Your KPI for personal financial success: Net worth

Financial Success

HOW does one measure personal financial success?

Some think it is to do with the balance in your bank account while others use their salary as a guideline.

If you’re one to keep up with the Forbes list of top wealthiest, however, you’ll see that the measure of financial success is neither of these two values.

For example, topping the list is none other than Bill Gates with his net worth valued at a whopping US$79.2bil. Locally, sugar, palm oil, and real estate tycoon Robert Kuok take the spot with his net worth commendably valued at US$9.1bil.

In my previous article, I have outlined how investing with a net worth in mind is far more efficient as compared to only managing your investments with return on investment (ROI) in mind. ROI is in fact merely a single factor of several which affects the end result – your net worth.

What is net worth and why is it important?

Net worth is essentially a monetary value from which is derived after totalling up your total assets – such as the value in all your bank accounts, shares investments, unit trust investment, the current value of your properties, EPF, and so on – and then subtracting the total value of all your outstanding debts such bank loans and taxes.

While net worth is used to gauge your current financial standing, it also serves as an excellent key performance indicator for investing. It quantifies each good and bad financial decision you make thus rendering it one of the best measures of one’s personal wealth. How does this work?

Let’s say you decide to pay more than your monthly mortgage repayment to settle your loan sooner. While you think your wealth has shrunk due to the fact that you have less cash to your name, in the long run, you benefit from lower interest charges, therefore increasing your net worth.

For medium to long-term investments, it makes better sense to take a little risk and invest in a few blue-chip stocks than to take the risk-averse path by keeping any surplus cash in a bank account. The quality and payoff of the decision to invest in blue-chip stocks would be reflected in the growth of your net worth some five to eight years from now.

Having a positive net worth also provides you with financial security.

Let’s say, for some reason tomorrow you lose your job. A person with large savings and zero debt (high net worth) would have a more worry-free time in between jobs, as compared to the next person who had a high paying salary but zero in savings and a large amount of debt (negative net worth).

Similarly, a person with a high net worth has the freedom to pursue his or her life’s dreams and ambition even at the expense of drawing a low starting salary. On reflection, a person with a negative net worth will not have the luxury and freedom to do as such.

From this scenario, you can already see the different dynamics net worth provides as compared to the mere value of your take-home pay or the amount in your bank account.

How does one increase net worth?

To increase your net worth, you’ll need to shift your attention to these four drivers:

The four drivers of net worth growth are savings, ROI, risks, and costs. All these factors work in tandem to influence your net worth as a whole.

To increase your net worth, you’ll need to:

Increase your savings

Savings is the raw material needed for your net worth growth.

To increase your net worth exponentially, you need to invest. And to invest, you’ll need to have capital. Thus the more you save, the more investment capital you have at your disposal.

The good news is that, among all the drivers for net worth, savings is within your control. The amount you end up saving annually is entirely dependent on your discipline and saving habits.

For example, you would have accumulated RM549,143.57 at the end of 20 years if you have saved RM12,000 annually with an 8% return. For additional RM48,000 savings per year, i.e. RM60,000, you would have accumulated RM2,745,717.86 instead. The difference that you have accumulated in your savings could go a long way.

In fact, the more you save, the better it is because it makes you less dependent on the other three factors.

Increase your ROI

The higher the ROI, the faster your net worth will grow.

Naturally, a unit trust giving you a return of 8% annually is preferred over fixed deposits with a 4% return. The investment vehicle with a higher return would grow your net worth faster.

Beware of the risk-return trade-off. It is generally understood that the higher the ROI (more than 12%), the higher the risk. You could lose part, if not all, of your investment capital, an outcome that could be a terrible setback to your net worth.

Contrary to what some people might choose to think, ROI is a driver that is not within anyone’s control.

Decrease your exposure to risk

Risks are also beyond anyone’s control.

While you’re taking active steps to grow your net worth, you’ll need to also take measures to protect yourself against any risks of losing your net worth.

