Pay off Mortgage or Not ?

Emotional Factor: Itch To Have Debt

Yes, a home loan or mortgage is a debt. The decision to pay off your mortgage or not, in my opinion, should not be based on emotional decision. Yes, human is emotional being, but this decision is purely based on financial knowledge. If you have a (limiting) believe that “Debt is bad” (then you need to learn about debt and leverage) or “Not having debt is always better than no having debt” (huge mistake, check all super wealthy people in the world who doesn’t have debt… zero – they are all have massive debt) – then just stop here as no matter what I or other said that will not matter already. Trust me, debt is not always bad (yes, there are bad debts) and Debt is very important tools in getting financial goal.

So, let’s go back to the original question with open mind: should I pay off mortgage or not ?

Home loan and Its Interest Rate Do Not Grow

If you have $500,000 home loan for your property. While your property can grow in value (doesn’t matter how slow or fast) — maybe increase 10% in value within 5 years, i.e: 5 years from now it worth $550,000 — the debt will always be $500,000 and decreasing if you pay the principal and interest, or it will stay the same if you only pay the interest.. Let say in this case we don’t pay the principal of the debt , just the interest.

Then if you can take a fix interest of 5% for 30 years, every year for 30 years you will need to pay 5% x $500,000 = $25,000 per year.

If you take the variable/moving interest rate, then probably it changes from 3% – 10% over times, meaning you will pay maximum of 10% x $500,000 = $50,000 per year when the interest is 10%.

Salary / Income and Inflation

During 30 years of span, inflation will eat up the value of money. That’s why $1000 10 years ago is much more valuable compare to $1000 today. With the same analogy, say if a salary of fresh graduate engineer is now $60,000, 10 years ago, it will not be $60,000 much less as somehow it will greatly determine by inflation rate.

In other words, assuming the same position and responsibility in a stable job market, income (i.e: salary) will generally go up with the proportion of inflation. For example: as Engineer you earn $100k per year. Ten years from now, will you still earn $100k? The chance is you will earn much more than that, not only because inflation adjustment, but also with the promotion in corporate ladder (if you are in business, from the growth of your business as well).

Therefore say the Engineer above buy the above property. So, with $100,000 salary per year, he need to pay $25,000 per year. The proportion is 25%. Ten years from now, say the salary is now $150,000, then with still paying $25,000 per year of interest, the proportion of the mortgage is only 17% then.

Making inflation and time your friend

This is why Robert Kiyosaki, the Rich Dad, make a remark that “Savers are Losers” : if you have debt – especially the large one, time and inflation become your best friends. Over time, thanks to inflation and increasing income, the proportion of the debt become less and less. In other words, over time, the mortgage become easier and easier. In this case: yes, maybe our Engineer a little bit struggle with $100k salary and $25 mortgage, but if it’s become $200k salary and still $25k mortgage per year, I don’t think it’s big matter anymore. It gets easier over time.

And to top it off, at the end you can actually make the bank to finally pay off this mortgage with their money. Isn’t that great?

So, What Then ?

Of course, the best use for your extra money is for investing. Do not ever consider your extra money to be used only for consumption or lifestyle – unless it’s being budgeted before. For example: you just wont $10,000 from lottery. Rather than use the money to buy new LED TV or jewelry, then it’s better to pay off your mortgage. But even better if you use the money to buy some good blue chip stock that can give you return and growth.

The simplest form of “investing” is put the money in high interest saving account, but this “strategy” is not too effective as the return is pretty low.Investing is literally a race between inflation rate and Return of Investment – as long as the ROI is higher significantly than inflation you will be ahead. And this will give you double benefit. Not only the homeloan become easier to service overtime, the passive income from investing will make your wealth come faster.

But before do investing, make sure you read this: Postpone Investing! Do this First ! . After that, there are too many “strategy” to do some investing such share trading and property investing.

So? Happy Investing, then !

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• Inflation Is NOT Price Goes Up: Common Misconception

Interest: Saving higher than mortgage – a trick?

Normally, bank will offer a saving account or term deposit with interest rate less than their homeloan rate. Because this is fundamentally how a bank derive their profit (beside fee from service of course).

For example: a bank get $100 million term deposit and give customer $5million as interest with 5% rate, then they will give $100 million lending (i.e homeloan) with 6% interest and get $6million re-payment from homeloan customer and end-up they book  profit of $1 million.

