If you have some extra cash lying around, we tend to use it to pay off house loan early so that we won’t be bogged down with loans well into our retirement. This is because housing loan can now go until 40 years or until we are aged 70.
Isn’t it a good thing then to settle our debts earlier?
Well I’m sure you have heard of the term, bad debt and good debt. Bad debt refers to debt that has a high interest rate, such as credit card and personal loan. It can reach double figures, with credit card interest in the range of 15% to 18% per annum, while personal loan is around the 10% range.
The interest rates are kind of fixed, so if you have extra cash – it is better to clear off your credit card and personal loan. Unless you can find an investment that can give a return which is higher than 18%. And consistently giving out that kind of high returns.
Whereas a good debt is having an interest rate that is low, but appreciates in value. Just like a house is. The current interest rate for loans in Malaysia is 4% to 6%, but your house value could go up by 10%.
If you have bought a house in the 1990’s or 2000’s, the house price have increased several times over.
So here’s a few reasons why you shouldn’t pay off house loan early.
1. Low Interest Rates
Yes, the primary reason is that the interest rate for housing loan is one of the lowest, if not the lowest. Compare that with the double digits that a credit card or personal loan, and you know that you are using loans for a good thing.
You should just enjoy the facility that the banks have given you, and take full advantage of it.
2. Invest For Higher Returns
Let’s say you have extra cash around RM100,000 and are considering to dump it all in your housing loan. But there’s a potential to make 8% return on the investment, which gives you an extra RM8,000.
In this case, you should go for that investment instead and let it compound annually. Using Rule of 72, the RM100,000 would have doubled to RM200,000 after nine years, provided that the 8% return is consistent throughout the years.
You shouldn’t pay off house loan early, if you can find a good investment.
3. Higher Return On Equity
For example, a property worth RM1 million which gets a rental income of RM50,000 a year, is fetching a 5% yield. If you buy the property without a loan, your return rate is 5%. When you get 90% financing from banks, your equity is RM100,000. So your return on equity is 50% (RM50,000/RM100,000).
If your rental yield of 5% plus all future capital appreciation is higher than the mortgage interest, the leverage effect allows you to get a higher return.
As you slowly pay down your outstanding principal, you build up the equity of the property. With a higher stake, your return rate comes down. That’s the reason that the more you pay down your mortgage, the return comes down too due to lower leverage.
4. Extra Payment Not Liquid
The equity value or extra funds that you put in your property is not liquid. You can’t take it out straight away, like you normally would when putting in your savings account. You might need to wait few days or weeks to cash out.
Another way to unlock your property is by refinancing. But this would involve a new loan agreement, legal fees, admin fees etc. And by the time you get the money, it will be a few months later.
That’s why you shouldn’t pay off house loan early, since you can’t take it out easily.
5. Tax Benefit
When you have rental income on a property that still has a loan, you can write off the mortgage interest when filing taxes. So the more you pay off the principal, the less interest you can deduct. Therefore, you might end up with more tax liability.
That’s Why You Should Not Pay Off House Loan Early
Now you understand why you should not pay off house loan early?
Inflation literally makes us all poorer by eroding the value of our money. The problems we have been facing in the two-and-a-half years due to the pandemic has made matters worse, as we have find ways to deal with inflation.
As the cost of living continue to rise, what should we prioritize when it comes to our monetary budget? Will we have to retire later? Do we have to change our children’s tertiary education plans?
In a Facebook livestream on 7 September 2022, conducted in conjunction with World Financial Planning Day 2022 (WFPD2022) by SmartFinance (SmartFinance.my) with the support of the Financial Planning Association of Malaysia (FPAM), Rajen Devadason, a licensed financial planner, offers some strategies we can use to deal with inflation.
Here is his tips on how to deal with inflation:
1. If You Don’t Have A Budget, Please Create One
If a budget only exists in your head, you are strongly urged to have it written down, whether on paper or as lined items on a spreadsheet. Getting the tactile sensation of writing things down will get you more invested in the numbers and provide you with a road map of your finances.
2. Prioritize Nourishment
When it comes to budgeting for yourself and your family, do not compromise on nutrition. Make sure nutritious food that meets caloric content is taken care of and no one goes hungry. Everything else can be set aside.
3. If It Possible To Accelerate The Repayment Of Debt, You Are Advised To Do So
Many of us have debt that flow. So, when interest rates rise, the cost of our borrowings will go up. One way to deal with inflation is to pay down debt you can, as fast as you possibly can.
Each time you get rid of a liability to your name, the monthly repayment disappears for life (unless you take on an equivalent loan). This will clear up additional cash flow, give you a breathing room and let you do more with your money in an inflationary environment.
4. Exercise Delayed Gratification
Used to changing cars every 5 years or going on two overseas vacation a year? Don’t be too quick to spend your earning on the things you want.
You are likely to have surplus money to save up if you can cut back on some luxuries, until your financial goals are met. Delayed gratification is another way to deal with inflation.
5. Work Harder, Work Longer, Bring In More Money, And Tighten Your Belt Like You Have Never Done Before
Unless you wish to stay poor, you cannot stay static. Most of us can only improve on our situation by working harder, and then by working smarter. If you are not earning enough, get a second or third stream of income. One of the saving graces is internet connection is now better than 5 years ago, which enables anyone with online access to participate in the gig economy and earn a side income.
For those who are under the age of 35 and in good health, you’ve got more energy; your youth, stamina and vigor will give you the ability to work beyond your normal 40-hour work week, if you are willing to pay the price.
6. Save And Invest More
Saving and investing are two different things. We save for peace of mind, knowing we will be able to deal with emergencies. Meanwhile, we choose to invest to try – though without guarantees – to beat taxes and inflation. If you have been successful, you have grown your money faster than taxes eats into it and faster also than inflation.