The higher the risks, the higher the potential of your net worth being depleted.

Health-related risks, for example, could deplete the net worth you have spent years to achieve.

Without medical insurance, you may have to fork out a lump sum of RM30,000 during a medical emergency. However, for a small monthly fee, you can transfer this risk to an insurance company, thus preserving your net worth value.

Investment risks should be taken into account as well. The Genevva gold scam and the infamous Madoff investment scandal are two perfect examples of investment fraud. Investors had lost millions, many losing 100% of their money because they were blindsided by the upside and failed to consider the risk of capital loss. Those who suffered the loss of their entire life savings also irrecoverably have their net worth affected.

Therefore, always take the time to do your research and due diligence and study your options before you part with your hard-earned money.

Decrease your costs

Most people may not realise this but the cost can be a factor that will deplete your net worth.

Therefore, one should strive to decrease all unnecessary costs that limit net worth growth.

For example, those who have purchased properties at a higher interest rate should strongly consider revising their interest rate now that the rates have dropped.

A difference between a 20-year housing loan for RM500,000 at an interest rate of 8.6% versus 4.6% is phenomenal – with the former, you’d end up paying RM548,995 in interest, where else with the latter, you’d only fork out RM265,672 in interest payment. A quick revision here could save you money otherwise spent unnecessarily.

Another cost to look out for is the cost of estate administration upon death.

Ironically, many of us spend the majority of our energy and waking hours working in one way or another to grow wealth, but fail to realise the one major cost that could cripple all that we have strived for when we pass on.

Estate administration costs can often reach the leagues of hundreds of thousands of ringgit. Drawing up a comprehensive estate plan for your net worth or inheritance could save you and your loved ones from unnecessary costs incurred (for example, legal fees, administration fees, and fees for court proceedings).

Final thoughts

Getting a snapshot of your overall financial health regularly will give you a measurement of progress over time, motivating you to reach your financial goals. As such, net worth should be measured on a regular basis – at the very minimum once a year.

Growing one’s net worth also involves a multi-dimensional approach.

ROI may play an important role in one’s pursuit of wealth, but it is a means to an end, not an end in itself. To assume such would be just like placing all bets on a singular number in a game of roulette.

Most investors make the rookie mistake of focusing solely on ROI as a means to grow wealth without realising that there are other elements at play.

To increase your overall wealth, it all boils down to the four drivers of net worth growth – savings, ROI, risks and cost, and how effectively you manage them.

Now that you know the four cornerstones of growing net worth, it’s time to put it into practice and steer your way to a financially promising future.

Source: http://www.thestar.com.my/Business/Business-News/2015/09/26/Your-KPI-for-personal-financial-success-Net-worth/?style=biz

Which is better – Debit or Credit?

Debit and credit cards are everywhere. While most of us understand the basics of each, there are some very important features that differentiate the two. And maybe even some benefits you didn’t know about. Ultimately, which is better – debit cards or credit cards?

Rewards and Benefits

Debit cards - Some debit cards offer rewards like cash back or discounts at some stores. However, debit card reward programs have become fairly rare since the government placed new restrictions on the fees banks can charge for their debit cards.

Credit cards - Credit cards offer more generous rewards. There are credit card reward programs that can help you earn airline miles, cash back or statement credits, and other benefits. If you’re able to use credit responsibly, these rewards can end up saving you hundreds of dollars every year. Also, look for additional benefits like car insurance when you rent a car and extended warranties on some purchases.

The better choice: credit cards

Credit

Debit cards - Debit cards don’t offer an opportunity to borrow money in an emergency. If you have a large unexpected expense, such as a car repair, a debit card won’t give you access to extra funds. This could force some to liquidate investment accounts to cover an immediate need, versus having the option to finance the expense for a couple of months.

Credit cards - For those who can use a credit card responsibly, it will help build your credit score. Paying your bill in full (and on time) each month and not carrying a large balance on your card will help improve your credit profile. The length of your credit history on an account matters though – so even if you pay on time, it won’t matter much if you consistently open and close accounts, or just open too many. In fact, these behaviors will actually hurt your credit score.

