There is NO such thing as Passive Income !?

21st century personal finance is moving away from saving and focus into the income arena. In short, the gurus are now educating public that saving is NOT good enough, hence sourcing for passive incomes on the another hand is a BETTER solution, than just saving alone.

While the concept is definitely true and correct but unfortunately as the hypes go bigger and bigger, the idea of passive income has been abused and more scams started to appear in the market, as if they were the gurus as well. Except the 'passive income' they refer to is barely promoting their own original same old products. The personal finance market has become so competitive that even some real gurus have no choice but to go beyond the line in their marketing effort - Robert Kiyosaki is no exception in spreading "Saving is bad".

Although passive income is very well defined here using income ratio 1:100 but is there really such thing as Passive income ? When I looked up dictionary, these words come up

PASSIVE : not participating, inactive, not reacting, inert or quiescent.

None of these words correctly describe a well implemented passive income. I use my best judgement to find a good location, a value property and a pay master tenant. I setup a profit take target and an exit strategy in my investments before I leave and let them auto pilot. All of these are very participating, actively applying my knowledge and experience, reacting appropriately when necessary etc.

The word "Passive" also gives people a psychology of No Need To Do Anything; As if an easy to get rich scheme with a better cover.

Hence this article wants to pursue all readers to stay away from the term Passive Income. Its negative, misleading and now abusive by the over-stress marketing effect. Instead, think of Smart Income !

There is no hard and fast rules for Smart Income. Any income can be earned the regular way or the Smart way !

An employee can use minimum of his time effectively to earn the highest salary or benefits. A self employ can easily leverage on Internet to earn income repeatedly. A business owner can employ a system to run his business. An investor can setup an autopilot mechanism.

So no matter which income quadrant you are in, it is possible for you to turn that income into a smart one. Its a matter of HOW you earn your income, NOT WHAT you do.

Are you pursuing smart income ?

Economy Politic Finance Quadrant

There are 2 BIG main external factors affecting our investment decisions

• Economy
• Politic

When the time is really bad (economy downturn and politically unstable), its best to park your money under something that is really stable, ie Gold. Which is by definition usable anywhere you go in anytime.

When its good time, invest direct to the stock market would yield very good return.

When the economy is not so good in a strong country, the government bonds or related money market would be able to yield higher return than just gold.

However, the most dispute solution in good economy unstable country is investment in property. This is mainly due to easier rental and higher chance of capital gain.

By simply moving money around depends on the political and economy situation, one was able to achieve more than 12% compound return for the past 20 years. That is equivalent to a 10X return.

But by no mean this is easily done. Some of the concerns include;

• how would one know exactly when economy/politic turns good/bad ?
• is Gold the ONLY option ?
• property may not easily liquidated
• how to choose which property or stock market ?

. . . which can be explored further.

Malaysia Best Rates 2010 March 11 update

1 month Fix Deposit

Most banks offer 2.25% now except a few ones. Most of the ones who are still stuck at 2.0% are international banks like Bank of China, JP Morgan, Bank of Nova Scotia and Alliance banks.

1 year Fix Deposit

Highest offered rates is 2.75% by Affin Bank, AmBank, Bangkok Bank, Bank of Tokyo-Mitsubishi UFJ, Deutsche Bank, Hong Leong Bank, Malayan Bank.

Base Lending Rate

Most local banks stand at 5.8% now with Affin offers the lowest at 5.75%. International banks offer lower rate starting from 5.50% by Royal Bank of Scotland.

Saving Accounts

Kuwait Finance House continues to offer highest saving interest rate in its KFH Savings Account-i at 1.5%. This account is also very simple and straight forward.

Other than that, Standard Chartered's Al-Wadiah Savings Account-i offer 1.0% for up to RM 10,000 savings.

CIMB's Air Asia Savers Account and Mudharabah Saving Account-i also offers 1.0%.

