7 Advantages of a Debit Card

According to a news item in the paper, more and more Malaysian are using debt cards and debit card spending has increased 50% year-on-year. A debt card offers many benefits:

1.      Better Control of personal finance: A debit card allows you to spend only on what you have. You can use your debit card to spend according to your budget.  However, a credit card, without using it wisely, can lead to bankruptcy.

2.      Safer: You don’t have to carry a lot of cash when you go shopping, you avoid getting robbed.

3.      Simple life: With a debt card shopping is hassle free. There is no need for a buyer and a seller to count cash and avoid errors.

4.      Shop online: When you have a debit card, you can shop online. It is just like a credit card. 

5.      Avoid running out of cash: There is no need to look for a bank or an ATM when you are short of cash, just use your debt card.

6.      Supporting documents for your spending: It is easy to monitor your spending because there is a slip for each and every transaction.

7.      Worldwide acceptance: Like a credit card, it is accepted internationally and you can withdraw local currency from ATM when you are overseas. 

You need to monitor your spending and avoid getting into an embarrassing situation when a transaction cannot go through because there is insufficient fund in your bank account.

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Why You Need to Do a Personal Cash Flow Forecast

In the 2012 Global Finance Who’s Who in Treasury & Cash Management Survey, it is stated that more than 60% of the organizations formally assess or monitor their cash flows daily to meet operating requirements. While you do not need to do it daily it is wise to do it once a month for the next three months to be on top of your personal finance. A cash flow forecast, as its name implies, is to estimate your future cash flow situation. The whole purpose is to manage early in case of a shortfall in the near future.

Here is a simple cash flow forecast statement. For simplicity, it is assumed that you are not using credit cards. You are now at the end of October 2012 and you have prepared for a three-month forecast for the next three months:

November 2012

Cash Inflows

Where are your sources of income in the form of cash? It can be your salary, income from part-time work and dividends from stocks and shares. In this example, your take-home pay is your only cash inflow which is $6000.     

  

Cash Outflows

It is a good budget because there is no overspending and there is also an amount of $600 set aside for savings.    Other expenses vary from month to month and they include such items like eating out, gifts, clothing, minor car repairs and donations.

Net Cash Flow

In the month of November income equals Expenses, so it is zero balance.   

Balance B/F

It is assumed that in the current month, your actual income ties with total cash outlay so there is no surplus fund to bring forward to November 2012, so the balance brought forward is zero.

Balance C/F                 

There is no money to bring forward to the month of December.   

     

December 2012

There is a special item in December. You are going for a Christmas holiday and you have budgeted for an amount of   $2000. Your cash flow forecast clearly shows that you are short of exactly 2000 in the month of December. You will have to decide now if you are going ahead with your holiday you will need additional funding.

January 2013

There is another shortfall of $1500 in January 2013 because your car insurance is due in January. If you have set aside $125 per month every month you would have ready cash of $1500 by January 2012. Since it is not done, you will have to look for additional cash of $1500.    

 Now

The forecast tells you that you need an additional fund of $3500 to meet expected expenses in the next three months. For those who have included savings as an expense item in their monthly budget, there is no problem; all you need to do is to draw from your savings.  Without savings, you can either draw from your emergency fund or liquidate part of your investment. When you do not have other sources of ready cash you will need to borrow or apply for a personal loan now and get into debt. You do what you need to do now and avoid getting into a panic situation later.

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7 Ways to Retire with Financial Freedom

You are now able to live longer than before because of better health care. It means you need to have more money to spend and cover inflation as well. According to data compiled by the Social Security Administration:

A man reaching age 65 today can expect to live, on average, until age 83.

A woman turning age 65 today can expect to live, on average, until age 85.

And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

Here are seven wise things to do for those who are about to retire:

1.      Be debt-free: The biggest enemy of financial freedom is debt because you are going to pay more than what you have actually incurred. The longer you delay, the more interest will be added to the outstanding amount and it will be more difficult to clear as the amount grows bigger over time. 

2.      Continue to work and earn: If you enjoy what you do, it would be prudent for you to continue working. When you work, there is a source of regular income and you and your employer will continue to contribute towards your retirement fund. Another point is that you are not touching your retirement fund and it continues to grow.  The longer you work your retirement years will be shortened and the less money you will need.     

