Future Money » debt

Budget Planning Using Credit Card

Zen Foo — Fri, 13 Nov 2009 04:22:25 +0000

When it comes to credit card and debt, the most common advice one will hear is; pay off debt, cut half the credit card and send it back to the bank. For those who have accumulated mountain of credit card debt, this advice is the most relevant. These people fear of credit card because they let their emotion of overspending run them over. They can’t control spending habit with credit card lying around, and that is why this advice best suit them. However, with a bit of financial intelligence, we can use credit card to our greatest advantage!

Higher leverage for your wallet. You don’t need carry a pile of cash anywhere you go, with this amazing plastic card, you can make payment on the amount a few times the cash you could carry in your wallet. Of course, you should not use it on the amount you can’t clear off on before the deadline. Otherwise you will need to pay interest.
Spending visibility. Average people will say that there is less control on the amount of spending when using credit card, I beg the different. I will say using credit card on every spending you make massively increase your spending visibility! Usually credit card companies will provide an online portal for user to view their statement up to daily basis, while the least credit card companies provide is sending you the paper statement. With this statement updated on daily or monthly basis, it is much easier for us to monitor our own spending pattern.
Convenience Input Data for Budget Planning – You can use credit card statement as historical input for your future budget planning. Best thing is you don’t pay for credit card statements. Bank track it down and send it to you, when you are minding your own business. If you review the credit card statement up to 4 months back, you can observe the pattern or trend in your spending habit. Is it increasing or staying average? If it is increasing, which items causes the jump in spending. Then ask the questions: Is the surge of amount causes by one-time item? Is it avoidable in subsequent month? List out and discount the one-time and avoidable items, then you can project how much you will spend in each subsequent month.
Credit Card as Cash Flow tool. Credit card provides a lot of flexibility in term of cash flow. Let say if you are a freelancer who get paid irregularly, credit card enable cash upfront for you to smooth out any urgent payments. Be sure you can make it in time for debt settlement before due. However, a little bit of interest can be unavoidable some times. One must know how to balance the cost of money with the urgency of usage. If the urgency far outweighs interest rate then paying the interest charge is still justifiable. For example: What to do if you are not able to pay the rental in two months time? The interest is probably ten dollars if you don’t pay in the first month, while you will probably get kicked out from the rental house if you don’t pay for 1 month.
Get Rewarded for Mindful Spending. While you spend on things you need, you also earn points on the purchase you pay with credit card. Most of the credit card companies have such system. One example of redeemable items is cash voucher. It is probably not much, but the thing is, this is something extra you get back while you spend. If you pay off credit card debt every month, this reward is like interest the banks have to pay you back. You don’t get those things by spending cash. Of course, don’t spend credit card for the sake of collecting points otherwise you will be out of control.

Read How Not To Be Millionaire on how you will never get rich by misusing credit card.

Why Can’t I Get Rich?

Zen Foo — Thu, 12 Nov 2009 06:16:49 +0000

Have you read How Not To Become Millionaire?

The moment Johnny chose to enroll into the private university, he has been placed onto high roller of debt and consumption. The average tuition fee of private universities is few times higher than those of public university. His peers, most of them are from rich and wealthy families whom also have a lot of free money, given by their parents, lying around for disposal. In order for Johnny to blend in to his new friends, he has no choice but to join his peers in most of the high consumption activities hence started to cultivate the consumption patterns.

1. Start Up High and Get Higher

Johnny’s father thought of kick starting Johnny life really put him high up above other fresh grads (Let us pick one of the fresh grad for example, his name is Jimmy). Jimmy started with monthly salary of $2,500 per month, yet he only owned a car half the price of Johnny’s. If let say 3 years later both Johnny and Jimmy decided to upgrade their vehicles, who do you think has a high barrier in term of cost to upgrade, Jimmy or Johnny? The answer is obviously Johnny. With his first car cost up to $70 thousands, he would probably think of buying a mid-size car that easily cost up to $120 thousands. Where by Jimmy would probably go for the entry model of Japanese cars that costs up to $60 to $80 thousands, still almost half price of what Johnny’s upgrade.

2. Opportunity Cost

Johnny paid $600 per month for 2-bedroom apartment, yet if he chose to share it with one of his friends; he would have saved half of the rental and put them into saving account. A saving of $300 per month can become $3,600 per year and $7,200 in two years. By the end of second year he could have $7,200 saved from the rental and started investing.

