the stock closing price on 30 April 2009, which, coincidentally, is lower than its entry price on 1 Nov 2009.

Lesson 2: APR - The Real Cost of Credit Card Annual Interest Rate

Read the basic difference between APR and AER before continue reading the below.

Refer to the annual interest charges for Maybank credit cards.

Assume you are one of those who constantly spend more than you earn and frequently misses your payment, putting yourself in Tier 3 bracket of 17.5%.

Say, you have outstanding balance of RM 10,000, so you'll think (I did previously) that, even if I don't pay a single cent for the next 12 months, by the 13-th month, I would need to pay 117.5% x 10,000 = RM 11,750. Or, you think, every month, I will be charged a monthly interest of 17.5% /12 = 1.4583%

Not quite that simple. Confused? Let's solidify the concept with an example below.

Remember, you get your credit card statement monthly - your outstanding balance plus interest incurred previously will be carried forward to the subsequent month. That means, the compounding period is monthly!

Lesson 1: Annual Percentage Rate vs Annual Effective Rate - Can you differentiate?

Statement of the Day : Understand that banks are sneaky

When a product provider quotes an interest rate, it is not always immediately apparent how much you will be paying - or be paid - if you take out the product.

Einstein said it best - 'if you can't explain it simply, you don't understand it well enough'.

Finance firms love selling complex products. That way customers don't know what they're buying, won't understand the potential downside risks, or realise the true costs, many of which will be expertly hidden in the small print.

Bank profits are big because as Andrew Ellson, Personal Finance Editor of The Times, perfectly sums up:

 "All Banks employ every trick in the book to disguise the true cost of almost every financial product they sell"

Let's get to this 2 terms before I illustrate examples in my subsequent posts.

Annual Percentage Rate (APR) 

• Also known as nominal rate or simple interest rate per annum
• Does not take into account the effect of intra-year compounding

Housing Loan Reduction from EPF Account II - To withdraw or not to withdraw?

Question I have been asking: Is it always wise to withdraw EPF Account 2 for Home Mortgage Capital Repayment or in layman terms, reducing housing loan?

In the The Do’s and Don’t’s of EPF Withdrawal during an interview session at ntv7, Mr Yap Ming Hui stated that generally, if the “mortgage interest rate far exceed 5% (EPF dividend return)”, then it is advisable to do so.

Next question is, how much is “far exceeding” in this case?

I have been doing some simulation.

Referring to the table here:

Simple Method to determine Forex rate yourself

Here's something probably you could relate to.

When I need to go to the States for business trip, I go to the Pengurup Wang Berlesen aka Licensed Money Changer and wonder - should I look at the Buy rate, or the Sell rate? What if I have US dollars in hand and need to change that to Ringgit instead?

Very easy actually. You just need to remember - the Pengurup Wang always profit; means you are always on the losing side. That's just how they make money. It's strictly business.

Take Australian dollar - BUY 3.2284 and SELL 3.2312. Since I know I will be getting less than AUD 100 for MYR 100, I need to divide either of the rate. But which one?

Ask yourself this - which one, if used as divisor, will yield a smaller number?

Simple maths right - you divide by a larger number (divisor) to obtain a smaller number. "Smaller" in this sense means you are on the "losing side". In this case, I will divide MYR 100 with the SELL rate - 3.2312, which yield, AUD 30.95.

Investment Diversification

The concept of diversification in investment can mean in terms of asset class or sectors.

To simplify things, let's take local mutual fund as an example.

Funds classified as "Mixed Asset" or "Balanced" type are essentially diversification in terms of asset class and sectors. See the excerpt from OSK-UOB Smart Balanced Fund. Asset class here consists of Cash/Deposits, Real Estate Investment Trust (REIT), Bonds, Equities and derivatives. In terms of sectors diversification, there's construction, consumer products, industrial products, and trading/services.

Equity Fund, as the name suggests, mostly consist of shares and derivatives only - hence, only sector diversification, not so much on asset class diversification. From OSK-UOB Smart Treasure Fund Fact Sheet, observe there are various sectors where the money is invested.

