LCF on Personal Finance featured comments in Personal Money magazine, twice!

Here's the November 2011 issue of Personal Money Letters to the Editor

And here's the December 2011 issue.

A Convenient Way to Check Insurance Policy Cash Value

e-Connect is Great Eastern web-based service for policyholders. With e-Connect, you can:

• View and download your Life Insurance Premium Certificate(LAPC) 

• Check your policy details and values

• Download form for transactions

• View Investment Link Annual Report

Steps to sign up as user

Step 1: Go to Great Eastern e-Connect Portal and click Sign Up Now.

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.

A Very Red Market Day

Manufacturing index dropped to 50.8 in October, down from 51.6 in September, a sign of slowdown, according to the Institute for Supply Management. Any reading above 50 indicates expansion. The manufacturing sector has grown for 27 straight months, according to the index.

The Greek government shocked financial markets with news that it would put its unpopular cost-cutting plan to a public vote. If it's defeated, the country could drop the European currency and default on its debt, which would put the European banking system and regional economies at risk of another crisis.

Bad news: Debit Card Fees

If your bank need to charge you an annual or monthly fees for the debit card you own, what would be your first reaction?

Absurd.

The Good News: That is what just happened in US.

Apparently, Bank of America will start charging debit-card users $5 a month if they use their debit cards for purchases in any given month, starting next year. The fee will not be triggered by transactions at automated-teller machines.Paying to use a debit card was unheard of before this year and is still a novel concept for many consumers.

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

LCF was one of the readers interviewed in Personal Money Sept 2011

 I guess some of you asked. Well yea, it is me in the magazine. :)

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.

Gross National Happiness

Only in Bhutan, a measure of progress known as Gross National Happiness (GNH) exists.

Its sole purpose is to quantify, albeit subjective, the quality of life or social progress in a more holistic way on top of economics progress in terms of GDP.


Source: Wikipedia.

Is Modern Economy going backwards?

It is quite enlightening after reading Graeme Maxton interview with Personal Money regarding his third book titled The End of Progress: How Modern Economics Has Failed Us. A summary of his thoughts below.


Men's greed led to mass over-consumption in modern economics. Commodities are not infinite. There are already numerous future depictions of world conflict which arises due to scarcity of resources - food,water and liquid gold. Debt crisis in the US and Europe - it is just a time bomb. The rich become obscenely richer, and the gap widens between them and the poor. How much further the debt ceiling be raised? How long can this be sustained? Progress and intellectual development are stagnating - instead of being concerned about the major global issues, people are more concerned about designer handbags and the latest gadget. In today's age, freedom often means - do as you like regardless of its consequences as opposed to freedom of thoughts and expressions in the 18th century Age of Enlightenment.

Graeme suggested that we start protecting our resources and change the way we approach consumption. No more wasting. Ever ponder how our life would be if sweet crude oil costs $1,000 per barrel instead of $100? [Author]: That's like RM 18 per litre for RON95 here, and it would take RM 720 to fill up your car 40 litres tank.


Wealth should be distributed evenly, not just concentrated on a few. Live should not be made terrible for the poor, but nowadays, the rich becomes richer, while the poor sinks further. This, of course, is in contradict with a free market - with minimal government intervention. But before things goes spiraling out of control, perhaps it is prudent to raise tax on consumption and undeserved income. Undeserved income from doing nothing which comes to mind includes profit gain from financial speculating. On the contrary, productive work tax should be reduced.
[Author]: A statement made by Warren Buffet recently echoed this sentiment. He urged US lawmakers to raise taxes on wealthier Americans to cut Washington's budget deficit. In other words, tax the rich more while tax the middle class and the poor less.


What's your take?

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 :)

Warren Buffet Invests Like A Girl...

I am not demeaning the value investing guru of all time here. It is the actual title of a book by Motley Fool.

Here's the excerpt from the review at Goodreads.


