Impact on Net Worth if you choose NOT TO Settle Credit Card’s Outstanding

Most of us knowing that the interest rate charge on credit card is 18% per year,  which also means 1.5% per month (18% / 12 months ). However, bear in mind if the amount of the monthly interest in the credit card statement is not settle, there would be interest on interest, the compounding on interest within a year will amount to 12 times. This thus gives rise to Effective Annual Rate (EAR).

	EAR = [ (1+Nominal Annual Rate/12)12  - 1 ] x 100%

 

                     = [ (1.015)¹² -1] x 100%

                    = [ 1.1956 – 1] x 100%

                    = 19.56 %

Hence, we should clearly know the effect of credit card cost and manage it well.

What would be the impact on your net worth if you choose not to settle the outstanding?

	Total Asset  = Total Liabilities + Net Worth

 

[His Debt]

Let’s say Alan owes credit card balance RM 10,000 at the end of each month. EAR as calculated above 19.56%, implies he has to pay interest charges of RM1,956/yr.

[His Asset]

He keeps RM 50,000 in FD with annual interest of 2.5%, and no other asset besides FD.

RM 50,000 = RM 10,000 + Net Worth

Net Worth = RM 50,000 – RM 10,000 = RM 40,000

If Alan just allows the interest on both asset and liabilities to accumulate, what would happen after 10 years?

  

Table A shows the growth of amount owing under Credit card.
Year	Begin Balance	Interest 19.56%	End Balance
1	RM 10,000	RM 1,956	RM 11,956
2	RM 11,956	RM 2,339	RM 14,295
3	RM 14,295	RM 2,796	RM 17,091
4	RM 17,091	RM 3,343	RM 20,435
5	RM 20,435	RM 3,997	RM 24,432
6	RM 24,432	RM 4,779	RM 29,212
7	RM 29,212	RM 5,714	RM 34,926
8	RM 34,926	RM 6,832	RM 41,758
9	RM 41,758	RM 8,169	RM 49,927
10	RM 49,927	RM 9,767	RM 59,693
** Assuming no penalty charges for no payment for 10 years.
Total Liability Increased RM49,693 (from RM10,000 to RM 59,693)

Table B shows the growth of Fixed Deposit.
Year	Begin Balance	Interest 2.5%	End Balance
1	RM 50,000.00	RM 1,250.00	RM 51,250.00
2	RM 51,250.00	RM 1,281.25	RM 52,531.25
3	RM 52,531.25	RM 1,313.28	RM 53,844.53
4	RM 53,844.53	RM 1,346.11	RM 55,190.64
5	RM 55,190.64	RM 1,379.77	RM 56,570.41
6	RM 56,570.41	RM 1,414.26	RM 57,984.67
7	RM 57,984.67	RM 1,449.62	RM 59,434.29
8	RM 59,434.29	RM 1,485.86	RM 60,920.15
9	RM 60,920.15	RM 1,523.00	RM 62,443.15
10	RM 62,443.15	RM 1,561.08	RM 64,004.23
Total Asset Increased RM14,004.23 (from RM50,000 to RM64,004.23)

Net worth Alan decreased by RM 35,688.77 !!

See the findings! If Alan chooses not to bother to settle the credit card payment, when he has the cash to do so, his personal net worth would

decrease from RM 40,000 to RM 4,311.23. (64,004.23 – 59,693).

The impact is much greater than you can imagine!

Prepayment of Hire Purchase Loan

Recently, one of my friend’s sister intended to use her surplus cash for her existing car loan. The surplus cash flow may either be used for investment or for settlement of an existing car loan. What I can suggest in this situation?

Some of the factors she may like to consider:-

1) Whether there are other uses of cash flows in the near future? If so, then this surplus cash flow ought to be set aside instead.

For instance, if you are planning to settle your credit card outstanding payment in near future, invest a real estate, education fund…etc.

2) The rate of return of investment proposal. If the return is no higher than the cost of existing loans, then, would recommend is to settle an existing loan.

For instance, the car loan interest assuming 5 %p.a. while the return from unit trust is just 4.8 % or the Fixed Deposit interest is just 2.5%.

3) The risk of investment proposal. Settlement of an existing loan involves no risk as compared with investment which carries different types of risk.

For instance, invest in stock market which has possibility obtain higher return (5% - 30%), however, there is a risk to loss the capital as well.