But you will find sometime – for short period (“Today Only!” or “This Month only”-kind of thing) banks offer very generous interest rate for saving or term deposit account. Is this some kind of trick ? No, they are real…

Remember, for smart people: “If it seems too good to be true, check out first and don’t miss out” – only people with no knowledge and not smart will always say “if it is too good to be true, it usually it is” – do not follow them they are mediocre people that will be just that: mediocre – average.

So, the next question will be? Is it better off I put the extra money in this super high interest, or just keep it on the mortgage’s offset account ?

(btw, the reason bank offer such high interest is to lure people deposit their cash so they can boost their cash reserve/loan ratio.)

High Interest Saving vs Mortgage Offset Account

One tricky factor that need to be considered to make this comparison is the tax. As you know, income from earning interest from deposit or saving is taxable (I heard rumor that it won’t be in the future to encourage saving, but until it becomes law , this kind of interest is taxable)

So, let’s pretend we have $300,000 mortgage with 6.5% interest, and suddenly the bank (could be different bank) offer a high 8% interest online saving or term deposit. As you have $15,000 extra money (emergency cash) – will it better in offset account or in term deposit ? (Assuming your tax rate is 30%)

Offset Acc vs Term Deposit

If you just put money in the offset account, your mortgage is treated as $285,000 instead of $300k and “only” attracts $18,525 interest. Well, at the end still better than taking the high interest saving / term deposit (see table above for more detail comparison)

Of course, if the bank keep increasing the high interest saving account/term deposit, at some stage it will be more beneficial to take that instead of offset account. To calculate that threshold, just use the formula below the table (above).

At this stage the calculation will yield 9.29%. Meaning if the bank offer 9.30%p.a for term deposit/saving account then you will start to be better off taking that offer rather than leaving your extra money in the offset account.

The spreadsheet to use calculate above number (Just right click on the link and select ‘Save As’):
termVSoff.ods (Open Office’s Calc format)
termVSoff.xls (Microsoft Excel format)

Conclusion

If you want to take high interest saving/term deposit for your extra money, make sure the interest offered is higher than the threshold. Otherwise, leave it in your offset account.

Remember, One bad thing about term deposit is that you cannot take your money as you wish. In the case of emergency you will suffer a penalty to access your money.

I always  suggest to put your emergency money in account that do not restrict in when you want take it (such offset account or saving account) – although it quite prudent to have some handful under your pillow as well (not too much, though)!!

Good luck in making inform decision !

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• For the Savvy, There is No Junk Mail ?
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• Offset Account: A Must Have For Your Mortgage

Win-Win Benefit for All

Great Offer?

At first, it seems unreal. Imagine if you sell a TV and only receive payment 3.5 years later, do you want to do that business ? Maybe no. The same answer I would expect from companies, such “Harvey Norman” who regularly conduct this special offer.

So, if they also don’t want to be paid 3.5 year later, how does it work? The answer lies on the “joint venture” between the companies who promote the offer and some financial/credit provider company:

• The company who sell the goods, will be paid immediately by financial/credit provider company, as if it is a credit card purchase. (There will be usual commission for each sales, just like normal credit card purchase)
• The customer who purchase the goods need to open a new credit card account or personal loan account on the spot or online with the financial/credit provider company. This is subject to normal credit/lending criteria including credit check, income information, debt information, etc. Just exactly the same if you want to open/have a new credit card. (That’s why the term is “for approved customer only” and there is minimum amount of the purchase to make sure it’s worth doing).
• The “joint venture” aspect is that the company who sell the goods “introduces” their customer to the financial/credit provider company. The company who sell the good will have more sales, the financial/credit provider company will have new customer. Of course additionally the financial/credit provider will pay some “kickback” or commission as if the company who sell the good were their broker.
• The customer is also happy as they will have more buying power at the earliest time (now!)

For the credit provider, having somebody only pay 4 years later is what they do for business (Remember, mortgages span for 30 years) – so really no big deal for them to provide such credit facility.

The Hidden Temptation For Customer. Beware !

This is not really a trap or “gotcha” from this scheme, but more on “temptation” for the customer. How ?