3.      Focus on sources of passive income: It is a smart move to build a constant stream of regular income during retirement. One such source is shared which are making regular dividend payments. When one regular source of income stops, another one takes over.     

4.      Build new sources of income during retirement: Another wise move is to start a second career during your retirement. What is your expertise? Can people pay you for your services? While you can continue to earn during your retirement, it is more important to keep your mind active and alert. 

5.      Spend less: You will never know how long you are going to live. It is prudent to adopt a frugal lifestyle so as to last your retirement fund as long as possible.

6.     Save as much as you can: Save your bonuses, if any. Don’t spend your tax refund check. The more you save, the bigger will be your nest egg.

7.      An emergency fund:  It is also good to set aside an amount to cover unexpected expenses such as a major car repair or illnesses. Such expenses, more likely than not, are excluded in your retirement fund.   

Take action now and enjoy financial freedom later.

Do You Know the Effective Return of Your Dividend Income?

Regular dividend-paying stocks are good for long-term investment because these companies are making a profit and they are well-managed. Their business is either transacted in cash or they are able to turn accounts receivable into cash quickly.     

Do you know the actual return of your dividend income? Check out the following: 

What is the par value of your shares?

When ABC Company pays a dividend of 20% per share and you are holding 1000 shares of $1 each, your dividend income is $200. However, if the par value of your share is only 50 cents each, your income from a dividend of 20% is only $100.

If ABC declares a dividend of 20 cents per share you will get $200 irrespective of the face value of your share, be it $1, 50 cents, or 10 cents.      

Is it taxable?

If the dividend is subject to a tax of 20%, your $200 and $100 dividend income will be reduced to $160 and $80 respectively. However, if you are personally not taxable you can claim the refund of the amount taxed. On the other hand, if your tax bracket is more than 20% you will be taxed even more.

What is your effective return?

You bought 1000 shares of ABC Company at $5 share with a total outlay of $5000 (We ignore brokerage and other fees for simplicity sake), for a dividend of $200, your effective rate of return is only 4% (200*100/5000) 

Do your homework and invest in dividend-paying stocks with a better effective return.  

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Are You Financially Responsible?

There are plenty of ways to get ahead.  The first is so basic I'm almost embarrassed to say it:  spend less than you earn. 

Paul Clitheroe

Here are some soul-searching questions to ask yourself about your financial responsibilities:  

1.      Do you spend less than what you earn?

If you don’t, it means you do not care about overspending and getting into debt. You do not consider the long-term negative consequences. You are thinking that things will sort it out by themselves, but the situation can only get worse because more and more interest will be added to your outstanding debt.  

2.      Do you discipline yourself to avoid spending unnecessarily on your wants?

A wise person will spend only when he or she can afford it. It is only prudent to stick to your budget faithfully and avoid getting into money problems later. 

3.      Are you financially prepared each time you charge an item to your credit card?

 Do not spend impulsively. You have to back each credit card transaction with the same amount of money in your bank account. You do not want to live on credit and get into debt and pay extra on interest charges. You treat a credit card as a convenience and a documented way of making purchases.  

4.      Have you considered all factors before getting a personal loan application?

Is the loan necessary? Are you spending on what you need? Have you factored the monthly repayment amount into your monthly budget? Are you comfortable with the additional outlay? Think carefully before you sign on the dotted line.

5.      Do you honor your monthly loan repayment commitments?

Do you treat your monthly repayments seriously?  Do you always pay when it is overdue or you miss one or two installments? It indicates that either you are taking the matter lightly or you are in financial difficulties.

6.      Do you make it a point to pay your credit card bills promptly and fully every month?

Paying in full when you receive the monthly statement is the only sensible thing to do. Paying the minimum amount is asking for trouble because credit card interest rates are among the highest in the industry. More people are declared bankrupt as a result of unmanageable credit card debt.   

7.      Do you value your creditworthiness?

It involves your financial reputation.  Can you be trusted to get a loan? Are you committed to pay the monthly installments?  The only way to establish your creditworthiness is to demonstrate a good record of your loan repayment pattern and make timely credit card payments.