Although you can be rewarded for building and maintaining good credit, you can also expect to be punished if you develop bad habits, such as missing monthly payments or rolling over large balances. These and other actions will likely hurt your credit score, making it harder to qualify for new loans.

The better choice: credit cards, when used responsibly

Fees

Debit cards - With debit cards, over-drafting your account is a risk. There are plenty of reasons why it may happen – whether it’s overspending or a check may not clear as quickly as expected. While some debit cards reject a purchase when you have insufficient funds, others overdraft your account, which carries a steep fee. According to a 2014 survey by Bankrate.com, the average overdraft fee is over $30. This penalty typically applies to every purchase you make when you have insufficient funds, so if a couple days pass before you notice, you could have easily racked up hundreds of dollars in fees.

Credit cards – In addition to a possible interest expense, some credit cards charge a sizable annual fee which may not be worth it for all consumers. Doing a quick analysis to calculate the value of the benefits (if non-cash) or how much you would need to spend to recoup your fee can help you decide.

The better choice: this one really depends on the individuals’ spending habits

Fraud Protection

Debit cards - Debit cards also have worse protection against theft than credit cards. If you don’t report the theft within 2 days, you’re liable for up to $500 of the stolen funds. If it takes you more than 60 days to notice the problem, you could be liable for the entire theft. Even if you are reimbursed by the bank, you’re still without the stolen cash while the claim is processed, which could leave you unable to meet your obligations for weeks. With cyber theft on the rise, this is a significant disadvantage for debit cards.

Credit cards - Credit cards offer much better protection against theft than debit cards. If your credit card is stolen, the most you’d be liable for is $50. As mentioned earlier, fraud monitoring and subsequent protection is a very important feature.

The better choice: credit cards

Sticking to your spending plan

Debit cards - Since debit cards are connected directly to your bank account, it can help some over-spenders stay on track, as they’re limited by the cash in their account and not the credit limit given by the credit card company. This can help some people stay within their means, as they can only spend what they have now, not what they expect to have next month when the bill is due.

Credit cards - When you make a purchase on your credit card, you are receiving a loan from the credit card company, instead of dipping into your cash reserves. This sometimes leads to overspending, and credit card debt can be difficult to overcome. If you don’t (or can’t) pay off your entire balance each month, you will be charged interest. According to a 2015 survey by Bankrate.com, the average variable credit card rate is almost 16%. If you consistently carry a balance, the interest expense will negate most of the benefits of a credit card, and likely indicates there may be other financial problems at play.

The better choice: this one also depends on the individuals’ spending habits

The verdict: credit cards

When it comes to choosing debit or credit, your choice does matter. If you’re comfortable using credit, this is often the better option given the added security, rewards, and ability to build your credit score. No matter which type of card you choose, being financially responsible, and living within your means is sure to pay off.

Are You Maximising Your Credit Card Benefits?

Credit Cards in Malaysia offer a host of benefits and rewards - but are you really making full use of what you've been given?

Credit Cards come with a host of benefits in Malaysia. Unlike their counterparts in many other countries (which do not offer perks at all!), we're pretty lucky.

Cards here come complete with merchant discounts, reward points, free services, and cashback to entice users to spend. But many users forget to use their credit card benefits, wasting tonnes of money-saving perks every year.

Have you neglected reading the benefit brochures or bank website? Check out some of the most common benefits tied to credit cards that you could have been missing out on.

Free Services

Few people realise that many credit cards come with some completely free services. These include free travel insurance, entrance into plaza premium lounges, free night stays at select hotels*, cab rides from the airport, golfing green fees, and concierge services if you are overseas.

These services are completely free but often come with some requirements and are capped per year but you still can save a good amount by making use of them.

*Free night stays are usually earned if you purchase a requisite number of nights with the same hotel on your card.