With so much going on in the world; the pandemic, geopolitical conflict, economic crisis etc, there is tremendous volatility, especially for the riskier investment spaces. Nevertheless, volatility is the friend of the long-term, life-long, consistent investor and saver.
As such, those who are wise enough to work harder, rework their budget, build up their surpluses, pay down debt, exercise delayed gratification, and try to save even though it’s very tough. Rajen’s advice is to take advantage of dollar cost averaging.
To stand to benefit in the long-term, invest in a manner that meets five specific criteria:
Invest in an asset of high quality (that are good hedges against inflation)
That asset should fluctuate in price
Invest in equal amounts
Invest at regular intervals
Invest regardless of market conditions
Finally, never put all your eggs in one basket. Diversify your investment across three distinct dimensions: diversify across different asset classes, different geographic regions, and over a very long timeline.
6 Ways To Deal With Inflation
There you go with 6 ways to deal with inflation that you can start implementing in your daily life. It might not be easy, but it will be worth it in the end.
We read about individuals losing money to scams in Malaysia almost on a daily basis. The losses are staggering, and even though the warning signs are all around us, the number of victims keep piling up. According to the Inspector-General of Police, Tan Sri Acryl Sani Abdullah Sani, there were 71,833 fraud cases recorded since 2020 until May 2022, with a loss amounting to RM5.2 billion.
The most prevalent financial scams in Malaysia as revealed by the Royal Malaysia Police (RMP) are:
Bank / Government Impersonation
Illegal Loans
Money Mules / Account / ATM
Card Rental
Investment Scams
E-Commerce Scams
Romance Scams
Since we want to become a smart investor, we will be taking a closer look at investment scams, with the hope that we are able to identify them and take the necessary actions to avoid becoming a victim.
Common Types Of Investment Scams In Malaysia
1. Get Rich Quick on Social Media Platforms
Usually, the scammer will ask for a small investment with a promise of very hight returns. For example, 100% return in three hours or RM1,000 in 30 minutes. Since the initial ‘investment’ is small, investors would have no problem giving away the money to start.
Once we see the gains in our account, we will be tempted to put in more money. And when the time to cash out the gains or to take out the capital, normally the scammer will ask us to pay certain fees. By the time we realise that we have been scammed, the damage had already been done.
2. Clone Firm Scams
Another famous scam that is going around is done where scammers use legitimate investment firms, but misuse their name and logo to dupe victims. It looks so real that you can’t easily tell them apart.
For example, the real business is Smart Investor, but the clone uses the name Smart Investment. It even uses the same logo, so you will genuinely mistake it for the real deal.
The Modus Operandi Of Scams In Malaysia
Operators of illegal internet investment schemes lure unsuspecting victims to make online investments or receive investment advice online, by offering investment opportunities with unusually high returns with zero or very low risk.
When questioned about their legitimacy, most scammers operators will claim to be foreign operators that do not require licensing from Malaysian regulators to operate their business.
In truth, these operators have no legitimacy whatsoever; they are not licensed to receive deposits by Bank Negara Malaysia or licensed to offer investment advice from the Securities Commission (SC) related to fund management, securities and futures.
Unsuspecting victims would then be enticed as scammers will pay them the high returns during the initial stage, and this is used as a tactic to lure and recruit new investors. The survival of this scheme actually depends on new depositors.
The funds obtained from new depositors will be used to pay dividends to the existing depositors. Therefore, the scheme will fail when there is no contribution of funds from new depositors.
However, the scam operator will eventually abscond deposits collected when they feel that the scheme is about to fail, thus leaving the depositors at the losing end.
With So Many Legitimate Investment Schemes, Why Do People Still Fall For Scams In Malaysia?
“Scammers employ various means to manipulate their victims including promising high-returns, illusion of safety and inducing fear-of-missing-out (FOMO),” said Bryan Zeng, CEO of FA Advisory, a financial planning service provider.
Bryan Zeng, CEO of FA Advisory
On the other hand, legitimate investment schemes are highly regulated with clear guidelines on what is permissible or not. These guidelines are designed to protect the investors but may make the legitimate investment appear as less attractive.
But then again, the promise of getting rich quick in these situations is hard to resist. Scammers will promise crazily high returns in a very short time, which makes no sense once you think about it. But at the spur of the moment, we feel that it is too good to pass on such an opportunity – and we tend to make decisions based on our emotions.
As emotional beings, we are often easily manipulated when we are at our most vulnerable, which makes us easy prey for scammers. When we are not able to think clearly, that is when we make ill-informed decisions that will come back to haunt us.
Always remember the old adage: “If something is too good to be true, it is most likely a lie.”
Hence, a healthy dose of scepticism, emotional restrain, and critical thinking can go a long way. You can also check with the relevant authorities before investing or depositing money into someone else’s bank account.
Debt, in essence, is all about borrowing money from a third party, and having the means to pay it back. Debt is not always bad news; it really depends on the kind of debt you currently have and your ability to pay it back. Let’s take a closer look at ‘good debt vs bad debt’.
Therefore, let’s start off with a self-assessment on debt. Referring to Table 1, kindly answer the statements with a “yes” or “no”. The more “no” in your replies, the higher your stress level in debt management.
1
My monthly loan servicing ratio over my monthly income is about 38% or below.
2
I am only investing my free money and never borrow to invest.
3
I have consistently (monthly) and/or fully paid my credit card debts.
4
I keep a track of my total debts annually and it is decreasing over the years.
5
I know the difference between good and bad debt, and only utilise the good debt to acquire appreciating assets like property.
6
I pay all my household bills on time.
