THE COLOUR OF MONEY
aware that money come in various colours. Money uses can be
segmented into four different types.
The first type is Serious Money
money is money to be used for serious needs such as education,
retirement, medical expenses, long term and others.
In this type of money, we are not too concern with a high rate of
return but a fair rate of return given to us at a time when it is
Typically, the financial products used for these kind of purposes
are life insurance, annuities, endowment, medical plans, education
policies and fixed income securities.
In Malaysia, most financial planners would recommend insurance
products because of its the tax advantages and its ability to be
By self-completing, it simply means the fund would be there
irrespective whether the payor (the person paying the premium) meets
one of life contingencies such as death, disability or critical
The second type is Borrowed Money.
examples of borrowed money are credit card expenses or bank
overdrafts. Most financial planners would recommend the repayment of
credit card outstanding amount because of the high interest charges
imposed. For instance, it does not make sense for a person to put
say RM 15,000 in fixed deposit earning 4% interest per annum and
paying interest of about 15% per annum in credit card outstanding
If you have to borrowed money. Then the total return from that
investment must be sufficiently high to cover the cost of funds.
Since most overdrafts are on free floating rate, a margin must be
provided in the event the interest rate rises.
The third type is Leverage Money.
money is typically found in investments such as buying a house. The
housebuyer usually puts in 20% of the house purchase price and
borrowed 80% from a financial institution.
When such a situation arises, then the purchaser is said to be using
leverage money. Leverage money is simply using a small amount of
money to purchase a large asset. The returns must be sufficiently
attractive before an intelligent purchaser uses leverage money. By
total returns, I am not just referring to rental income but also
capital appreciation and tax savings, if applicable.
The fourth type is Idle Money.
Malaysians put too much money in their bank accounts. Unfortunately,
for many depositors, safe investment does not mean profitable
investment. With the current low interest regime. Most bank deposits
are earning interest rate of about 4% per annum. It would certainly
not be a good hedge against inflation, more so if your personal
inflation rate is in the medium to high spectrum. Usually, financial
planners add a premium on personal inflation rate.
CPI Inflation Rate + Lifestyle Inflation Rate =Personal Inflation
The CPI stands
for Consumer Price Index. The reality in an affluent society, we use
more than the basic “basket of goods”. Thus if one uses imported
luxury items, or is funding a child education overseas, then he
should costs in a lifestyle inflation rate.
So, if it is not that great to put money in bank deposits, what
would be an appropriate amount to keep in the account. Financial
planners agreed that 6 months of annual income would be sufficient
for Emergency Fund and the rest should be invested in other
inflation hedged vehicles.
Generally, investors are divided into three categories. The first
group in Risk Conservative. They typically do not like to take risk
and invest in very sound instruments such as fixed deposits and
similar line of investments. The second group is Risk Moderate. They
are willing to take some risk for higher returns. They may invest in
some equities such as through unit trust or investment linked
products. If they purchase stocks they are likely to go for the blue
chips and the initial public offers.
The third group is Risk Aggressive. They are adventurous and usually
willing to take risks by investing in speculating stocks and
The general rule of investment is the higher the risk, the higher
the return and the lower the risk the lower the return.
If you do not have money to invest, you are probably a poor saver.
To be a good saver, you need to have a proper mindset towards money
management and debt management.
Most people believe that: -
INCOME – EXPENSES= SAVING
have this type of mindset, you will probably not be saving very much
or even none at all. Most people after receiving their incomes
proceed to pay off their expenses and thus have very little to save.
A powerful concept towards saving is:
INCOME – SAVING=EXPENSES
you want to save 15% of your income, the first thing you need to do
is to put the 15% into a saving vehicle (preferably compulsion or
semi-compulsion) before you pay your expenses. That way, you would
be able to accumulate a nest egg for meeting certain life events
that you have planned. One very good example of income minus saving
equal expenses is the Employee Provident Fund. It is so powerful
that it usually accumulate to quite a significant amount for most
Malaysians. Try it, it works like magic.
Jeffrey Chiew Kim Chwee
ChFC, RFC(USA), CLU, LUTCF