3. Long Term Surrounding Influence and Loss of Time

Johnny has cultivated the high consumption ways of life since early of his adult life. That also explained the method he used to release stress over busy working life. Partying and bar hopping, happy hour many nights in a week. He wasted a lot of valuable time in these unproductive activities when he could have done something more beneficial for his future, such as read up a book or plan for his financial future.

4. Instant Gratification and Pursuing of Material Items

Like most of the people, Johnny practice instant gratification. He bought expensive gift for himself, and roll them all into credit card debt. Even though he only paid as little as $200 per month, which he thought was a smart move, yet the most he spent paying every month was the cost of money, which is the interest rate. Remember that Johnny’s friends are mostly from rich family, throughout university life and they have been frequently hanging out together. The spending patterns and buying choice of his friend largely contributed to Johnny’s clothing and goods brand choices. Since his friends are from rich family, it is natural that they have very different perception on value of money against brand. Living under peer pressure, Johnny would gradually adjust his value judgments on material items, without him aware of it.

5. Asset or Liability?

Johnny doesn’t understand the meaning of asset and liability. Simply put, asset will put money into your pocket but liability will take money away from your pocket. When he bought his first condominium, he thought it is an asset, because the real estate broker and banker told him so. And so Johnny got the biggest unit in the floor. However, since he paid more than thousand every month, it is definitely a liability. It is an asset, but it is the bank’s asset because bank get paid in term of interest every month, and bank would get paid as long as Johnny services the loan.

6. Snowballing High Consumptions

A nice condominium unit in the mid-upper class area contributed heavily on Johnny’s future consumption patterns. First of all, a nice condominium unit will not be completed without a tasteful touch of renovation and interior design. Johnny borrowed heavily on personal loan in hiring contractor and interior designer. He spent all his saving in acquiring tasteful looking furniture to go along with his home décor. All his furniture designs has to blend well to the décor, else it would seem out of the place. Imagine what would happen if a piece of budget sofa sits in that tasteful design living room? And where can you put the cheap carpet? Besides, in order for him to blend into his rich-looking neighborhood, he saw no choice but to upgrade his car to a full sized. It costs him double the price of his previous car, another fresh liability rolled into his balance sheet.

7. Lack of Financial Intelligence

Even though Johnny earns very high income, he has no financial education. He couldn’t distinguish investment from gambling. That’s why he liked to relate stock investment to gambling which equals to buying a lottery ticket and not winning. He didn’t realize it takes a lot of financial literacy to excel in stock market, the financial intelligent required to read and understand financial statements and economical variables. The reason he made a loss in stock market and mutual fund was because of buying people ideas instead of his own intelligent. He didn’t realize hot mutual fund will eventually get cold. It is the slow train that takes you cross countries. Insider tips most of the time turns out to be a hype that speculators purposely created to make instant gain out of the loser – Johnny.

8. Work Hard to Increase Liability!

Johnny lived in delusion, believing that the more he earns, the more likely he will become rich. He hoped that one day he could also become wealthy by first having nice car and house. That’s not likely to happen. He didn’t realize his neighbors moved into the area only after they got wealthy. As Johnny’s income increase over the year so does his expense. There are many factors that could contribute to his rising expenses; his adopted way of life to instant gratify, pursuing of material items, and environment impacts. The problem will multiply when he has a family, Johnny could never imagine his way of life could have profound effect in his loved one, such as his wife and kids, and very likely they too, will adopt his spending patterns. This is when trouble is looking for more trouble.

Learn How To Pick Stock Like Warren Buffet

Zen Foo — Wed, 14 Oct 2009 01:21:42 +0000

When I did stock investment, I used to pick stock base on the name of the company and whether if i like the company rather than it is a profitable company. Profit From Panic (a book written by Singaporean author) described 8 steps in determining a good stock, i follow that ever since i read the book. I’m comfortable with his analysis techniques because he combines many winning stock picking strategies from some of the greatest investors such as Warren Buffet, Benjamin Graham and Peter Lynch. One of the famous strategies adopted and embraced by Warren Buffet is value investing which was taught to him by his mentor, Ben. Graham.