7
I am current on all my debt payments.
8
I know who to look for help if any of my family members r I are in deep debt.
9
I know the risks of becoming a guarantor, co-loan owner and supplementary credit card owner.
10
I know the interest rate of each loan that I borrowed, and how the interest is charged on the loan amount.
11
I know how to restructure my debt wisely if needed, and clear the loan with the highest interest rate first.
Table 1: Self-Assessment
Good Devt VS Bad Debt?
Did you know that debts can be categorised as “good” or “bad”? Good debts refer to the ones with low-interest rates (below 8%), and your borrowing is used to purchase appreciating assets such as residential or commercial properties, or investing in a business.
A study on Malaysian property valuation between 1991 and 2014 showed that the compound annual growth rate (CAGR) for overall property in Malaysia is around 5.97%。No doubt that property is an appreciating asset, still location is key for greater return.
Bad debt, on the other hand, is akin to borrowing money to buy a car, which is a depreciating asset, although the loan interest rate is considerably not high (around 4-6%). Every year, the car value will drop at an average of 10%.
From Table 2, it is crystal clear that we shouldn’t borrow if the interest rate is more than 8%.
Debt Type
Average Interest Rate (Annual)
Illegal Shark Loan
60%
Credit Card
15-18%
Personal Loan
10-12% (Promotional 8.88%-9.99%)
Education Loan
8-10%
House Loan
4.5-6.5%
Car Loan
4-6%
PTPTN
1% (3% is the old rate)
Table 2: Types of Debt and Average Interest Rate (Annually)
Words Of Advice
Healthy Debt Ratio – A key indicator on whether you have a healthy debt ratio is the Monthly Debt Servicing Over Monthly Income Ratio. It simply totals up your monthly debt repayment amount over your monthly income.
This ratio should always be kept below 40% at all times, though a temporary spike is still acceptable. For those far below 40%, you have more room to gear on appreciating assets resulting in easier loan approvals.
Never Borrow to Invest – The first rule of financial planning is not borrowing to invest, even in share margin investment, where the interest rate is low at about 4%.
We should only invest free money. Don’t borrow money even from family members, relatives or friends to invest. Otherwise, it could cost you both money and relationship.
Get the Longest Loan Period (if possible) – Forget affordability, will you apply for a 25-year loan (instalment: RM2,400) or 35-year loan (instalment: RM1,200) for a property purchase?
Choosing 35 is a wiser strategy to deal with loan and cash flow. Even if you opt to pay RM2,400 (instead of RM1,200) monthly and consistently, the loan will end in 25 years.
However, if you select the 25-year package, there is no way you can reduce your monthly repayment if you have cash flow problems in certain months.
In the event you don’t pay consistently, banks will increase the interest rate causing the repayment amount to rise, lesser free cash in hand, and a whole lot more stress!
If non-repayment continues for two months or more, you will be seen as failing to service your home loan, and worse, the bank might even auction your house. Therefore, why risk your financial position with a shorter period of loan which offers lesser flexibility?
The longer the tenure of your home loan, you would have more cash in hand to actively invest into an investment instrument that can give you an annual return of more than 6%. This is smart financial planning.
About the Author
This article is written by Yong Chu Eu. He is the Founder, Principal, MFPC Shariah RFP, CPD/CPE, HRDF Certified Corporate Trainer of Money & Life, Financial Book Author, Licensed Financial Planner, E2E Financial Literacy Principal Coach & Local Media Guest.
Despite the well accepted fact that everybody has unique circumstances, in general each of us should do the following in order to have a solid financial management:
Establish an emergency fund;
Ensure sufficient insurance coverage is in place for your dependents in the event of death or at the onset of critical illness;
Ensure you and your partner have wills on how your estate should be distributed in the event of death.
Emergency Fund
The foundation to a great financial management is that we should set aside some money or follow a disciplined effort to build up an emergency fund that is equivalent to at least 6 months of our income. For a safer and secured future, you may want a buffer of 9-12 months and more if you have a young family.
It does not always have to be an accident or hospitalisation. Many times, we associate emergency funds with these events.
There are many other forms of emergency or unexpected events such as usual sickness, retrenchment, dental issues, or when one is out of job after resigning and yet to land a new offer.
This emergency fund should be kept in a deposit or money market account, which will give ease of liquidity when it is needed.
With adequate emergency funds backing you up, things could not possibly go too wrong as you have a buffer to support you through the rough tide. Thus, it is advisable not to invest any of your savings until you have accumulated this buffer fund.
Insurance Coverage
Just think about how much is needed to settle your debt today if something untoward happened to you? Most of us have mortgage, credit card, study loan (such as PTPTN), hire purchase and so on.
How will your dependents continue to survive with these challenges and financial hurdles? What’s even worse is if you’re the sole breadwinner of your family, or you contribute a huge chunk to the household income?
If you were to become ill for long-term, how much of your current income or savings can continue to support you and your family, and for how long?
That is why in financial management, we need to ensure that we have at least this amount of life insurance coverage in place. Also, ensure that you have a basic medical insurance in place, so that your emergency fund and hard-earned savings will not be wiped out overnight by hefty hospital bills.
There are many types of insurance products; some are good for you, and some are good for the one who sold you the products; so, be sure to read the fine print, and know what you’re signing for.
What’s better is to work with someone who is independent and not tied to a product provider. This way, the chances are that your best interest is likely to be more protected.
Write a Will
A Will is a legal document that sets out who is to benefit from your property and possessions (your estate) after your death.
There are a number of ways to make a Will, but to be on the safe side, it is advisable to seek the assistance of a licensed financial advisor on how your Wills should be drafted in order to cater to your unique situation and wishes.