Retail Discounts

You've probably seen those signs at retail or restaurant counters - discounts if you use X or Y credit card. The sign is only the tip of the iceberg. Every bank in Malaysia will offer discounts at retail stores and restaurants but because there are so many - countertops won't display all the participating banks.

Some banks admittedly have more participating merchants than others but it's always worth a try to find out if the stores you frequent are tied into one of the bank credit cards you use. To find out, best to check the bank website or contact them for a full brochure of retail discounts. Retail cashiers are not always clued in to all promotions so best to go back to the source.

Tip: Many retail cashiers are overworked and keying in bank discounts is low on their list of priorities. To make sure you get the discount you are entitled to - remind them about it before allowing them to swipe your card.

Passes and Priority Service

Credit card companies often team up with entertainment venues such as movie theatres, recreational centres (bowling, archery, futsal, etc), and select concerts. This gives cardholders priority lanes for booking and purchase of tickets or choice pick of VIP passes.

If you are keen on attending an event, concert, movie or simply have a fun time at an entertainment centre - keep your eyes peeled for bank logos. Some entertainment credit cards offer these benefits all year round, in which case, a call to the bank is all you need.

Reward Point Redemption

Reward points often go unused as many cardholders don't pay much attention to how many points they have or unwittingly believe that redemption is a hassle. This is no longer true.

Banks today offer the convenience of even paying for purchases with points alone at select retail stores or allowing you to redeem vouchers, items, or offset your card balance with a simple redemption phone call.

Do keep an eye out for reward point expiry dates as not all points are evergreen. You don't want to miss the chance to redeem free stuff!

Cashback

We left cashback for last because it is usually a perk that is automated and you don't really have to do anything to redeem. However, you could maximise your cashback returns if you pay attention to the fine print.

Check cap amounts, peak days, or merchants where you earn more cashback. If you follow the schedule - you could earn up to your capped amount of cashback faster.

How to Maximise Your Benefits

It's great that we've listed these benefits for you, you think - but how in the world do you go about using them? It all sounds much too complicated!

In truth, it isn't. There are only a few steps required before you are on your way to free stuff from your card all year round! Whip out your trusted cards and go through these steps to find out if you're really using them for all they're worth.

1) Peruse the bank website. Almost all bank websites will feature a page with the list of benefits they offer. For card-specific benefits, you will need to look up your particular card on the bank website. For general bank retail discounts - do a quick search on the site for the page on retail discounts and promotions.

2) Check your statements. Your statement doesn't just tell you the amount you owe the bank - it also carries featured merchant ads, your reward point balance, and often comes packaged with a brochure of benefits. If you've switched to e-statement, you can still find your reward point balance on it but you will need to do the next step for the discounts.

3) Contact your bank. If you didn't receive a brochure or have lost the one you did - give your bank a call and ask them if they would be so kind as to send the brochure to your registered address. You can also call them if you are planning a particular visit to a restaurant, hotel, or merchant and would like to know if any deals exist.

4) Check your email and spam box. Banks often send emails to users when select promos are ongoing. These are usually the bigger promos with more prominent merchants but it could just be the merchant you frequent. Keep your eyes peeled when these emails come in so you don't miss another promo.

Source: https://ringgitplus.com/en/blog/Credit-Cards/Are-You-Maximising-Your-Credit-Card-Benefits.html

Six Habits That Can Land You Deep in Debt

Debt is the worst  poverty (Thomas Fuller)

If you’ve ever been in debt, you know just how soul-crushing and stressful it can be. When you’re deep in debt, you have to plan your life around it. And if your dollars are stretched too thin, you may have to sacrifice other financial goals to keep up with those monthly payments.

Unfortunately, a lifetime of debt is something Americans know too well. According to Federal Reserve figures, the average household carried a credit card balance of $7,281 in 2015. And if you exclude the households with no debt, the average outstanding balance surges to $15,609.

Digging Your Own Debt Hole

That kind of debt usually doesn’t happen overnight. While some people wind up in debt through no fault of their own, the vast majority of those who are in debt end up there after years — or even just a few months — of poor money management.

