Happy New Year, have you written down your New Year’s resolutions yet? I’m in the midst of doing mine. Well, I roughly know what will go on the list already but to “keep it real”, I need to put it all onto paper and make a PLAN! Yes yes, worklife (oops I mean work-life … you see, I can’t even split the 2 words up) balance is definitely up there.
As you know, TOHTMYM is generally about managing your money….and so far I’ve been blabbing on about investments and the options available. But I have many friends who moan to me all the time about how they cannot invest because they’re clearing off debt, or how they cannot save on their meagre salaries!!! These are folks in their early to mid thirties. My friend Nance got caught in the debt trap because she said they lived a paltry existence, up until her first credit card was approved! Then, BOOM! all hell broke loose
and she started to live it up, buying white goods for the household (she lives with her parents still), partying every weekend with friends and eating out, buying little nice ‘bajus’ and trinkets for herself. Yet another friend, Peter told me that his RM10k+ salary wasn’t enough because he had a lifestyle to maintain…which included paying off his BMW and condo, and weekend binges at the latest trendy bars in town. Still another friend, Myra said to me “I’ve got everything that I need. I’ve almost paid off all my home loan. I don’t need anything else. I will use my money for travelling instead”. On and on it goes, different people with countless reasons why they haven’t started saving for their future. And then, because they know that I’ll start to (ever so-gently 
) get on their case about it, they give me a guilty look and say “I plan to start though”. (tsk! tsk!)
I’m sure many of you know someone like my friends above. Saving money seems to have gone out of fashion in the world we live in. Maybe we’re all too caught up in the material world (cue Madonna) these days, and it’s ever so easy with just a swipe of the card to build that fantasy life that we so aspire for. Maybe it’s peer pressure – everyone else is having fun, everyone is driving a cool snazzy car…why shouldn’t I too!! I must admit, my own particular weakness has always been buying CD’s, books and DVD’s (legitimate la!!!) and I am partial to the odd marathon shopping spree at ZaraMNGTopShop(thank God H&M and Bershka have yet to make their way to our shores!!).
Another friend of mine, Chloe (The Chronic Consumer) buys an average of one gadget every two months…iMac, Nokia N-whutevalatestmodel, notebook, plasma TV, notebook again, blackberry, ipod (coming soon!). What do you do when the world around you is about consuming? Even the government wants us to constantly consume “It’s good for the economy”…as evidenced by the stimulants offered in Budget 2008.
So taking stock of the world we live in, here briefly are some reasons why I think that cultivating the savings habit and committing to it is a very good thing if you’re still coming up with your 2008 list:
1) It makes you self-reliant in your older years – no hand-outs needed from parents, friends, family. No burden to society.
2) You are in control of your life and you will probably feel less stressed, guilty etc etc
3) You learn to appreciate the small and simple things in life…taking a walk, hanging out with friends, playing with small kids (substitute with pet if no kids)
4) It’s good for the soul!! This is especially true if instead of consuming, we learn to create. So next time, you get the urge to consume (buy things, watch TV, buy yet another CD), maybe you should think…what can I draw, build, write (like keeping a blog for example!)…
5) If you are faced with a major expenditure eg a loved one falls sick or your boss gives you so much sh*t that you think “enough is enough”, you can handle it
6) You can give some to charity and make the world a better place
7) Very importantly….the younger you start saving, the more you save!!! Remember the 8th wonder of the world as touted by Einstein? The power of compound interest means that over a longer period of time, what money you tuck away in your kitty today will be worth more. So it doesn’t matter if it’s just RM100 or RM200 or even RM50 a month. Just start!!!
Last but not least,
8 ) Add your own reasons just for good measure!
Need more inspiration/challenge? Here’s an article that I lifted from Tim Ferriss (of The 4-hour Workweek fame) ’s blog:
***************
Princeton friends John Perry and Sarah Pelmas had debated repeatedly with their San Francisco buddies about the impact of the U.S. consumer lifestyle on the planet and on their own quality of life. In late 2005, they decided to do something about it: The 10 friends challenged each other to see if they could all go through the whole of 2006 without buying anything new.
The group called themselves The Compact, after the Mayflower Compact, and pledged that for the entire year, they would purchase secondhand or borrow everything they needed, except for food and essentials like toiletries and medicine.
“We thought that if we stopped participating in the cycle of disposable consumption and empty shopping, we could tread a little more lightly on the planet,” says Perry, a communications director at a high-tech company, who majored in English at Princeton.
