Money: Creative ways to be frugal

WE previously discussed some extreme measures on how to manage your food and clothing expenses. This week, we suggest ways to manage your transportation, utilities and entertainment/lifestyle costs.

Let us reiterate the importance of being frugal. It plays a significant part in helping you cope in extreme times, but it doesn’t mean you should deprive yourself of the good things in life. It’s about being more creative with your spending. To quote Amy Dacyczyn, “Frugality without creativity is deprivation!” Transportation We no longer use our legs as much as our ancestors as there are various modes of transportation today. So much so, most of us can’t live without a car! A car may be necessary but with the rising cost of petrol, we may have to look for alternatives. Suggestions: • Get rid of your car and get a bicycle! Too extreme? Perhaps, but we need to overcome your reliance on a car. For instance, if you want to get a newspaper or buy food from a stall down the road, try cycling.

• Use public transport. We may not have a world-class public transportation system, but it’s still the cheapest alternative. If you live in the Klang Valley, you can get around the city from as little as RM1. If you were to use the bus and the Light Rail Transit, the most you will pay is RM7 a day. • Drive efficiently. You can find smart driving tips on the Internet. For example, accelerating quickly and speeding consumes more fuel. How and when you fill up your tank also makes a difference.

• Try not to use your car at least once a week. You will not only save money, but also do your part for the environment. Utilities Our country is blessed with natural resources, but that doesn’t mean that we should be wasteful. We should inculcate the habit of conserving energy and preserving our resources for future generations. We can do this by: • Turning off all lights, fans and air-conditioners when you leave a room. • Converting your lights and electrical appliances to energy-saving types. For example, instead of using an electric kettle, it may be better to use a conventional one. • Using rainwater to wash your car and water the plants. Also try to bathe using one pail of water and brush your teeth with one cup of water. Challenge your family members to see who uses the least amount of water.

• Limiting your phone usage. It might be a good idea to switch to a package that offers unlimited calls. If you’re using a mobile, either go for prepaid or have your service provider restrict your outgoing calls if it exceeds a certain limit.

• Sharing your Internet/broadband usage, say, with your neighbour and splitting the cost. You can also do the same for your newspaper subscription. This will not only help you save money, but also promote good neighbourliness. Entertainment/lifestyle It’s possible to get good wholesome entertainment for free or almost free if you’re resourceful and creative. Just because times are bad doesn’t mean you can’t have fun. No matter what your income, make time to relax and do activities that you like. Without fun, it’s hard to lead a healthy life. Suggestions: • Give up your fitness club membership if you’re not using it regularly. Instead, take a stroll in the park, hike or bike and enjoy the fresh air.

• Borrow books or attend seminars or programmes for free at the public library. You can also attend free book readings at your local bookstore. • Check out free concerts, children’s programmes and family activities in newspapers or through tourist information centres or websites.

• If you drink or smoke, now is a good time to fulfil your New Year’s resolutions. Cut down on your consumption and eventually kick that habit. You’ll be surprised how much money you’ll save. • Want to catch the latest movie? Borrow or rent it from friends or your local video store. You can enjoy it with your family and friends in the comfort of your living room.

As we have said before, extreme times call for extreme measures, and what better time than now to re-examine our spending. Refocus our priorities and remind ourselves that we’re merely stewards of all the resources that we have been entrusted with. Use them responsibly for the benefit of generations to come.

AKPK is an agency set up by Bank Negara Malaysia to provide free services of financial education, counselling and debt management programme. Call 1 800 88 2575, or visit www.akpk.org.my or www.speaksens.com.my. Get Money Sense and Celik Wang books and keep a lookout for the Mandarin version at all of its 11 offices nationwide.

*Taken from NST Online

Money: Spend within your means

HAVE you noticed lately that the meter on the petrol pump would keep running even after the RM100 mark? Have you noticed the new price tags plastered onto old ones at your favourite mamak stall or kopitiam? Have you noticed that your bills seem to be higher these days but not your pay cheque?

