How much insurance one really needs?

A case study based on Total Needs Approach:

Say, Mr Lim, aged 35, earns $ 100k annually. He is married with a 3 years old son.  Should he dies, he wants his family to have an annual income of $ 60k for the next 25 years, with the first payment due his death. He also needs to ensure his son is provided with at least $ 150k for his tertiary education in 15 years time. His biggest debt includes his house mortgage with $ 250k outstanding amount. His wife is also working and will be able to service the house mortgage with her salary.

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.

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

Rate of Return - the Right Way to Determine

Also known as the average annualized return or geometric mean of return, a potentially confusing term in the mathematics of finance.

Compared to simple arithmetic mean, geometric mean takes into account the time period and the effect of compounding, and is a more accurate representation of investment return.

Let's take an example something we can all relate to - unit trust fund. A hypothetical fund - Fund LCF has the rate of return as below:

Year 1: 15%    Year 2: -15%

At a glance, the "too-casual observer" will conclude that over the 2 years period, the investment return is 0% of your capital. This is arithmetic mean of return calculation. You break even.

Not true actually. Say, if you invested RM 10,000, you investment will be at RM 11,500 by end of Year 1. By end of Year 2, your money would have reduced to RM 9,775 (0.85 x 11,500). So you actually lose RM 225, or 2.25% of your initial capital.

The more accurate method to know the rate of return within the 2 years is by using geometric mean. It's really no rocket science. The calculation is as such:

[ (1+ r1) x (1 + r2) ]^(1/n) - 1, whereby r1 = 0.15 and r2 = -0.15, n = number of years, 2

...and you will get, -1.13%. This is the annual averaged loss over the time frame of 2 years. "WTF?" you asked. Unfortunately, this is the number that represents the reality in this case.