LEVERAGE IN INVESTMENT

Leverage means The use of credit or borrowed funds to improve one’s speculative capacity and increase the rate of return from an investment, as in buying securities on margin.

Investing is already a high risk activity, according to those not used to do investment. If to use leverage in our investment, it means the risk involved is even higher. But only with the proper use of leverage, a person can grow rich even faster. We must have heard that most wealthy people actually had gone through some difficult years prior to their success. Normally, they are able to double their income every year after those initial struggle. They certainly use some form of leverage. Example:
1. Buying property with bank’s money. In order to own a RM100,000 real property, we only need to pay 10% down payment of RM10,000 for residential property. When the property appreciate to RM110,000, we made a gain of RM10,000, which is a 100% return from our initial RM10,000.

2. Buying warrant instead of it’s mother share. Warrant itself is a form of leverage. When the share price rises 10 sen, the warrant will normally follow by 10 sen as well. Those who bought warrants know that warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.

3. Borrowing money to do business. That’s how entrepreneurs are able to build their wealth in a short period of time ( 3-5 years). They use the bank’s money by paying them 4-9% interest, but are able to produce more than 20% return per annum in their business.
If we can learn the art of using leverage, we will be able to grow our wealth much faster!

BANKRUPTCY

How much do you know about Bankruptcy?

NAZRUL was a young, hot-shot executive. Used to life in the fast lane, nothing seemed to be beyond his reach. He was the proud owner of countless trendy gadgets plus a spanking new four-wheeler and an apartment in a `happening' neighbourhood.
Until his spending spree screeched to a painful halt.
Reason? Nazrul had got carried away by the spending power of credit cards. Owning more than eight cards, his penchant for luxury items finally caught up with him. So had the creditors.
Nazrul had accumulated RM30,000 in debts over just two years. With no means of repaying them, he was declared a bankrupt at the age of 27.
Nazrul is not the only one in such a spot. In 2004, 1,397 Malaysians were declared bankrupt due to their excessive consumption habits, especially via credit cards.
`All this is because of easy access to credit cards,' says Marimuthu Nadason, president of the Federation of Malaysian Consumer Associations (Fomca) and Era Konsumer.
According to Bank Negara Malaysia figures, in 2004 there were 6.6 million credit card holders in Malaysia, of which, 5.37 million were principal card holders and 1.21 million supplementary card holders. By July 2005, the number of card holders had increased by 10% to 5.91 million principal holders and 1.35 million supplementary holders.
For the first seven months of 2005, Malaysians took cash advances of RM1.519 billion, an increase of 13% over the RM1.34 billion taken in the same period in 2004. As of July 31, Malaysians owed a total of RM13.1 billion, and more than RM2.05 billion in outstanding balances.
The increase in credit card bankruptcies has changed the traditional view of a bankrupt. Previously, a bankrupt was often viewed as a wealthy person who had become poor due to bad fortune.
Deputy Finance Minister Datuk Dr Ng Yen Yen says the growing trend of people being declared bankrupt is not good and must be stopped. `Financial planning is very important. The answer is discipline through education and awareness,' she says.
She believes the rising trend of bankruptcies among individuals below 30 is due to spiralling credit card debts as a result of failure to manage expenses. Ng believes in public education campaigns to discourage overspending.
Which may be easier said than done. `It is very easy to overspend with credit cards,' says Marimuthu. `With easy access to credit facilities of up to RM20,000-RM30,000 per month, it is easy for a young executive earning a monthly income of RM3,000-RM5,000 to overspend.'
He says young executives tend to overspend especially when purchasing a new car or apartment. This ties up their income. As a result, they start to rely more on credit cards for their other needs.
A study conducted by Professor Dr Fatimah Daud of the University of Malaya's Department of Anthropology finds that 10.5% of bankruptcies are due to credit card abuse.
She says it is common for individuals to hold more than three, sometimes as many as 10, credit cards. `These cards are sometimes used for cash advances and personal loans. With banks withholding personal loans, card holders use cash advances as a source of easy credit,' she says.
Fatimah also finds that defaulters are not doing enough to repay their debts. `Credit card cash advances may be better than borrowing from the loan sharks, but one should also control one's expenditure,' she says.
`Much more needs to be done. This is not just about commercial bank expanding their credit card business. They also have a social responsibility here.'
The increasing trend of commercial banks providing free credit cards, free transfer of credit balances and upping credit limits are pushing Malaysians further into debts. In this regard, Fatimah calls on the Insolvency Department to investigate further the financial standing of bankrupts in Malaysia.
Department director-general Halijah Abbas declined to reply to queries by Malaysian Business on the issue.
Marimuthu says only strong measures can curb credit card bankruptcies in Malaysia. The first step should be to restrict credit card holding by increasing the minimum monthly salary requirement from the present RM1,500 to RM5,000.
Fatimah says each holder should be limited to three or five cards each while Marimuthu recommends that card applicants have a working record of at least two years and be prompt in his income tax payments.
Stressing on the importance of public education to promote wise spending, both Fatimah and Marimuthi agree that credit card providers must take the lead in sponsoring such campaigns.
The last revision to the Bankruptcy Act 1967 was in October 2003, when the minimum debt was raised from RM10,000 to RM30,000 for a person to be declared bankrupt. Should there be another review?
Marimuthu does not believe an increase in the minimum debt would help much. Indeed, when the threshold was last changed in 2003, the number of new bankruptcies decreased temporarily in the coming two months but reverted to almost earlier levels within the next few months.
Being a bankrupt in Malaysia is not a pleasant thing. Until a person is able to repay his creditors, his passport is seized, he cannot hold office in any political or non-governmental organisation, and all his assets are put under the care of the Insolvency Department. Besides, a bankruptcy declaration also affects one emotionally and psychologically.
Could consumers be taught to exercise self-control in their spending habits? Fatimah is not too confident. `You need tight industry regulations and constant education on the spending culture. It is hard to resist spending when credit comes so easily.'
Besides credit card-linked bankruptcies, other bankruptcies in Malaysia are caused by defaulting on car loans (23%); failing to pay personal or business loans (29%); and bankruptcies due to standing as a guarantor (21%).