You are a financially responsible person when you can say yes to all the above questions. 

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What is Your Personal Wealth?

If you don't think you're rich, try counting all the things you have that money can't buy...

~ Rob Hawkins

Your personal wealth is more than the money in your bank accounts and all the worldly possessions you have. These are measurable.  There is intangible personal wealth you should treasure more than anything else because it is priceless. Perhaps you have overlooked it.  Here is a list of your truly personal wealth:  

Health: Your health is the soul of your life and your wealth. You have the power to create more wealth when you are fit and healthy. You are also free to enjoy the wealth that you have created because when you are feeble and weak, your movement is restricted and you have no way to enjoy your wealth. Health is your greatest wealth.

Skills, knowledge, and wisdom: All the material wealth can be taken away from you, but nobody can take away what you have in your mind. You can start all over again to rebuild your wealth. You have the skills and the expertise which are of value to others. The knowledge you possess and the experience you have gained are transformed into your personal wisdom. What you know is truly priceless. 

Creativity: Ii is about an idea, a unique and original idea. When you can conceive, you can turn an idea into wealth. It is the key to success in the world of online technology. Creative thoughts are wealth.    

A positive mindset: Your personal wealth is also measured by the way you perceive yourself and the world around you. You are rich when you are optimistic and confident. You are poor when you feel dejected and pessimistic.     

Happiness: Are you happy? If you are not, you will miss the most important element in life. If you are not happy, material wealth does not matter. When you are happy you are rich beyond what you have. Life is worth living and you look forward to each new day with joy. 

Relationships: A happy family and people you can count on and connect with are the precious things in life. You can’t measure it with money.

Think about it, you are wealthy in many ways. 

Getting Effective Personal Financial Education

An investment in knowledge always pays the best interest.

Benjamin Franklin

According to Wikipedia, financial literacy is the ability to understand finance. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions through their understanding of finances.

It implies that you have to get financial education by studying   financial information, understand it, do it and obtain valuable experience. You are likely to make financial mistakes along the way but you will be wiser. 

There are three stages in life to learn about relevant financial issues: 

At home:

Financial education starts at home for the kids.

Savings: It is the best time to educate your child about savings and how your money grows with compound interest.  It is also a good thing to talk about the simple rule of 72 (the time needed to double your money with a fixed annual interest rate. At 6% you will double your money in 12 years - 72/6) in relation to savings. Take the opportunity to talk about save-and-buy-later for a big-ticket item when he or she is about to buy an expensive item like a laptop or an electronic dictionary. To save and buy later is a concept on effective use of money and avoid paying more on interest and getting into debt.        

In school:

In secondary school:

Education loan: When your child is about to enter college, polytechnic, or university, it is also a good time to talk about student loans.  Getting a loan to pursue tertiary education is not the best option. Think about it, before you get a job you are already in debt and there will be more debt to incur like a car loan and mortgage. It is good to obtain a degree but there is no assurance that you will get a decent job of your choice or a job at all upon graduation.  

Higher education:

Debit cards: It is good for you to have a debit card to gain knowledge and valuable experience of using plastic cards. The card is tie to your saving accounts and each time when the card is used the amount is deducted accordingly from the account. There is no way to spend more than what you have in your savings account.     

As a young adult:

Needs and wants: Landing on your first job after graduation is a great achievement. Getting your first paycheck is a delightful thing and you are thinking of buying so many things. So it is time to learn about wants and needs, budget and living within your means. Needs are essential and wants are optional and you can go without.  A budget is a way to control spending so that it is less than what you have earned and there is still money left over every month to save for a rainy day.   

Good debt and bad debt: It is also important to learn about good debt and bad debt. Getting into debt to buy what you want is bad but getting a mortgage to buy your first house is OK because a house appreciates in value over time.  Getting a car loan is bad but how many of you can buy a car in cash? A car depreciates greatly in the first two years.  The outstanding loan may be more than the value of your car.

Credit cards: You will also acquire your first credit card.  It is crucial to know the danger of bankruptcy relating to young people and credit cards. Wise use of credit cards is about applying the knowledge of wants and needs, following your budget faithfully, and paying the outstanding amount fully and promptly. The most important thing about credit card usage is for convenience and not to obtain credit and get into unmanageable debt.