I extracted most of the stock trading strategies from the book which i think most useful. The information is comprehensive and easy to follow so i think it’s a good to follow that guideline everytime i want to buy stock. Now here is it:

1. Consistant Earning Growth – First criteria of the stock i will be looking at is the company’s earning for 5 continous years (or more if you want to). Of course this will require me to study through the company’s annual report for 5 years (Usually the company’s website will highlight this in financial summary). Well, you don’t need to read everything in annual report considering it is hundred page long. Just some key figures will do, like profit after tax or income from operation. The earnings need to demontrate some consistant growth over these period of time, let say a growth of 10-15% year to year. If a company’s stock demonstrates consistent earning growth of 10-15% every year, then i would it’s a good buy. However we also need to look at other criteria.

Where to get earning figure: Net income/Profit after tax in balance sheet.

2. Sustainable Growth – After determining the company’s consistant earning growth, now i have to consider the sustainability of the growth, after all investing in a company’s share is actually buying into their growth, future prospects and you think the company can do well in the coming years. There are several factors that could interfere a company growth and one of them is competition. In order to overcome this obstacle, the company needs to demontrate either one of these few characteristics such as brand name, large existing market share, economic of scale, etc. For example: Coke is a soft drink brand every one in this world will know, and Genting being the one and only one in casino business in Malaysia.

3. Debt - Profit is only considered as real profit when there is no debt. For example you borrow 100k to start up a business and your revenue is 20k per month. Minus off operation expense, rental, employee and your own salary, you can only pay back 10k every month. You will only be able to break even on the tenth month and started to make profit on the eleventh month onward (This is just an oversimplified scenario, corporate financial is excruciatingly complicated).

But realistically speaking there isn’t much company out there has zero debt, a little leverage is still consider as healthy. There is no sure way to determine how much is too much debt, however as a measure, the figure should show at least something like; the long term debt is no more than three times of the annual net income then the company is still considered as healthy.

In real life, a good company is always in expansion and growth, which is good thing, so most probably there won’t be chance where you will see zero debt. As expansion require borrowing of money, borrowing needs to be paid, and earning to sustain the payment, this constant cycle that can never end. So as long the debt-to-annual net income ratio is not too high, says 3-1 in this case, then it’s only ideal. I personally went through many industry leaders’ company financial statement and their debt-to-income ratio is not as low as described, a lot of them is slightly higher in leveraging. So if that’s the point, it’s very subjective and we need to look further.

Where to get key figures: Non-current liability and annual net income (also call profit after tax) under balance sheet.

4. Return on Equity is another key figure we need to consider when reading a company’s annual report. The calculation looks like this:

ROE(%) = Net Profit After Tax Divided Divided By Shareholders’ Equity

In the result of this calculation we have an idea of roughly how much return is for per share. The book says 15% and above, however, i think the percentage is rather subjective, consider it is very much depended on type of company, or the sector the stock belongs to for example. However 15% is a safe guideline the book can assume.

Where to get ROE: It is included in balance sheet, but a lot of time we need to calculate it.

5. Strong Cash Flow – In difficult times like economic crisis, or natural disaster, cash flow is very important for a company. Consider the company suddenly encounter drop of revenue because of drop in demand, and then income suffers. Excess reverse of cash can be used to fund debts and operation expense before economical rebound or demand recovers. Lacking of cash might result a company to go for desperate measure like issue new shares, retrenchment or even bankruptcy. To measure a company’s cash position, we need key figures; net cash flow from operation, capital expenditure, and revenue . Net the cash flow from operation of the Capital Expenditure we obtain the free cash flow. The percentage margin of free cash flow is to divide free cash flow by total revenue. The bigger the percentage the more cash rich it is.

Where to get the key figures: Net cash flow from operation can be obtained from cash flow statement under operating activities section. Capital expenditure can be obtain from investing activities also under cash flow statement. Revenue can be obtained from Income Statement.

6. Management is Buying Back Shares – The most likely reason for a company’s director or CEO to buy their own share is because they think the market has undervalued the stock and they are picking it up as bargain and they want to make money when the share price goes up.

In contrast, if you know that the management is aggressively selling shares, most probably the stock price is overvalued and a correction is in pending (Correction is term use to refer to adjustment of stock price by the market to it’s so called fair value). Another reason could be that the company is in some kind of trouble and only the management knows that the stock price is in for a big dip!

In the next part i will write about stock intrinsic value calculation. That is the part i spend most of my time in picking a value stock.