THE COLOUR OF MONEY

Are you aware that money come in various colours. Money uses can be segmented into four different types.

The first type is Serious Money

Serious 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 needed.
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 self-completing.
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 illnesses.

The second type is Borrowed Money.

Some 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 amount.
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.

Leverage 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.

Most 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 Rate

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 businesses.

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

If you 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

Let say, 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

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