1. The fact that you have additional buying power the same as you have additional money in your pocket will give you so much temptation not to “upgrade”. You know: want 40 inches plasma TV-  end up buying 52 inches one, want laptop with 120GB Harddisk/2 MB memory – end up with 160GB Harddisk/4MB memory, no plan to buy dishwasher – end up with not only dishwasher but also a small fridge.
   See, the problem is, this is really nobody fault except the customer. Only self-discipline will guard you from this, nothing else. The seller is on the business to sell more to you, that’s given. So, cannot really blame anyone except yourself if you buy more than planned.
2. When you open the new credit card/revolving credit, the company will give you more credit than the amount that you buy. For example: you buy $1000 computer using this scheme, open new credit card account, and the financial/credit card company may give you $5,000 credit. Yes, they block that $1000 no interest,  but you have $4000 credit ready to be used – and of course with that hefty interest at the order of 15%-20%. Yes, the company will explain to you that additional purchase will attract interest (if they did not explain to you then they miss their obligation) but along the way when the temptation come, there will be so much harder to resist that you have immediate $4,000 to spend.
3. Beware of  the “additional offer while you are on it“. For example: the computer you buy has 1 year warranty, how about buying 5 year extended warranty instead (or sometime they ask you as a requirement). Or since you buy this plasma TV, why don’t you add this HD set top box for additional $25?
   This kind of offer will not be limited while you are in store only, but it could be happening during the life of your “no interest” period.
4. At the end of interest free period,  there will be a temptation to keep it under credit (not paying it off) and then you start paying the high interest rate.

And final caution is beware the administrative fee / annual fee that will be imposed to the credit that they provide to you.

My Recommendation.

Remember, never ever buying consumer good with debt. But if you have the money already, and you qualify for this offer and can tolerate some hassles then, why not?! But remember to do the following:

• Put your money on high interest saving account (such online saving account or term deposit – don’t put it on your mortgage offset account as it will not “earn” that much). As example: $1500 purchase where the money can be put into 8% term deposit for 3 years will earn you almost $400. Not bad.
• Do not use the credit card or credit facility at all as you will possibly paying hefty interest from it.
• As soon as the “interest free” period ends, pay off the amount with the money that you have already and close the credit card/credit facility that you use.

Thus, as you can see… you really need self discipline more than anything to get the most of this mouth-watering offer!

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Saving Money Little By Little

What is Rule of Ten?

Rule of Ten is a plan to make a saving at least 10 percent of your money. Why 10%? It’s small enough for you can manage the “missing money”, but it’s big enough to make significant amount.

For example: if you have a salary of $1500 per fortnight, you need to save at least $150 for that paid period.  What you can get after a year (26 fortnights) will be just under $4000! And managing $150 per fortnight or $75 per week from your budget should be not that challanging if you willing to try the tip below.

Maximize your chance!

To get the best out of this technique, so some of the tips below and you will maximise your chance of success

1. Open a new account separately from your “normal account”.
   “If you cannot see it you will not use it” is the main purpose here. Your saving account should not directly and easily viewable by you. Open a dedicated saving account (maybe those no-fee “online” saving account) that should not be linked to your day to day internet banking or ATM.
2. Pay yourself first.
   Transfer that saving amount (10%) first thing before even touch the money from everything else. Better yet, setup on your internet banking a direct recurring payment scheduled to transfer the amount from your day to day account where  you receive the salary in, to that special “saving” account. Place the date 1 day after the usual day of payment. For example: if your salary always come at Thursday, then setup the transfer to be done by Friday . (Not less, as the crew probably were not ready.
3. Do not over-commit the amount.
   If you can afford to save more than 10%, that’s great.. but you need to do this continuously and should not overburden yourself. The problem if you commit too much is that at one day you will stop and start using the money and it defeats the purpose of the saving. Actually if you really tight, start with 5%. Better smaller but consistent rather than too big but you cannot commit.
4. Separate this “saving account” with other account such mortgage offset account.
   The idea is, if you have extra money, put that extra into mortgage offset account to help you reduce the amount of interest paid every moneth. But of course if you need more money to cover expense you can always get it from this offset account. The reason to separate this “saving” account is that the amount of this saving is never to be touched unless really emergency or  until you achieved the goal.
5. Dont put this saving into term deposit.
   Having some extra money on the bank earning no or little interest will tickle you to put it on the term deposit instead. But this again defeat the purpose. This saving money is supposed to be your emergency fund that you use on rainy day. A simple visit to the bank or ATM card should be all you need to access the money. If you put it on the term deposit, then you will need to wait until the maturiry date to access the money without penalty.

What next?

The first goal of this exercise is to give you the level of Financial Protection first. That is to have in that saving account the amount of money enough for you to live without working for 6 months. Of course the amount will be different from person to person who live in different city/country. Do your budget and determine the amount.

Once the first goal is achieved you can start allocate the extra money to top up your investing account. The investment account can be as simple as term deposit, or account for buying share/stock or other investing purposes. Don’t stop what really already started (regular saving), but from time to time if you calculate that you have more than 6 months worth of living cost money (remember to make sure you incorporate any increased of living cost), then transfer the extra amount to your investment account.

