Friday, October 3, 2008

The Biggest Killer in Malaysia Personal Finance Planning

I did start this blog with Malaysia in mind.  All previous postings are general in concepts and may apply everywhere.  Now let's look at specific challenge in Malaysia.

So let's talk about CAR ... one of my daily routine item ...

I bought a 2nd hand car in 1995 for $10,000 and eventually scrap it in 2005.  
So $10,000 divided by 10 years of usage is about $1000 a year.  
Divide it further by 365 days is roughly $3 a day.

That means I had been paying $3 a day for that car.

Then I bought a Wira in 1998 for $55,000 and today its worths about $15,000.
Following similar calculation, I have been paying $11 every day for this car.

So I used to pay $3 for my vehicle back in 1995,
Now I have to pay $11 for the same in 2008.

This alone is more than 10% compounded infation !!

I haven't mentioned I bought a Hyundai for $90,000 in 2003 and now its worth about $20,000.  That is more than $38 / day !!

Ok ... some of you could be smart enough to see the flaw in above calculation.  I am still using my Wira and Hyundai.  So as time goes, the average cost of ownership should go lower.  It is TRUE BUT don't forget the car resale value also becomes lower as time goes.  So give and take, its still not much difference.

I haven't included car loan in above calculation.  The actual total price I paid is more than $68,000 and $110,000 for Wira and Hyundai respectively.

For every car you buy in Malaysia, you pay more than Double the car's value. That means at the moment you buy an imported new car, you lost half of your money instantly !

This is due to various ways how goverment increases the car price in the name of protecting national own pride, make of our own cars.  I was in Total Support IN THE BEGINNING !  And that was more than 20 years ago ...

Right or Wrong put aside.  Buying car in Malaysia is the #1 killer in Personal Finance Planning.  No matter how little your income is, if you do NOT own a car, you probably can still have a great solid finance ground.  And no matter how rich you are, the cars you own are burning big holes in your pocket, an easily 10%-30% depreciation rate.

Lastly, if owning car is a MUST like me, think of it as paying for the experience.  So the next time you get in your own car, be happy ... because you are getting more out of what you already paid.  Else you lost both your money and the enjoyment.  Drive Safely ... and Happily !!

How to Buy Car in Malaysia ( personal finance point of view )
1.  Try your best to buy car with CASH only
2.  Get the loan with the Smallest Amount and Shortest Time possible
3.  If possible, go for limited edition super famous car.  That way, it may become a capital that may appreciate.


** OUT OF TRACK 思 想 出 軌 ** said...

Very Interesting :DD
Excellent Post!!!

ChampDog said...

Did you mention about petrol? It makes the statement “Car is #1 Killer in Malaysia” even stronger. Surprisingly, owning and playing around with the car becomes a hobby to some of us (excluded me). It somehow always an interesting topic when we talk about cars during lunch with colleagues…

1. Try your best to buy car with CASH only
2. Get the loan with the Smallest Amount and Shortest Time possible

It depends! Some companies (like mine one) they help to pay some portion of the loan interest so it ends up the interest rate is lower than the FD interest. So if you have cash, you don’t go all the way and you may also go for longest time as possible in this situation.

Michael Tsen said...

Thanks OutOfTrack :D

ChampDog: everybody already feel the petrol pressure so no need for me to mention here ... :)

You have a very good point about company subsidized interest, however, unfortunately I have to say that is one of the most common mistake made, which I called a Paradox in Personal Finance.

For example, takes $100,000 as the cash you have now, Fix Deposit rate is 3%, Car Loan is 5% and your company subsidize 3%.

So your effective paying interest rate is 5%-3% = 2% which is 1% lower than FD rate 3%. You think if you keep your money in FD and pay your car loan slowly and extend the loan period to maximum, you can earn the extra 1% longer right ? ... WRONG ! Do some calculation and see what happen ...

1. If your loan period is 5 years at an effective 2% rate while keeping the rest of the money in FD at 3%, your total lost at the end of 5th year is $4,377.61

2. Period 10 years, your lost at the 10th year is $7,301.91

3. If you extend the loan to 20 years, you lost $13,124.28

So in all 3 cases, you still lost more money than if you would have paid with cash up front.

I have created a Google Doc for this but don't know how to share with you.

The trick in this case is:
1) Car Loan is calculated flat, or at the total amount. For example, $100,000 2% 10 years => $120,000. Then divide it by 10 years, your annual repayment is $12,000.

2) FD compound slowly month by month or year by year.

So if you annualize car loan rate of 2%, it actually comes up to more than 3%, which is why you lost at the end. And the longer the period, the more you lost.

( there is a factor to convert car loan rate to FD rate for comparison, I need more time to find my old analysis work )

In short, being subsidize is better than none. However, whether the subsidize allows you to by pass some fundamental principals, you will really have to run a proper calculation to determine that, case by case basis.

In general, I advise people to treat all subsidize as an income ( part of your salary ). And do not let that interfer with your personal finance planning. Having more income just means that you SAVE MORE monthly.

But ofcourse, if you HAVE TO buy the car, definitely claim the subsidize to the max lah !

Michael Tsen said...

Oh yea, about the Petrol. Actually Malaysia Petrol is relatively cheaper than the region and the whole world. So yes petrol does hurt but other countries hurt more.

So if comparing personal finance in Malaysia and other countries, petrol is quite favorable ... so are all the other controlled items.

ChampDog said...

Huh? You surprise me again. Isn't that compound gain more that the fixed loan rate? This is something worth to share if I'm wrong. :D

ChampDog said...

Send the doc to my gmail. :) Need to figure that out later...