Other accounts who seems like offering high interest rate but require high amount of saving are excluded. Some special accounts like OCBC's iQ Saving is also excluded because their offer rate may seems high at 3.28% but their effective rate is hard to simplify for general public. In short, for those accounts, if you use up the benefits they offer then it would be a great deal but if you do not use any of those stuff then its better you stick to a lower but 'real' rate, simpler and more straight forward saving account.

Don't forget you can get a simple widget

like above to show on your blog / web site.

Just visit here to see how.

Car Loan : NEW Car

Maybank continues to offer the lowest car loan rate starting from 2.7%. However, this is NOT a standard rate apply to all applicants. The actual rate can range up to 4.3%.

Bank Muamalat offers 2.85% for both New and Used cars but it requires an admin charges of RM600.

Most other banks rates offer are 3.25% for New cars.

Car Loan : Used Car

CIMB offers the lowest 3.25% used car loan rate.

Most of other best used car loan rates offer are 3.75% by Affin, Hong Leong Bank, Alliance, EON and RHB.

Don't forget Car Loan rate is Fix Term Rate

which is effectively a MUCH HIGHER

than variable term rate

like House Loan and Fix Deposit.

House Loan

Affin remains as the best house loan offer at BLR - 2.3%.

Standard Chartered offers BLR - 2.25%

Most banks offers are BLR - 1.8%.

Multi-tiers house loan offers are excluded because it would be impossible to simplify their pro and cons without knowing the actual details of your particular loan details. Hence, only simple and straight forward house loan offers are compared.

Best Retire Young ? How possible is it ?

Is it best retire young? Have you ever heard some people retire early at their 30s ? Do you think they got lucky or they must have own some businesses to become rich before they can retire ? Here are the stories of 2 persons who retired at their mid 30s and they only have worked for other people before.

( due to consent issues, the figures are generalized just to illustrate the concept )

They started working at their early 20s with starting salaries of $1,800 to $2,000. After more than 8 years of working, their monthly income were more than $6,000 and then it didn't increase any much further after that. Usually the salary big jump occurred during career move and they have changed career once or twice. Together with bonuses, they have earned a total of $800,000 in total after 12-15 years of working.

Through out those time, they have saved aside a total of $175,000. Initially they save their money in fix deposit getting about 2-3% return but very soon they move on the mutual fund and stock market. Over the years, their average return is 6.3%. So when they retire, their savings are more than $260,000.

Their monthly expenses is about $1,000 and their personal inflation rate for their life style is 2.8%. So with this saving alone, it can last them until age 75.

They also have an EPF ( like 401K ) that is more than $100,000 at their mid 30s. When they can withdraw it at their 55, they should get at least $200,000. With this, they will still have a $500,000 balance when they are 100 years old. Of course they don't plan to live that long but this is their surplus money.

At the time they retired, they also have a home and a vehicle that are already fully paid off. The property was worth $100,000. They ended up paying about $120,000 for it with their 10 years loan. Conservatively this property is expected to worth more than $200,000 when they are 60 years old, just in case and in time for them to enter old folks home where care and friends are around.

The first few years they retired, they literary sit around doing nothing. But very soon they got bored and started interacting with they industry they are used to. From time to time, they provide freelance consultancy to their friends and earn some extra income too, ie. $10,000 to $20,000 a year sometimes. With these incidental incomes, it pushes their 100-year-old left over to $3 millions !!

They may have lived frugally all along but they are enjoying life the luxury way more often now. They don't run any business, they didn't get any lucky in their investments but they must have been good at their jobs because someone actually paid for their services after they retired. But then again, a $10,000 yearly consultancy fee doesn't sound like a real consultancy at all, its more like a very small incidental assistance in one small project only. On the other hand, a $6,000 salary employee is a good employee but its no where near CxO positions neither. So there can be many good employees, this is not one of those only-one-man-scenario.

Some of the keys to their early retirement would be;

• Save First
• Live frugally first
• learn to invest
• bought a motorcycle - just to get around
• bought a small apartment - just enough for him and his visiting friends

There is really no trick here. If there has to be one, they are singles. Some of them may be married but with no dependencies, meaning no need to take care of parent and no kids.

