If it's too good to be true, something's wrong

DURING a recent shopping session with my family, I saw an interesting promotion for a television set at a big retail store.

The retail price for the said television set was RM4,999. A 22% discount was offered for cash purchasers which brought the price down to RM3,899.

While the price seemed attractive enough, I saw another sweetener for the deal, stating that the special price under its flexible payment plan was RM2,729.30, apparently a massive 45% discount from the retail price!

At first glance, the flexible payment plan was the best deal. As the deal seemed too good to be true, I decided to do some calculation to see the rationale behind it.

Under the flexible payment plan, the weekly installment was RM26.72 for a total of 5 years.

The price of the television set would end up to be RM6,947 instead of RM2,729 upon the last payment.

I was surprised with the huge difference between a cash purchase and the flexible payment plan. This incident has also highlighted some blind spots we have in our spending.

Many a time, there are instalment plans that offer seemingly low interest rates as their marketing strategy.

As consumers, we may end up spending more than we thought if the effective interest rate and other financial concerns are not taken into account.

Taking the television set as an example, the total amount paid for the instalment plan is 78% higher than the cash purchase.

The effective interest rate per year for the financing of 5 years is about 45%, which is way higher than our fixed deposit rate of only 4%.

Bear in mind the high amount that we pay is for a depreciating item. With more advanced technology introduced year after year, the television set we buy today would not have much value left.

Thus, what looks like an attractive deal initially does not ring true anymore after factoring in high effective interest rates and accelerated depreciation in values.

Looking at the high premium charged for the instalment plan, it would be better to go for a cash purchase if the situation permits.

Often, it is better to evaluate our needs before making the decision to purchase depreciating items.

I always encourage prudent spending especially in testing times when we are faced with uncertainty in the economic environment.

Imagine if we can channel the money spent on depreciating items to assets such as investments or properties for the same period of 5 years.

Our money would have grown and helped to improve our financial position, or at least to hedge against inflation.

Other than potential value appreciation, the interest we pay for a housing loan is lower compared to other loans such as personal, credit card and car loans.

The effective rate for a housing loan is as advertised, and the rate is calculated based on the reducing balance (only pay interest on the remaining loan balance).

On the other hand, for car loans and flexible payment plans like the one mentioned above, their interest rates are calculated based on the full loan amount throughout the term, which makes the actual interest rate higher than the advertised rate.

For instance, the interest rate for credit cards is calculated based on 1.5% per month, hence the effective rate per year is 18% (1.5% times 12 months).

On the other hand, for a RM100,000 car loan with a 2.5% interest rate and a 7-year loan tenure, the interest amount would be RM17,500, making the total amount for the car RM117,500.

As a result, the effective interest rate for this car loan is 4.7% instead of 2.5%.

On many occasions, we tend to be drawn in by the “attractiveness” of easy payment plans without weighing the hidden financial commitments.

Though it helps us to obtain an item immediately, we may overlook the true value of the item and the potential financial burden it brings.

Therefore, if a deal is too good to be true, most of the time, it is just too good to be true and worth a second thought.

By Alan Tong food for thought

Datuk Alan Tong was the world president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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The mind-set: how the rich get richer, the poor get poorer? You need more money ...

The rich may get richer while the poor may get poorer, but it doesn't have to be that way. It requires a change of mind-set.

I ONCE overheard someone lament that “the rich get richer and the poor get poorer”, which made me think if indeed that statement is true.

The rich do get richer only because they have sound financial concepts required to stay rich. They focus on their net worth, working on their appreciating rather than depreciating assets.

They know how much is required to keep their lifestyle. They don’t necessarily need to be debt-free because they know what good leveraging can do to enhance their wealth. They employ financial strategies which are contrarian to common ones - taking on investment opportunities when others would stay away and having the purpose driven portfolios.

They consciously inject capital into their portfolios rather than on an ad hoc or timing basis. They know the impact of inflation on their money and insurance coverage because they review their financial life regularly. Their financial data is maintained and accessible anytime they want.

The poor do get poorer only because they continue to adopt a poverty mind-set. They focus on their expenses too much either being overly frugal or overly spendthrift.

Frugality means overprotective of your money which prevents risk-taking while overspending means financial leakages and unnecessary bad debts.

Their financial life has no planning and they have never taken a conscious effort to straighten it out. Their finances are all lumped into a “pot” which is meant to be used for everything.