Welcome to the era of “High Cost of Living”! While all is not gloom and doom, it’s imperative that we watch our spending. This week, we will look at your food and clothing bills.Be frugal This simply means getting the most value out of your money. To do that, ask yourself: • Do I need this? Can I delay having it? • Can I get a less expensive alternative? • Can I get it for free? Until we seriously look into this, we’re in for a hard time coping with the higher cost of living. Food bills Fine dining, all-you-can-eat buffet, fast food or home-cooked meal. You can choose the kind of food to consume. Plan your food budget and take drastic measures if you must to keep on track. Some suggestions to cut down on your food bills: • “Eat breakfast like a king, lunch like a prince, and dinner like a pauper!” — there’s wisdom in that. Breakfast is the most important meal of the day and usually the least expensive. If you have a wholesome breakfast, you won’t need to snack in between and save some money. And lunch is normally cheaper than dinner as many eateries offer special lunch deals. • Bring your own drinks. Do you realise that drinks can cost as much as a third of your main meal? This means that for every three meals, you could have one free meal. So why not start bringing your teh tarik, kopi-o or sky juice (plain water)? Note: Check if the shop charges a fee if you bring your drinks. And if you need to order a drink, make sure it comes with free refills.

• Pack your lunch. Most working people don’t have the luxury to head home for lunch, but you can pack lunch from home. It’s cheaper and healthier. • Many families eat out during weekends, but make it an exception rather than a rule. Eat at home if possible, and make it a fun-filled family event. Children can help prepare the food, Mum can do the cooking and Dad can wash up. Be creative and experiment with new recipes. For instance, you can bake a cake for your child’s birthday using natural ingredients instead of food colouring. This is not only healthier and cheaper, but can also bring the family closer. • Never over-indulge yourself. For some of us, we have to change our life’s philosophy from “live to eat” to “eat to live”.

• Never waste food. Perhaps we should try fasting once a week since this is good to both our pockets and soul. Clothing bills Today, there are many styles to choose from. Prices can range from a few ringgit to tens of thousands, and this is where you have to exercise your discretion. Some think what they wear defines who they are in society, so they go for the newest fashion trends even though they may be struggling to maintain their lifestyle. There’s an apt Malay saying that goes, “Ukurlah baju di badan sendiri”, which simply means we have to live within our means. Some suggestions on how to save on clothing bills: • Go for off-season clothing or buy them at a bargain. • Buy factory overruns. This is where you can buy branded clothing at regular prices. • Buy in-house brands, which are cheaper than premium brands. Of course, quality may differ, but you need to ask yourself if it’s worthwhile paying for one piece of premium branded clothing when you can buy 10 regular ones. • When was the last time you went through your wardrobe? Just browse through your clothes and you may discover that you have not worn many of them for ages. They are as good as new and some thought to be old-fashioned could be “in” now. If you find that you won’t be wearing some of them, sell them at a garage sale or donate them to charity.

*Taken from NST Online

Money: Living more on less

A prudent lifestyle does not mean having to sacrifice the finer things in life

WHAT goes up and never comes down? Besides your age, the price of goods and services is a possible answer too!

In fact, of late there has been much talk about rising food and fuel prices all over the world. With prices going up and income remaining relatively stagnant, it’s important that we learn to be prudent.

What being prudent means
Ask our forefathers and, most often than not, they would tell us that their lifestyle was synonymous to this word.

Today, we may be earning much more, but we seem constantly short of cash, what more saving any. This is not surprising because in those good old days you could buy a bowl of noodles for five sen, whereas today even a beggar would ignore a five sen coin dropped into his bowl!

Being prudent or frugal simply means managing in order to save. It means getting the most for your money. Those who are prudent constantly find ways to save time, money and energy. It doesn’t mean being a “cheapo” (stingy) or “kiam siap”, as the Hokkiens call it.

How can I practise prudence?
There are many ways to live on less money. Here are some suggestions:
• Reduce your daily expenses: Before you buy anything, ask yourself:
1. Do I really need this?