Here are some unfortunate money habits that can lead to a mountain of debt over time:

Impulse Spending

According to a 2014 study of 1,000 adults administered by CreditCards.com, three out of four people openly admitted to shopping on an impulse. Those who responded positively said they purchased things when they were excited (49%), bought stuff out of boredom (30%), shopped when they were sad (22%), made impulse purchases out of anger (9%), and made unplanned purchases when they were intoxicated (9%).

While an occasional impulse purchase may not break the bank, constant overspending may be cause for worry. And if you make a habit of putting those unplanned expenses on credit, impulse spending can cause you to spiral deep into debt over time.

Eating Out All the Time

According to Commerce Department data released this year, restaurant and bar sales overtook grocery store spending nationally in March 2015. Yes, you read that right: For the first time, we are spending more on dining out than we are on groceries — and with disastrous consequences for our pocketbooks.

While eating out is only problematic if you don’t plan for it (and can’t truly afford it), a little goes a long way. And if you’re prone to put that restaurant meal on a credit card, this habit could do a lot more than eat up your expendable income; it could cause your credit card bills to surge over time.

Going Sans Budget

Even though budgeting is nothing more than a plan for your money, the dirty “b-word” gets a bad rap. Unfortunately, going without a budget is one of the easiest ways to wind up in debt. After all, how can you be aware of how much you’re spending if you aren’t actually keeping track?

Unfortunately, a fairly recent Gallup poll shows that only one in three Americans creates a detailed monthly budget or spending plan. When you consider that unfortunate statistic, it’s really no wonder so many of us are deep in debt.

Going Without an Emergency Fund

What happens when you have an unexpected medical condition that keeps you away from work? An emergency home repair? An expensive legal situation you must take care of?

If you don’t have an emergency fund, you might be tempted to rely on credit in the short term. And unfortunately, using credit as a crutch can come back to bite you. If you rack up debt due to an emergency and don’t have a plan to pay it back, you could easily wind up in debt for the foreseeable future.

Embracing Lifestyle Inflation

If you’re growing in your career, you might enjoy a hefty raise or annual bonus. What you do with that raise can have an equally important impact on your finances over time.

If you save that raise each year and learn to live on last year’s income, for example, you could have a lot of money stashed away by retirement. But if you allow your expenses to creep up as you earn more, you will always wind up living at the edge of your means.

That’s why many people refer to lifestyle inflation as the ultimate net worth killer; if you constantly spend all that you earn, your annual bonuses and raises won’t actually help you grow rich over time.

Making Minimum Payments on Credit Cards

If you’re making the minimum payment on your credit card, you should brace yourself for a lifetime of debt. With credit cards carrying APRs anywhere from 4.9% to 24.99%, your small revolving balance could grow a lot faster than you ever anticipated.

Remember how the average indebted household carried $15,609 in credit card debt in 2015? That kind of debt doesn’t happen to those who make a habit of paying their credit card balances in full each month. No matter what, making the minimum payment on your credit card is a surefire way to land deep in debt.

The Bottom Line

While good financial habits can help you avoid debt and grow your nest egg over time, bad habits can lead to a lifetime of monthly payments — and even financial ruin.

Recognizing toxic habits early — and doing something about them — is the best way to squash bad habits and replace them with behaviors that will help you in the long run.

10 Common Reasons Merchants Reject Your Credit Card

Did a rejected credit card leave you stranded at the point of sale? Knowing why this happens can help you avoid such mishaps in the future.

You’ve spent months scouring the Internet for the perfect washer-and-dryer combo to complement your newly renovated laundry room. Finally, you’ve located what appears to be the right match at a great price.

Suddenly the deal is off. Your credit card won’t go through, and you have no other immediate form of payment to use.

It’s happened to many of us, and it’s not always the result of financial irresponsibility.

Here are factors that could trigger a credit card rejection, along with tips to remedy the problem.