They do invest but usually due to either lack of knowledge or fear of losing their capital, the amount is too small to be financially significant. Their insurance coverage depletes as medical costs rise, unsure what and for how much they are insured for.

It really doesn’t have to be this way. There is a way to change your financial situation. The first step is to decide to be financially responsible yourself. Acquire the right financial knowledge and make that change. Find a financial buddy to help you get started.

- Financial Snacks by Joyce Chuah, CEO of Success Concepts Life Planners

So you need more money ... 

The problem always starts when you owe more than what you can earn, financial experts say.

When it comes to money, Adrienne Wong (not her real name) believes she is a reasonable spender.

An assistant communications manager, Wong, 31, earns about RM8,000 a month, but says her debts take up a sizeable chunk of her monthly income.

The two biggest items in her list, her housing and car loans, amount to about RM3,000.

“My credit card bills usually come up to another RM1,000 plus, so that’s more than half of my salary gone. With utility bills, that’s another RM600. The rest goes into savings, pocket money for my parents and a bit of shopping.

“With property and car prices as high as they are now, it’s no wonder our loan amounts are so big. But what choice do we have?” Wong asks.

Indeed, the rising rate of household debts is a pressing concern – as of March, this year, the Malaysian household debt ratio against the GDP reached an all-time high of 83%.

Last week, Bank Negara Malaysia (BNM) announced a three-prong approach to curb the rising trend of household debts:

> Maximum tenure of property financing is now fixed at 35 years;

> Maximum tenure of personal loans is fixed at 10 years;

> Prohibition on the offering of pre-approved personal financing products.

BNM Governor Tan Sri Dr Zeti Akhtar Aziz had said that Malaysia currently has the highest household debt to GDP for a developing country in the region. In comparison, Thailand’s household debt ratio stands at 30%, Indonesia at 15.8%, Hong Kong at 58%, Taiwan at 82%, Japan at 75% and Singapore at 67%.

Countries that have higher household debt to GDP are the United States at 91.7%, United Kingdom at 114%, Australia at 113%, New Zealand at 91%, and South Korea at 91%.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng says BNM’s move is a “prudent one”.

“A financial crisis can always be traced back to excessive borrowing or leveraging, and the problem is that we never know we are in a credit bubble until that bubble bursts.

“The higher this figure is, the more vulnerable the household sector will be to economic shocks, which can come in the form of an economic downturn,” he says.

The concern, he says, is when people owe more than what they can earn, which is not sustainable.

According to BNM figures, the three biggest contributors to Malaysian household debt are the housing, car and personal loans (refer to chart).

Personal loans can be used for a variety of reasons.

Teacher Siti Norsharmi Fateh Mohamad, 28, says she took a RM35,000 personal loan three years ago to fund her wedding.

“We wanted our wedding to be special, with everything done up nicely. It didn’t feel like much then, but now that we have more commitments (a daughter and a housing loan), it’s definitely an additional burden for us.

“On hindsight, we shouldn’t have taken the personal loan ... it wasn’t a necessity,” she says.

But personal loans are popular lately and there’s a reason for it.

“Banks aggressively push personal loans because it’s one of the most profitable products for them. Interest rates for personal loans can be anywhere from 3% to 12%,” says a former local bank manager who declined to be named.

Spending trends have also changed, says Dr Yeah.

“Previously, people only spend what they can afford, but practices have changed. Today, many people don’t mind spending money they don’t have.

“Taking a personal loan is not necessarily a bad thing, but it depends on why you’re doing it. Taking a personal loan for education, for example, is fine, because you’re improving your skills ... or for medical purposes to enhance one’s health. But to take a loan for conspicuous consumption, or to make speculative ‘investments’... I think that should be discouraged,” he says.

Credit Counselling and Debt Management Agency (AKPK) chief executive officer Koid Swee Lian agrees.

“It is quite common now for people to take personal loans prior to a festivity because they want to buy new furniture, change their curtains, do a bit of renovation.

“Consumers must be discerning and responsible in their borrowings, just as credit providers must be responsible in their lending. Earn before you spend, not spend then earn! Use the debit card and not the credit card if you cannot pay in full each month,” she says.

Before taking a loan, Koid says consumers should ask themselves:

> Do you really need the personal loan?

> Is it for a productive purpose or can you forgo it?

> Can you afford to pay the loan instalments? If the interest rate increases, can you still pay the increased loan instalments?

> If the loan is for a productive purpose, would you generate enough income to repay the loan and leave some income for yourself?

