Financial Rules of Thumb for Malaysians
I remember way back when I first started work and I asked my cousin sister as a guide, how much should one pay for a house or a car based on annual salary?
She said 10 times but you know, bless her, she's a bit of a bimbo when it comes to money since she's always had loads of it! Hahaha
Anyway, being a bit free the other day, I decided to do a bit of number crunching based on my ahem "insider banking" knowledge (kidding) to work out for myself what is an easy benchmark to decide how much you should pay for a house or a car.
The calculation model is very simple, using the maximum 33% of net salary as the repayment amount to determine the maximum eligible loan, then apply an assumed 90% loan to get to the house / car price amount.
I also imputed the tax depending on the income levels because for lower income, the difference between your gross and net pay is relatively low with the bulk being caused by EPF's 11% but for higher income folks, the effective tax rate is as high as 23% thus impacting on your take home pay because combined with EPF, off the bat, you're down 34% of gross versus a lower income earner whose net pay is only about 15% lower than gross.
Income per below refers to either household or individual income, depends on whether it is a joint or single loan. The multiplier stays the same.
So.. after all that palaver, the results are:
HOUSE:
Gross Income is below 8K per month (96k per annum) - Maximum house price should be 5 times annual income or 6 times net income
Gross Income above 100K per annum - Maximum house price is 4.4 times gross or 6 times net
The easy way: 6 X Annual Take Home = the maximum house price you can afford based on a 10% deposit.
If you have more cash in hand, then add on top of that for higher affordability.
CAR:
Firstly, you should only take a 5 or 6 year tenure on your car.
Because of depreciation and possibility of having to change car within 5 or 6 years. Do not be saddled with a 9 year loan because if you find the car giving problems in year 6 or 7 and you want to change it, you have very little equity or negative equity because the resale price cannot cover your loan.
You have been warned.
However, I did compute for 9 years anyway so the results are:
5 year loan:
A car should cost 1 year's take home salary at maximum
7 year loan:
1.2 years or roughly 15 months take home salary
9 year loan:
1.44years or roughly 18 months take home salary
So if you want to be a nosey parker and want to figure out how much someone earns if they are driving a flashy car, then take the car price and divide by either 1 (if you think they are financially astute) or 1.44 (if you think they are the mesti-gaya type) and you will know their salary! hehehehe
I also did this as a check against what I have as commitments to see if I am within the normal boundaries - so it is ok, in fact I'm below because I'm rather frugal in that sense - especially for cars because I don't mind driving a car that is considered "below standard" for my corporate rank.
She said 10 times but you know, bless her, she's a bit of a bimbo when it comes to money since she's always had loads of it! Hahaha
Anyway, being a bit free the other day, I decided to do a bit of number crunching based on my ahem "insider banking" knowledge (kidding) to work out for myself what is an easy benchmark to decide how much you should pay for a house or a car.
The calculation model is very simple, using the maximum 33% of net salary as the repayment amount to determine the maximum eligible loan, then apply an assumed 90% loan to get to the house / car price amount.
I also imputed the tax depending on the income levels because for lower income, the difference between your gross and net pay is relatively low with the bulk being caused by EPF's 11% but for higher income folks, the effective tax rate is as high as 23% thus impacting on your take home pay because combined with EPF, off the bat, you're down 34% of gross versus a lower income earner whose net pay is only about 15% lower than gross.
Income per below refers to either household or individual income, depends on whether it is a joint or single loan. The multiplier stays the same.
So.. after all that palaver, the results are:
HOUSE:
Gross Income is below 8K per month (96k per annum) - Maximum house price should be 5 times annual income or 6 times net income
Gross Income above 100K per annum - Maximum house price is 4.4 times gross or 6 times net
The easy way: 6 X Annual Take Home = the maximum house price you can afford based on a 10% deposit.
If you have more cash in hand, then add on top of that for higher affordability.
CAR:
Firstly, you should only take a 5 or 6 year tenure on your car.
Because of depreciation and possibility of having to change car within 5 or 6 years. Do not be saddled with a 9 year loan because if you find the car giving problems in year 6 or 7 and you want to change it, you have very little equity or negative equity because the resale price cannot cover your loan.
You have been warned.
However, I did compute for 9 years anyway so the results are:
5 year loan:
A car should cost 1 year's take home salary at maximum
7 year loan:
1.2 years or roughly 15 months take home salary
9 year loan:
1.44years or roughly 18 months take home salary
So if you want to be a nosey parker and want to figure out how much someone earns if they are driving a flashy car, then take the car price and divide by either 1 (if you think they are financially astute) or 1.44 (if you think they are the mesti-gaya type) and you will know their salary! hehehehe
I also did this as a check against what I have as commitments to see if I am within the normal boundaries - so it is ok, in fact I'm below because I'm rather frugal in that sense - especially for cars because I don't mind driving a car that is considered "below standard" for my corporate rank.
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