In general, if you have other measures in place (income protection insurance, life insurance, etc) you don’t really need more than 6 months. But of course you can just decide to make the goal changed to have 12 months worth of financial protection instead.

Happy Saving !

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• A Sweet Revenge: Let The Banks Pay Your Debt
• Income Protection: Your Salary Cover In Need

1. How Much You Spend For Xmas?

First thing first, you need to know how much you spend just for Christmas related expense: gifts, special donation, decoration, taxi for party, extra tip, etc. No need to be exact number, just roughly.. $500? $1000? or massive $5000 or more? I guess most of us, as long as we don’t leave the city will spend around $500 – $1000 for all those extra festivity expense.

Small Piggy Bank for Christmas

2. Little Help From Bank

Thanks to a little bit competition among banks, let us now open a new saving account – the one without monthly account keeping fee. No need ATM access, no need internet banking and not even need interest, if that help – as long as we can transfer (electronically via internet for convenience) from our existing account. It doesn’t have to be your normal bank, any bank or credit union that offer no-fee account. We will open a dedicated “XMAS account“.

The idea is old: piggy bank. But we make it more modern and fancy: a special bank account just for all Christmas related expenses. And since it does not have account keeping fee, it will not cost you a cent.

3. Contribute Throughout The Year.

If you have your salary weekly, how hard to contribute only $25 each time? Or make it $50 fortnightly? With this amount, suddenly you have extra $1300 cash for Christmas every year. Of course, you can add more if you can, but do not make it too high as it will come a burden and then make you stop. Even as little as $20 fortnightly will give you a handy cash just over $500 for Christmas shopping.

The trick is to make it automatic. Set up a periodical transfer with your internet banking  exactly the day you usually receive your salary. For example if you received your salary on your account every Wednesday fortnightly, set to auto pay every Wednesday fortnightly the amount that you want. Why exactly on the day? This is to do an illusion to the brain to not realizing that the amount has been deducted from your salary. After a while you will get used to it and maybe forget about it, only to find that extra $1000 on Christmas. Isn’t that nice ? (Note: just make sure your account does not go into negative if the transfer from your employer got a day delay or so – leave some buffer)

Again, don’t set the amount too high so that your budget will severely affected. This is just a little squeeze, if it is too much, you will alter it.

No Christmas Debt Next Year

So, yes, this year you may still have those xmas debts, but this year will be the last. Next year, you can be sure that there will be no debt anymore as your little piggy bank has started accumulating little by little – automatically.

Have a good new year, then !

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• No Related Post

(If there is a mortgage product that allow you to fix  the interest rate for long period: 20 or even 30 years with very competitive fixed rate – go for it. Unfortunately not every country have that great product, they have to juggle between lower variable rate or higher fixed rate with fixed short term – before revert back to variable rate
Note= variable rate = flexible rate = adjustable rate)

Let The Number Talks

For our discussion let’s say that we have $350,000 mortgage and we are considering between a Fixed Rate mortgage (7.59% interest, $8 per month account fee) and a Variable Rate mortgage (5.91% interest with $300 per year account fee). And the bank charge $300 to switch between the fixed and variable product. We also know that usually reserved bank increase by 0.25%. (All number are real as per December 2009). This can be summarized in table below:

Just by simple calculation, the difference between the fixed rate and variable rate can be seen below:

Yes, if the rate stay where it is now for a year, if you stay in variable rate, it will save you just under $6000 for a year -or- around $490 a month. And if the rate is going down, you can save even more. But, of course no body knows for sure whether the rate will go up or down next month. The movement of interest rate is simply impossible to predict accurately. Furthermore, the bank can just raise the interest without even waiting for the reserve bank.

So, for our analysis, we will do the worst case scenario. The worst case scenario is when the reserve bank increase the interest rate every single month. On the table below, we will see what happen if the interest rate go up for consecutive 24 months, each time with 0.25% considering all the fee and upfront cost. This is what will happen:

The “saving” shown on the table is accumulative from the first month. That’s why even the monthly repayment for variable rate is already higher than the fixed rate on 8th month, since you have previous saving, it only become break even on 15th month.

In other words, basically, based on the simulation above,  you will still in advanced should you stay on your variable rate until 14 consecutive months of increases. On the 15th month you can start laughing that “Lucky, I choose the fixed interest rate!”. But before that 15 months, the variable rate still more superior.

Well, maybe you said that increase every one is a bit too harsh. OK, how about an increase every 2nd month?  Here it is:

Fix or Variable ?