Sounds hard? They say it wasn’t. They shopped less overall and got creative when they needed specific items. They reserved “shopping” for times when there was something they really couldn’t do without. When Perry needed a pressure cooker to prepare vegetarian dishes for his partner and their two children, he found a used one on the Internet. Pelmas and her husband, who are renovating their home, found secondhand appliances and recycled wood for baseboards and cabinets. But they were stumped by how to find used nails, screws, and hinges, and broke down and bought them new instead — the only time they cheated. Pelmas also struggled with finding sports sunglasses for rowing. Never able to find a used pair, she taped up her old ones and kept using them instead.
“It seems impossible and daunting, but it really isn’t,” says Pelmas, who studied English and creative writing at Princeton and now works as a school administrator. One of the benefits of ditching recreational shopping was more time for friends and family. “It’s completely changed the way we look at things,” Pelmas says. “Most things don’t seem necessary anymore.”
The Compact unexpectedly morphed into a national — and international — phenomenon after the media in San Francisco caught wind of the project. Before the year was out, stories about it had run in dozens of U.S. and international media outlets. The Compactors started hearing from people around the country and around the world, including environmentalists and people concerned about global warming, but also from parents worried that their children were becoming too materialistic, and people troubled by the consequences of U.S. oil dependency.
About 8,000 people have joined the e-mail list The Compact created to discuss the project, and groups modeled after The Compact have sprouted in 38 communities across the United States and in countries including Romania, New Zealand, and Japan. You can read more about The Compact on its blog at sfcompact.blogspot.com.
The project was supposed to wind down at the end of 2006, but Perry and Pelmas plan to continue living in the spirit of The Compact. “When you stop engaging in ‘retail therapy,’ you realize how much you have and how little you really need,” Perry said.
By E.B. Boyd ’89
E.B. Boyd ’89 is a freelance writer in San Francisco.
January 8, 2008 at 12:56 pm
Thanks for posting these wonderful articles.
Too many people just don’t realise they don’t need a lot to start saving. Too many necessities in life for them. I am amased to see people around me, for e.g. a worker who earns one or two thousand ringgit every month, while complaining they don’t have enough money to support the family and yet without second thought they will buy a DVD player which cost one or two hundred ringgit. They think that is very cheap. Don’t they realise it is about 10-20% of their salary. Is this because their mathematic is really bad? Probably not, it is the desire…. They could have used the money to pay off their house loan instead or save it for future.
January 11, 2008 at 5:15 pm
Recently I have the chance to remortgage my house to a lower interest rate, instead of the insane 7.6% and out of the deal, I was given the opportunity that I could redraw the capital from my house. I can’t do this very often though but this really put me in serious thought about what I should do. I actually can withdraw up to RM 100,000 from my property and I have about RM 100,000 investment in various area. Should I
1) Withdraw my investment and pay towards my mortgage?
2) Withdraw my equity from my property and put the money into my investment?
3) Don’t bother, just keep both equity and investment as it is and live naturally.
4) Withdraw both my investment and equity from my house and buy a property in KL or somewhere and let it out?
4i) At what Loan to value should I aim for?
4ii) I thought of using the maximum LTV of 90% and 30-40 years mortgage term, so my repayment mortgage on buy to let property would be minimal, while the rental should cover my repayment and a bit of excess to go into my pocket as pocket money. Effectively I am betting on property hike up in price in the years to come. Do you think is a good idea?
What’s your opinion on this?
January 23, 2008 at 6:35 am
One often overlooked place to save some money is your car insurance bill. As an agent, I can tell you that the squeaky wheel gets the grease. We don’t have time to requote every policyholder’s coverage at renewal, but if asked to, we will shop their coverage around. Companys are changing rates and adding discounts all the time, so if you haven’t shopped your coverage around lately, you might be surprised how much you could save!
Below is a link to my California car insurance website. Even if you don’t live in California, you can just enter your zip code and a list carriers in your state will appear. They are some of the cheapest companies you’ll find, so quote a couple and see if you can trim some fat from your budget!
Visit here: http://www.carinsurancequotes-california.com/get-quotes.php
January 23, 2008 at 8:50 am
good articles.many younger peoples out there still do know how to saving their money because they always think that life must be fun.Credit card is vehicle to make dream come true.Even my peers also
spend a lot of money to life in fantasy.How much your salary in not issue but how your manage your salary is more important.The magical of money compound is really work.Let we star our money as soon as possible.
January 27, 2008 at 9:08 pm
Yes, I agree with you. Enjoying and having fun is the first priority for many young people. What you said is true about credit card, it makes their dream come true. This is a very good one. Compound interest is also another simple important concept which ignored by a lot of people as well.
February 1, 2008 at 11:48 pm
How about using credit card to invest? What do you guys think?
