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1. How inflation halves our money?
So what is inflation? One of the famous definition on inflation defined as a sustained increase in the general level of price for goods and services. In a simple words, as inflation rises, every Ringgit we own will buy a smaller percentage of goods or services. The value of Ringgit will never stays constant when there is inflation. The value of Ringgit is observed in terms of purchasing power. When inflation rises, the purchasing power become lower. For example, if the inflation rate is 3.5% in that particular year, the good or service that is priced RM 1.00 this year will become RM 1.035 the following year. Likewise if you do not spend the money, you keep the money under your pillow, the money will not stays as RM 1.00, it will become less RM0.035 which makes your money to RM 0.965 the following year.
What cause the inflation? Top notch economist even until today cannot say for certain what cause the inflation. Nevertheless they have come up with two theories that explain the value of our money will not remain the same.
- Demand-Pull Inflation: Too much money chasing to few goods. So if demand is growing faster than demand, the price of the goods or services will increase.
- Cost-Push Inflation:When the cost of operation of the company goes up, the company will certainly increase the final good product or services, in order to maintain their profit margins.
The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than our wages or not.
In recent case, it certainly increase way beyond our annual increment. So lets calculate how high our money become halves when we have the money under the pillow with the inflation rate rise to 5% (In Malaysia after the announcement of fuel price hike) in 5 years time.
We will be using the compounding formula which describe as follows
FV = Future Value
PV = Present Value
i = inflation rate (in percentage)
t = numbers of year(s)
Put the figure to the equation as follows:
Say if our money under the pillow is RM 10 000.00, our money will become:
RM 7738
So we have lost RM 2262 in 5 years time.
Call me at 019 325 6161 or email me at Nor Razi (norrazi@myproinvest.com) if you want to know more.
2. How to beat the inflation rate?
We have come to this point where we understood how our money get halves. So much so to say but we cannot do anything to prevent the inflation from getting high. So many people we lives with that make the inflation changes inevitably.
However we can still do something to protect the value of our money from becoming less. The technique call saving to the right place often protect your money without fail.
The bank that offer for fixed deposit and ordinary saving often time only protect the value of money from depreciating further. It don't really help us to protect and grow our money. In simple words, RM 10 000.00 we have today will have the same value that of 5 years down the line. Banks always offer interest of 4% to 5 % to their customer and since this interest is the same with the inflation rate, they just cancel off the gain and the loose and therefore the money value remain the same.
Stocks market and trust funds always gives us good return when we invest the money correctly. Though stock market could gives far better return to the customers, it always for the case for people who had mastered the business in stock marketing. For ordinary people like me, we can still have the profit from stock market business when our money is being controlled by experienced fund managers. This is call trust funds.
Many trust funds could offer better interest or profit from the bank. Say for example for Amanah Saham Bumiputra (ASB) that give people 10 % of divident and bonuses we can still have the profit of 5%, i.e. 10% dividend minus 5% interest = 5% profit.
We will be using the compounding formula which describe as follows
FV = Future Value
PV = Present Value
i = interest rate (in percentage)
t = numbers of year(s)
Put the figure to the equation as follows:
with the clean profit of 5%, our money will become:
Which mean you richer by RM 2763 in 5 years time.
But don't you think that there are other funds that outperform ASB. Unit Trust from Public Mutual always give superior dividend to its investor, far better than ASB. So you basically reap more with Public Mutual.
Call me at 019 325 6161 or email me at Nor Razi (norrazi@myproinvest.com) if you want to know more.
3. Managing the risk in volatile market
In order to minimize the risk of having great lost in the portfolios, fund managers always expose the fund under management into various equities that comply with Shariah requirements. This, often time help the fund manager to minimize the risk of losses. Say for example, a fund manager may invest in 3 ~ 4 companies that he fields, after thorough observation and studies, can increase the capital prize of a Unit Trust and also could give good dividend at the end of the companies fiscal years.
Even after due diligent, market downturn is inevitable for various reasons beyond fund manager knowledge. The best example of things that beyond fund managers controlled are like the fuel price hike, instability in the government, the closure of a company because of mother nature effect etc. More often than not, this effect directly affecting the bourse of a country and the bourse index may drop for couple of week or even months.
Some of the investors in Unit Trust may opt to switch his fund from equity type of funds into bond type of funds. The market seems to have her own rules where equity and bond react reciprocally. Thus, the investor may ask the Unit Trust Consultant to do the switching and therefore minimizing the lost that may incurr to their unit trust during the market downturn.
Nevertheless, this is not the only way the investor may opt to do. There is another methodology that would benefits the investor in the medium to long term period of time. And since investing in Unit Trust may require you to stay in the same period of time, it really doesn't matter anyway.
The other method is by averaging the prize of your Unit Trust. This method is known as Dollar Cost Averaging. In a simple words, the investor keeps accumulating the portfolio when the prize of the portfolio reducing. Knowing that the prize will bounce back again, the investor may reaps profit when the market is up again in a matter of months or 2 ~3 years.
