The 5th income category to RichPoorDad

I mentioned before that Rich Dad Poor Dad's income categorization is more of a concept and not finite categories.  It covers E as Employment, S as Self Employ, B as Business and I as Investor.

Well, there is one type of income I was trying to match into those categories but without success.

One of the examples I used in that old post is beggar.  I was showing how begging can be E, S and B.  However, in real life, no beggar is going to do anything like I suggested there.  Beggar simply beg for things without rules, timing or any pre-requisite.

Like wise, I also cann't find a category match for charity.  Old folk homes and orphan centers require high coordination and managment skill to make them run smoothly and their 'income' is one of the very important parts.

Sometimes I recycle quite a lot of stuff and I get money out of it.  I didn't really spend time and effort to recycle, its more like a mind set and way of life.  Yet I get income out of it.

Most religions in our world receive money from their belivers too and form a major part of the religion's income.

All these are real Incomes but not fall under E, S, B and I.  So I came up with the 5th category.  I don't really have a good name for it yet but I have been calling it "Charity".

Do not underestimate the power of charity.  The whole of our society today is run base on this income category.

There are a few ways to identify this income category;

1.  It starts with almost 'Nothing' and ends with an 'Income'

2.  Since it starts with nothing, you can actually "make any excuses" out of it without penalty

3.  It usually touches a human trait to do good, either for himself or for others.

Rob said the best way to earn income is by investing.  Well, that is because he didn't know the power of Charity at that time !

Just to bring us back to reality, quite a lot of illegal income falls under this category too.

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speaking of which, its about time I need your donation to keep this blog going

Minimum Trading Size vs Lowest Brokerage Fee

In last post, it was shared that in order to enjoy the lowest brokerage fee, you will need to identify the minimum trading size !

The Lower percentage of a brokerage fee, the Higher the minimum trading size becomes !  As a result, it seems like one should always pick an account type that matches his average trading size.

Wrong again ... I cann't stress enough that we need to analyse the real numbers to know the whole truth.  Not just the concept.

Compare different brokerage fee offers in an old post

As you can see the blue line in above graph.  Although your brokerage fee is as high as 0.8% when you only invest $1,000 but it is STILL ALWAYS lower than other type of accounts, ie. 1.2%

At the end, the lowest brokerage rate with the lowest minimum brokerage fee DOES equal to Maximum saving in this case !

Cheapest brokerage fee will cost you MORE ?

The cheapest brokerage fee to trade a stock in KLSE (MY) I can find is from Jupiter, offering 0.05% with a minimum of RM 8.


Normal online trade brokerage fee is 0.42% with a minimum of RM 12.
or
Jupiter also offers 0.2% with RM 12 minimum for non cash up front account.

click on image to view larger table

full info from Jupiter web site

You may think since 0.05% and RM 8 are both the lowest, then picking this type of account will definitely save more ?


Well, lets see ...


If your average trade size is RM 1,000 then you would be paying RM 8 each time, equivalent to 0.8% and not the said 0.05%. Guess what, 0.8% is also much higher than 0.2% and 0.42% isn't it ?


In order to enjoy the said LOW brokerage fee, you will need to calculate the minimum trade size needed.





For 0.05% and RM 8, it comes up to RM 16,000 !! If you never trade up to that amount in every transaction, you actually NEVER enjoy the 0.05% brokerage rate AT ALL !!



So if you want to save in brokerage fee, which account type will you get ?

Apply Dollar Cost Averaging in Investment Link

Investment Link plans deduct your investment units in order to pay for insurance coverages.  It was mentioned in last post that this is not good for you because it goes against the concept of Dollar Cost Averaging.

However, its actually NOT "ALL" bad.  As I mentioned before, one would really need to analyse with the real numbers and not just depend on a bare concept.  Lets look at this particular case.

Current way of deducting units is GOOD in an uptrend market.  Basically you buy more units initially and then deduct less units as the market price goes up.  However it is VERY BAD in a down trend market.

And ofcourse the insurance company HAS TO assume their investment would continously be going up when they are convincing you to buy it.  That is why they calculate the units the way they are !

Calculation Example : Annual Payment RM 2,400.  Monthly deduct RM 100 for insurance coverage.

You may think the insurance company should deduct the money first and then only invest to the units.  That way it would be like Dollar Cost Averaging, isn't it ?  Well ... slightly better but still NOT stable enough !

If you do that, you would just get a similar effect except it is BETTER in down trend market but WORSE during up trend.

Refer to above summary table, you can see that during up trend its better to deduct units to make payment;  However during down trend, its better to make payment first and then buy the units.  Either way, you are still widely open to market risk. 

The TRUE dollar cost averaging application in this situation is to invest your money monthly and NOT yearly !  Since the insurance company is going to deduct the insurance coverage fee monthly, there is really no reason for you to prepay your premium without interest.

In short, when you buy an investment link policy, you should set your payment mode to Monthly !  That way, it doesn't matter if the insurance company deduct the units first or pay the coverage first, you would most probably always get the same amount of investment units !