Warren Buffett and all of the women of the world have one thing in common: They are better investors than the average man, a fact proven by psychologists, scientists, and the value of their portfolios. In this well-researched, eye-opening, and wonderfully witty must-have book, the impresarios at The Motley Fool show that women, with their capability for patience and good decision-making, epitomize the Foolish investment philosophy, and the investment practices of the most successful investor in history: Warren Buffett. While men tend to be too confident, compulsive, and overly daring, women tend to be more studious, skeptical, and reasonable - traits that have led them to consistently outperform their male counterparts as investors. Unlike men, women spend more time researching their investment choices - knowledge that helps them avoid hot tips and trading on whims. Women trade less than men; their lack of confidence actually helps them choose more wisely and results in higher dividends and lower costs. And women consider more than just the numbers when making trading decisions. They invest in companies they feel good about ethically and personally -companies with good products, good services, and ethics that tend to have better long-term prospects and face fewer lawsuits. 


For those with XY chromosomes (myself included), drop your masculine armor and herd mentality right now.  Heed this advice and adopt a more 'feminine temperament' in investing.

The End of the Engineer by Tom Gillis

A very inspiring article. I personally felt the sentiment as an engineer. If we do not continue to evolve ourselves from our "boxed-in" engineering perspective, we will be 'obsoleted'.

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

I’m an engineer who grew up in a family of engineers. They probably won’t be too happy with the blasphemous statement I am about to make, but it’s the truth: The era of the engineer is over. (Sorry, Dad.)

Allow me to defend myself by putting this statement into some historical context.

If we look back at the evolution of commerce in this country, we see that it is constantly changing. Zoom out 150 years ago, to when we lived in a largely agrarian society. Landowners ruled. But with the onset of the Industrial Revolution, more value was created by companies that had the ability to efficiently manufacture and distribute goods. Henry Ford and the others who thrived in the industrial era were successful because they found ways to efficiently produce higher-quality products at a lower cost than their competitors.

But those competencies would not secure success decades later. Industry evolved so that companies created more value by focusing on a particular part of the value chain—manufacturing, distribution, or inventory management. Ultimately these once “niche” core competencies also evolved into commodities. For example, today manufacturing is something that is largely outsourced.

I believe that we are now experiencing a similar paradigm shift in the technology industry. Three decades ago the core competency that separated good from great was determined by the ability to produce something that was “better, faster, and cheaper” than any alternative.Intel was spectacular at delivering speeds and feeds to the market more consistently over time than any other company. Dell destroyed Compaq,Microsoft destroyed Apple (version 1.0), and Oracle destroyed Sybase. In aggregate, over the past three decades, companies with a strong engineering core competency created the most value.

But just as we’ve seen manufacturing, distribution, and supply chain management mature to the point of commoditization, engineering development is now on the same trajectory. As China and India continue to evolve, their supply of engineering talent is likely to outpace demand, driving down the cost of engineering a product and increasing the availability of this skill. Having the ability to design a product that runs at 3.2 GHz instead of 2.8 GHz, for example, will not be sufficient for lasting value creation.

The problem with fresh grads

PETALING JAYA: Poor attitude -including asking for too much money - is the chief reason why employers shy away from hiring fresh graduates. Another common complaint is that many graduates are poor in English.

A survey by online recruitment agency Jobstreet.com showed that 55% of employers cited unrealistic expectations of salaries while 48% of them said poor English was the main reason why Malaysian fresh graduates from both public and private institutions remain unemployed.

“While previous surveys named poor English as the main cause for unemployment, bad attitude has now topped the list,” said its chief operating officer Suresh Thiru.

He said their attitudes were so bad that some did not even bother to inform the companies if they were running late or unable to attend scheduled interviews.

It was announced that the number of jobless graduates had increased from 65,500 to 71,600 although the overall unemployment rate had dropped from 3.4% last year to 3.1% during the first quarter of this year.

Another study by recruitment agency Kelly Services showed that fresh graduates asked for flexible working hours and expected their work to accommodate their personal life, not vice versa.