1. Maxed-out card

Exceeding your credit card’s spending limits can have negative consequences, both in the form of fees and denials.

It also can damage your credit rating because of the utilization factor, which accounts for 30 percent of your FICO credit score.

If you’re close to the limit, you can try to request an increase. But don’t use that as an excuse to go on a shopping spree and increase the height of your debt mountain.

2. Fraudulent purchases

If your credit card issuer suspects a fraudulent purchase is being made with your card — or if you have actually reported such fraud — it will prompt a freeze.

Such activity — real or suspected — also could result in the closure of the current account, followed by the issuance of a new card.

If your account is frozen, promptly contact your credit card issuer to validate the purchases.

3. Authorized user dropped from the account

Perhaps you have been an authorized user on a credit card account, but the person whose name is on the card has decided to revoke your rights. In such instances, you will be cut off from using the account.

You can also lose temporary access if the cardholder has reported the card as lost or stolen.

To avoid being caught off-guard, simply keep the lines of communication open with the person whose name is on the card.

4. Transaction holds

Transactions such as securing a hotel room or renting a car could result in a hold being placed on your account. If you are close to your credit card’s limit, the card could be rejected at a subsequent point of sale until you’ve paid the final bill and the holds are lifted.

To avoid running this risk, keep your balances low to maintain a large amount of available credit.

5. Foreign/international transactions

Foreign transactions can raise credit card companies’ suspicions about fraudulent purchases being made with your card, resulting in a freeze on your account. That can be true even if you are in the U.S. but making a foreign purchase online.

The solution? Before you travel, let your credit card company know that you will be far from home, including where you will be and when you will be there. And always alert them in advance about foreign transactions conducted online from the comfort of your own home.

6. Unusual purchases

If you make a purchase that seems odd based on your prior spending behavior, it may be flagged by the credit card company.

Two years ago during Black Friday, I headed to Saks Fifth Avenue in search of some goods whose prices were steeply reduced. My purchases came to $458. The card was quickly denied.

When I called the bank, it released the hold but told me that because I usually don’t shop at “high-end” stores, the bank figured my credit card information had been stolen.

Let your credit card company know if you plan to shop at a different type of store or to make a usually large purchase. At the very least, always have a backup way to pay.

7. Delinquent accounts

Ignore the balance due long enough and the magic plastic may suddenly lose all of its powers. Whether you suffer this fate depends on the issuer and your history with the company.

Other negative consequences that may result from not paying your bill include:

• Damage to your FICO score once the activity is reported to the credit bureaus.
• Lower credit limits if the issuer views you as a greater risk than before.
• Fees for late payments.
• A higher interest rate.

To avoid the risk of delinquency, set up payment reminders. If money is tight, reach out to the creditor to see if payment arrangements can be made or whether any additional remedies are available to you.

8. Card has expired

If you didn’t get a new card in the mail before your card’s expiration date, call your card’s issuer. It is possible you have been a victim of mail fraud.

Of course, it’s also possible that the card was mailed to you, and you mistook the envelope for a piece of junk mail before tossing it in the trash.

9. Transposed numbers

Sometimes you are asked to provide a ZIP code or the security code on the back of the card to confirm your identity at the point of sale. Mix up any digits, and rejection will follow.

You can always retry. But if you make too many errors it may prompt your credit card issuer to lock you out of using the card until you call to explain what happened.

10. Closed account

A credit card company can close your account for all sorts of reasons, and it doesn’t have to give you advance notice. CreditCards.com says:

Even if you’re not in default, an issuer can boot you at any time. The most common reason is that you’re not using the account often enough.

To lower the odds that your account will be closed, simply be a good customer. It’s a good bet that your card company will keep you if you use the card regularly and responsibly and always pay your bills on time.

Has your credit card been rejected at the point of sale? Tell us about it in our Forums. It’s a place where you can swap questions and answers on money-related matters, life hacks, and ingenious ways to save.

Source: http://www.moneytalksnews.com/9-common-reasons-your-credit-card-was-rejected/?all=1