In above example, you will always get 816.39 units no matter if the market goes up or down !

This example shows that Dollar Cost Averaging is a simple concept and easy to execute but sometimes can be overlooked and become very confusing.  The 3rd part ( if ever published ) may explains why we have such confusion.  Which venture a bit into the philosophical side of Financial Planning and Human Nature.

Real Life examples how Banks abuse Credit Card Holders

A is M-ban, one of the banks in zzzz and D is Daniel a citizen.

D : I receive a SMS asking me to make payment but I don't have any M-ban credit card

A : Sure sir, may I know your name ?

D : Daniel XXX

A : Ok Daniel, I have to ask you a few questions for verification.

D : Ok.

( after some identity card, address info sharing ... )

A : What is your Credit Card number ?

D : I don't have one.

A : Sir, without your credit card number I cannot help you.

D : But that is the whole point, I am complaining to you that I do not have M-ban credit card and yet you are asking me to make payment, 

A : I know sir !  You have to tell me the credit card number before I can help you.

D : I don't have it.  Do you have other verification question ?

( silence for a short while )

A : Sure ... when is your card expiration date ?

( at the end, A "advised" D to make payment to avoid any further delay )

HL is another local bank in zzzz and this time MS is Mew Siang, a HL-ban credit card holder.

MS's card is due renewal in June but MS doesn't need the card anymore.  So MS wrote an official email to HL to cancel the card back in May ( 1 month before renewal).  After 14 days, MS didn't hear from HL so MS called HL.

MS :  I wrote in to cancel my card a few weeks ago but I haven't heard from you since.

HL :  Sure miss, Let me .... ( after 5 minutes of verification )

HL :  Yes Miss, we have already received your cancellation letter and now it is in process.

2 months later in July, MS received a statement asking payment for renewal fee.  Soon after that MS received a call from HL.

HL :  Miss, in order for us to process this cancellation, you will need to fully pay up all the due amount !

MS : But I cancel this card 2 months ago !

HL :  Sorry miss, there is NO way I can cancel this card for FREE.  But you can keep it and use for 12 times.  Then we will waive the renewal fee for you !

MS :  What ?  I cancel this card and you ask me to use it ?

HL : Yes, that is the only way you can waive your renewal fee.

( MS firmly assure HL that she has all the documents in record and will submit to consumer rights report if HL doesn't do this properly )

HL : OK miss, I will cancel you card.

WTF ?  Didn't HL just said there is NO way she could cancel this card ?

is the credit arm of Aeon group who also own the famous supermarket Jusco.  Mou Tan, a consumer,  applied for its credit card because she was assured to collect 1.5X more points when she shop in Jusco which she always does.

After months of using the card, she found it extremely hard to make payment.  The only doable way to make her monthly payment is at Seng Heng, an electrical shop near by.  But in subsequent bill statement, it shows that an extra of $2 was billed because she was making payment in Seng Heng, although that was instructed by AEON staff and without prior acknowledgement for such a fee.  She also found out that all her purchases are NOT collecting 1.5X points as promised earlier.  As a matter of fact, there are NO Points collected with her newly applied credit card.

She called to claim her points but without success.  There are so many terms and conditions that it is just not worth it to keep the card.  So she cancelled it.  Upon cancellation she was told the total amount to pay in order to cancel the card.  So she paid that.  2 months later, another bill come asking for more payment.

MT : I already cancel this card and already pay in full as instructed.

Aeon : Ya, I know.  But there are still some remaining amount here you have to pay.

( after 5 calls totalling 2.5 hours of no progress.  MT gave way and pay the remaining small amount hoping to end  the issue fast )

3 months later, another bill come asking payment for 4 cents.  MT ignored it every month and until today MT still get a bill asking for 4 cents.  Since 3 years ago.

One of those traps in Investment Link Insurance

You probably know investment link insurance has many elements in it.  One of the elements in it is ofcourse insurance coverage.  While you can buy the 'cheapest' insurance coverage through investment link, do you know that your 'investment' element is badly affected in order to pay for the 'cheapest' coverage ?  

Investment Link is a type of products you should consider if you do not know much about investment.  And if you do not know much about investment, you should at least know Dollar Cost Averaging.  Lets review Dollar Cost Averaging and Buy Low Sell High concept !  Basically you accumulate more units during down trend and less units during up trend.

In investment link policy, your annual premium is NOT directly credited into your account.  It will first be used to deduct your protection charges monthly.  The protection charges may remain the same but the way it is calculated is NOT a dollar to dollar deduction.  It will use the market price of your investment to deduct the number of units in order to match the premium payment.

 For example;

Premium Payment Needed	Market Price	Number of Units Needed
$100	$1	100
$100	$2	50
$100	$0.50	200

So instead of deducting $100 consistently from your account, it is deducting the number of units.

You can see that during a down trend ie. when market price is $0.50 you lost 200 units.  And during an up trend ie. when market price is $5 you lost only 50 units.

So instead of accumulating MORE units during down trend,

 you LOST more units.