You can see that the break even between Fixed Rate and Variable Rate is even further away (28 months – inserting 1 month for every increase)

The SpreadSheet

I have prepared the downloadable spreadsheet shown above that can run on your computer (No macro, no virus – I promised ). Once you downloaded it you can generate your own simulation based on your own condition. This is just a simple spreadsheet but an eye opener.

If you have Microsoft Excel, you can download the XLS file, otherwise you can have the Open Office version: ODS file. (You can download Open Office for free from the internet)

To download, right click your mouse on icon below and select “Save Link As”

Note: any cell with black background and white font indicate that you should change the value to customized to your own number. You can change all the parameter to check your specific “what-if” situation. What if the bank increase by 0.50% instead of 0.25%,what if the “gap” between fixed and variable is not that much , etc.

Conclusion

If the gap rate between fixed rate and variable is too wide, then the answer of “should I fixed my rate or keep it variable” will be “no”. The simulation will prove it to you. But your own circumstances will dictate what’s best for you, so consult with your financial planner if you are not sure. But as I always encourage people to take charge of their own financial matter, you cannot be in state of limbo and unsure of everything. Get the solution and understand it first. Maybe it will take more time, but be it. Your life, your money, your responsibility!

Have a good mortgage shopping and have fun with the simulation !

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• Your Homeloan Also Depends On Your Credit Card!

Credit card scares you ? Don't be....

The Ideal Case

First thing first, your credit card should have some interest free period (55 days or better would be nice). No matter how low the interest is, should your card provider doesn’t offer interest free period, close the account and get another one.

The idea of credit card is win-win. The customer can pay by credit card without having to have cash on hand but without additional surcharge, the retailer will have the opportunity to have more customer and more sales with credit card facility and the credit card company will get a decent cut from the proceed. Everybody happy.

But if there is no interest free period, then the customer is the one at lost. So no good. You credit card must have interest free period.

So the mechanism is: you shop throughout the month and at the end of the month a statement arrive and you just pay off the whole amount. No interest charged. The main convenient factors are: you don’t have to wait the cash (salary or otherwise), your cash is accumulating / earning interest for you in your saving account while waiting for the end of the month, you can also accumulate reward point (if there is one) and convenience shopping throughout internet and normal shop.

Fall into Debt, Get Out Soon

One day, due to forgetfulness or late salary payment from your employer or other reason, you then miss the due date to pay the whole amount mentioned on your statement. What to do now?

First of all, once you know you will not be able to pay the whole amount before the due date, pay the minimum amount (always mention in your statement, usually only around 2%-3% of the total or some minimum # whichever higher). Failed to pay the minimum, not only you will be slugged by late fee, but you will flag your account to be at risk for a default. A reminder later will come and then get nastier and nastier. So, just pay at least the minimum amount.

Once you only pay the minimum amount, the hefty interest rate will kick start. All the purchase that you made will have interest charge from the day of purchase and all new purchase will also carry a daily interest rate as soon as transacted.

Now that you have fallen into debt, then let’s try to get out from it. The first step is: do not stop using the credit card – but with special method below.

How to use credit card which is still in debt:

1. Use it as “prepaid card”. So, if you want to do grocery shopping of around $100, transfer $100 into your credit card account before the shopping.
2. Keep using it, do not stop. One of the common mistake if a credit card gone into a debt is to stop using it. Why? Because of the monthly minimum payment.

For example: You still owe $2000 and have to pay minimum of $80 per month. And your shopping is about $500 per month. Then if you complete stop using the credit card, you now have to pay $580 ($500 for the usual shopping with cash or other method and $80 for the minimum payment).

But, if you keep using it as describe in item (1), then that $100 per week is more than the minimum. So, at the end of the month, you only pay in total $500 (all your transfer into the account is counted toward the minimum payment, hence no extra $80 at the end). However, please note that your  interest will accrue accordingly (meaning you will have bigger balance due next month). But this is the price that you have to pay to give you time to recover from the fall.

In conclusion: keep transfering money into the credit card account as much as possible before using it but keep using it!. Try to back out from the debt the month after if possible.

Deeper Problem

Let see what happen if instead of going out from the debt, but you fall even deeper into the debt. Your balance is growing each month and getting near to the maximum credit limit each day. Here is some items that you could do:

1. Very important. You need to manage, whatever it takes, to pay that monthly minimum
2. It’s time to put a break on your expenses. (You do have budget, aren’t you ?) Make a drastic measure until you have comfortable space, only buy essential only, no eating out, no coffee, no daily newspaper, just tighten your belt as hard as possible
3. But still keep using it as per above. Stop using the credit card will cost you more in term of cash flow.
4. If you haven’t got one, draft a budget ! Talk to financial expert that want to help you without charge you for the fee. Or even just pay the expert to get you out from this potential problem.