2. Can I get it cheaper somewhere else?
3. Can I get it for free?
• Cut something big out of your budget: Go without a car (ouch!) and save on petrol, repairs, road tax, insurance and toll charges. Or for something a little less harsh, try scaling down on your car type and go for lower-capacity vehicles.
• Use less: Switch to energy-saving light bulbs, cut down on the use of air-conditioners, wash only full loads of laundry, dry clothes in the sun instead of using a drying machine, and turn off all electrical appliances when not in use.
• Reduce waste: Use paper on both sides or go paperless whenever possible, and use cloth diapers instead of disposables.
• Reuse or recycle: Compost your wastes wherever possible and use to fertilise your vegetables and plants, and turn your trash into cash!
• Make things last longer: Mend clothing, re-glue shoes and fix things before they’re beyond repair.
• Find new uses for old things: Paint old furniture, make quilts from old clothes, and convert old, large tables into desks. In other words, recycle, recycle, recycle!
• Find cheaper substitutes: Buy generic brands, shop at garage sales, and rent instead of buy.

Creative ways
You can also be frugal by taking care of your needs in creative ways, by sharing with others and buying using community resources. Here are some other ways to save:
• Find free or cheap entertainment (we’ll discuss more about this later)
• Share big purchases: Sharing can help you get what you need for less money.

For example, you may share a ladder, drill or vacuum cleaner with your neighbours, or share your children’s toys with friends and family members. Car pooling is another example.

• Trade or barter for services or products: Yes, we’re living in a modern world, but who says we can’t practise bartering? If you can give a good haircut and your friend bakes, trade your skills. Both get what each needs and save money in the process. Now, think about your skills, the things you enjoy, the things you do well. Next, think about the skills and talents of your friends, family and neighbours. Ask if anyone wants to trade. Start with something simple and see how it works. Who knows, you may someday create another eBay!

Saving on entertainment
This is one area where we spend quite a lot without realising. But it’s still possible to get good wholesome entertainment for free, or at least almost free.

No matter what your income, make time to relax and enjoy yourself (after all, you only live once!). It’s probably even more important when you don’t have a lot of money. Without fun, it’s hard to lead a healthy life.

Here are some suggestions:
• Borrow books or attend free seminars or programmes at the public library.
• Instead of going to the cinema, rent a video.
• Try making your own kacang putih and cookies.
• Visit the museum, zoo or park and enjoy the fresh air (depending on where you are!).
• Look out for free concerts, kid’s programmes and family activities from the newspaper or through tourist information centres or websites.
• Take an inexpensive class through community education, learn a new craft, or revive an old interest. You may even turn that hobby into a business.
• Attend free book readings for adults and kids at the local bookstore or library.
• Walk, hike or bike to explore something new or visit a favourite place.
• Watch the sun rise and set, find constellations in the sky, or start a project with your family such as planting a tree (durian or mango trees are perfect as these will help you save money on fruit).
• How about people watching? Sit in the park or mall and just observe what people do, how they walk, talk and laugh, and how some parents communicate with their kids.

Conclusion
Living on less money doesn’t necessarily mean living any less. It’s more about living our lives more abundantly and purposefully and not merely living for others.

Being prudent in all aspects of our lives is the cornerstone of wealth building. If you hope to be financially free someday, you’ll need to make prudent financial management a way of life, no matter what your income level or status.

*Taken from NST Online

Money: How to retire comfortably

LET’S take a look at how much you need for your retirement. If you have a couple million ringgit worth of assets, you may feel very confident with your existing financial position and perhaps, take it easy with your money management.

You may be thinking that it’s time to sit back and not to take risks in investment anymore. This situation is like the race between the tortoise and the rabbit. The tortoise was willing to race hard to get to the finishing line while the rabbit decided to take a rest and finally, did not reach the destination in time.

In money management, it is important to know where you are now compared to your financial goals. My experience tells me that many of us tend to underestimate the capital we need to support our desired retirement lifestyle. Table 1 shows the amount of capital required for different living standards upon retirement. Let’s assume that you are now 45, plan to retire at 55 and expect to live another 25 years. The inflation rate experienced is four per cent per annum throughout the period. Let’s also assume that you are experiencing an after-tax return on an investment of eight per cent per annum during the retirement period.

For those currently enjoying a living standard around RM180,000 per annum, it is reasonable to aim for a retirement living standard of RM120,000 per annum. If you would like to maintain a living standard of RM120,000 per annum, you would need a retirement capital of RM2,931,257 at 55, if the principal is to be liquidated over the next 25 years.

