Recently, there has been quite a number of discussions on saving money and retirement. After a few rounds with different friends and colleagues, I noticed that the outcome is almost like golf – more heartache than good memories!
Now, I don’t claim to be a financial expert and for the same token, I don’t think financial expert should claim they are the greatest financial planners as well.
I’m writing a 2-part articles this time and for the first part, I prefer to bring out a few shallowly understood concepts and also some possible misconceptions.
Here we go:
Investment
We buy a new phone and just because it’s expensive, we call it an investment. Hello…when you are using something immediately, you call it ‘buy and use’. Not investment. Investment simply means something that today it costs more but in the long run, it is still cheaper. Does your phone appreciate in value?? Stop cheating ourselves with nice literature words :)
Depreciation
There are a lot of people that buy Japanese cars because of their relatively higher resale value. But we need to understand that this is only true when we are buying new cars so that when we want to sell it, we lose less in depreciation. However, if we are buying a second hand car, what‘s the difference? You buy at lower prices and so you sell it away at lower prices, right??
Packages of 10’s are cheaper?
Well, if you go for massages or facial treatments, you will always come across the promotional packages they are offering. No doubt that they could be cheaper to buy en bloc, but that doesn’t mean you see more money in your savings. Imagine this. I usually go for my massage biweekly and the attendant suggests me to buy sets of 10 for the price of 9. While it is true mathematically in my savings, but how sure am I that I will see the RM80 I saved in my savings? Can I be very sure that that I will not spend RM80 on something else for the next 4 months? But one fact is clear. I have to pay RM800 upfront first!! So, packages only work if you have a fixed pocket money but you intend to stretch it further.
Getting loan for investment
This is a real funny one. Investment usually refers to the money you ALREADY have and you try to invest carefully so that they work harder for you. But sometimes especially when during market boom, there will be guys who borrow money to invest. No money but plan to invest?? This is not investment. This is called trading i.e. buy low and sell high but using banks to finance the transaction. So remember, that’s called trading. Same thing for a house. When you plan to buy a house and go for 90% loan, you are not investing because you don’t have the real money. You are…TRADING. You try to buy a house at lower price and sell it at higher price and trying to finance this transaction through a bank.
Unit Trust
This area is also quite misunderstood. I’m not against trusts. I have some myself. But again, we need to understand that there are such things called commissions (between 5 to 6.5%) and management fees (0.5% to 1.5%). It could be front loaded or backloaded but the fundamental questions we must always ask ourselves are: if I today buy 1000 units for RM1,000, how much will I get back in REAL cash when I sell that 1000 units 3 years later? Most agents will tell that if the price is RM1.50 per unit, then you will get RM1,500. However, one must understand that the growth of 50% in the 3-year period is actually not 50% but probably 56% to 58%. That is because there is commission and management fee involved. So, buying prices need to be lowered to accommodate for the fees.
Financial planners
This is also quite interesting. It is good to talk to some financial planners and see their views and that’s a great way to cross check against your plan to make sure that it is still a sound plan. But, you still need to be caution because that very guy who comes and sees you and tells you how to achieve financial freedom is probably also actually a guy who has not attained financial freedom himself. There will naturally be discussion on diversifying risks in different investments, but at the end of the day, it still stretches from insurance on one hand to stocks on the other and are usually services from the company he works for. If there’s one guy that also considers buying property, opening a coffee shop, insisting you pay your credit card first, then he is most likely the right guy you can pursue. Otherwise, you could be talking to a salesman actually.
Save money for your kids?
It’s true that we need some cash. However, we need to know how much cash we need for our usual expenses and rainy days. But there are guys who try to save money for kids’ future. We all know that death is certain. So, why not ‘maximize your death’ by buying insurance? Then, your kids use your current and mid-term savings, but use your insurance money when you check out from earth.
Interest – tool or enemy?
I have seen a lot of friends who frantically compromise lifestyle in order to clear their loans. Interest, in their belief, is the no.1 enemy. I beg to differ. Interest from loans is actually like a knife. It can be used for cutting vegetable and it can be used for killing. But the knife is not the cause but the user is. The knife is merely a TOOL. I strongly suggest we don’t go bonkers about interest and treat it like your family’s foe. It’s a tool and use it wisely. Evil of interest is widely known and I will not elaborate. But I need to share some benefits of interests. Interests ‘fast forward’ time so that you can start using something before you are qualified to. If you need to save to own a car but your job requires a car immediately, interest comes to the rescue. If you have a business that will yield 20% returns but you don’t have the money, an interest rate of 10% will realize your opportunity. For those who still disagree, try to find yourself an aunt that can lend you RM200,000 for 20 years and do not need any collateral. If you find out, please introduce to me too!
Well, hope the 1st part is of some values to you. On the 2nd part, I shall talk about what I think we should do at different stages of life in the road towards retirement or financial freedom.