Say, using funds tight up with credit card with interest rate of 15% to invest in an instrument that can potentially gives you 30% return.
February 7, 2008 at 2:19 am
could you give me a detail but simple and easy to understand more about saving money(the steps,reason,the benefits)…as a students I would be very happy if you can help me..thanks.
February 9, 2008 at 6:56 am
It is not uncommon people do use credit card to raise capital for a nothing down real estate investment. I think it is justifiable because the return from real estate is predictable. Similarly if FD pays 8% interest while credit card charges 0% interest, then obviously it will be more beneficial to invest with credit card. I am sure if you do your maths right, use credit card to invest is acceptable.
HOWEVER, if your investment vehicle is some mutual funds, shares, stocks, bonds, etc, the return is not predictable. You could easily lose your shirt if the market turn against you and still have to think about how you are going to repay your credit card loan.
muzze, it has all got to do with maths. Because compound interest is truly magical and the only magic potion it needs for it to work is time. Say if your parent helped you to say RM 1 per day since birth and continue to do so without fail until you reach the age when you can earn your own money and still without fail you carry on this legacy till you are 65. Guess how much will you have by the time you retire at 65?
RM 74,133,823.25 (Assuming you put your money in some mutual fund with average return of 12% per annum – not uncommon at all). So before you spend RM 3000 on your PS3, think about how much it cost you in your retirement. Assuming you spend RM 3000 on your PS3 and not putting RM 1 away for another 3000 days, at your retirement, you get RM 27,633,878.32 and a very very very old PS3 console. in other word, your PS3 cost you RM 46 million future money. So, before you exchange your ringgit with a junk, think about how much it cost you in future ringgit. I am not against anyone buying PS3, and certainly not against Sony. I believe there are lots of things in life we will bound to think of buying, it maybe plasma tv, ipod, car, house extension, etc.
My example is only to put away RM 1 per day into an average mutual fund. I am not even talking about putting away RM 10 into an outstanding investment with 20%, 30%, 40% return per annum. Imagine, how much would you have if you have a strong determination to do so every day without fail. The number would be astronomical.
Good luck in your adventure to the world of investment.
February 16, 2008 at 10:28 pm
It’s definitely much harder to save money these days compared to even 10 years ago. Too many temptations such as electronic gadgets, hagaan daaz and the works and everything is going up by 10% per year. Even the humble mee goreng is now RM3 in many mamaks!
March 2, 2008 at 7:17 pm
Simon, thanks for your question — hopefully this reply is not too late. The answer to your question depends on a number of things including your age, your current income earning capabilities (stable job etc), any other financial commitments and the nature of your other investments. Other than the savings that you can get from your mortgage refinancing, think about any hidden costs that may come with you refinancing eg. penalty for premature termination, and also legal costs to be incurred in the new loan agreement. Some companies come to you and tell you that their rate is lower but it may only be for the first 3-5 years, thereafter the rate may be increased drastically.
The general rule of thumb is to keep your debt repayment level (loan repayments & credit cards) at not more than 30% of your monthly take home earnings. And to have at least 6-8 months of emergency funds in cash and liquid assets to protect against any unexpected financial commitments. Generally, it would be prudent to keep a debt:total assets ratio of not more than 50% also. Total assets would be things like bank deposits, investments in stocks, mutual funds, property, EPF and the cash value of anyinsurance policies. Note that property would exclude your home, as it is not something that you would want to sell, when faced with a credit crunch.
Managing your cashflow and gearing or debt ratio is as important in personal finance as it is for corporate finance! It is easy to be tempted to over-borrow so as to buy more properties…and hope that the property market goes up and take your net worth with it! But make sure that you would be able to easily afford the mortgage repayments when times are not so good (eg no tenant, in between jobs). Don’t forget that there are other extra costs involved too in owing property like renovation, furnishing, fire insurance, council rates and maintenance which will add up approximately 40-45% to your monthly costs according to the financial guru Suze Orman.
What Loan to Value you should aim for…well the lower the better, so that your monthly repayments are lower and you save on the interest….especially if you’re talking about your home, and not buy to let property. There are no tax benefits to be gained from paying a higher interest. So with lower monthly loan repayments, you can at least use another part of your salary for investing in stocks or mutual funds. Hope this helps.
March 2, 2008 at 7:20 pm
Muzze, how to save money – I highly recommend the book The Automatic Millionaire which was my Book of The Month for March 2007. Please read the review which contains a summary of the book and also try to get a hold of the book if you can – available at MPH. Also check out my other posts under the subject header “Saving Money” and “Investments”.