It is important to have a Will in place as if you were to die ‘intestate’ (without a Will), there is a danger that your assets may not reach your family or beneficiaries. Furthermore, it will relatively take a longer time for the court to issue a clearance order.
Depending on your circumstances, you may wish to include guardianship arrangements in your will so that, in the event that your children are left parentless, there will be someone to take care of them: you obviously need to get the agreement of the people you intend to name as guardian(s) beforehand.
Conclusion
The three areas mentioned above may look unimportant to most people, or appear to be ‘simple’; however, we should not underestimate its importance for a solid financial management.
The benefit of having an emergency fund allows the person to have the ability to handle unexpected events without having to incur mental stress that usually comes when we deal with money issues.
It also reduces the chances of enlisting an external party to assist us. Moreover, if any form of loan or borrowings was involved today to address any unexpected issues, it simply means we have to pay back in the future.
Thus, having an emergency fund could help prevent these from happening. I would say the same is true with regards to having adequate insurance coverage, especially personal accident and medical insurance.
While the first two areas provide flexibility and ability for an individual to deal with unexpected events without having to trouble others, preparing a Will or paying attention to estate planning can help ensure that our family members do not have to deal with the emotional pain of losing out their family member
It also makes the process of unfreezing and distributing the estate much easier; thus, preventing them from going through more troubles, that potentially could drag up to years, or create tension and conflict among the surviving family members.
By building up this financial cushion (and taking concerted efforts to maintain it), you will protect yourself when things go the wrong way. This allows you to be in a better position to work out alternatives, in order to focus on the next important step in peace.
About the author
Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at kevin@nextgenadvisors.my and www.kevinneoh.my.
One aspect of wealth planning is managing debts. Asians, particularly Malaysians, often have the mindset of prioritising debt payment over savings for retirement. Any extra cash at the end of the day is used to pay off existing debts rather than investing into a retirement plan.
Smart Investor spoke to a few prominent financial experts to gage which should prioritised – being debt-free or saving for retirement.
Retirement Savings More Important
Kenney Khew, Licensed Financial Planner Phillip Wealth Planners Sdn Bhd
Managing both our debts and savings is important because it increases our net worth eventually.
However, I personally would give more importance to retirement savings than reducing mortgage debt, especially now when inflation rate is pretty high. Furthermore, planning for the next 25 to 30 years is more important than focusing on debts that have already incurred.
One way to manage mortgage debt is by purchasing the Mortgage Reducing Term Assurance (MRTA) from banks. The MRTA is usually incorporated in the mortgage debt or monthly housing instalment to mitigate anything untoward happening to the primary borrower, namely accidents, death, total permanent disability and critical illness.
If this happens, the insurance company will pay a compensation to the bank to fully settle the mortgage loan.
However, if your Debt to Service Ratio (annual loan payment/annual take home pay) is greater than 35% and Debt to Asset Ratio (total liability/total assets) is greater than 50%, you might want to consider settling your debts first.
Debt is Cheap
Steve Lim, Chief Learning Officer Affin Hwang Asset Management
I think it depends a lot on an individual’s cost of debt verses investment returns. If I make say 12% returns from my investment in the long run, I would rather put more attention to retirement savings than paying off my debts that’s costing me 4% per annum.
Of course, you can quickly pay off your debts if you decide otherwise, but you’re only going to save 4%, and give away differential returns of about 6-8% on retirement savings.
As Asians, we have a debt-free mentality. But debt is very cheap in this environment right now. Everyone is getting very low interest rates, thus, if you can accumulate a return of 10% on your investment, better focus on that than settling a debt that is very cheap.
The only time an individual needs to focus on debt is if he is a conservative investor, investing predominantly in fixed income instruments that gives him a return of 5-6% per annum. With a 4% cost of debt, he would be quite indifferent as to whether he should pay off his debts or invest for retirement.
Understand your debts first before managing them. For instance, concentrate on settling short-term debts like credit card and car loans rather than mortgage loan. It’s wise to keep your short-term debt low as the repercussions of non-payment can be quite damaging.
Housing loans, on the other hand, are long term, and if you have a savings buffer of 6 months to a year, you should be able to pay off the instalment if you lose your job.
In fact, a home loan can only become a non-performing loan (NPL) after a year, so you shouldn’t be too worked up over a long-term debt, as you still have time. Therefore, my advice is to put things into perspective rather than doing intuitive.
Balance the Scale
Yong Chu Eu, Licensed Financial Advisor Fin Freedom Sdn Bhd
In my opinion, both are equally important, so instead of choosing to prioritise one over the other, we should try balancing the scale – meaning settle our debts and have adequate retirement savings.
If you’re debt-free upon retirement, which is highly recommended, but lack savings, you will be having a tough time managing even your daily expenses.
Likewise, if you have adequate savings, and still have a high level of debt upon retirement, most of your wealth will be used to settle those debts. This is why I always stress on simultaneous management of debt and savings.
Most Malaysians are conservative. They prefer to utilise their free cash flow to clear off debts, only then think of investing for retirement. But this is not a good idea as they will have lesser time in compounding their wealth.
The best way is to service your debts on a monthly basis according to the loan requirements. Take note that your total debts should not be more than 40% of your monthly salary.
Invest extra cash into an investment vehicle that you’re familiar with, but make sure that the returns are higher than the loan interest rate.
50/30/20 Budgeting Rule
Gor Sheau Shuenn, Licensed Financial Planner Blueprint Planning Sdn Bhd
Reducing mortgage debt is recommended if it’s for self-occupancy because we want to have a debt-free home to live in upon retirement.
However, if it’s investment property, just follow the loan repayment schedule and cover the commitment with rental income. Furthermore, the interest on loan are allowable tax expenses, which could be used to reduce chargeable income.