Take control of your financial matter is  the key. Remember credit card interest is very very high. If you need to get some loan, there are many other loan that substantially cheaper than credit card debt.

Final Words

So… I hope you are not running into credit card debt problem. Try to get help from friends or professional before it’s too late. Don’t be shy and embarrassed. There must be someone that will help you.

On the other hand, if you have proven to yourself that you are good in managing your only credit card, Well done ! Remember that credit card is just a convenience tool in doing your day to day transaction. With this in mind, consider to have 2 credit cards with similar value. Only 2 (two) though… no more…!

Don’t leave home without it !

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A little trick at Money Changer they don’t tell you about…

Most of the money changer / foreign currency shop will display “No commission” and people falsely feel that they just change more than enough money for the trip and then the unused money can be changed back later. But this way carries a hidden cost. It’s from what’s called “spread”.

Currency Exchange

For example: I am in Sydney Airport and about to travel to Hawaii and I want to change my Aussie Dollar to US Dollar, this means I want to buy $US and the shop will sell the US$ to you. In the shop you will see something like this: US$ Buy1.160 Sell 1.237.  This means they will sell US$ 1  for A$1.215, but will only buy US$ 1 for A$1.160. So my A$10000 then become $10000 / 1.237 = US$8084.  Now, after the trip you did not actually use all of it, you just use half , so you still have $US4042 in your pocket and you want to change it back to $A. So US$4042 will bought at 1,160 rate and become 4042 x 1.160 = A$4,688. So, your half of your $10,000 is no longer A$5000. It  is now only $4688, thanks to “spread”. (The difference of $312 is the profit for that shop – that’s how they make money)

So, changing more money than you need is not a good idea as you will have to pay the spread to the money changer. (Of course, if during that holiday, say the $A become significantly weaker, then probably you pay very little spread, but on the other hand, if the $A become significantly stronger then you pay even more to change back to where you were)

Furthermore, carrying cash is probably very risky as it can get stolen quite easily.

Credit Card Cost

Let us see about credit card. Yes, even with credit card, you will need to pay the exchange rate – no one will escape from this if they want to change currency. But who will likely able to give you the best currency rate,  a local money changer with tens of thousands proceed a day or Master Card/Visa/American Express with billions of dollar a day ? I would say the chance are the one with big proceed will give better deal.  Of course, not always, you will probably find some local shop that is “on sale” and give you better deal, but it is unlikely as these local shop also get their supply of money from their banks who deals with these credit card companies on wholesale pricing.

On other note, there are “transaction cost” that usually being charged for international transaction. And 2 middle men charge this transaction fee: the credit card company and your bank/card issuer. But the total amount of fee will likely no more than 2-3% (although depend on the country and currency. But if they charge extra for certain currency/country, the chance are the local shop will charge even more expensive rate). Check your credit card fine print for more detail.

Recommendation For Overseas Travel – Money-wise

So, knowing both aspect above, here is the list of recommendation for your consideration for your next overseas trip

Prepaid the bulk cost of your trip: airfare, hotel, guide tour, car rental, etc before you depart. And yes, pay it with credit card as you will accumulate points (but don’t pay surcharge for this as it will defeat the purpose)

Bring only minimum cash of the foreign currency only to cover petty cash: pay tips, buy ice cream, small purchase, etc. Just exchange whatever amount that you think you would use it up. Don’t plan to have the money exchanged back.

Pay everything else with your credit card: souvenier, taxi, restaurant bill, theme park ticket, etc… Everything else. Just pay with your credit card.

Have online access to pay your credit card from internet. You need to be able to transfer some money from your saving account to your credit card account as your credit card limit is not supposed to be that high. Do this maybe once a week or so at your convenient

How about emergency fund ? If you can have debit card: “Debit Master Card” or “Debit Visa” this will be your best alternative as the money will not be touched until you withdraw them in emergency and the cost of withdrawal is very very small.
Other alternative is to prepare traveler’s cheque for your trip. They have better spread in case you want to convert back to original currency and you can split it for your convenience. Say you want to carry $10,000 emergency fund, then you can purchase 2 x $5000 traveler’s cheque. This way, if you only need to access only some of that emergency money , you don’t need to cash out all $10,000.
Otherwise, just spare some credit limit on your credit card for this emergency purposes. But withdrawing cash from credit card is quite expensive, not only it attract the interest rate straight away (regardless of free interest day period) it also attract cash advance fee at the time of withdrawal.

