Sunday, 31 January 2016

EPF 3% reduction - what should you do?

Firstly, on a macroeconomic level, I think this is a good move. Increasing disposable income will increase consumption, hence increase overall economic output - thus the economy will continue to grow.

Taking a more nuanced view - even if a lot of the increased income flows to debt reduction, this means less pressure on capital requirements on bank balance sheets. However, revenues will suffer slightly in the short term but in the medium term, this frees up capital to lend - this will stimulate growth.

So the debate is raging on social media on what should one do and there are of course all sorts of accusations and pictures of calculations showing how much you will pay on GST, taxes etc .. there are so many angry people out there... sigh

My suggestion is very simple - You Do What is Best for YOU.

Don't Listen To People Telling You What They Want You to Do Just Because That Is What THEY Want To Do Themselves!

So what is best for you? I've broken it down to 3 main categories:

A) You should take the 3% reduction IF YOU ARE:

  • Carrying a balance on your credit card - at 16% or 17% pa, there is no way that EPF returns can off-set that. So you're better off taking the extra income and paying down your debt faster.
  • Living from pay cheque to pay cheque and have no savings - please please please use this opportunity to build up some liquid savings for emergencies.

B) You must not take the 3% reduction IF YOU ARE:

  • In your 20's, just started work - even if you have credit card debt but if it is not a lot, you must learn to work within your existing budget and pay that off. Leave your 11% alone to grow in future - by leaving it to compound, your retirement savings will grow much faster!
  • Going to spend that money on luxuries that are above your current budget - however, that is what the majority of people will do. Well, I guess if some spending can buy some happy experiences like taking the kids on a holiday that you couldn't have been able to afford, then why not? 
C) Indifferent - minimal impact IF YOU ARE:
  • Quite well off, have high income and large EPF balance already - the 22 month 3% program amounts to 66% of a month's income to you - you could leave it in and it will boost your savings a bit; BUT if you wanted to have a bit more liquidity on hand, there's no harm in taking the 3% reduction also.
For C - one possible avenue is thus: you could take some of your existing savings of equivalent value to the 66%, use that amount in a lump sum to either invest or reduce long term debt like a housing loan because you are assured that you can build your savings back up to the original level with the extra 3% per month. 

The premise of this is that you have a savings level that you are reluctant to reduce but with the temporary increase in disposable income, you can similarly temporarily reduce your current liquidity level to retire some debt or can now flow that into less-liquid investments.

So depending on the situation you're in, choose the option that works best for you.

Generally though, delayed gratification is better - let the money grow in EPF. But if you have high interest debt, then it's better to take that extra money to pay it down.

Saturday, 16 January 2016


First time in my life I received such a substantial bonus! OMG!

And I also got a 10% increment!

One telling thing that my boss mentioned in front of everyone is that I don't complain. I may look shell-shocked at the amount of work he piles on me BUT I don't complain he he he

Guess that could be one of the factors why he gave me so much....

Also because during the discussion on the bonus people, my peers were all showing him their unhappy look and I was keeping quiet, then he asked me what did I think and I blurted out that in all my years of working in international banks, this pool looks very generous already so I'm happy with it - then he burst out laughing and that, I think, probably contributed towards my payout - also because budget-wise, I "gave back" a substantial portion of my allocation due to some circumstances so that helped I guess.

SO .. the big question is, what should I do with the money? At the moment, I shunted the whole lot into a 1 month FD to earn some interest first while I think about what to do .. property? shares?

I did think about putting some into knocking off the house loan but mmmm ... I dunno ..

I'm leaning towards buying a small investment property but given the current prices vs the rental return, it doesn't seem worth it. Perhaps I should think about that a bit more ...

Well, the good thing is, my savings have suddenly jumped up - that's always nice..

So let's think some more .. oh yeah, I would say some of that has already gone towards a holiday for the family.

Thursday, 24 December 2015

Raising money for that downpayment

It's a Malaysian dream to own a property - our culture is not geared towards renting long-term.

Renting is considered something you do either as a student / newly working / a temporary solution if you're prone to being transferred - but in the long run, conventional wisdom is to bite the bullet and buy at least ONE property for your permanent residence.

So the conundrum lies in the wherewithal for the deposit and attendant costs.

To some, the need is urgent and saving up takes too long - so what are your options?

The fastest but most expensive:
Credit Card cash advance - that baby will hit you with an 18% p.a. interest rate the moment the cash comes out of the ATM.

Do Not Use This Method. Please. Even though it pays my salary.

The slightly less fast, also kinda expensive but sort-of bearable:
Personal Loan - you can take a bigger amount, take a longer time to pay it off and you have that lump sum to help secure the property you want to buy.

Only use this method when you are about to buy, you are quite sure of the price you want to pay and you are assured you are eligible for the housing loan.

You can couple this method with the following one:

The "It's already your own money but you have to apply for it":
Your EPF account 2 of course - you can use your EPF funds to purchase a home, you will need proof of purchase which is the Sale & Purchase Agreement (SPA or S&P). Therefore, you must have enough money for the legal fees and the earnest deposit (all in about 5-6% of the property purchase price) - these must be paid before you can access your own retirement funds.

If you had taken out a personal loan for the initial deposits and fees, now is a good time to pay it off with your EPF money so that you reduce your debt. You may incur some penalty charges which the bank is unlikely to waive if you cancel the loan before the halfway mark of the tenure, so you have a choice - pay the penalty or wait out to half way then pay it off. Your choice.

Another option available to Bumiputras eligible for ASB loans is the Dividend method:
This option takes a few years - yes, years to bear fruit. However, it's big, 'free' fruit, mind you.

How it works is thus:

  1. Max out your ASB loan - the cap used to be 250k but now it seems that it has been raised depending on the individual. Let's use 250k as the example for now
  2. Wait for your annual dividend - historically it's been about 8% return. That gives you RM20k in the 1st year - keep the money in FD or plough it back into ASB by cutting down your loan outstanding by 20K - you also save on interest charges
  3. 2nd year - another 20k or more; so your equity is now at 40k. Enough to buy your dream house yet? If so, then cancel your loan and keep the remainder and that's your down payment money.
  4. Not enough yet? Wait another year for it to go up to 60k.
So in 36 months, you can have about 60k cash in hand, not including what you have in EPF to buy your house. Provided your income makes you eligible for the 250k ASB loan, that is. So if you are eligible for 125k, then you will have 30k after 3 years..