It is really not that hard to retire young.

One last key difference between young retirees and others, their hobbies do not cost them money. As a matter of fact, some other young retirees actually make their hobbies their life time businesses after they retired.

BEST rates in Malaysia - update 2009 10 06

This is a comment update to FREE Info on Best Rates in Malaysia :

Car Loan

Maybank still tops the list after many months offering starting from 2.7%. The trick is that not everybody can get that rate and further more its mostly for national cars only. So the way they published their car loan rate has successfully made them the best choice over the past few months.

2nd runner up is Bank Muamalat whose car loan rate is only 2.85% but charges a RM 600 admin fee.

House Loan

Affin bank still top the list with BLR - 2.3%, the trick is that they don't approve many loans. They have this self image that they are the 'high quality' house loan processors ...

2nd runner up is Standard Chargered BLR - 2.25%, who is relatively more flexible and more marketing oriented. That means they may listen to what you need, try their best to request benefits on your behalf, with the hope of getting your business.

Fix Deposite

FD rates haven't changed since the recession staying at 2% which really puzzle me. If the recession is really over, why isn't the saving rate goes back up yet ?

BLR is generally staying at 5.55% with a few exception where foreign banks are offering slightly lower rate.

How does Best Rate make its choice

How to use this Best Rate on your own web site

How to Find all the latest rates yourself

Mutual Fund is the highest return passive finance tool

Mutual fund is one of the personal finance vehicles that can provide us highest return with managed risk and yet do NOT require us to really know much about it.

According to malpf's wealth pyramid, Mutual Fund is at the top part of the pyramid, only below Shares or stock investment. However, the distinct difference between mutual fund and stocks is that stock would require you to REALLY learn 'something' about it before you can "consistently" gain from it. While in mutual fund, you can still gain from it no matter if you know or don't know much about it, almost like a Fix Deposit (well, not exactly).

Basically when you put your hard earn money into mutual fund, you are 'trusting' the fund manager who is certified as profession by your country, will help you maximize return for you. Although such certification could be questionable, but the chances to go wrong is way less than those who are NOT certified.

The key component in a successful company is the boss, the key to a stock is its CEO so the key to a mutual fund is its fund manger. It has been emphasized before that you should follow the fund manager, not the fund itself.

There are only a few key components when investing in mutual fund;

1. Fund Manager : who make the decisions for this fund, have they been performing well ?

2. Objective of the fund : what this fund will and can invest into ?

So if the fund manager or the company is 'somewhat' reputable and the fund's objective matches your own personal view point, you can rest assure to put your money into that fund.

Not as easy as Fix Deposit where you don't need to worry about above 2 questions but 8-12% potential return (mutual fund) is very much higher than 2-5% return (FD). So the effort needed could still be considered low, while the return could be high and continous - as a passive income.

Even if you do not know the fund manager NOR the objective of a fund when you invest into it, it is still NOT as bad as in stocks or businesses. When the right strategies are applied, what you have got yourself into is just lower return as the price of ignorance.

Having said that, its not a totally worry free finance vehicle. These are the common problems of mutual funds which are valid;

1. Expensive or High Fee Charges .... 5.5% is charged when you invest into equity mutual fund, as compare to stock's fee at 0.7% and Fix Deposit at 0% or NO charges. ( read here for comparisons of mutual fund with FD and stocks , compare mutual fund and stock's fee)

2. Fund managers have restriction to maximize return. ( why ? )

3. Unit price can still go down as well as up, so the so called 12% return may not be realized after all.

... and many more ...

There are also many different views on mutual funds ...

1. People who want to get rich, had experience in stocks or properties usually distrust on mutual fund.

2. Some active mutual fund investors buy and sell as often as they can, "keeping the fund will NOT earn us anything", they think.

...

However, ALL issues raised on mutual fund can be settled with only TWO strategies ...

1. To buy or NOT to buy

2. Dollar Cost Averaging

... more will or may be posted on each of the concern above ....