Final words

The actual cost using credit card for overseas travel is just that “transaction cost” around 2-3% that will be charge for each transaction. But avoiding this cost by carrying cash is becoming more expensive at the end. Not only the risk of cash being stolen but financially, you will pay “spread” cost to put the cash back into the original currency. This is a hidden cost that not many people realize it.  Just bring and exchange cash for petty expense and don’t expect to change it back to the original currency.

So, as final word: just use your credit card on your next trip: domestic or international !

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How to Get Rich Explained: 4 Simple Plans

Without further due, these are the 4 simple plans that will make you rich but only if you do it all:

1. Earn more income. Make sure your income beat the inflation
2. Spend less money than what you earn. As less as conveniently possible.
3. Invest the difference between (1) and (2)
4. Protect all activity above: (1) and (2) and (3) with insurance.

Financially Wealthy

That’s it. That’s the very key secret of getting financially rich. The only caveat here is : you need to do all fours without exception. If you do all four, then the different between one people and other people is the speed to become rich. Some will be very quick and enjoy the the rest of their life as rich man. But for some, the speed toward richness is just too slow that they will sadly be gone first before it got there.

Plan 1:  Earn more income. Make sure your increase of income beat the inflation

The goal in this first plan is to earn as much money as possible and increase your income every single year above the inflation rate. For example: if the inflation rate is 5% then you need to increase your income at least by 6% or more.

But it does not necessarily mean asking a pay rise from the company that you are working for. Fine if you can get a pay rise, but your income could increase by doing freelancing, some part time job at late evening or week end, It does not mean you increase the price of your product eithr, but perhaps get some more customer will do.

Plan 2:  Spend less money than what you earn. As less as conveniently possible.

This is where your budgeting strategy come into the play. With budgeting, you need to make sure your income is larger than your spending. Delay instant gratification and just plan ahead of the actual need. Not only you become more in control on your spending behavior but this will maximize your saving. The counter balance is that you should still live comfortably. For example: budgeting only eating every second day is not only not comfortable, but it also absurd and not healhty. Don’t do that. But reducing eating out at the restaurant from weekly to biweekly is something that everybody can do.

Plan 3: Invest the difference between (1) and (2)

The goal here is to make return of investment as high as possible, which includes following aspect:

• The higher the saving (difference between income and spending), the more capital you have. The more capital the higher the return value.
• Choosing the right investment strategy is crucial. Putting money in saving account in the bank is the standard here. This method of investment is too slow and will not get you to richness level that you want. You need to be able to choose other investment strategy that give much better return.
• Accelerate investment with debt

Plan 4: Protect all activity above: (1) and (2) and (3) with insurance.

When I mention “insurance” it does not necessarily only insurance product that you can buy from insurance company, but in wider understanding. The goal on this plan is to protect whatever we already have as much possible against any unexpected occurrence a.k.a “risk”. This plan will includes:

• Protect your income with “income protection” insurance
• Protect your spending by purchasing insurance that limit your liability: car insurance, indemnity insurance, business insurance, health insurance, etc
• Protect your investment with some kind of hedging or capital loss protection such as put option protection or some other advance scheme. With this, even there is another global financial crisis that bring down practically everything down to its knee , the value of your investment is protected. Especially if you are using debt as leverage, managing risk is a must.
• Protect the whole activity by having “emergency fund” (before even do investing) that guarantee you can do everything as per normal for at least 6 months without any income at all.

Without all the protection above, you will be vulnerable of any mishap and unexpected circumstances. Remember nobody will really know what happen next. Just prepare enough for the worst, just in case.

Complicated ?

I hope the essences of those 4 plans above is not too complicated for you. Basically all your activity in pursue of wealth can be categorized into one of those 4 plans.

Now you know the big picture how to get rich, the next step will either:

1. to implement the 4 simple plans above into real tactical strategy how to do it the fastest –or–
2. to make excuses that the plans will not work

Remember the quote from Henry Ford: “Whether you think you can or can’t, either way you are right“ This is just the way things work. So, your call !

One important note before I end this article: the journey to wealth is not easy and require a lot of sacrifices, but it does not mean that you have to suffer. On the contrary you still need to make it enjoyable on the way, for example: make sure still have quality family time every day and weekend despite extra part time work, still budget for holidaying together every now and then, although not as often but you should still enjoy eating out with family and friends, etc.

Of course if you lucky enough to get that 50 million lottery jackpot, don’t worry about above plans. The question is how do you control it that you will get it someday ? Maybe do something more within your control like these 4 simple plan.