Fixed Income Fund focuses primarily on fixed income securities - mostly on Government or Corporate Bonds. This is mainly asset class diversification - bonds having the lion's share of the pie chart per fund investment objective, followed by 3 equities sector and derivatives.

A more advanced type of diversification can refer to geographic diversification. It often means investing in foreign assets - most commonly, international share market. However, speaking from experience, there is a limitation on how much you can diversify investments, especially in non-local scenario due to limited budget. On top of that, there's currency exchange risk involved.

Anticipating the price of goods in "n" years

Approximate this by calculating the Future Value, FV using financial calculator or excel.

Say, GSC  movie ticket at RM 10.00. Ignoring personal inflation rate, we take CPI increment of 3% per year, in 10 years.

In Excel, type "=fv(", then you will key in "0.03" for "rate", "10" for "nper" which mean n number of periods, "0" for "pmt" which stands for periodic payment, and "-10" for "[pv],  present value for which it must be negative.

You will get the answer RM 14.80. This is the expected movie ticket price in 2022 if inflation remains constant each year.

Cost Push vs Demand Pull Inflation

These are the 2 types of inflation. I can assure you that you and me have definitely encountered these on daily basis, albeit indirectly.

Cost-Push Inflation = a decrease in aggregate supply

Cause

a) Increase in labor and overhead cost

b) Increase in raw material prices as they become more scarce

Explanation
Because the production costs have increased, producer has 2 choices - either to produce less quantity, or decrease wage rates to retain the price, while still remains profitable. The former is usually not desirable.

Unfortunately, when wage rates cannot be reduced anymore, while the same volume or more is needed, consumer will have to bear the cost of this price increase.

The indicator for this is Producer Price Index (PPI)

Examples

1. Iphones and Ipads are being outsourced for mass production at Foxconn China due to low labour cost.
2. Manufacturing plants for US companies are set up in Penang instead of in the States because comparatively, salary paid to an equivalent job level will be higher in the States.
3. Surge in timber demand and prices post Japan tsunami

************************************************************
Demand-Pull Inflation = an increase in aggregate demand

Cause

a) Increase in money supply

b) Increase in price level of goods in the rest of the world

Explanation
Increase in money supply has to do with consumer spending. When more people can afford and willing to purchase goods, the available supply in the market become lesser if production output cannot keep out with increasing demand. When something become scarce, only the highest bidder can possess it. From the seller perspective, he can afford to sell his goods at a higher bargain price.
The second causes has to do with diminishing purchasing power of a nation relative to the rest of the world. It means if our foreign exchange rate (and economy) is weak, it would cost us more to buy imported goods.

Examples

1. Land is scarce in the Penang island, yet, more people desire to stay in Penang as the population grows. As a result, housing developers can charge a premium selling price for landed properties.
2. An imported item from United States will cost more in 2009 when the exchange rate is RM 3.50/U$ compared to current home currency of RM 3.00/U$.

OPR, BLR & Inflation - The Correlation

BLR, or Base Lending Rate, quoted in percentage, simply put, is the cost of borrowing money from financial institutions for any man in the street.

For house buyers and buyers, this all seem familiar - you want the lowest interest rate for your mortgage loan. However, at any given time, BLR is fixed, so the only variable in this equation is the percentage discount (BLR minus) or premium (BLR plus) from the BLR rate.

Overnight Policy Rate or OPR refers to the interest rate at which a financial institution lend liquid funds (immediately available money) to another financial institution overnight. This rate is determined by central bank, as in Malaysia, Bank Negara Malaysia during its Monetary Policy Meeting and it is a standardized rate for which banks can access short-term financing from central bank depositories.

The BLR is adjusted in correlation to OPR. The cause and effect of OPR adjustment is vast in terms of micro and macro economics, but suffice for this post here to illustrate the direct factors and effects.

Hike in the cost of borrowing has the intention of slowing down consumer demand & spending in a overheated economy, usually characterized by a steadily increasing inflation rate, uptrending share market and business activity. Example, the recent 25 bps in OPR translates into 35 bps in BLR at 6.60%.