March 3, 2008 at 8:04 am
It looks like I haven’t got a very healthy financial health. My ratio does not stack up. When I bought my house three years ago, the house price was astronomically expensive. The house price has increase more moderately these two years but it would have only been a bit higher than what I have paid 3 years ago (115k vs 105k).
Anyway, I have recently remortgaged it to a shorter mortgage term of 20 years, instead of 25 years. My capital repayment mortgage is currently 42% of my take home pay (Ouch!). I am still okay with that as my wife take care of the rest of the bills and expenses.
We divided our financial commitments whereby, I take care of the mortgage and investment side of things, she take care of expenditure and saving. She has approximately 1 year worth of expenses held in the form of FD whereas I have approximately 15 months worth of mortgage payment in the form of stocks and shares.
I have only about a month of cash sitting in my account (spare cash) and even that amount has been pencilled in to be invested in exchange traded fund this middle of the month. I normally hold very little amount of cash in my account because of the split of our financial duty and our attitude to risk (To me Cash is Trash, I eagerly convert cash to bullion, commodity, shares, bonds as soon as I had it on my hand. To her, Cash is King, she eagerly put them in FD as soon as she had it on her hand)
When you say maintaining a debt to total asset ratio of not more than 50%, do you mean secured debt or unsecured debt. We have not had any unsecured debt, hence the ratio is zero. But if you mean both secured and unsecured debt, that ratio is hellish (600% = 95k mortgage / 15k stocks)
Both my wife and I are researching into buying our first B2L property. I think we are at the verge of able/unable to afford a B2L property. Our combined income cannot support a second property. We have to rely on tenants paying their rent to repay our interest only mortgage. Our combined investment, saving and income allow upto 8 months of void. In the other blog, I realise you are a B2L investor yourself, may I have some idea of how many months of B2L mortgage you have set aside for emergency? Or have you been in a more fortunate position whereby you could afford both mortgage on your primary residence and mortgage on your B2L property? How many B2L properties have you got? We are doing our first deal and therefore we are a bit nervous and would like some hand on experience from someone who has been through this before. Say if you have 10 B2L properties, having 6 months of mortgage payment on each of them in emergency fund would be a bit over the top, won’t it?
March 3, 2008 at 8:06 am
I have read The Automatic Millionaire from cover to cover. Absolutely love it. Another great book is Rich Dad, Poor Dad by Robert Kiyosaki. I recommend it to everyone.
April 15, 2008 at 1:43 pm
i believe we should strike a balance in everything we do in live… of course there is a need to save money but then on the other hand, don’t forget to enjoy life as well…
Quote from simon:
Assuming you spend RM 3000 on your PS3 and not putting RM 1 away for another 3000 days, at your retirement, you get RM 27,633,878.32 and a very very very old PS3 console. in other word, your PS3 cost you RM 46 million future money.
Ok, lets assume the PS3 will cost RM46m in future money, but when you are that old, are you able to enjoy the same experience as you were when you’re young? i’m not against saving money and investing money but recently, i had the opportunity to take a look at someone’s life who is over 50yrs old now. He spend almost all of his life saving money and investing. I can say that he is pretty successful at this, but when you look back at the life he had gone through, you might think again, is this worth it? There are things in life which you can’t buy back even if you have RM46million. Do you think playing a PS3 at the age of 25 vs playing PS3 at the age of 55 is the same? Can you buy back the time of you being young and full of energy playing PS3 or Wii with RM50milion or even RM1000000000000millions? As of now, i dont’ think so…maybe technology will evolve and it might be possible in the future, who knows? but it’s up to you to bet on it then…
I will not comment further but what i am trying to say here is…manage your money well and don’t forget to enjoy life! Get a PS3 if you can afford it now (save 10% of your salary till u are able to buy it?) cause 50yrs down the road, do you think you will regret missing out on the joys and wonders of life? you live only once… you don’t wanna wake up one day at the age of 55yrs old with tons of cash but an empty life…
April 18, 2008 at 12:58 pm
Kevin:
Agreed!
The purpose of money is to provide for a good life, not the other way around. One could live simply or simply live. Many money-minded folks are so narrowly focused on money that they see no value in anything else.
Most of us are familiar with the commonly cited story of 2 brothers, where one starts saving at age 21 and stops at 30, and the other starts at 31 and doesn’t stop until 65. The story concludes that, assuming an 8% APR, the early saver beats the late saver; giving the implicit moral, as echoed in some earlier comments of this thread, that young people should start saving early.
I will only offer this point to ponder: if one were to agree that value can take many forms other than wealth, then is it not true that the second brother–if he had spent the money wisely on something truly meaningful, such as education, family obligations, and traveling–would have enriched himself beyond what the first brother could ever rival?