Hope this inspires you ! Take Care!

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All about Loan Serviceability

When you apply for a home loan on a mortgage, it’s all about loan serviceability. A bank or other lender only want to know whether your income can pay for the loan – in other word whether your income can “service” the loan. This is what they call as “loan serviceability”.

This is how it works. Let say if you want to borrow $500,000 with 5% interest rate and you only take the “interest-only” loan.

1. Hence you need to pay the bank $2083 monthly.
2. The bank will now taken into consideration of the living cost. They have standard table for your local city/area based on number of children, age of the children,  your marital status, etc. For example: In Sydney, family with both parents working with 2 children below 5 years old will have more expensive living cost compare to Family with boths parent working but with 2 children between 5 and 10. Well the reason is because the cost of child care is more expensive than primary school cost.
   Let say for this example the living cost is deemed to be $2500 per month.
3. Then the bank will now look into other loan: car loan, personal loan, shop card, credit card, etc. They need to know how much you need to pay/service those loan monthly. Let say your monthly obligation is $500 monthly.
4. So, total from 3 items above will be:  $5083 monthly

This is where the notion “cash flow is the king” come into effect. From example above, your income (can be combined with your spouse/parter) HAVE TO BE more than $5083 monthly or $61k per annual after tax. Some lender will prefer to have also additional safety band and add 10% or more into the calculation. But basically this is how it works. Your income have to cover this monthly commitment.

But how about if you have quite some money sitting in the bank, say: $100,000 sitting on the bank? Nope, it wont help. The amount of money you have in the bank will not affect your serviceability above, because:

1. You can spend those money without any control from the bank/lender anyway
2. Without regular income, the amount of money sooner or later will be depleted.

(You can though, withdraw this amount and make it as additional deposit so instead of borrowing $500,000 you only borrow $400,000 which in turn will reduce your serviceability criteria)

Credit Card and Mortgage

Your Credit Card Reduces The Serviceability

Some people will always pay off the monthly expense on the credit card, but some other people won’t. So, the bank or lender will assume the worse. If you are committed with the new loan that they provide and you have some kind of financial difficulties, the chances are you will max-ed up your credit card and pay only the minimum amount. So, this is the calculation that will be used by the bank.

The typical minimum amount to pay each month from a credit card will be around 2%. So every $10,000 credit card debt you will need to pay at least $200  monthly. So, in example above, as you pay 5% for the home loan, then additional $200 monthly will be equal if you borrow additional $4,000. Therefore in other words, every $10,000 credit card limit will cost you $4000 home loan serviceability. Although this example is mathematically correct, we will never know the exact calculation that the lender do when it comes to reducing the serviceability. Therefore , I would recommend this rule of thumb:

Reduce the serviceability by the same amount of the credit c ard limit.

So, if you have a few credit card with total credit limit of $50,000 then if you think you can service $500,000 home loan, then with because of this credit card limit, then expect that the bank will only allow you to have $450,000 home loan.

Even if you don’t use the credit card at all, the lender will assume you will use all of the credit. This is quite unique to credit card as for other type or fixed loan, such as car loan, if you already pay off 75% of the loan, then your “obligation” will be only calculated as only the rest of the 25% of that loan.

Things that You Can Do

There are 2 easy things that you can do to help with this issue:

1. Close the credit card that you never use. Ask for the closing statement (the one which explicitly mention in words that you have closed your account)
2. Reduce the credit limit to your comfortable level (read this article about maximize your credit card benefit before decide). Make sure to ask the statement that explicitly mention that you have reduced your credit limit.

The statement about your account closing or limit decrease is quite important. Why? The bank/lender knows that you have a credit card from other bank (from your credit history check) and you will be most likely be asked to provide the latest statement, but a change of credit limit or closure is not that obvious (they cannot really check it) – hence you just provided it for your own benefit.

Also you can do: close all of your credit card except 2 (read Benefit of having 2 (two) Credit Cards of Similar Value) and consolidate all of your credit card debt into your new home-secured loan. Remember home loan is the cheapest loan around, so maybe it’s a good ide to have them all consolidated.

As final word, remember that getting a new home loan should not change your lifestyle dramatically (you won’t survive as home loan is long term commitment). Also credit card should be just your convenience tools. So you need to balance between these two:

• don’t push it to the highest home loan possible by increasing your serviceability by closing credit card account such that you have no convenience anymore -or-
• having too much credit limit in credit card so that your home loan serviceability is too small.

Well, you decide – no one else does. Good luck !

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