Other related articles

insurance vs FD vs mutual fund

use mutual fund to practise Buy Term Invest the Rest

minor differences between mutual fund vs unit trust

FREE info on BEST Rates in Malaysia

Its been a while since I start sharing the latest BEST rates in Malaysia including Saving Accounts, Fix Deposit, Car and House Loan, BLR etc. The orange color bar start with wordings "Best Rates..." at the top right angle on this page is an example. Or you can see one below here too ...

Since then it has been made into a widget and anyone can include this info at their own blog / web site by following some simple instruction here.

It is NOT easy to simply pick a number out of the long list of available choices and call it Best rate. Furthermore, there are so many considerations and factors that it is almost imposible for other people to 'decide' which rate is the BEST rate for you. Hence, lets review why and how malpf makes its list.

Fix Deposit is a finance tool you use when you have a sum of money that you will NOT be using for a while and you can gain Higher saving interest than normal saving account. So the higher the rate the better it is. Hence the interest rate is mark in blue color.

One of the greatest pit fall in FD is that if you withdraw before its maturity date, you may lose your interest or even have to pay penalty to it - liquidity problem. On another aspect, its best to increase the frequency of 'taking' the interest and put in back into the FD itself to enjoy the power of compounding interest. Hence keeping these 2 in mind (liquidity and compound interest), 1 month FD is the better choice compare to other longer term FD even if longer term FD may give higher return. Choosing compound more frequent with lower rate is better than locking the fund with a rate that seems high today.

Hence when comparing FD rate, 1 month FD is used and the higher the rate is the better.

BLR or Base Lending Rate is another important number where most of the variable loan will use as the reference loan rate. The lower this number is, the better it is. Hence the rate is marked with RED color. Just to add a note that business loan can benefit more from lower BLR than housing loan.

Saving account is one of the hardest ones to compare due to its large variation in future. There are junior and senior accounts, ordinary and islamic accounts etc. However, if we focus on the fundamental of saving account, it is a finance tool to 'temporary' keep our money to maintain our cash flow, ie. day to day liquidity. So the ease of interest calculation is important and we shall focus mainly on working adults ( Not Junior Nor Senior accounts ). For ease of calculation, multi-tier rates are less welcome. Certain accounts who impose minimum amount before paying interest is also less welcome. After considering these factors, we can pick the highest interest rate as the Best Rate (in blue).

Car Loan is usually fix loan rate. Car loan for used car and new car is very different. However, use car's selling price is very largely different as well. So when used car loan rate is too high, simply shop around more looking for a cheaper car will do. Hence back to the Best rates consideration, it is more reliable to consider NEW car loan rate where the car price is pretty much standard. In this case, the lower the number the better it is. ( red )

Lastly is House Loan, which is also a very tough call for Best Rate. However, borrowing principals from saving accounts, multi-tier rates are less favorable here. Getting 1-2 years of Zero interest by committing to potentially high rate in future is NOT exactly a great way to go. Therefore malpf only concentrates on the simplest BLR-X% where the Higher the X is the Better it is, ( blue )

Among all other best rates, house loan best rate may be the least influencing one because all other considerations like Zero Moving Cost and the most recent flexi all in one account, overdraft without the overdraft rate feature makes it really tough to generalize their good and bad.

Alright, thats the start of why and how these rates are choosen.

Check out below on some of the new Best Rates too, some of them may be useful to some people too ... ie.

FD12mth : 12 months Fix Deposit for those who are really sure will not touch those money for a year

Save1mil : Saving account that has MORE than 1 million in it

Save15k : Saving account thas has MORE than RM 15,000 in it

iSave : Islamic Saving account

UsedCarL : Car Loan rate for used cars

Allianz Power Saver Guaranteed 4% = 0.28%

note : updated content found at the bottom of this post 

Copy from Lowyat forum that :

Allianz Power Saver gives guaranteed 4% interest return. Every year invest certain amout of money on it and on the 5th year, the 4% return will be given out. Maturity of 30 years For example,

For RM100,000 sum asured (Every year payment of RM20,000. So total of RM100,000)

So in the 5th year, payment of RM4k will be given out for 26 years. So total collection of RM104,000 over the years.

