In a recent post, I shared a few tips on how to save money effectively. Saving money is indeed a very crucial step to achieve a financial goal or to reach financial freedom. What does financial freedom mean to you? Essentially it means maintaining a desired lifestyle without having to worry about money. I couldn’t agree more that saving money alone will never get you there if you don’t know how to grow your money. It’s proven to be difficult for a novice investor to grow money through various investment channels that may pose risks that the person couldn’t afford to take. For example, invest in stock market with high volatility and no guaranteed returns.
I used to have a thought when I was a kid. “Why does it matter if I never know how to grow my money?” “So long I am debt-free, I will be OKAY!” Remember my first time buying a car, I forked out as much as I could for the downpayment and chose the shortest loan tenure. I was thinking, “Let me settle my debt soonest possible and I gonna be a happy man”. “I will be free from commitment on a depreciable asset!”. As I grew older, I realize that such thought is not grossly wrong but I have definitely missed the opportunity to narrow the gap to meet my financial goal. Debt is inseparable from your daily life and forms part and parcel of it unless you were born with a silver spoon.
Now, let me share with you the simplest way of growing money, LEVERAGE! You will appreciate why being debt-free may not necessary the best thing in your late 20s or mid-30s.
What is LEVERAGE?
Getting back on the topic of the day, what is leverage? Leverage simply means buying an asset with borrowed funds to generate returns. However, a person has debt doesn’t necessarily mean that the person is using leverage. It merely means the person owes money to someone or a bank. The purpose of leveraging is to acquire an asset using debt with the expectation that the appreciation of the asset’s value will exceed the cost of debt (i.e. interest). Many people with conservative mindset tend to work their asses off just to keep themselves staying out of debt, not knowing how to capitalize on the opportunities to grow their money. Now, let me walk you through how to use leverage in a few no-brainer ways to grow your money.
Leverage using Instalment Payment Plans with 0% Interest
Instalment payment plan is a feature that the banks or credit card issuers offers to the credit card users. It provides the users the flexibility to make payment for purchased goods or services and repay in equal instalments over a fixed period.
Instalment period generally spans 3 to 36 months. Most of the instalment payment plans offer zero interest with no hidden cost. That’s why many people tend to take advantage of instalment payment plan for large purchases like furnitures, electronic gadgets, etc. For those who can afford these items with immediate settlement, more often than not they will avoid such cumbersome method. That saves much of their effort to monitor outstanding balance and make monthly instalment payments.
The simplest way of growing money using leverage starts from making best use of instalment payment plan. Assume now you want to buy a Iphone X 256GB for RM5,000 online at Lazada. Instead of making full settlement out of your savings, here are the investment options that require minimal effort to generate returns if you opt for a 12 months instalment payment plan.
Option 1: Fixed deposit
Place RM5,000 cash as fixed deposit for 12 months with 3.4% interest rate per annum. Consequently, you can earn a return of RM170 in 12 months time. Fixed deposit rates typically range from 3% – 4% p.a. in Malaysia. (Refer here for fixed deposit rates comparison)
Option 2: Contribute to your EPF account
Self-contribute RM5,000 cash to your EPF account that gives you an average dividend rate of 6% per annum. As a result, you can earn a return of RM300 in 12 months time.
With effective 1 July 2018, EPF has scrapped the RM50 minimum ruling for members who voluntarily contribute to their accounts with a cap at RM60,000 per annum. As highlighted in my previous post, self contribute to your EPF account is one of the best investment alternatives with no effort required. EPF has consistently generated returns with dividend rates ranged from 5.7% to 6.9% for the past 8 years. The returns are clearly more captivating as compared to many investment offerings available on market. This can be done easily at your fingertips using internet banking.
Option 3: Peer-to-Peer Lending (P2P Lending)
Invest RM5,000 cash in P2P lending with an average effective interest rate of 12% per annum. You will earn a return of RM600 in 12 months time.
Peer-to-peer lending, also known as P2P lending. As explained in my earlier post, P2P lending is essentially loan of money to individuals or businesses through an online marketplace that matches between the lenders and borrowers. It may sound unfamiliar to you given that it’s still fairly new in Malaysia. In 2016, Malaysia became the first country in ASEAN to regulate P2P lending. Securities Commission (SC) had issued licences to six P2P lending platform operators in Malaysia.
