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1. FEATURE ARTICLE: NO GUARANTEES
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I received a question from a reader about a strategy of
maximizing EPF savings recently. The reader received a
proposal from one Hamba Allah and wanted my opinion on the
subject matter. Since practically all of us are affected, I
thought of shari ng the answer with you. (As usual, do enjoy
the spelling errors and broken English!)

THE PROPOSAL

EPF’s contributors can withdraw their savings in Account 2 to make monthly payments towards their housing loans.
NOTE: Total contribution every month will be at least 23%
of your total grosses salary (11% from employee and 12% from
employers) and out of this, 30% will be kept in Account 2.

EPF’s latest dividend is at 5.8%
Average housing loan charged by the bank is at 7.5%
Cheapest rate for personal loan is at 6% (Bank Rakyat and Bank Islam)
Average return by ASB is at 8% per annum
Average return by Unit Trust investment is 15% per annum

You can generate well diversified personal investment
portfolio and generate better return than EPF i.e. you can
own:

House
EPF
ASB Investment
Unit Trust Investment

With the same risk that you have now!

WHO?

Owned or plan to own a house
Committed to housing loan or plan to commit
EPF contributor
High discipline in saving
Looking for long term wealth
Not satisfy with EPF’s return ha..ha..ha..!

HOW?

Use the Account 2 allocation to pay your monthly commitment to the max.
Reason: EPF’s return 5.8% and Housing Loan 7.5%. You save
1.7% interest! Look at the big picture, on average you will
save the interest from RM30,000 to RM50,000 over the period
of loan.

Use that extra saving to commit for the cheapest persona l loan.
Use that capital wisely!! Create a balance portfolio, i.e. create a stable base and at the same time take a little bit more risks.
Invest on a 50:50 basis to ASB and Unit Trust
Reason: Your investment will be safe. It is balanced by
having both guaranteed as well as aggressive investment. On
top of that, you’ll be getting 6.5% income based on bigger
capital, i.e. based on your total loan commitment and not
based on your monthly saving amount. Why I’m saying 6.5%, it
will be illustrated in the calculation below.

ILLUSTRATION

Assuming you have:

1) Gross salary: RM5,000
Therefore your EPF contribution will be at least RM1,150
(23% X 5000). Out of this 30% will be allocated to your
Account 2, i.e. RM345. Bare in mind, with th at amount you
have every month, you can take RM25,000 personal loan.

2) Housing Loan
Total monthly commitment at RM1,000. You must be very
discipline with this concept! Maintain this commitment.

Commit at the personal loan. Split it into 50:50 basis and
invest it in unit trust and ASB. Your average return will be
around 6.5% after deducting your loan cost. (Average return
(8%+15%)/2 = 11.5% - Loan 6%).

Again, you must see the beauty part of this strategy, with
a commitment of just RM345, you will be getting 6.5% net
return based on RM25,000 capital. i.e. RM1,625 year. As
compared to not taking the personal loan, your return will
be around (RM345 X 12 X 11.5% X 50%) RM238 per year.

On top of that, you’ll be saving your interest on housing
loan of approx. RM1,500 a year.

Therefore, by taking the EPF’s monthly withdrawal scheme for
house financing and invest it, you’ll be saving and getting
an extra income of RM3,125 per year (RM1625 + RM1500) or
RM260 per month.

WHY?

This structure will not have to ‘kacau’ your monthly
expenditure. Meaning to say, it will not require you to
sacrifice your current expenditure. If you view this as a
long term saving, the investment risk is about the same as
the investment risk in EPF saving and at
the end of the day you’ll be having:

House (Value will be appreciated, itu tak kira lagi)
Cash in EPF
Cash in ASB
Cash in Unit Trust

You’ll be having liquid cash, i.e. in ASB and unit trust in
any emergency case that require you to use cash. It’s under
your discretionary

AND THIS IS MY ANSWER:

I must admit that my head was spinning after reading the
proposal. Why? Because this is an example of information
abuse!