Hmm wondering if this power saver is really the best in the market? For sure it is a lot better than the current FD rate.

If I understand it correctly, then it should be like below spreadsheet.



click here to view the spreedsheet

It is like you save into a Fix Deposit who pay you 0.28% interest rate ONLY !!

Far from 2.X % that is paid by most banks now ! Not to mention the calculation above is compounding yearly while real FD accounts compound monthly

Ofcourse they will pay you more money at the end of 30th year. That will boost up your effective interest rate but want to bet ? As shown in earlier posts in Capital guarantee plan ? and 2,400 get 800 = 33% ? Whatever the guaranteed maturity value is, the final effective rate will be less than 3%.

any kind of insurance guarantee return policy will provide you slightly less than FD return at that point of time !!

do correct any of the info here if mistake found, all confrontation welcome for the good of all.

Blogged with the Flock Browser

---

2009 03 13

Allianz personel showed up in the forum above and provided more info and complete picture.  First of all this is the full illustration provided :

One very important fact shared is that the life coverage in this plan is a Reducing Term Average which means the life coverage reduces as it approaches the end of 30th year.  I can safely assume the Sum Assured is $100,000 and as the SA reduces, the guarantee $4,000 pay out will eventually make up to the reduced Sum Assured.  So sum it all up, you will get back your $104,000 whether you die early or you don't die at all.

If you scroll to the right in the spreed sheet at the beginning of this article, this plan basically gives a 2.93% to 3.47% non guarantee return.  Although its NOT guarantee but looking at today's recession ( entry time ) and a period of 30 years ( exit time ), its almost no brainer this return can be easily paid out as promised.  So not exactly as FD but can be as safe as FD.

I hope this exercise benefits some people.  First of all, guarantee return is usually not able to be higher than Fix Deposit.  2nd of all, we cann't really assess a plan correctly until we get the full info and quotation.  As mentioned by this blog before, analyse the actual numbers, not the rate published by the promoter or sellers.

Buy Term Invest The Rest

In one of the old post I shared how to best use of your money among insurance, fix deposit and mutual fund ( click to see old post).

Basically it says if bad thing happens within the first 5 years, insurance is the better choice because you get $100,000+ while your FD/Mutual Fund saving is only starting to accumulate at $10,000+. However for the next 10-20 years FD and mutual fund are clearly better choices because they are more flexible and provides better returns, $300,000 and $600,000 respectively.

So the answer is to build your own portfolio !

I went back to insurance company P and asked for a Term Insurance quotation for $100,000 which costs only $313 a year for 5 years. So I minus out $313 from my yearly saving $17,920. On year 1-5, I would only save $17,607. And because I am greedy so I pick mutual fund over Fix Deposit as my saving vehicle.

Wa lah ! If I die within the first 5 years, I will get more than $100,000 which is slightly more than the insurance plan earlier - actual amount would be $ 119,016 even for the 1st year where $100,000 paid out by the Term Insurance, and the rest is from my own saving.

If I survive through the 10-20 years period, I will still have all my saving plus its earned interest !!

Best of BOTH WORLD !! Isn't it ?

This is called

Buy Term Invest The Rest

Insurance vs Fix Deposit vs Mutual Fund

Insurance

I search around and found this, one of the best Endowment Insurance Policy I can find.  

Just a reminder that "Endowment Insurance" is a type of insurance you go for when you are aiming at SAVING !  ( read old post for more info )

Basically this plan says if you save $18,000 for 10 years, you will get $300,000 by the year 20th.

That is about D O U B L E your investment, not to mention the F R E E benefits you get from the insurance side.

There is a GUARANTEE payment of $100,000 to your loved ones should you not live through the period ...

Fix Deposit

If you save the same amount of money every year for 10 years .... you will have $18,547 by the end of 1st year ( assuming 3.5% Fix Deposit rate ).  That alone, is triple of what you get on above plan.  Like wise, every year onward is ALWAYS higher than the insurance plan above.  