The popularity of P2P lending has surged in recent days due to its attractive returns and low risk in nature. Investing in P2P lending can easily yield more than 10% return per annum. It is fairly easy to use for beginners and requires initial investment as low as only RM100. Personally I would recommend Funding Societies, the first and largest P2P lending platform in Malaysia. Quickash is also one of my favourite P2P lending platforms that provides principal guarantee on investment.
How to Start Investing in P2P Lending?
For those who are interested, you can click on this link to begin: Sign up to invest in Funding Societies. (Disclosure: This is an affiliate link)
Summing-up Instalment Payment Plans
It can make wonders if you know how to make good use of instalment payment plans. However just a word of caution, there are a few key points to take note before opting for an instalment payment plan. Firstly, make sure you understand the terms and conditions clearly to ensure there’s no hidden cost. More importantly, you need to make sure every payment can be made on time to avoid hefty interest. It could also hurt your credit history badly if you miss any payment.
Leverage using Housing Loan
In the aftermath of 2008 financial crisis, many people squeeze every penny out of their pockets to get their feet wet in real estate investment.
The property prices in Malaysia skyrocketed over the past decade. Up to recent years the property market begins to moderate. It’s not difficult to understand how leverage works in real estate investment and how people reap benefits from it.
Imagine you want to buy a condominium unit that costs RM300,000 and you have RM100,000 extra cash. Let’s assume you pay RM100,000 as down payment and get a bank loan to finance the remaining. Many people think that perhaps a higher down payment would be a great idea so that they won’t have a high monthly commitment to service. But what if you get a maximum financing of 90% for your first house and at the same time buy another unit with 90% financing as well? Let’s do a quick comparison between the two scenarios assuming you have struck a fantastic deal with 30% appreciation in the property value after 5 years.
Refer here for housing loan interest calculator.
The difference in return on investment is spectacular isn’t it? Don’t forget there’s still a remaining cash balance of RM40,000 in the 2nd scenario. What happens if you self-contribute RM40,000 into your EPF account that gives an average dividend rate of 6% per annum? After 5 years with the compounding effect of 6% p.a., RM40,000 will grow to RM53,529. That gives you a whopping 34% return!
Have you missed your boat?
For those who did not join the craze and ride on the property booming trend previously, don’t worry yourself. No doubt 200% or 300% appreciation in property value may not ever happen in foreseeable future but there’s always an opportunity. According to PropertyGuru, property prices continued to decline in Q4 of 2017. With the introduction of Sales and Service Tax (SST) to replace Goods and Services Tax (GST) with effective 1 September 2018 that does not apply to building materials, some believe that property prices will fall. Undeniably it may be too early to tell if property prices will fall nonetheless the observable trend is indeed the buyer’s market in years to come. Certainly you have not missed the boat yet, you just have to be patient and wait for the right timing to work in your favor.
Leverage using Car Loan
Every year there are hundreds of thousands of cars registered on the road despite vast improvement in our public transportation system over the years.
I am pretty sure many of you had a similar experience to mine. Questions that were floating in your mind when you were buying a car. “How much should I borrow for my car loan?”. “How much should I pay for the down payment?”. “What is the most suitable loan tenure for me?”. For those who are not familiar with how car loan interest is calculated, here is the quick guide from IMoney. A simple illustration is shown below:
There’s always misconception that car loan interest rate is low, typically ranges 2.8% – 3.2% for new cars. However, the interest charge is actually much higher than you think. The interest rate used to calculate car loan interest is based on a flat interest rate, which is different from effective interest rate used to calculate housing loan interest. A flat interest rate of 3% p.a. is equivalent to an effective interest rate of 5.64% p.a. (Refer here for better understanding on how car loans work)
Again, deciding on how much to finance your car and the most suitable loan tenure is very much depending on how best you could maximize the returns using your available cash balance. Apply the same principles explained above. You could easily capitalize on the available investment options that yield a higher return than the interest cost such as investing in P2P lending. It could still generate positive returns to grow your money even though your car loan interest rate is fairly high.
Sophisticated investors apply leverage as their investment strategy in different ways to maximize their returns. It is also a common strategy that hedge funds adopt such as buying securities on margin or using credit lines to purchase assets. Those may sound far more complicated or make no sense to you. However all you need to know is that the basic principles are no different from what I have explained above. It is clearly not rocket science. You could simply use leverage on things that are closely related to your daily life. It doesn’t matter whether or not you could generate massive returns using leverage. More importantly is how leverage can change your perspective that helps you better with your money decision-making process.