For now, it may seem that at 10.5%, credit card bankruptcies are on the low side, but Fatimah warns that it is the fastest growing cause of bankruptcies in Malaysia.
It is unfortunate that Nazrul had to find it out the hard way.

KEYMAN INSURANCE AND INCOME TAX

Are you buying Keyman Insurance for your business?

Two common questions?
1) Premium can claim tax (deductible for income tax)?
2) Insurance Proceeds need to pay tax (taxable receipt)?

The answer is, it DEPENDS.

The taxability of the insurance proceeds depends on whether it is a Term Life policy, Accident policy, Whole Life policy or an Endowment policy. If it is a Term Life or an Accident policy, the proceeds receivable will be taxable on the employer or the Company since the Insurance Premiums are allowable for tax deduction.

Conversely, where it is a whole life or an endownment policy, the proceeds available will be considered to be a capital receipt and not taxable on the employer or the company since the insurance premiums are not allowable for tax deduction.

In short,

Whole Life / Endowment => Premium NOT Deductible => Proceeds NOT Taxable
Term Life / Accident => Premium Deductible => Proceeds Taxable

Source / Reference:
Publlic Ruling No 2/ 2003 issued by Director General of Income Tax Department (aka LHDN)

WHAT IS MONEY MANAGEMENT.?

 

Do you have a proper money management system set up for yourself? Why is it important to have one? Have you ever forgotten to pay any of your bills on time? Have your ever misplaced any of your financial records? Are you often clueless as to how much you have in your various bank or investment accounts? If you answered ‘yes’ to any of these questions, then you probably need a proper money management system to prevent any of these incidents from reoccurring again.

Having a proper money management system simply means establishing a set of tasks that can assist you in reaching your financial goals. Below are some examples of money management tasks.

• Prepare a spending plan / budget plan (monthly)

• Pay utility bills (monthly)

• Pay credit card bills (monthly)

• Pay house mortgage and car loan (monthly)

• File finance related documents / financial records (monthly)

• Analyze net worth (yearly)

• Complete income tax return (yearly)

• Review financial portfolio (yearly)

• Review insurance needs (yearly)

• Review retirement plan (yearly)

Looking at the tasks above does not look so intimidating after all as you are probably doing some of the tasks consistently already. It is your responsibility to ensure each one of the tasks is completed according to schedule.

If you are thinking that it is still a lot of work to do, then use the computer and internet to simplify your life. For example, you can use online banking to pay your bills, monitor your account balance, create a spending plan, etc. If you are computer savvy and like the idea of using financial software, below are some tasks you can do to manage your finances even more efficiently.

• Create financial graphs and reports

• Put all your accounts in one place

• Do a daily or weekly tracking of your expenses

• Analyze your spending history

• Keep track of your assets, liabilities and net worth

• Set up reminders for bill repayments

Do a search for ‘free financial software’, ‘financial software’ or ‘financial tools’ and you get a lot of choices to try on. Examples of often-heard financial software are Quicken, Mint, Mvelopes and Myspendingplan.

OK, you have reached the bottom of the page. If someone asks you about money management, you are not in the dark about it anymore. Hopefully, reading this article has given you some ideas on what you can do or should do to manage your money and put a money management system in place.

Making You Rich Is Not A Financial Planner's Responsibility

What are the responsibilities of a financial planner? There are many kinds of financial planners marketing their services to the market. Some are single-product planners: insurance agent, unit trust agent. Some are multiple-products planners – they deal with insurance, will writing, unit trust etc. Some are fee-based consultants – they are independent and charge consultancy fees only. The latter kind of planner are rare in Malaysia. In fact, I still don’t know any whom only charge fees and doesn’t deal with any financial product.
No matter what kind of planners they are, their role or responsibility to the clients might be similar to the list here:

• provide proper advice on related financial matters
• provide product information
• recommend suitable product based on the client’s need
• engage clients with the suitable product supplier ( insurance company, unit trust company, will writing company etc)
• provide after sales services
• help client to save
• help client to invest for medium to long term
• help clients to protect their wealth

Their roles is to help on managing the client’s financial resources, which is $$money$$. As stated above, the list does not include “help the client to become rich”. This is certainly out of the job scope. If meeting a financial planner and getting proper advice will make you rich, you will certainly feel that the consultant fees are too cheap to be true. In other words, don’t expect the financial planner can help you get rich. But if you meet the right one, he might be able to show you how others get rich.
If you still haven’t got what I am saying, this is the conclusion: – getting rich (if and only if we really want to get rich), is our own responsibility. It is not a burden or role of the financial planner.