Creditworthiness: Smart use of your credit cards is an excellent way to establish your creditworthiness. The key is paying the amount in full when you receive the monthly statement from the card issuer. It tells the financial institution that you are a financially responsible person. You are in good financial standing to grant credit because you pay promptly.

Net worth, assets, and liabilities: Next you will learn more about your net worth, assets, and liabilities. Your net worth is what you own less what you owe.  Let’s look at an example and simplify the issue for education purposes. One of your valuable assets is your house. It is worth, say 200,000. Does it mean that you own an asset with a value of $200,000? No, because you have taken a mortgage and you still owe the bank say, $100,000 (which is a liability) and if you sell the property you only get 100,000 after paying the bank off. So your net worth for your house is only $100,000.

Emergency fund: It is important to incorporate an amount for savings into your budget because if you are thinking of saving what is left, there will be nothing left.  One important thing about life is to save for major unexpected expenses such as car repairs, medical bills, and the like. That is why it is called an emergency fund.

Car loan, mortgage, marriage, and family: It is also time to plan for the down-payment for your first car and your home. Think also about the money you need to get married and start a family of your own. 

Insurance: The subject of insurance is vital for financial education. Learn to leverage insurance to reduce the impact of personal disability due to sickness and accident. You also need to cover perils such as fire, flood, and theft against damages done to your property.      

Tax: Tax is one thing you cannot ignore. Learn to take advantage of tax deductions to reduce your tax liability.  

Investment: How do you get money for investment? It is from your savings accumulated over time. You have to learn the different vehicles to invest such as stocks and shares, unit trusts, bonds, gold, and property.
   

Retirement and children’s education: You invest with a major purpose. It is for your retirement when you are no longer working and there is no regular income. It is also essential to grow your wealth to meet your children’s education needs. It is always prudent to start early to save and invest for your future because a smaller amount is needed to get started.    

Wills: The last thing to know is the creation of wills to distribute your wealth according to your wishes in a hassle- freeway when you are no longer around.

Financial education is a lifelong learning process. The most important thing is to avoid gambling and get rich quick schemes. The ultimate aim of personal finance is financial freedom.

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Why Young Workers in Malaysia are in serious financial trouble

The scenario:

 In Malaysia, 24.2% of the households are in the high-income group and 33.4% are in the low-income group and the remaining 42.4% belong to the middle-income group. People in high income spend only a fraction of their income while the low-income group has no money to spend.  It is the middle group that spurs the growth of the economy in the country.

Among the middle-income group, 58.1% are young workers between the ages of 18 and 35. Out of which 67.2% are in serious debt. According to the headline in the news, over-leveraged spending is unsustainable.   

 

Why are they in serious debt?

Young workers are impacted by low interest rates because:

· Low-interest rates discourage savings and encourage spending. So young workers choose to spend and overspend and incur more debt.

·         Lower interest rates mean lower mortgage repayments. It will spur more borrowing to finance the purchase of houses and inflate property prices.

· Low-interest rates also attract more consumer borrowing.

Young workers also need to spend more because things are costlier than before. The other thing is that their pay increment cannot match additional cash outlay.

According to the same article, rising household indebtedness, rendering them vulnerable to income and interest rate shocks and render the economy and the financial sector more vulnerable to instability and crises.            

 What can they do?

If they do not take drastic action to manage their personal finance, their outlook is bleak. Here are a few suggestions:

·         The way to go is to get out of debt as soon as possible or make debt repayments within their budget. When their monthly spending is under control, it means there will be no more borrowing and they are able to live within their means. It implies that a serious spending cut is crucial to achieving long-term financial freedom. 

·         Start the habit to save and build an emergency fund so that they are able to cushion in case of a financial crisis.

·         Think of unique ideas to create new sources of income. The key is to make changes and improve their financial position.

Current financial situation and its outlook warrant wise management of personal finance to stay afloat.  

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Top 25 Business & Finance Books

Global Finance is celebrating its 25^th anniversary with a special Spring/Summer 2012 issue.