Nevertheless, saving for retirement is equally important. Retirement cashflow should focus on living necessities instead of loan repayment.
If you put all your money into paying off mortgage loan, eventually, you would have a house to stay, but not money to fund for basic living needs. What would you do then?
Of course, investment property can be disposed off anytime for capital gains and parked under retirement fund. But the question is whether you would be able to liquidate the property immediately.
Therefore, I would like to introduce to you the 50/30/20 budgeting thumb rule:
50% of your take-home pay should be used to pay for mortgage, home insurance and maintenance, hire-purchase loan, car insurance and maintenance, and other bigger commitment.
30% of your take-home pay should be used to pay for groceries, dining out, entertainment, and other family and personal expenses.
20% of your take-home pay should be used for savings, out of which 50% should be kept for retirement and the balance 50% for other financial goals and emergency purpose. This is on top of your EPF savings.
For instance, assuming you are 25 years old today, with the ability to invest RM500 every month into an investment instrument which gives you a return of 7%.
In 10 years’ time, or by the time you’re 35, you will be able to save RM86,500, and RM260,500 by 45.
Apply the Rule of 72 every 10 years, and you would be able to double up your capital by 7% per annum. By the time you reach 65, you would already have RM1 million, even if you have stopped investing at 45 years old.
Financial Discipline is Key
Tan Kim Book, Licensed Financial Planner Philip Wealth Planners Sdn Bhd
For an individual who would like to plan for effective wealth accumulations for retirement and distributions, we would first have to take a look at his personal financial statement.
If the cost of mortgage is higher than the rate of return on your investment, then I would advise you reduce your mortgage debt, which is logically and mathematically very effective as this can reduce the instalment tenure and save the mortgage cost.
However, you need to have the discipline to save more for your retirement after reducing your mortgage debts. Sometimes, you might have the discipline, but alas, time and compound interest may not be on your side.
Liquidity for day-to-day cash flow and accumulating for future retirement income is equally important. Unless you have a very high annual savings ratio of 20-30%, you may want to consider reducing your mortgage debts. Otherwise you have no choice but to increase your savings through your earning capacity.
On the other hand, if the rate of return on your investment is higher than the cost of mortgage, the problem is solved.
For instance, let’s assume that the cost of your mortgage is 4.5%, and the rate of return on your investment is 8%. In this case, there is no hurry to reduce your mortgage debts.
Instead, you should channel your surplus into the Employment Provident Fund (EPF) or a Private Retirement Scheme (PRS), and allow time and compound interest to work for you.
An important fact that many of us aren’t aware of is that we shouldn’t withdraw the savings in our EPF Account 2 facility, either monthly or lump sum, for paying mortgage instalments or early settlement, if the EPF return is higher than the mortgage cost.
It’s an Ongoing Process
Kevin Neoh, Licensed Financial Planner VKA Wealth Planners Sdn Bhd
I would say both are equally important. Debt management is also part of the key component towards a sound retirement planning, for if we have debts on our shoulders, we can never truly retire as we still have to service the loan when we stop working.
But if one has to take precedence over the other, then it is important to note that usually, our mortgage has a tenure that is as long as our time horizon towards retirement.
If one repays more to reduce the mortgage and to redeem the property from the financier earlier than the tenure stated in the loan agreement, no doubt there will be extra cash in hand and also a property that is free from incumbencies.
However, what happens when the person runs out of retirement fund? Does he have to sell his property then? If yes, where will this person stay after that?
Hence, it is important to prepare for a retirement fund while we are still working, as there is still ample of time before reaching retirement age. In short, just follow your mortgage repayment schedule and save the extra cashflow towards building a retirement fund!
Regardless of your level of wealth, estate planning is a vital part of your overall financial plan, with effective estate planning providing you with greater control, privacy and opportunity to leave more of your legacy to your loved ones.
To put things in perspective, an Estate Plan is a collection of preparation tasks that serve to manage one’s asset base in the event of their incapacitation or death, thus ensuring that all the individual’s personal assets go to his/her intended loved ones.
However, good estate planning is much more than just making a plan in advance and naming whom you want to receive the things you own after you die – there are many important factors to be considered in this aspect. Here’s what the experts have got to say.
Pay Attention to the Details
Azhar Iskandar Hew, Rockwills Trustee Berhad Group Chief Executive Officer
The key points to consider when doing estate planning and successfully leaving a legacy depends on whether the person is preparing a Will of trust, or both. Generally, an estate plan should include:
The list of beneficiaries;
Who to appoint as the trusted executor of the Will;
If the children are young, then appointment of guardians is recommended;
What are the assets to be distributed;
In what proportion, as well as the terms of distribution;
Substitute beneficiaries will need to be considered, depending on the family’s lifestyle such as yearly family holidays, along with the number of beneficiaries to be named.
In addition to the above, it is important to have a complete and accurate record of assets and liabilities including tax file status; items held in trust by others and for others; and a list of overseas assets.
Special attention must also be given to joint properties, assets or funds where nominees have been made earlier. It is also important to ensure that there is enough liquidity to pay debts.
For business owners, it is important to plan for proper business succession, both in terms of management and ownership. Not to forget, preservation of controlling interest as well as preservation of capital, including protection against creditors and ex-spouse claims.
With the above, the individual can then leave clear instructions to prepare a comprehensive Estate Plan to ensure he has a successful legacy. Depending on the person’s objective, Estate Planning can also cover various aspects including planning for business succession, education and retirement.
As an example, Mr Tan and his wife are the shareholders in two private limited companies involved in manufacturing and services. His two children are working for him.