If you want to leave the real value of principal intact for the rest of your life, you would need RM4,791,123. Now, it is clear that RM1m-RM2m is insufficient to fund your required living standard if you plan to sit back and do nothing about it. In Table 2, the inflation rate experienced is six per cent per annum instead of four per cent as in Table 1 throughout the period of before and after retirement age. If you would like to maintain a living standard of RM120,000 per annum, you would need to have a retirement fund of RM4,335,053 at 55 if the principal is to be liquidated over the next 25 years. If you want to leave the real value of the principal intact for the rest of your life, you would need RM11,585,055. In another word, an increase of two per cent inflation rate will definitely make your retirement planning job even tougher. This situation is not so unlikely given the fact that things are getting more expensive everyday.

In Table 3, it is assumed that you are experiencing after-tax return on investment of four per cent instead of eight per cent per annum during retirement period. This scenario is not unlike that where you put all your retirement nest egg into fixed deposit to avoid losing the principal. In Table 3, you do not have a column for principal required to leave the real value of principal intact for the rest of your life. In the scenario where your inflation rate is higher than your after-tax return on investment, there is no way you can keep your principal intact because it would be continuously depleted by inflation.

If you would like to maintain a living standard of RM120,000 per annum, you would need a capital of RM6,950,228 if the capital is to be liquidated over the next 25 years. You may be asking why my calculation is different from what you used to understand. Most of us would have used the following formula to determine the amount required to maintain living standard. It is a simple and straight-forward formula to produce desired income without depleting the principal. Principal needed = Income required/Expected return on investment (in most cases, use fixed deposit interest) For example: RM120,000/4% = RM3,000,000 If we use this formula to calculate the amount required for RM120,000 income, we would only need RM3,000,000 based on the assumption that bank interest is four per cent. By the same logic, this amount would be able to generate an income of RM120,000 per annum continuously for the rest of your life without depleting the principal. In that case, the amount required would definitely be smaller if we are willing to deplete the capital. Why the difference? The answer is that this formula does not take into consideration the impact of inflation. Any calculation without inflation factor would not be realistic and therefore not accurate.

No matter how much you have accumulated so far, put some effort into objectively evaluating where you stand in your retirement goal achievement. Only when you know will you be able to take the necessary actions required to reach your destination. For details about how much you need for your retirement and to download a retirement capital calculation template, log on to www.yapminghui.com and click on Latest News section.

*Taken from NST Online

Hedging against inflation

WHAT is inflation? In the economic field, it is defined as persistent and consistent increase in general prices over a period of time.

In layman’s term, it means the prices of goods and services go up and never come down.

Based on the Government’s statistics, our Consumer Price Index (CPI) is about two per cent. But most of us experience a higher inflation rate as we consume a lot of items that are not counted in the CPI.

Two weeks before Chinese New Year, I met someone in a kopitiam who told me the coffee that used to cost RM1 a cup three years ago was now RM1.30. That’s 30 per cent increase in three years, which is equivalent to 10 per cent per annum.

Though not every item has a price increase of 10 per annum, I personally estimate the inflation rate to be about four to six per cent.

Case study

Michael is 50 years old. He used to own and manage a successful chemical material distribution company.
Last year, he sold his company to a multi-national for RM3 million and retired.
Due to previous bad experiences in stock market investments, he decided to put all his money into fixed deposits instead and earn the interest. He believes he can live on the interest alone and eventually, leave the principal sum of RM3 million to his children when he dies.
Based on his calculation, the interest he will get should be about RM120,000 (RM3 million x four per cent annual interest rate).
Therefore, he believes he can maintain his living standards with RM120,000 per year for as long as he wants.
Do you agree with his plan? Is there any problem with it?

The problem
Michael’s retirement plan is a typical example of how one manages money without considering the impact of inflation. In Michael’s plan, inflation is non-existent. He presumes that the RM120,000 generated by his fixed deposit interest will continue to be worth RM120,000 in 10 years time. He also presumes that his RM3 million will continue to be worth the same 10 years later.
Here’s a very simple example to illustrate the impact of inflation, using a six per cent average increase in the cost of living (inflation) and four per cent annual investment return.

Let’s look at the middle column first. Note that if we start with a capital of RM3m and an average six per cent inflation, it takes only 12 years for the capital sum to decline by 50 per cent. In other words, if you took RM3m, buried it in your garden and dug it up 12 years later — assuming the average inflation rate of six per cent during the 12 years — your money would be worth only half as much as when you buried it.