Inside the magazine there is a list of 25 most influential business & finance books for over 25 years:

1.      Too Big to Fail: Inside the Battle to Save Wall Street, by Andrew Ross Sorkin

2.      Boomerang: Travels in the New Third World, by Michael Lewis

3.      The Great Crash: 1929. By John Kenneth Galbraith (edited by James Galbraith)

4.      The Big Short: Inside the Doomsday Machine, by Michael Lewis

5.      The Subprime Solution: How today’s Financial Crisis Happened, What to do about it, by Robert Shiller.

6.      The Warren Buffet Way, by Robert Hagstrom

7.      The World is flat: A Brief History of the Twenty-First Century, by Thomas Friedman

8.      Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms, by Russell Napier

9.      When Money Dies: The Nightmare of the Weimar Collapse, by Adam Fergusson.

10.  Civilization: The Six Killer Apps of Western Power, by Niall Ferguson.

11.  The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell.

12.  The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, by Clayton Christensen

13.  The Great Unraveling: Losing Our Way in the New Century, by Paul Krugman

14.  End This Depression Now! by Paul Krugman

15.  Freefall: America, Free Markets and the Sinking  of the World economy, by Joseph Stiglitz

16.  Fault Lines: How Hidden Fractures Still Threaten the World Economy, by Raghuram Rajan.

17.  The Rational Optimist: How Prosperity Evolves, by Matt Ridley.

18.  The Facebook Effect: The Inside Story of the Company that is Connecting the World, by David Kirkpatrick.

19.  Doing Business with China: Avoiding the Pitfalls, by Stewart Hamilton and Jinxuan Zhang,

20.  Breakout Nations: In Search of the Next Economic Miracle, by Ruchir Sharma.

21.  Greece’s ‘Odious’ Debt: the Looting of the Hellenic Republic by the Euro, the Political Elite and the Investment Community, by Jason Manolopoulos.

22.  Extreme Money: Mater of the Universe and the Cult of Risk, by Satyajit Das.

23.  The Quest: Energy, Security and the Remaking of the Modern World, by Daniel Yergin.

24.  Steve Jobs, by Walter Isaacson.

25.  The Ascent of Money: A financial History of the World and Civilization, by Niall Ferguson

I would be interested to read The Warren Buffer Way if I could only choose one book. How about you?

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10 Wise Tips about Savings

A penny saved is a penny earned.

~-Benjamin Franklin

Saving is a habit and it is the starting point of building your wealth and getting financial freedom. The most important question is: How do you save effectively?  Here are some ideas about savings:

1.      Earnings: Even when you can make a lot of money if you don’t save, it means nothing at all.

2.      The money is not yours: The money you have made is not yours. The money you have saved is yours.

3.      Work: You may not be rich even if you work smart. You have to save like no other in order to be rich.

Don't spend your life working for money; save money and hire it to work for you.

~Dr. John F Demartini

4.      Spend: When you spend money, you do it for others.  When you save money, you do it for yourself.

5.      Pay yourself first: When you spend and then save, there is nothing left to save. If you save and then spend, you will see your savings.  

6.      The effective way to save: Don’t think of savings only when you have more money. You have to save first to see your money and savings.

7.      Discipline: You may be saving regularly for many purposes such as an emergency fund and for investment to build your nest egg. If you don’t control your urge to spend, you may spend it to get what you want for the money you have saved.

8.      Debt: When you are in debt, the first thing to do is to clear your debt because the interest you can earn for your savings cannot outpace the interest on your outstanding debt. Save when you are debt-free.

9.      Spend less than you earn: Prepare a budget, allocate an amount for savings every month, and then it is safe to spend the rest.

10.  More ways to save: Save part of your annual increments and bonuses. Save when you get a tax refund.  Save when you spend less than what you have budgeted. These items are not in your regular income budget, I am sure you can save part of it if not all.    

Be wise and save effectively.

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Effective Ways to Manage 3 Areas of Personal Finance

In life, when you do not earn a reasonable amount, you may not have enough to spend and live a decent living.

When you have earned sufficiently but you spend freely or gamble away your earning, there will be nothing left or worse still you will be in debt.

When you can earn and spend within your means, you may not be able to invest and grow your wealth because you are greedy. You want quick gain and get conned.
     