Firstly, the proposer added in the EPF to make it look as if
you had more money than you actually do. The EPF money has
nothing to do with the investment in this case. It is to be
used to pay off your mortgage, which does relief your burden
a little. But if you take the ‘extra’ RM345 (from your
salary) to be able to afford the personal loan, you’re back
to square one because that money is now used to pay off the
loan.

Next point. Basically what the proposer is talking about
here is the concept of taking a personal loan and then
investing that money to make more money. Now I have no
problem with the concept because that is how we build wealth
- using OPM to generate more wealth.

However, while it is easy to borrow money, it not so easy
to generate more wealth with that borrowed money. Of course,
the math will say that you will make more money if the
return is higher than the interest charged. So if the return
is 10% and the interest is 9.5%, you should borrow the money.

However, what is missing here is the risk involved. Returns
are not guaranteed, which means that it can drop below the
‘promised’ or historical figure. If it drops below the
interest figure, it means that you are now losing money!

Worse, interest rates are often not capped. Banks can and
often raise the interest rates, which can only make things
worse for the borrower. Returns fall while interest rates
rise! Double-banger!

Next, I have a big problem with the 15% return from unit
trust claimed by the proposer. It will take another article
just to explain about rates of return but it is suffice to
say that the figure is incorrect. A more realistic return is
between 6 - 10% in the long run. (Please read my Handbook
“Growing Your Money” for details about rates of return.)

Finally, there is at least one error in the calculation.
The average return is not 6.5% but 5.5% (11.5%-6% = 5.5%).

But I suppose it all comes down to two things: (1) Should
you use your EPF money to pay off your mortgage?; and (2)
Should you take the personal loan?

Generally speaking, you should use the EPF money to help
pay off your mortgage. Why? Because the interest rate of
the housing loan is higher than the interest paid by EPF.
This will mean that you will pay off the loan faster and
therefore reduce the total interest paid and own the house
faster. Of course, this means that if and when the EPF
return rise above the interest charged for the loan, all
bets are off!

However, you should be careful about taking a loan to
invest in unit trusts or even ASB. The spread between the
return and the interest charged is too narrow, which means
you are taking a big risk.

As for me, I would only take a loan for investment purposes
when the spread between the return and the interest charged
is at least 5%.

Most important of all, be very very careful when getting
proposals about money. Many things are not what they appear
to be. One read and the proposal do sound interesting.
But when you look deeper, you will find flaws in them.
Just like this example where there are incorrect assumptions
about rates of return, no mention of the risks involved and
plain errors in the calculation.

Trust the answer has helped you.

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2. QUOTE OF THE MONTH
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“Your attitude, not your aptitude, will determine your
altitude.”

* Zig Ziglar *

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3. YOUR QUESTION ANSWERED
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SOALAN: Assalamualaikum en Azizi.Baru ni saya baca mengenai
petikan encik dalam Dewan Ekonomi..saya amat tertarik dan
minat mengenai pelaburan dalam hartanah, tapi masalahnya
saya sekarang masih student universiti,umur baru 22 tahun.
Saya belum ada duit beribu untuk melabur dalam bidang
hartanah…so,soalan saya:

1. Boleh tak yang belum ada duit melabur dalam bidang
hartanah?

2. Sebagai student, macam mana cara terbaik melabur dalam
bidang hartanah.

JAWAPAN: Cara yang terbaik untuk melabur di dalam hartanah
(atau apa-apa pelaburan lain) ialah untuk belajar tentang
pelaburan itu dahulu. Bertanya kepada orang yang arif
tentangnya dan baca buku dan majalah tentangnya.

Dalam kata lain, kumpul ilmu tentang pelaburan itu dahulu.
Apabila ilmu sudah di dada, wang akan datang.

Tanpa ilmu, wang yang ada pun akan hilang - pergi ke poket
mereka yang berilmu.

I know I sound like your father but that is the best advice
when it comes to money.

* HOT TIP *

Rea d “Think Lazy, Grow Rich” by John Ruck.