Both Mr Tan and his wife intend for the companies to continue to be owned by the family for many generations to come. The solution would be for Mr Tan and his wife to create a trust by settling in it their shares in the two companies.
An independent trust company should be appointed as the trustee to hold the shares of the two companies for the benefit of the children and their lineal descendants.
During the lifetime of Mr Tan and his wife, they have sole ownership control over the companies and upon their passing or disability, the two children will be given control, and thereafter suitable and qualified descendants will be appointed as successors.
The trust should spell out the detailed succession and distribution plan so that control remains within the family.
With a proper business succession plan, the ownership of the two companies will be fragmented which would lead to in-fighting among the descendants which in turn may cause the companies’ business to be disrupted.
In the same trust, Mr Tan and his wife can instruct the dividends received by the trust to be used to pay for the tertiary education of the descendants that is related to the business of the companies. This would ensure that there would be continuity of suitable and qualified successors in the business.
Don’t Procrastinate Estate Planning
Kenney Khew, CFP Philip Wealth Planners
Estate planning is important throughout our cycle of life, regardless whether you’re in your 20s, 30s, 40s or 50s. Many tend to have the misconception that only the rich should think about distributing their wealth, while others may even feel uncomfortable to broach the subject when you’re still alive!
That aside, wealth planning is crucial as it allows you to leave your hard-earned wealth to the beneficiaries of your choice in the shortest time possible with very few hassles and setback through the application of a grant of probate (testate).
In the case of Intestate (not having made a Will before one dies), the deceased’s family will need to apply for a Letter of Administration by choosing an Administrator to determine the value of the estate, and get two sureties (guarantors) to unlock the frozen assets.
Should we want to leave a legacy for our children, there are certain aspects to consider:
Your appointment of trusted Executors – A valid Will should spell out the appointment of executors to carry out your wishes so that wealth is properly distributed to your loved ones as soon as possible, and the best person is a trust corporation or professional trustee, and it is important to look for a qualified person who is professional, independent and knowledgeable;
Your choice of guardian for your children below the age of 21 – With the choice of guardians in your hand, you can be sure that your children will be well taken care of;
Your choice of beneficiaries and their entitlements – how much of your wealth is to be distributed to your beneficiaries upon your demise has to be clearly stated in your Will (normally in the form of percentage);
Testamentary Trust – a testamentary kicks in upon your death and allows your young children and ageing parents to receive a sum of money for living expenses and school fees. In these circumstances, you will need to entrust the trustees to carry out your wishes accordingly.
Will custodian – in this case, a will custodian is very important as it is pointless to write a Will only for your loved ones to not be able to locate your Will. The safekeeping of the Will and its easy retrieval are vital in order to ensure your wealth is distributed to your beneficiaries with no hassle.
Witnesses – once the Will has been drawn up, it is not effective until it has been signed in the presence of two witnesses. These witnesses have to be present at the same time when the Will is signed to confirm that you are of sound mind, that the Will is made voluntarily and without pressure from another person, and that the Will was not signed when you are intoxicated or drunk.
A Will is a Must!
Kevin K.M. Neoh, CFP CERT TM, MBA VKA Wealth Planners Sdn Bhd
When it comes to effective estate planning, you mainly need to consider the position of the estate (i.e. if there will be anything left to be given away to the beneficiary).
If the person has more debts than assets, then this person would die insolvent, which means that it does not matter if the person has written a legit or complete Will or not, since most of the estate would be used to repay his outstanding debts.
Next comes tax matters. It is important to ensure that we keep proper filing and do our tax filings well, and have no outstanding and unpaid dues.
The basic form that we need to consider when it comes to estate planning is perhaps writing a Will. A will is simply a legal document and we will need an executor to carry out the wishes of the testator.
Appointing executors, therefore, is a very important matter because if the appointed executor is not capable or have a good sense of responsibility, the entire process may go haywire and worse, the interests of the beneficiaries may not be protected.
Lee-Wang’s story is not unusual these days. He and his family have been living in Asia for more than 25 years. But as his business expands globally, he spends more and more time shuttling between countries.
The globetrotting businessman is in the process of getting his citizenship through a Portuguese golden visa programme that offers a real estate investment route to gaining residency and potential citizenship in the country and hence European citizenship.
A big driver is for his two children to have the ease of travel a European passport offers in the future. The golden visa programme in Portugal is the most popular in Europe.
Portugal Golden Visa Programme
It was launched by the Portuguese government in 2012 to stimulate investment into Portugal and has since encouraged several billion Euros in real estate investment and over 2,000 family applications each year.
An investment of €500,000 is required in real estate in Portugal. The property, either residential or commercial, can be rented for income. Any number of properties can combine to make up the €500,000 minimum investment.
Joint buyers can pool investments into one property. The property can be mortgaged for any investment exceeding the minimum.
Portugal has a very favourable tax regime for anyone considering living in the country. No taxes are charged on overseas income for the first 10 years.
For those non-resident individuals, tax is charged at 28% on income derived in the country. This can be reduced with expenses for rental income.
Capital gains tax is 28% and there are allowances for costs and depreciation. There is no inheritance tax in Portugal. Applicants can apply for permanent residency after five years and Portuguese citizenship after six years.
Global residency and citizenship programmes have been in existence since the 1980s. The demand for the benefits of such programmes expanded rapidly in recent years. The new golden visa programmes in Europe and the Caribbean have wide appeal across many countries.
However, not every country and programme are the same. There are significant differences relating to investment level, family qualification, permanent residency, minimum stay, citizenship and passports, and not to mention, the differing economic states and real estate investment prospects in each country.