Pink graph is Fix Deposit @ 3.5% and Blue graph shows the return from insurance return above (P).

By the end of year 20, both FD@3.5% and Endowment Insurance provide similar returns at $300,000

Mutual Fund

My personal past 15 years of mutual fund return is 8-12%.  So lets says my next 20 years of mutual fund return is at 8% ... 

Yellow graph (return M) shows the potential mutual fund return ...

A whopping of $600,000 return by end of year 20 !!!  That is D O U B L E again for the other $300,000 !!!  By Doing NOTHING but choosing a different finance tool !!

So from the perspective of saving, Mutual Fund and Fix Deposit are clearly better option ...

However ...

Should things don't go as planned and you are no longer able to save ( passed away ), the insurance will pay $100,000 immediately in year 1 comparing to $18,000-$20,000 on the other 2 options.

So from Unexpected Incident point of view, Insurance clearly win over Fix Deposit and Mutual Fund.

At the end, what should you do ?  Answer to be revealed soon but actually has been hinted before ...

Mutual Fund - service charge

Equity Mutual Fund is a fund that invests into stock market directly, usually either to (1) gain maximum capital appreciation or (2) receive constant dividen payout as an income.

The standard advice is to read the prospectus, understand the purpose of the fund before buying it.  Public Mutual is the largest private mutual fund company in Malaysia and this is a sample of prospectus.  All the important stuff are highlighted at the top.

First thing that put people off is the varies charges and fees.  The biggest chunk is Service Charge at about 5%.

Because I put mutual fund in between Fix Deposit and Stocks in my pyramid, I can compare mutual fund with either FD or Stocks.

Mutual Fund vs Fix Deposit

The way I understand bank is they promised me a FD return and then use my money to earn a bigger return.  But bank does not disclose how much their cost is.  So if mutual fund is doing the same as what bank does, and if they disclose 5% as their 'cost', its ok for them to charge me 5% as long as my final return is larger than FD.  

My FD return now is 3%.  So if they charge me 5%, then their fund return should be AT LEAST 8%.  So I browse each and every fund for their past 1 year return from this link.  

Unfortunately a lot of fund shows a huge drop in late May and I don't really know why.  Before I find out why, I also decided I should look for one fund that is as steady as FD and should have a Always Up trend.  ( a new requirment I add after I browse these graphs )

Finally I found one, like below.

So this seems like one mutual fund that I can use to replace my Fix Deposit.  From the chart itself, it seems like despite the current market down turn, its producing 50% return for the past 1 year.  So I would consider this to replace my FD.  

Mutual Fund vs Stocks

My stock invesment is charging me 0.7% each time I have a transaction.  Meaning each time I buy and sell a stock, I am charged 1.4% of its average price.  Mutual fund charges me at 5% which is quite high.  However, if I buy sell 4 stocks, then the total charges I have paid is 5.6%; which is quite equivalent to the charges I paid to mutual fund.  So if I can find one mutual fund that already invest into 4 or more stocks that I am interested in, then its worth while for me to buy that mutual fund, else I will pass.

Like wise, the factor is 4x.  Says if my normal stock investment practice is buy and sell within one year, then the only time I would buy that mutual fund is if I plan to keep that mutual fund more than 4 years.  On the other hand, if I buy sell a stock more than 4 times a year, then it may be worth while to buy the mutual fund and keep for one year instead.

So finally I come up with a formula for myself about mutual fund investment as an alternative to stocks, for my own portfolio :

Basically the formula says, instead of me buying and selling many stocks many times, I may as well leave it for the fund manager to do it.  The 5.5% charges is relatively low IF compare to my large number of transactions.

Like wise, if I am interested in one particular company and plan to buy its stock to keep for life, then I should NOT consider mutual fund at all.