For further understanding you can read the slide power point presentation on DCA HERE or surf from the right bar.
For more detail and explaination, call me at 019 325 6161 or email me at Nor Razi (norrazi@myproinvest.com)
A lot of people thought they know how to handle money and yet still struggling financially in their life. Most often than not, it always more days in a month than money. Simply because we short of money to live our monthly life.
You don't have to disagree with me right now. I just want you to reserve your opinion until this discussion over.
In university or college people do learn about money. It just scholastic approach on how we could balance the ledger so that we could show the profit or lost we made in a business. People like Susan Lecter who is Certified Financial Planner and later co-authoring Rich Dad Poor Dad with Robert Kiyosaki was also agreed that what she learned in business school never taught her how to become Financially Literate.
Robert Kiyosaki has a passion to tell the whole world about his idea on Financial Literacy. He described everything in his book titled Rich Dad Poor Dad.......... Go and get one........ you will never regret.
In understanding our own financial strength I subscribed to the system by Mr Kiyosaki known as Financial Statement. It comprise of few cells, i.e. Income Statement, Expenses Statement, Liability Statement and Asset Statement.
To understand how the Financial Statement works, I made the case study as follows:
You have just recently graduated from college or university and you got a job. Lucky you.
Financial Statement 1
So for the first few month, Financial Statement 1 suits you. When you get your salary, you pay for your rental, buy new clothes, buy groceries,etc. What you get, you spend. You always have enough money and have a little saving. It is good.
Now few months later when you have enough money for down payment for a new car you start to commit yourself with the bank. For that dream car. You smile. When this happens you start to subscribe to credit card because your account only suffice to buy groceries and to pay for rental and some gas. What about car maintenance, other accessories and what not. So you succumb to your own judgment of having credit card. Everything is Justifiable.
You tell your self it is investment of your life but the fact that you just commit a liability to the bank. You don't own the car. Bank own them. Ok, check if you have your car's grant in your hand........ See, bank own them. So Financial Statement 2 represent your self now. The Liability Cell is bigger than Assets Cell. Now it always more days in a month than money. I bet by 20th of the month you don't have the cash. You'll use Credit Card.
Later, you find your soul mate and want to have her/his as your beloved spouse. You get married and you happy because now know you have a combine income. So you start to dream of having a big house with four rooms. You buy the house as commitment of life, you said it is indeed you investment. True property always appreciate if not all. But they will give you profit if you sell them. If you stay at that house you just get paper value profit. Nothing more. Financial Statement 3 now represent you.
Financial Statement 3
So you owe the bank again and your Liability Cell has become bigger and bigger while you Assets Cell which you think will grow because you bought the house will remain small. Bank own you house, bank own your car, until you have paid all.
This is how we build our liabilities. The perception we received in school is that buy the house is actually investment. It will become yes if we make the transaction and we get the profit. Then it is deem true. Or otherwise, it is your greater liabilities. Think, what if something happen to your life and you get fired from your job. If you feel that your mortgage payment is under threat. Then it is indeed you liability.
So much so to say in building liabilities. In simple words, anything that is out from our pocket basically a liability. In order to create wealth, our expenses must be smaller than income, or we must make more income to the Income Cell.
They are many ways people can do to have more income. You can buy a house and selling it at the high price when the demand is there. Normally we book our house when it is just launch and the price will normally at the market price. When the house is completed and you about to get the CF from the developer, the price of the house will become higher. You sell it and you get the gain. Some people bought a house and rent it. As long as the rent is higher than the payment you make to the bank, it is still good. If otherwise, its not a wise investment.
More often than not, this type of investment require massive amount of money. That is why not many people could embark on this type of investment. People start to invest in mutual fund because the capital investment is not too big and the compounding factor still give good return to the investor.
Financial Statement 4
As a start, this seem feasible to most of the people in Malaysia. Financial Statement 4 represent people who start the investment in bond and equity market.
When the portfolios give you good distribution, you let the money reinvested again to the same portfolios and over a medium period of time, you see your money have double from the original value. Now you start to diversify your investment and the return or dividend from that investment you invest in another instrument and diversifying your portfolios. You start to invest in gold because gold is known to be very stable in the market. The profit you get from the distribution you reinvested back and the later you have enough money to buy and sell properties. Your make another investment instrument by investing in property.
Financial Statement 5
Financial Statement 5 represent this type of people. They have patient in investing and within 10 to 15years of time, they become millionaires.
By building the Assets Cell, we will allow the money to grow and the distribution we get from the investment is used to buy things or to take we to places we want to go.
This process call MONEY MAKES MONEY and the investors will not have to work hard to earn the money because the money is now working for the investors.
By doing diversification of investment instrument, we minimize the risk and we can be rest assure that our money grows money.
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