If taking up a personal loan is absolutely necessary, Koid advises potential borrowers to do their homework and compare the different bank rates.

“Go to bankinginfo.com.my where you can make a comparison of all the rates. Don’t take a loan just because it’s offered. Also, understand what you’re signing up for. Find out whether the bank is charging you a flat rate, a reducing rate or a floating rate,” she says.

Koid gives an example of a loan with these terms – a RM10,000 loan to be paid over five years at 4% interest rate per annum.

“A flat rate of 4% for a five years may not sound like a lot, but what it actually means is that you’re essentially paying 20% interest for the five-year loan. The amount of interest you pay doesn’t change regardless of how much you’ve repaid,” she says.

“Compare this to a reducing rate. If you’ve paid RM1,000, that means the interest should only be on the remaining RM9,000.”

Those who have trouble managing their cashflow can also seek help at AKPK or call its toll-free line at 1800-88-2575.

“People who have a debt problem often feel very embarrassed, but I think they need to be realistic. You’re in that situation, you have to solve it. Come to us, we will do our best to help you,” Koid says.

BY LISA GOH  lisagoh@thestar.com.my

How to save when you’re broke?

Saving money is not impossible when you're in financial dire straits

SAVING money can be a tall order for a lot of people but it becomes near impossible when you're broke or financially challenged. Still, it's not a position you can't come out of.

Here are some simple steps to follow to help you save despite being broke.

Set up a budget plan

If you're broke and trying to save money, than it's best to come up with a budget plan, says Standard Financial Planner Sdn Bhd's Jeremy Tan.

“If you're broke, then you need to evaluate what you're doing wrong.

“Have a budget plan. Look at what assets you have? “Perhaps you could try liquidating some.

“But even before you're broke, you should have contingency or emergency funds,” he tells StarBizWeek.

Keep working

MyFP Services Sdn Bhd managing director Robert Foo believes that if a person is broke, it's imperative for one to continue working or seek a new form of employment - as soon as possible.

“If you have a job, then you should continue working.The experience that you already have would be invaluable.

And what happens if you've lost your job or unemployed? All is not lost, says Foo.

“Don't feel hopeless. You've got skills and should be able to have contacts that can help you find a new job.

“If you have a job and you feel it's unstable or that you might lose it, then you should ensure that your resume is with headhunters, to ensure your income position remains as stable as possible.”

Tan also points out that age can be a factor. “Of course if you're young, you'll be able to take on multi-tasking jobs. If you're old, then you might need to go easy on the job load,” he says.

Compare prices

Self-confessed shopaholic PS Tan says that when she's “a little bit behind on her credit card payments” and needs to cut down on her spending, she decides to be a little bit more “choosy” with her shopping.

“When I know I need to cut down on my spending, I go several hypermarts or supermarkets and compare prices first before eventually purchasing.

“Also, if I have been using items that were expensive, I just choose to buy ones that are cheaper.
Be open to new brands and products,” she says.

Eliminate costs

While trying to save, also try to rid yourself of whatever debts you have.

“If you're broke, ask yourself if you have debts or not? Find out how you can restructure them,” says Tan.

Tan meanwhile says now would also be a good time to evaluate and consider eliminating the unnecessary financial obligations that one can do without.

“If you have a gym membership for a gym that you've not been going to for a long time, or perhaps a year's subscription for a book or magazine you've been hardly reading, just cut it off.”

Live within your means

If you're broke, than you're going to need to need to change your lifestyle - immediately!

“If you're broke, then you're not going to be able to sustain the lifestyle you've been living.

“The fastest way to solve this is to cut down on your expenses,” says Foo.

He reiterates that one could find a part time job or even a second one to curb debts quickly.

Eric Lee (not his real name), a marketing executive who was laid off for six months, says he was forced to cut down on his lavish lifestyle when he had difficulty finding a job.

“I had to do a lot of things differently.

“My car got repossessed and I had to move out from where I was staying because I couldn't afford the rent.

“I moved in with my parents and also had to rely on public transport to go where ever I needed to, especially for job interviews.

“If I was lucky, sometimes I could drive my parents' cars.

“When I did get a job, I initially still had to live within my means as I was still unable to stand on my own feet. This meant taking home-cooked meals to work.

“Initially, I also had to use t-shirts from friends as I couldn't afford new ones.”

By EUGENE MAHALINGAM
eugenicz@thestar.com

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