I have 2 sets of stock invesment account, (1) one is long term where I plan to keep them forever, (2) the other is where I 'play' with the speculation using all kind of methods.  Account (1) has nothing to do with mutual fund.  But I use a lot of mutual fund as the 'base' for my Account (2).

In Account (2), one month alone may already have more than 20 stocks transations.  So the 5% charges in mutual fund does not really bother me that much relatively.

I also have many mutual funds before I learn to buy stocks and started my own businesses.  Most of my mutual funds are more than 15 years old.  So 5.5% / 15 years = 0.367% per year.  Agains, doesn't bother me that much, especially when I don't need to do anything about them - a passive generator.

When I was shopping for what mutual funds to buy, I also learn that buying mutual fund means buying an industry.  For example, I know that    - h a l a l -   business in Malaysia is a good business in the sense that they will produce good income regardless, due to varies specific reasons including the unique economy policy.  I personally pursue for absolute freedom in open market so I do not really support those policies.  Hence I really have no interest to learn nor understand those businesses.  As a result I will not be able to buy those stocks with informative decision.  But I do have the 'general' idea that they will earn money despite the market fluctuation.  So Ittikal fund is one of the biggest portion in my portfolio for the past few years.

When I have some GENERAL ideas 

about an industry or a trend 

but I do not have interest

to learn the details

I choose a mutual fund

that matches my GENERAL idea.

And personally I do not mind paying someone 5% to help me check if my general idea is correct or not, for the next 5-10-20 years.

Note :  Not all mutual funds are charging 5.5%.  Some are lower than the others.  You may shop of cheaper fee mutual fund but I don't really recommend that.  Because when a fund manager is using 'lower fee' to attract investors, that also implies that fund manager has 'no confidence' that his portfolio can do better than the other fund managers.  If he is 'not sure' about his return, then most probably he is more speculating than performing fundamental invetments.

Lastly, do remember that Fund Manager is more important than the fund itself.

Bond

Bank lends your money to others to earn an income and in return promise you a lower fix interest rate.  This promise is usually govern by authority to make sure bank fullfills that promise.  Else someone else may take over to continue pay you the promised return.

When a company does the same, its call bond.  When a company needs to raise some money, they issue bonds to you.  You buy their bond and they promise you a fix return.  Bond is also govern by similar authority as the Fix Deposit in banks.  However, if a company fails to fullfill their promised return to you, there may or may not be anyone step in to continue paying you the promised return.  Sometimes glitch may happens in bond too.  ie. a global event like huge disaster affected the whole finance world and globally the bond pay out rate is revised downward.  For that short few months, those bond funds due in maturity may be affected - paid out in lower rate than promised and there is nothing much you can do to pursue your right.

Bond Fund to Bond is just like Mutual Fund to Stocks.  So a Fund Manager helps you to select all the Good bonds so that your bond return is almost as good as Fix Deposit, but with higher return.

A large sum of Fix Deposit is actually correlated to bonds, that's why in stable market, bond fund return is usually a little bit higher than Fix Deposit interest rate.

Scenario : Young Work Force

Scenarios for Young Work Force

1.  Get a job, earn some money.  ( Do something you like most and do it with persistency can earn you most in long run )

2.  Setup Standing Instruction to transfer 10%-30% from your income account to another dedicated saving account.

3.  When the saving account reaches 50% or the same amount of your Income account, save the extra to a 1 month Fix Deposit

4.  When the 1 month Fix Deposit is as much as 2-3x your monthly income, start another 3 months FD.

5.  Like wise you start keeping 3 months and 1 year FD.  Its totally up to you how much to put in each FD.  If you don't have patient, you may even choose not to start a 3 months FD.  But you HAVE TO do Steps 1-4 as minimum.  Else my guarantee to you is considered void.

( you can jump from 4 to 6, but you cannot skip 4 and 6 )

6a  Start putting money into Mutual Fund or Unit Trust ( for now, they are the same )

6b  The way you invest is like step 2, except it is not by percentage but a fix amount.

6c   Start a mutual fund with RM1,000 and automatically put in RM 100 every month. ( from saving account or income account ).  Make sure the automated systems runs for the next 3-10 years.