And every 12 years thereafter, its value would further reduce in half.
So here is the first negative impact of inflation — it destroys capital.
If Michael dies at 86, he will leave his children with a wealth worth of RM375,000 instead of RM3,000,000 that he has originally planned.

In money management, accumulating capital is only an intermediate step. The end game of this is to provide us income at some point in our lives.

Ultimately, we all want to replace our working income with investment income. The only difference is when we want to start receiving that income.

Some people want it right away (like Michael) because they are already retired.
Others won’t need it for 10, 20 or 30 years. So, if generating income from your investment is your ultimate goal, let’s look at the impact of six per cent inflation to your investment income over time (third column).

In Michael’s example, a four per cent return on RM3,000,000 will yield RM120,000 annually. But at a six per cent inflation rate, the purchasing power of that income in 12 years will buy only half of what it can today.

In other words, if you can buy a cup of coffee at RM1.30 today, it will cost you RM2.60 12 years later.

By the time Michael reaches 74, the purchasing power would be cut in half once more. If Michael lives to age 86, he will need to get by on one-eight of the purchasing power with which he had retired.

Inflation is a serious problem and although its severity goes up and down, it never disappears completely.

In fact, in the long run, loss of purchasing power is the greatest investment risk we face.

Effective solutions
1. Understand the impact of inflation. Change your paradigm. Recognise inflation and understand the damage it can do to your created wealth.

2. Cut down expenses and spending. Plan your shopping and buy only what you need. If possible, time your purchases. Buy more items at sales. You will enjoy easily 20 to 50 per cent saving. To further cut down your expenses, eat at home. That will save you another few hundred ringgit every month.

3. Minimise your cash holding. Your money is shrinking in the bank every day. If inflation is at six per cent and your bank interest rate is four per cent, your actual investment return is -2 per cent per year. So, I would suggest that you hold cash only for emergency purpose. If you are working, hold emergency cash equivalent to six months of living expenses. If you are retired, hold emergency cash equivalent to three years of living expenses.

4. Invest the extra cash to hedge against inflation. Once you have set aside your emergency cash, you can afford to invest the rest in longer-term investments that will hedge against inflation such as:

• Equities: Effectively-run businesses normally can pass whatever price increases to their customers. As a result, profits will increase and share prices will grow accordingly in the long run.

• Property: The price of properties will also grow due to the rising land prices and rising building material prices. Investing extra cash on selected properties will help you to hedge against inflation and make some extra investment return.

• Unit trust: If you are a new investor with a small cash outlay, unit trust investment may be right for you. But not every unit trust fund can effectively ride on inflation. Therefore, choose equities funds only or at least balanced funds. Avoid fixed income or money market funds because they may not outgrow the inflation rate in the long run.

*Taken from NST Online

Money: Time to watch your expenses

Worksheet 1: Net Worth Statement

WE’RE all going through a challenging time now and there’s no better time to take stock of what we have. In fact, it’s more important than ever that you know exactly where you stand in your finances and start tracking where your money is going. Otherwise, it’s hard to survive, what more to achieve your goals.

Figuring your net worth The first step is to determine your Net Worth. This simply means finding out your overall financial condition. Begin with a list of your assets: possessions (and their fair market value) that you own and could sell. (See Worksheet 1: Net Worth Statement). Then make a list of your debts: the amounts you owe to creditors (banks, finance companies, stores, credit cards and the like). Subtract your total debt (the total of your debt list) from your assets (the total monetary value of your asset list) and you have your net worth: an indicator of your financial condition.

If the difference between your assets and debts is a positive number, you have a positive net worth. If it is a negative number, you are insolvent.

