Tuesday, November 2, 2010

Financially Stupid?

Normally I use harsher words than that and I'm even harsher if I were to talk about personal finances verbally. So I don't think that is a harsh question that everyone should ask themselves. 

I am halfway reading this book by Jason Kelly "Financially Stupid People are Everywhere.....Don't Be One of Them". Well, the first 2 chapters of the book basically covers personal finances stuff (i'll mention later), and the rest are pretty much about the mess in the US which are more relevant if you are living there...or if you are interested.

Okay, I'm not going to do a book review on this of course I haven't finish the book yet. But I gonna share with you some of those personal finances tips and disaster from the book - plus some of my thoughts.

He mentions about the 3 Cs: Credit cards, cars and castles. 

Credit Cards:
What he suggests is pretty simple, leave NO balance. Pay your statement balance on time and not just minimum payment but ALL of them. With this it'll help you stay out of credit cards problem that most of us had. The reason for this is plain simple, NO balance equals NO interest charge.

My thoughts: He has his points, 1.**% per month is a lot of money. That is at least 12% pa. If you are into investment, you would have probably see "magical" of 12% growth to your money is. But if that is reversed...well...you know the math. He also mention about installment payment. Those who had done that 0% installment charge aren't really 0% at all. They charge some 3-5% initially. Does that mean installment payment aren't good. Not really. There is this thing call bad debt and good debt. The book uses a business example, but I'll use an investment simple example. Say you have RM5000 in cash but you purchase something worth RM5000 with a 12months installment and the bank charge you 5% services charge for it which make your total credit balance RM5250. What this mean is that the bank will pay the RM5000 amount to the seller and charge you RM250 for that. So instead of using the RM5000 of cash to pay for your product, you invest it in an income fund (which probably gives you about 5-6%pa in return). What does this mean? 

You get what you need in advance and have the service charge covered and in possible earning position. 
Bank: 0 vs You: 1. 
If you put them in M-REITS for example which yield about 8-9%, you'll be in positive position. 
Bank: 0 vs You: 2.  
But if you miss all your installment
Bank: 12 vs You: 0

Get the idea? He actually went on to explain how disastrous for those to purchase goods after goods believing they "own" them and the danger of balance transfer. But I'll keep this post short, if you can understand the example above, you'll why people go bankrupt for doing that.

He suggests buy cars with cash. I know most you will shout WTH? or even WTF? He says ask yourself this simple question if you plan to purchase your car by 5 or 7 years installment, will your car still be cool after 5 or 7 years? We all know the car you drive belongs to the bank until you services all your loan. Will it still be cool then?

My thoughts: Well, actually I agree with unless UNLESS there is a real need for a car. I understand in Malaysia, we NEED a car. Public transports are as if they weren't there and it is safer to swim in Taiping Lake than to drive in Malaysia road so bike is not a good idea. It would be great if we can afford a car with cash. So for me, buy a car if you need one. If I were to get a better car (upgrade), wait till I can afford it with cash not when I'm Polo enough. Simple.

Kelly suggests a 20:80 rules. That means, pay with AT LEAST 20% down payment and 80% on loan. Buys only when you can afford and really comfortable with the installments. There is nothing wrong staying in a rented property.

My thoughts: Castles here aren't the property for investment. This is your home where you stay. So in Kiyosaki's definition this is a liabilities where cash flows out from your pocket. All these make sense. Yes, your house does appraise in value over time. Question is, in order to capitalize on the gain, you would have to sell the house. Are you going to do that to buy a cheaper or probably smaller house? With the property price goes soaring over the past few months, affordability has become an issue among many of us. This book did mention on not to get tricked by banks' fancy package. I mean those flexi interest rate type of package. Yes, the installment does look really cheap the first 3 years or so but what really matters is when the interest rate eventually increase. Can you afford it it with your current pay? Is it still 1/3 of your take home income? Some of the working class claim that their salary will increase over time. Well, that's for me a gamble a person can ill-afford. And when decide to purchase a home, do take into account, the renovations, insurance and maintenance for the house.

So are you financially stupid?

1 comment:

JW said...

I admit I've been a financial idiot most of my life. Beginning to wake up after reading Rich Dad Poor Dad.
Credit card is good to track where our money goes to for us who are poorly disciplined in budgeting. Emm, swap cc with a debit card? Still get all the discount perks n points minus the debt.
Most of us can't even afford to buy a kancil with cash. Buying a second hand car isn't an option for ladies fearful of old machines acting up and getting stuck at highways in the middle of the night. Glad that I can proudly declare I OWN my own car, a perodua after finish servicing the loan nx yr. If you plan to use your car beyond 5 years n plan on getting a national car, i'd say get a perodua n save yourself the trouble of unreliable protons.
As for castle, stay in parents castle for as long as you could haha.