The EU Context
Colorful Isolated Europe in Watercolor
A number of European countries offer golden visas through investment in real estate, government bonds and donations. A citizen of any EU country is a citizen of the EU. Citizenship and a passport from any EU country allow the holder to live, work, study or travel visa free to any EU country because they are a European citizen.
A resident of any Schengen countries can travel freely throughout the Schengen zone without border controls even though they may not have a European passport.
The Schengen Area is the area comprising 26 European countries that have abolished passport and any other type of border control at their common borders, also referred to as internal borders. It mostly functions as a single country for international travel purposes, with a common visa policy.
Based on experiences, some of the motivations behind global residency and citizenship planning are:
Investment Return
Most programmes offer real estate investment as the route to gaining a golden visa from that country. Long, medium and often short-term investment horizons lead to significant capital gains for real estate.
Safe Haven Investment
The USA and Europe remain safe havens for investment with clear property ownership laws, democratically elected governments and established taxation rules.
The laws of the Caribbean countries offering citizenship programmes are based on UK law with democratically elected governments.
Legacy for Family
Once the investment is made and the visas, residency cards and citizenship are granted then the ties and contacts with that country begin to increase.
Children can be included, they eventually move on perhaps for an education, eventual jobs, eventual citizenship and the next generations have firm roots which they have either put down or have the option to do so.
Education for Children
Once permanent residency is established by living full time in the country, children can be educated under either the state or private education system.
Looking to the future, as European citizens, children can gain access to universities in English speaking countries such as the UK at European and not international rates (a substantial saving).
Some Caribbean countries offer higher education offering ease of access to universities in the USA.
Ease of Travel
A golden visa will lead to a residency card or eventually citizenship and a second passport. In all cases this can significantly improve an applicant’s ease of travelling throughout the world.
A European passport allows the holder to live, work and travel anywhere in the EU including countries outside the Schengen Zone, such as Switzerland, the UK and Ireland.
Second Passport
The second passport and citizenship option arise from all the Caribbean programmes and several golden visa programs in Europe.
Taxation
Taxation is a big concern for most wealthy investors. This is an area where more detailed planning will be needed. The Caribbean countries offer low or no taxation on overseas income.
In Europe, some countries such as Portugal impose no further taxation on overseas income for the first 10 years of residency.
No doubt, there are changing times ahead, with residency and citizenship planning or getting a Plan B already becoming an essential part of an offshore wealth management strategy for high net-worth individuals.
On a final note, beware of fraud. The demand for second citizenships has created opportunities for fraud and misrepresentation.
Be sure to perform the necessary due diligence or hire a qualified advisor or consultant specialising in such programmes. Get the right advice that is balanced and independent.
About the author
YH Wong has over two decades of experience in the financial services industry. His clients include high net worth investors and boutique institutions such as family offices and investment partnerships in the region. He is currently a senior partner with Satori Consultancy Ltd, a financial services company regulated by the Mauritian Financial Services Commission. He can be reached at yhwong@satoriconsultancy.com.
Debt seems to give a negative impression. Sometimes it even gives people the chills just by hearing the word. But what is debt? Both layman and business dictionaries define debt as something that someone has given permission to borrow but with conditions to repay.
Now when it comes to organisations around the world, debt is used as an engine that creates financial leverage and multiplies yield on investment; provided returns generated by debt exceed its cost because the interest paid on debt can be written off as expenses.
Looking at this, is debt a good thing? Does debt put you in a better position or worse? Does debt make you RICHER or POORER? The answer is: “It depends!”
Poor Debt
We have seen tremendous growth in lifestyle expenditure. The unfortunate part of this culture is the increase of debts which makes people poorer. Let’s take the credit card as an example; 40% of credit card holders’ debt revolve around their credit, which means they only pay the minimum or part of the due amount after spending in full every month.
This trend has been rising for some time now. When you spend beyond your means and revolve unnecessarily, especially on lifestyle lavishness, you are paying a high price for your indulgences as the payback for your expenditure is compounded by a whopping 18% per annum.
To make matters worse, most of these lifestyle extravagances depreciate in value.
Responding to this trend, the personal loan product emerged as another form of new age credit. It gives easy cash access as it requires no asset pledged or charged as security. Many people are attracted to this sudden access to large volumes of cash that can be used for anything desired.
What’s more, its fixed low monthly payback instalment makes borrowers believe they have more control of their finances this way. The personal loan is another lending facility that gives the after effect of one week of pure enjoyment and five to seven years of dreadful commitment.
Running a debt on a credit card and personal loan is EXPENSIVE. It will cost you three to four times MORE than a home loan / mortgage.
In a nutshell, a poor debt is basically spending your future money for current or past expenditure and it does not generate anything for your future.
Rich Debt
Please see the situation below on how a debt that can make you richer.
John buys the same asset worth RM1M, and after three years, he also sold it at RM1.2M and made a handsome profit of 20%. He paid the entire asset of RM1M in cash. This was his capital outlay.
Amanda buys an asset worth RM1M, and after three years, she sells it for RM1.2M, making a handsome profit of 20%. She had the cash to buy the asset but she took a loan to finance 90% of the asset. Her capital outlay was only RM100,000.
Who is a smarter investor? Who made more money? Who is financially more resilient?
Amanda only used RM100,000 to make RM200,000 in three years.
While on the other hand John used RM1,000,000 to make RM200,000 over three years.
Amanda applied the power of SMART Leveraging. Amanda leveraged using debt, which she intentionally created, and a debt that is clearly controllable both in paying down and its desired outcome to increase her ROI (return of investment) percentage from 20% to 200%.
On top of that, she had funds for emergencies and additional money to invest on other opportunities that give better ROI than a savings plan. Doesn’t that make more financial sense? Amanda successfully leveraged her way for higher gains.