Michael Tsen said...

compound upward is 'faster' than linear.

however, car loan calculation is not exactly 'linear'. It is an up front projection to the future, which has eaten into your future cost opportunity.

However, house loan is perfectly fine. If a subsidize of house loan is lower than FD, then yes ... maximize the tenure and earn the extra rate no matter how much cash u have .... :)

** OUT OF TRACK 思 想 出 軌 ** said...

We work in Msia and we need to own a car, thats the case - so we have to be the dumbers - thats the case!!!

Michael Tsen said...

not that bad geh ... car kills us in Personal Finance. So don't use "Personal Finance" money to buy car lor.

That goes to solution #1, buy with Cash.

Which means you will have to work on the Income stage. If you earn enough, then buy the car with cash just like how you buy that bowl of mee every morning, just like how you buy a fridge for your home etc.

Even further than that, think of it in business terms. Buy 5 cars with a business loan ( not car loan ), rent 4 out and the profit from that may let you drive your own car ( the 5th car ) for free.

If you don't achieve the above 2 types of scenarios, then settle with solution #2 lor ...

loan the smallest amount and shortest time

expanding from #2 solution, you can also use your house loan money to buy car ... that way, you also save in compound interest ...

Personal Finance is supposed to give us choices and solutions, not to get demoralize or upset ... for curse sharing, also go to my personal blog, hee hee hee ...

** OUT OF TRACK 思 想 出 軌 ** said...

My friends in MY are earning in the level to survive so I dont think many of them are able to talk about personal finance. solution#2 works well on them, they only need to be reminded to loan in such a way than the others, but usually thats not the case cos they might as well want to use more money Now than Later so they choose to loan at the longer period... thats why, all these while it intrigued me what could Michael Tsen offers for my friends... apparently, mtsen is great however my friends are are not doing great so... :(
I dont find any financial related info in your personal blog, but I do still wait for your reply/comment in Mt.s.e.n. about why MY is still a great choice. Continue to above paragraph, most Malaysian are living in fear and insecurity especially my single female friends and it is horrifying. Even I too felt the same - I had planned for a 7-day trip back to KL in Aug07, but I left in day4 cos it was way too expensive and inconvenient in many ways... I do admit that I get too comfy here as compare... but I do wanna a try to stay at homeland...

ChampDog said...

Out-of-Track, you Malaysian currently stay in HK?

Another option is to look for a job that you can work from home. Blogging is a good example. Then you can avoid *NOT* to buy car at all. :)

** OUT OF TRACK 思 想 出 軌 ** said...

champdog. Yes I am.
Hubby and I do wish to come back for good but we've jes chosen to back off, for time being.
Hubby could work from home and not needing a car, but I couldnt find a neighborhood with almost everything included: a decent school for our child and yet I dont need to move around to much for daily routines? In conclusion we are expecting to come back to relax in shaking legs with savings which we arent there yet :))

Michael Tsen said...

I don't have much and yet still everyday shake legs here ... :)

may be I start a new post about how to get a car without hurting ur pocket then ... but in short ... u can buy used car, u can bid tow vehicles, puspakom scrab etc. In some cases, you can even make money reselling those cars. But that is the 'income' part, not personal finance planning part ... :)

Michael Tsen said...

if u work as a manager in Mercedes or BMW, you get to use car for free too ... I am sure Proton and other manufacturer has similar benefits ... :)

the ideas just keep rolling ... if this really bother u and u focus ur mind to the right direction, u will be able to get what u want.

KCLau said...

you are definitely right..
I never feel happy whenever I pay the car installment.. except for the first few months (because the car is brand new at that time)

Anonymous said...

1) Is your blog talking about starting from zero and how to get good money with ultimate goal of debts-free future?

I searched your blog by 'loan' but I only get to see 2 posts... doesnt seem much helpful to what i want to find out.

2) What would you suggest for someone who is in debts, say negative of RM20k?

Your advice and guidelines and prompt reply are very much appreciated.

Anonymous said...

A couple of U-grad are having their cars being repossess, biscuits for lunch... Is living in KL all of a wrong choice?

Please start sharing all that you can for us who are in great danger and lost of life aim... oh we do have an aim - zero. Thats all we want to know how.

Michael Tsen said...

good feedback. I don't have any myth or paradox on debt other than saying "u idiot, what have you done !" thats why I didn't post much on it.

but I guess you are right I should have at least covered debt loan topics, the next immediate article released will be about what to focus on when in debt.

as for real help and if you are in Malaysia, you should immediately contact, make an effort to personally go meet them there. They will help you get through this tough time.

living in KL is not a wrong choice, living without a solid personal finance plan is. my recent post on Financial Freedom is a start of a series of how to cope with depression.

Anonymous said...

Thank you for your help, attention and reply. It is soothing and helpful. Im looking forward to your upcoming posts.

Being one of your faithful readers, this is the reason that I cant stand anymore bcos the social circle around us is in - status instead of +. Reaching zero is our major aim of life, how sad. And we are U-grads. What's it for to educate our children to pursue their studies in future? Did you start your + status by your own efforts or help from last generations?

I do wish I can forward this blog to my friends cos it is indeed worth reading, however, it 'hasnt' been much help to us, the majority of Malaysian.

Michael Tsen said...

you have a lot of good questions, I suggest you start posting those questions on a blog, that way more ppl can know the questions and perhaps more ppl can give answers too ... then its higher chance one day you may hear what you wanted to.

each of ur questions will have a long series of articles for it, in short ..

-ve life style is a result of today's finance system ( money is evil started that part )

a personal success has a lot to do with last generation, this part has started with, Who would you listen to will eventually link to this

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