Thursday, August 16, 2007

Banks Credit Card - The World's legal Loanshark....

I came to a point where I think it is only right that the pupils in school should learn about financial management. Just as the author of "Rich Dad, Poor Dad" Robert Kiyosaki and co-author had mentioned in their book, the school do not teach financial management but only knowledge that allow people to only work for other people for the rest of the life, living the rat race, as he has coined it.


An example happened to the people around me. Sister-in-law (B) argued with boyfriend (A) over the buying of car issue. Why? Boyfriend B bought car by using credit card for the first downpayment. Boyfrined B could have paid off the amount own to the credit card, however, he dragged on the payment by paying very minimum (about $100 - $200 per month). With the kind of interest rates that the banks charged at 24% per year, the $100 - $200 will only cover the interest that the bank charge.


Two Issues:

1) $100-$200 will not cover part of the principle that the person own the bank, meaning that the money will go into the pocket of the bank.

2) if the interest is not paid, it will snowball, just think compounded interest, meaning more and more interest needs to be paid. So isn't the bank quite a big loan shark??? and with the backing of the law, they will declare the person a bankrupt when the amount reaches $10,000. Even the laonsharks do not charge so much interest (only 20%interest max), but the loanshark do not bring you to court to make you a bankrupt, only harass you and your family (irritating enough, but that is the price of borrowing). At least, the borrower can call the police to get rid of the loanshark, but the borrower cannot call the police to arrest the bank, right??


A few basic things to do


First, live within your means. With a pay of $2,500, I do not think buying a car is affordable, considering that the monthly expense of a car is about $1,000 (installment, petrol, HDB parking fee), not even considering the repairs of the car. Besides, if the person wants to get married, there must be savings (maybe $500 monthly maybe a good amount). Hence, that leaves a monthly expenses of $1,000, equal to roughly $30 daily. On top of that, there is still the yearly car insurance (roughly $2000+ for people age below 30 yr, age above 30 still need $1,300) and road tax ($600 - $800 depend on the type of car)


Second, pay yourself first as the Robert Kiyosaki had writtened in the book, is the same as savings. Saving allow the person to invest in shares, equity or unit trust or even invest in a business. In this new knowledge economy as the school always preached, I want to say that it is not a knowledge economy. The economy has never changed, it is always the rich getting richer, only money can maked with money. A new product like Windows by Bill Gates will also need some form of capital to start the ball rolling. Virgin Group (Group because of the over 350 companies) by Richard Branson started by selling records that he bought from some discounter store. Stock guru, Warren Buffet bought his first stock at the age of 12 years old. Warren Buffet started with three friends buying three pin ball machines to place outside barber shops to make money. Without money, how can Warren buffet buy pin ball machine???


Third, owning a house is not an asset, same as Robert Kiyosaki had written. Why? Because as most Singaporeans are still paying for the mortage from their CPF. You cannot own things that do not belong to you in the first place. Plus, Robert Kiyosaki re-define asset as properties that help you make money. Hence, the flat that you live in is not making you any money, so not an asset, but a liability, because the flat depreciates with age. Even if property price increase, it is because of inflation, hence, the loss is the oppotunity cost of owning the property. Plus, I have to buy another house at a higher price when I sell my home, so there is no gain in this.


Four, clear all debts. This is the basic and most difficult. One should clear all credit card bills immediately. Flat housing loans, even with HDB, should be cleared as soon as possible to avoid pay the large amount of interest. Some people do not see that for every $100,000, the interest per year is around $1,200. Imagine the amount of interest one has to pay for the 30 years loan ($36,000), that is alot of money. Plus some young couple took renovation loan, usually around $30,000 from the banks. My advise is if possible, it is wise to do the basic renovation, like flooring, kitchen and master bedroom, as basic as possible. It is always possible to do minor renovation when there is spare money. Car, obviously, is a no-no, unless there is spare money. As you know, I just bought an off-peak car for my family transportation during the weekend. After checking with Citibank ("Robber"), the interest (Interest rate @ 2.88%) for my car loan of $28,000 is $7,000+. There is a penalty to pay if I attempt to pay off early: 2% of the principle and 20% of the remaining interest that I own them. So my financial strategy put me in a better position that I will save for the $17,000 (rebate that I get for buying off-peak car) in my bank (earning interest) so that I can convert my off-peak car to normal car. Moreover, the amount to convert is prorated to the remaining months left of the car so I actually do not lose out.

Pray to GOD for wisdom in handling your finances. He is true and living, A GOD with the perfect plan, it takes us nothing to ask, right?? As written in the bible, Matt 7:11, If you then, being evil, know how to give good gifts ti your children, how much more shall your Father in Heaven give good things to those who ask Him?
The verse came after the following, Matt 7:7-10
7. Ask and it shall be given to you; seek and you shall find; knock and it shall be opened to you.
8. For each on who asks receives; and he who seeks finds; and to him who knocks, it shall be opened.
9. O what man is there of you, if his son asks a loaf, will he give him a stone?
10. Or if he asks a fish, will he give him a snake?

Last, be a good steward of your finances.