Younger generation of Malaysian not active in stock market –The Star article

The article has highlighted from a survey by Bursa, only 12% of investor in age group 20-29, 59% for those 40 years and above. And it also stated “ People shy away from investing because they feel there is a high risk attached and they do not have enough money and don’t know how to invest. Clearly these reasons show a lack of knowledge and can be addressed by education”.

I was totally agree with above opinion, especially for the young group who do not learn how to investing, wealth accumulation, risk management, retirement plan… etc during their school, no education specialize on investing and how to use the money to work for us. Therefore, people will have there own bias when they making a decision on investing.

For instance, in the stock market, they tend to follow the rumours, media report without own analysis on the fundamental, economy movement, world’s economy impact, financial report interpretation and the economy cycle….and more factors. I would like to share with you Robert Kiyosaki 6 Rules For Investing as below:-

1)   Have a Plan

à  Always Ensure you or your financial advisor draws up an appropriate investment    strategy in line with your financial status and align with your risk tolerance.

2)  Don’t put your eggs in one basket

à  Obvious advice but many people fail to follow it. If you have put all your financial eggs in one asset basket – property, what happen if property market collapses.

3)  Build in appropriate timeframes

à  There is an old saying “ When the tea lady starts to invest in the stock market, it’s time to get out.” Means : when the share market is so high that everyone starts to clamber on board, it has probably reach its peak.

à  2 ways successful investment planning :-a) Buy low Sell high – extremely hard to do

      b) Choose good investment and stay with them over long term

4)  Avoid high risk investments

à   These refer to risky business venture, highly speculative stock, too-good-to-be-true proposition that promise usually high return.

5)  Avoid borrowing for your investment

à  Borrow to invest can be fraught with danger.

6)  Stay with the traditional and known

à  The best and surest investment are Fixed Deposit, Bond, Retirement Plan Scheme.

Work out the optimum mix for your investment portfolio and have a safe plan to work with and you can’t go wrong.

Another Complaint On Mortgage Loan

Have you come across an article as showed above in Sin Chew Jit Poh ?

From my opinion, I would say that the outstanding of RM 10,2000 of her home loan after her full loan period completion (17 years) is possible. There are a few variables which would affect housing loan, for instance: loan period, monthly installment amount, interest rate (BLR), loan principal…etc. 

Base on her borrowing detail, she start her loan from bank in Year 1991, during the year BLR is 7.5%, Year 1992 BLR is 9% and Year 1993 BLR is 9.5%.....Year 1998 BLR is 10.5%,  the BLR keep increasing means that the loan interest is also increasing and vice versa. Although her loan period in agreement is for 17 years, however, she will still owing certain amount to bank due to the increasing BLR. Even she seek for a lawyer for her case and put into a court case, I can say that the banker still the winner.

Based on the loan agreement and letter offer she had signed, all the terms and conditions have clearly outline. I can say that, if she is smart, she can seek for a mortgage auditor to audit her loan when her loan is started, then she will not face this problem at the end of her housing loan.

Be a smart home owner and do not fully depend on banker’s one side information on your housing loan status, get a professional to audit and monitor for such long term liabilities to prevent any regret at the end of the day

Malaysia Individual Income Tax Table For Year 2010

The reduction in income tax from 27% (maximum rate) to 26% for residents chargeable income exceeding RM 100,000 and applicable for income earned in calendar year 2010 onwards.

Chargeable Income	RM	Rate	Tax (RM)
On the first	2,500	0%	0
On the next	2,500	1%	25
On the first	5,000	-	25
On the next	15,000	3%	450
On the first	20,000	-	475
On the next	15,000	7%	1,050
On the first	35,000	-	1,525
On the next	15,000	12%	1,800
On the first	50,000	-	3,325
On the next	20,000	19%	3,800
On the first	70,000	-	7,275
On the next	30,000	24%	7,200
On the first	100,000	-	14,475
On the next	50,000	26%	13,000
On the first	150,000	-	27,475
On the next	100,000	26%	26,000
On the first	250,000	-	53,475
Exceeding	250,000	26%	-

Malaysia income tax range for year 2010 is 0% - 26%.

Those not able to enjoy the 1% reduction due to not being tax on the maximum income tax rate, they still able to benefit from the personal relief increased from RM 8,000 to RM 9,000.

Also, individual is allowed relief on premiums for Life Insurance and contributions to EPF increased from RM 6,000 to RM 7,000.

A tax relief of RM 500 per year on broadband subscription fees from year assessment 2010 to 2012 to enhance usage of broadband in line with government’s effort to establish a knowledge based economy and narrow the digital divide.