The objective of personal finance is financial freedom. To be  financially independent it depends on how much you can earn, the way you spend your money and how you grow your wealth.  

1.       Maximize your earnings: You start off as an employee and the amount you can earn depends on your skills, education, and experience. You learn the secrets of the trade and get more productive and every year you get your pay raise. There is a limit to what you can earn even if you change to another job. An ideal position is that your earnings are able to cover your expenses plus an amount for savings.   If you want to earn more, you can get a part-time job, but the amount is still limited. Starting a business of your own, especially an online business is the best option.  The most important thing about a business is a unique idea. There is no limit to what you can earn as long as you are willing to take risks associated with running a business as an entrepreneur.

2.       Prudent spending: The key to wise spending is to avoid getting into debt and spending more than you earn. You will incur interest and pay more for an item that you can pay in cash. Be practical, when a small car can provide the transportation you need, don’t spend more on a bigger car.  A car depreciates in value over time, especially during the first few years. Buy what you need according to your budget and get what you want only if it is within your means.  Learn to appreciate what you can afford and what you have. Avoid bad habits like gambling because it will empty your money and ruin your life.   

3.       Grow your Wealth: When you budget for your monthly spending, you are also wise to include an amount for savings. The amount is crucial to be set aside for a rainy day. The monthly savings are also to be accumulated over time so that you can invest and make your money grow. Investment is for the long term and diversification is the key. Invest in many vehicles such as shares, unit trusts, gold, property, and bonds. Your wealth will be good for your children’s education and for your retirement. Avoid scams and get rich quick schemes.

Take a three-pronged attack to manage your finance: earn more, control your spending, and invest wisely.

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7 Effective Money Tips for Young Workers

    According to the latest survey of Financial Behaviors and Financial Habits of Young Workers by The Consumer Research and Resource Centre, 47% of the young adults were seriously in debt because their monthly debt payments were 30% or more of their gross income. 37% lived beyond their means and 15% were without savings. Most of them were lacking in financial knowledge. On a score of 1 to 6 (1 – strong financial knowledge and 6 having no financial knowledge), 43% scored 4 and above. That is why they felt that they had poor financial knowledge.

You can take the following steps to put your personal finance in order:

1.      Review your financial situation: Take stock of your financial situation. Find out your take-home income, outstanding debt from various sources (mortgage, car, personal, and student loan), and your present spending pattern. You need to think of and do several things at the same time: clear your debts as soon as possible, earn more, spend within your means, and cut unnecessary expenses.

2.      Getting out of debt: Your first priority is to get rid of outstanding debt especially those with high-interest rates such as credit card debts. It is to avoid incurring and paying more interest.  You are also trying to keep your debt manageable so that you can avoid getting into bankruptcy.

3.      Budget: At this point after you have budgeted for your basic needs in a thrifty way, you have to allocate a substantial amount of your income to reduce and eventually clear your debt.  Avoid impulse spending and forget about all your wants. Be disciplined to follow your budget and learn to appreciate what you have. The objective of your budget is to get rid of credit card debts and to avoid getting into arrears for all the other installment payments.  

4.      Emergency fund: It is mentioned in the survey that if they stopped working, the consumer had enough savings on an average for only 4 months. As soon as you are out of debt, you have to set aside an amount every month for a rainy day. It is also to develop a habit of savings. The creation of wealth starts from savings and nothing else.

5.      Credit cards: Can you handle credit cards? If you can’t, cancel all your cards and avoid making purchases on credit and get into debt and incur interest. Credit cards are for convenience only and you must make payment in full when it is due.  

6.      Earn more: Sustaining your positive working attitude, acquiring additional skills and working smart are positive ways to add value and justify more pay. Do your homework, approach your boss at the right time and ask for it. You can also take up a part-time job relating to your expertise. As a young and energetic person, you will spend more time making extra money and avoid spending money with too much leisure time.

7.      Financial education: Learn to be money savvy. Get books, go online, attend personal finance courses or get free counseling from Credit Counseling and Debt Management Agency.  You will learn about needs and wants, income and expenses, budget and savings, interest and debt, insurance and mortgage, investment and retirement, wills and estate management, and more.

Get into good personal financial shape and enjoy financial freedom. 

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