7a  Understand that stock market is a 'representative' of country's economy

7b  Select businesses that you like, have worked with and/of have high hopes in.

7c  Analyse the figures and management of the company to decide which business you would like to own too

7d  Buy that company shares ( if in doubts, just start with Blue Chips )

Results : If you start at age 22 with a monthly salary of RM 2,200

by only doing step 2, you will have more than RM 200,000 by age 52

by doing step 3, you will have an extra of RM 100,000

by doing step 6, you will have another extra of RM 120,000

So you have about half a million CASH by the time you are about 50.

It may not be a Huge Figure but don't forget, this half a million is by doing Nothing but only setup the initial steps.  It may take only the first 3 years to setup everything.

Banks ...

The principle is .... Bank makes money from you. So if you think you can make money out of banks, then you must be more naive than the banks.

Having said that, it doesn't mean you cann't make money WITH the banks, together with them ...

Unfortunately due to banking history and its old pratices, they will hide everything they think is benefiting you.  ( btw, before there are moneys, there are already banks ).  Although they are regulated by goverment to protect you, but they still have the room "Not To Voluntarily Offer You Information".  

With Banks, if you don't ask the right question, you will NEVER get the right answer.

So all the traditional banking products including Saving Accounts and Fix Deposit just let you get by.  You don't really earn anything from there if you consider inflation.  In the past, Banks didn't want you to know about Mutual Funds and Insurance.  But now they don't have that choice anymore.

In short, you put your money in Saving Accounts and Fix Deposit when you don't know what else to do with them.  AND you think its higher risk to keep them in your own place.  If someone stole your money from your place, you lost them.  If someone stole your money from the bank you deposit into, usually you will still get your money back, thanks to legislation and laws.

Inflation => You Lose

(Saving Accounts + Fix Deposit) - Inflation -> You Lose LESS

But you still don't earn.

(don't assume yet, mutual fund and insurance aren't going to get you out of your rat race neither, if its that simple, I wouldn't need to start a blog at all)

now Finance Planning starts ....

You already setup a Standing Instruction transfering a Fix Amount ( Percentage ) of monthly income into another Saving Account.  

Congratulation !  More than 90% of general population never survive till this stage.  Surprising or not, those who can make it to this stage are usually those non high flyers, the old guy next door or the geek who never leave his room etc.  And all of them became the millionaires next door that you never know.  ( Amazon agrees )

Basically what you have accomplished is managing your Cash Flow.  You have decided Future is Important and want to reserve some seeds instead of eating up all of them now.  Here onward is all about maximizing return of this Saving Account.

The key is Passive or Money Earns Money.  A way that the money grows by itself without you watching it, working on it ... if you are eager to talk about earning more money, goes back to the Income stage.  Increase all your want and explore all your wild ideas there ... here is about putting your wealth aside and comes back years later to wow yourself.

( The analytical part after Cash Flow is Asset and Liability but I leave this to later.  Lets stay on something simple and practical stuff first )

Basically you pile up your wealth pyramid like this ...

1. Bank Saving Account

2. Bank Fix Deposit

3. Bond Fund

4. Mutual Fund ( Balance Fund then followed by Equity Fund )

5. Stock Exchange

This is the part where challenges may come.  Different consultants share different approaches based on their own perspectives.  Not everyone pile up the pyramid bottoms up.  Not everyone draw the pyramid like that.

This is also the part there is no right and wrong answers.  Its all about how YOU want YOUR SAVING ACCOUNT to grow IN ANYWAY YOU WANT ...

So what should you do ?

If you are new to this and no other people is confusing you, just take this pyramid now.  Subsequent sharing will lead you to building your own pyramid.

If you already disagree with this pyramid or your existing consultants tell you otherwise, then this is a good time you take out a pen and draw your own pyramid now.  Whenever you have more than two ideas that cannot co-exist fully, then its time you pick the good from both and build your own.  Afterall, this is all about you yourself, not anybody else.