In long run, you are strategically put into a 'losing' position while the insurance company has a HIGHER chance to earn MORE of your money.  Because you are getting into a position that is OPPOSITE of Dollar Cost Averaging !

Below shows a Sample of an actual detail list of an invesment link policy, click on image to view in bigger  size.

If all these are true, so what should we do about it ?  read Part 2

How to "REALLY" get a car FREE ?

http://tinyurl.com/ce32dm

I always share that below picture can help me answer ALL kinds of financial planning questions.  Let's try it now ...

First of all let me emphasize that I may not have free lunch here.  So if you are expecting magic here please wait a bit longer until I graduate from my magic classes :)

Legally there are 2 ways you can get a car for FREE 

1) by adopting the green shaded area called "Earn $2 with $1" and

2) by applying some 'tricks' in the "Income" area

The easiest way to get your first car FREE is ... by NOT buying it "now".  You may say this is a no brainer or even a bit pissed with this suggestion but its the reality in Personal Finance Planning ;

DO NOT buy the things you cann't afford

Time with compounding interest is your friend

For example, an averagely usable used car would cost one to five thousands dollars, so lets say you are budgeting $3,200 for this purpose and all you have is $100 to start with.  According to Rule of 72, if you save $100 with 12% interest, you will reach your target 30 years later.  So if you save your $100 at age 10, you can buy your first car for "free" when you are 40 years old.

Some of you may get even more pissed by now, "What kind of lifestyle is that ?"  

Well, above is assuming you do "nothing" or purely a "passive" growth.  If your expectation is you don't want to pay with Money but DO NOT MIND spending some effort, then keeps reading on ....

Playing with the same number game, these are the interests you will need and number of years to achieve your target.

18% : 20 years

24% : 15 years

36% : 10 years

72% : 5 years

Now this is the turning point ... 90% of the respond up to now is, " There are NO WAYS we can get 72% return !! "  

Fewer would complain slightly differently, " The only way to get that return is by doing business myself ".

I know asking you to start a business to earn enough money to buy your first car would even be more lame for this topic.  But this still brings out another reality in Financial Planning ;

When you cann't address your finance needs "passively"

you will need to solve it "actively" 

"passive" means Earn $2 with $1 and Buy $100 with $1

"active" means doing something with your income

You may get away with NOT paying with money, but you would most probably still need to PAY with some effort or at least PAY with a Darn Good Idea !

Here comes a few ...

Ask For Minimum Wages

The next time you are offered a job, do not ask for salary raise.  Indeed ask for minimum wage and a FREE car.  In some case, the company car you received is still taxable but usually the total taxable is still lower than if you have a high salary.  There are a few ways how the company can do this although not common.  The general principal is that your lower salary helps you pay less tax and company purchase vehicles reduce business taxes.  At the end, you may receive more than your raised salary while your company is paying less.

Your effort :  You will need to calculate all the figures correctly and build a strong case to propose to your employer why it is beneficial for them to do it.  This requires you to really understand your local tax policy, your targeted purchased car resale value and depreciation rate, industry total compensation plan.  Lastly you probably need to have good presentation and convincing skill.

This is already a standard procedures for top positions in big companies with very expensive cars.  Smaller companies do not see the point of doing this with everyone because the saving is not that big.  However, if you do all the calculation for them, there is no reason why they don't want to save an extra penny.

Don't Buy One, Buy More !

Find an investor, buy 10 cars and rent them out.  You link all these people up but let your friends manage the business.  You keep a very small share or no share at all with the agreement that you can use one of the cars 5 out of 7 days or when the car is not in rent.  5 years later, you may keep the car for good.

Your effort : You will need real business skill to come up with the business plan and proper contract to get this going.

This used to be a very successful model in Langkawi and Labuan when they have a lot of tourists back in those days.

Be A Market Expert

Pick a used car model you are interested in.  Start compiling your own market price statistic by calling each seller.  Record the lowest selling price you get from each seller.  Eventually you should have the actual selling price of this car model in your local area.  Keep looking until you find one that is 20-30% cheaper than your compiled price.  Buy that car with 90-100% loan.  While driving the car, put up an adv with 5% more than the selling price but stated "negotiable".

Your effort : You will need to be a marketing guru to understand how above has used the technique of "leverage".  If done correctly, the cycle keeps going and you will have a free car.  But if done incorrectly, you may end up in debt trouble.  You will also really need to know the car and its price very well.

There are 2 ways in leveraging.  You may buy the car 20-30% cheaper than 'normal' or you can sell the car 20-40% higher than 'normal' by value adding.  This depends on how well you know cars, its supply and demand.  This technique is still actively practised everyday but not with the purpose of driving a FREE car.  The car sales men are adopting these strategies to earn big money.

Hmmm ...

I just realize this post has gone too long, I can go on and on ... so if you are still not happy with above suggestions, do leave comments why so and I would try to come back to this topic in future ...

don't forget, Buying Car is #1 killer in zzzz Personal Finance due to its country policies