Analyse your monthly cash flow After determining your overall financial condition, the next step is to analyse your monthly cash flow. This will show you which direction you are headed — whether you are accumulating money, holding steady or going further in debt. You can do this by examining your monthly income and expenses. (See Worksheet 2: Cash Flow Statement). If you have money left over at the end of the month after paying all your expenses (yes, we understand that many people would need Divine Intervention for this to happen), your net worth is increasing, and you should have money to save or invest. If you are not meeting your expenses, you need to make adjustments so that you can pay your bills. No matter what your financial direction is, diligent, periodic examination of your expenses is important to successfully manage your money, especially in challenging times like these. Here are a few things to consider about some of your major expenses: Education One of the first issues to consider in a financial plan is education. Although obtaining a college degree or certification in a particular trade costs money, this expense is almost always one of the best investments we can make. On average, people with higher education and marketable job skills consistently earn more money. Gaining additional education is one of the best financial investments we can make. Managing debt Going into debt is generally not a bad idea. The challenge with debt is that, in addition to paying back the principal (the amount borrowed), we also have to pay interest on the outstanding balance. Over the course of a typical 30-year loan for a house, for example, the borrower pays more than double the purchase price of the house, as additional money will be required to pay the interest on the loan. The more we can avoid borrowing money, the better off we’ll be in the long run.

In some circumstances, it may be necessary to borrow money. You may need it for either your business, buying a house or buying a car. Even when you are borrowing money for these reasons, it is good to be sure you have some extra funds for emergencies within your budget. Emergencies and unexpected expenses always arise.

Therefore, it would be wise to be cautious before committing yourself to any debt. Debts which we cannot immediately repay have a way of compounding.

Buying a house In addition to costs associated with buying a house, such as a down payment (often 10 or 20 per cent of the purchase price) and mortgage fee, you should also consider its maintenance costs, and other fees that come with it.

If you choose to sell your house, you often have to pay fees to a real estate agent. In addition, there are other incidental costs such as stamp duties, legal fees etc and not forgetting, the penalty on your housing loan if the house is sold within the lock-in period of the loan. All these can take a few percentage points off the selling price. Because of these costs, buying a house and living in it for a short time before selling it again must be an informed financial decision.

Other factors you should consider when buying a house are the local market conditions (whether houses in your area are gaining or losing in value), the location (those in desirable areas usually resell better) and whether the house will serve your needs as well as the needs of a future buyer.

Transportation Owning a car is a wonderful convenience, but it can consume a large portion of any household or personal budget. Considering the costs of insurance, repairs and maintenance and car loan re-payments, if you cannot buy a vehicle outright, car expenses can quickly add up to a significant amount. Especially with the rising cost of fuel today, using public transportation (buses, LRTs, trains, etc.) may be a better choice. Although not as convenient, this option is generally less expensive.

However, if we need a car because public transportation is not available or for other valid reasons, we must make sure we are able to pay for all the costs involved while owning a vehicle, especially costs of fuel and maintenance.

Food The cost of food is another significant portion of a household budget. In general, purchasing basic commodities in bulk and preparing meals at home can be relatively cheaper than buying processed items and eating at restaurants. Some families find that having a garden or vegetable patch, is also helpful in stretching their food budget.

Clothing Everyone must have clothes, yet this area also provides opportunities for economy. A planned wardrobe versus impulsive buying can be less taxing on your clothing budgets. Purchasing good quality, but traditionally styled, clothing will often be the most economical approach in the long run.

Because such clothing will last and remain in style for a long time, it will be less expensive over time than clothing of poorer quality or fashions Savings Last but not least, one should focus on the habit of saving. Although savings are often considered a luxury or afterthought, they should be included in every household budget from the start. The reason is simple: Emergencies and unexpected expenses will always arise. When we have savings to cushion the blow, the effects of these surprises will not be as devastating. From this perspective, saving can be regarded as delayed spending.

Besides having a savings fund for emergencies, there are many other reasons for saving money, such as planned expenses for a home; a car, personal items, educational plans and even for the aim of leaving an inheritance. These financial goals all require one common element, which is self discipline in ensuring you set aside, regularly, a fixed minimum yet increasing amount towards your savings fund.

Be aware that marketing techniques will try to shift your mind towards the opposite. They encourage you to buy now and pay later and convey a “you deserve it today” mentality and approach to life. Having the self-discipline to save, and then to know when it is appropriate to buy, is one of the most important principles to successfully build up financial reserves.

Hopefully, we’ve been able to shed some light on how you could manage your Cash Flow better and thus increasing your Net Worth. Next week, we’ll revisit some of the ways in which we could cope better with rising prices of goods and services.

*Taken from NST Online