So, What is the Power of SMART Leveraging?
To simplify it, let’s say you have an objective to achieve, you know how to achieve it but all you need is something to leverage on to make it happen. A mortgage is a cost-effective way of borrowing. Interest rates on mortgage is no doubt the cheapest form of borrowing available in the market because it is secured with property.
What this is creating is that you are now boosting your wealth with effective returns. Just like the example of Amanda and John − Amanda has successfully increased her wealth by using only 10% of the asset value to give her a return of 200% after three years.
We borrow to buy our homes. We borrow to buy cars, which is a depreciating asset but at times, a necessity. We also borrow to buy lifestyle indulgence goods.
Most of the time we borrow to do things that are not financially productive. SMART Leveraging can be incredibly productive when it is understood and used properly.
Therefore, equip yourself with the right financial knowledge and start using mortgages as a wealth creation tool. It can be used as arbitrage to leverage what you don’t have and yet benefit based on the total current value of the property when it appreciates over time.
The key here is;
A mortgage allows us to leverage and leverage allows us to do more with less.
We now live in a more connected world, thanks to technology and easy travel access to other countries, which is why it has become increasingly normal for us to have our wealth scattered around the world.
However, I would like to urge you not to overlook and forget to protect your assets that are outside of Malaysia when you invest overseas.
Different Jurisdiction, Different Law
We often tend to take things for granted with regards to presuming that the laws and taxes where our foreign assets are domiciled are similar to the set of laws and taxes in Malaysia. As such, many Malaysians will kick-start their foreign adventure without even knowing what will affect them.
One such drastic difference that we must know from day one is perhaps the presence of estate tax or inheritance tax. If you have assets in countries like the US, your estate (US-situated asset) may be subjected to two levels of estate taxes, namely at the Federal and State levels.
Estate tax is a form of tax levied on the taxable estate, meaning after making certain adjustments to the gross estate value such as deducting funeral expenses and donating to charities, among others. It can rack up to as high as 40% of excess of US$5mil for resident and $60,000 for non-resident (on the Federal level).
My Client’s Experience
One of my clients, Mr. Y had experienced a great loss when his brother passed away. His brother is a Malaysian who is domiciled in Singapore a decade ago.
Mr. Y’s brother had accumulated his wealth both in Singapore and Malaysia prior to his death and had left behind a self-drafted will – one that was drafted about 6 years ago, with its contents neither reviewed nor changed since. Mr. Y’s brother had also appointed his younger sister, who resides in Johor Bahru, to be the executor of his Will.
However, when Mr. Y’s brother passed away suddenly, his sister refused to be the executor of the will since she couldn’t make time to go to Singapore on such a short notice.
What’s worse, Mr. Y’s brother did not leave behind a list of his assets and liabilities, which meant that they had to first find out what these assets were, and where they were located.
This responsibility was passed to Mr. Y, who had to write in to every financial institution to inquire if his brother had maintained any accounts with them. This process took Mr. Y several months, and brought him down to Singapore numerous times.
To avoid leaving a mess for our beneficiaries, consider these options to ensure that our foreign assets are protected from the two things that are inevitable in life: Death and Taxes.
1. Making a Will
While a will can lead to a smoother and simpler process of distribution, we also need to understand that not every will is executable.
The most important thing about writing a will is not about the instructions, but who the executor of the Will should be. Taking into consideration distance and proximity to decide who the executor should be might not help the situation a bit; instead the executor of the will has to be, first and foremost, someone who is capable and, at the same time, trustworthy.
As the executor might pass away before the testator, or may not have the time to handle the tedious task of executing the will, the will also needs to be monitored from time to time.
Another point to note would be that we should have multiple wills to separate Malaysian assets from foreign assets in different jurisdictions, especially when immovable assets such as properties are involved.
This will save precious time and money for both beneficiaries and executors as they can execute concurrently, rather than having to wait or decide where to apply for Grant of Probate (original will is needed to apply for probate).
2. Setting up a Trust or Foundation
A Trust or a Foundation is the recommended solution if you have a sizeable asset to leave to beneficiaries. The requirement for applying Grant of Probate is not applicable in this case as the transfer of assets into the Trust will have to occur prior to death of the settlor or founder.
Indeed, a Trust or a Foundation is the solution for investors who need a higher level of planning as compared to the use of will. A will’s role is to mainly dictate the intention on distribution of assets, while a Trust goes beyond and preserves it upon death.
A Trust or Foundation can be maintained for few generations, and some can be perpetual, provided that the funds and asset size are big enough. This can ensure succession for future kin and also allow the settlor to still have control over how beneficiaries can receive from the Trust or Foundation as there will be a Trust deed or Foundation Charter that contains the wishes of the settlor.
3. Insurance Wrap Account
An easier way to protect our paper assets overseas would be through the use of a life insurance wrapper. This is an open-architecture account whereby an investor can put in any form of liquid assets such as equities, bonds, mutual funds, bank deposits, ETFs, and even currencies into the account.
This life insurance wrapper allows investors to trade and buy stocks directly from major exchange such as the New York Stock Exchange and Tokyo Stock Exchange, and buy funds from renowned company such as JP Morgan, BlackRock and Fidelity.
Life insurance wrapper accounts can only be done via a Licensed Financial Planner and the account will be registered in tax havens such as Isle of Man, Cayman Island, the Bahamas and Panama, thus allowing protection from tax leakage as all investment returns are tax-free.
When we open a life insurance wrapper account, we will be able to nominate beneficiaries, thus allowing for smoother transfer of assets when death occurs, and at the same time maintaining protection from tax.
About the author
Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at kevin@nextgenadvisors.my and www.kevinneoh.my.
Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at 
