DIY Financial Planning

Created a simple spreadsheet (rev1.0) to devise some form of self-financial management. You can get it from here: https://www.dropbox.com/s/ani7eo357s0szxl/DIY_Financial_Planning.xlsx?dl=0. Nothing fancy but needs some explanation. The spreadsheet is divided into four sections:

[1] Income Management

[2] EPF Table (Malaysian Pension Fund)

[3] Risk Management

[4] Wealth Generation

Income Management

The most exhaustive among the big four and is important for your monthly and yearly budgeting plan. It is broken down into Income, Expenses, House Affordability Range and Car Affordability Range. Income is straightforward but do make sure you break your income between taxable and non-taxable. From here you can estimate how much you earn yearly in gross income, net take home pay as well as total EPF contributions and taxes you are paying.

In expenses I further drill into day-to-day spending, regular lump sums (monthly), regular lump sums (annually) and occasional lump sums (estimates). The regular lump sums is the critical part here as this probably the bulk of your life commitments. Towards the very end you will notice a column named "Difference". This is computed based on Net Take Home - Total Expense and will conclude if you are overspending hence the need to revisit your "lifestyle".

 

Next is the House Affordability Range. The formula is derived using ratio 4 as the standard. This value is universally accepted in many countries as well as historical figures for a house to be termed as "affordable".  

Similarly there is a Car Affordability Range. There is no standard ratio. This is simply computed by using how much you can afford (Ideal case) and the downpayment value. For the number of payments, it is best to stick at 60 (5 years). Anything longer means you are paying a lot more in terms of interest value.

EPF Table (Malaysian Pension Fund)

The second tab and this is important for your long-term retirement planning; to roughly guess how much you would have at a specific age depending on your current income. You would be able to estimate your yearly gross from the Income Management section earlier. Both average pay rise of 3.00% and EPF estimated returns p.a. at 5.50% are obtained from historical national statistics.

Risk Management

Here is where insurance comes into play. Broken into two parts: Summary of Protection and Inflation Adjusted Medical Costs/Dependency Coverage. I will explain the latter first. You will need to key in the inflation rate, this rate is the medical inflation rate not the usual consumer price index inflation rate. The cost of treating these critical illness is based on Year 2010. I obtain these values from various sources including articles/doctors/medical news and like asking around.

The Personal Accident coverage simply takes into account how much you earn per year * the duration. The duration that you key in for example might be derived from your family's age. E.g. I need to continue to support my kids for 20 years before they grow up to be able to work for themselves.

The Summary section. You will need to summarize all your insurance policies into a single sum. For Life and Health, both are bench marked against the Critical Illness cost for current year 2015. The Medical H&S is bench marked at 200. Likewise the Personal Accident Coverage is bench marked against the Dependency Coverage for year 2015.

Wealth Generation

Honestly the most difficult part. It is not ready yet but you get the idea where I am heading; partly thinking of portfolio style.

I will occasionally update the spreadsheet as I tweak it. Expect new revisions to come up from time to time. Any feedback is appreciated and I can be reached via my email. Again it can be obtained from here. https://www.dropbox.com/s/ani7eo357s0szxl/DIY_Financial_Planning.xlsx?dl=0

Saturday Lite: Econs in 30 Minutes

RON95 & RON97 Cheaper By 35c, Why You Shouldn't Be So Happy

Why is oil price falling?
Oil price (most specifically Brent Crude) is $48 as of this writing. Oil lost 50% of its value in just 6 months and is expected to be low if not lower for a considerable amount of time. The falling oil price has nothing to do with Malaysia, in fact we are too small to make any difference, 'kita tonton saja'.

We are enjoying cheaper fuel at the pumps but let's not be so happy since our country is running on auto-pilot. There is a price war between the Shale (US) and Sheikh (Saudi Arabia). America oil producers are pumping oil like rain falling from the sky. Meanwhile the desert kingdom has shown no willingness to reduce production so they could maintain market share and even issued a challenge:

Saudi Arabia Ready For $20, $30, $40 Oil

What do we have to say?
Drop in oil prices should not have adverse effect on country's deficit, says Tee Yong

KUALA LUMPUR: The drop in world oil prices should not have an adverse effect on our country's deficit as the average price from January to November has met the expectations set. You living in the past? The budget is based on forward looking estimates so I want to know 2015 not 2014.

Deputy Finance Minister Datuk Chua Tee Yong said that speculators should not be confused as Malaysia relies on the Tapis Crude and not Brent Crude. Both oil index correlates very well, I just took a weekly snapshot below but I've checked the entire 2014 so he is taking us round the moon.

"The average price for Tapis Crude has been above USD100 (RM344) per barrel between June to November and this meets our expectations," he said Wednesday. The average is $95 and this is not exactly above. Another horse crap from our deputy.

Budget 2015, 'An Zhua'?
Malaysia needs to revise Budget 2015, says Credit Suisse
Revenue projected RM235.2 billion.
Spending estimated RM273.9 billion.
This means we are short of RM38.7 billion, also known as fiscal deficit. This is -3.67% of GDP projected for 2015.

Oil and gas-related income is a backbone of the Malaysian economy as it currently accounts for 30% of the government’s total revenue. Let's assume this is correct (because credit agencies, banks and economists are quoting this figure, 'takkan semua salahkan', these are professionals not like our cabinet.

Revenue derived from oil & gas (O&G) RM235.2 billion x 30% = RM70.56 billion.
Because our budget is based on $100 oil price (said by PM Najib and endorsed by MoF, bukan saya kata), this means our revenue derived from O&G related income is halved. RM35 billion short now! 

So it becomes like this:
Revenue: RM200 billion.
Spending: RM274 billion.
Guess the deficit? Close to 7%. 'Wa kasi' discount: 6%, still 100% short of our 3% target. We should and must meet the target, otherwise our country's credit rating could be downgraded, we wouldn't want that - later 'macam' Greece. We have to cut spending somewhere OR raise revenue somewhere.

How to 'potong'? Operating expenditure is already RM223.4 billion which includes fixed charges and grants, emolument (civil servants), supplies & services. We can't cut this unless we trim the civil service which is highly unlikely.

We have the remaining RM50 billion for development. We can reduce security (no need to buy tanks and planes, we are not going to war) but that's not enough. We could cut economic sector developments such as smaller not so urgent federal projects. Some might get the knife but that's still not enough. Remember we need RM35 billion and that's assuming the oil does not fall even more; <$50.

The only option left is to raise revenue. [1] more direct and indirect taxes [2] ask more from Petronas. The former is happening now. Suddenly a slew of goods and services are GST-able; from insurance premiums to PG Bridge toll and Johor causeway to medical supplies and healthcare services. The latter is not likely as Petronas is being hit like a brick by falling oil price; it has to cut capex (capital expenditure) and just recently opex (operating expenditure). After slashing capex, Petronas plans up to 30% cut in opex

With the destruction of our East Coast due to flooding, more funds are needed for repairs. Furthermore we have this 1MDB RM2 billion default loan payment, govt is in no position to bail. Someone has to foot the bill... someone.

Base Rate vs BLR, Is This Just Another LPPL?

*Disclaimer: If the below information is inaccurate, lacking or omitted important information, please notify me. Thanks in advance.

As many of you know the new Base Rate (BR) mechanism is effective starting 2nd Jan 2015 which is to replace what we refer to as Base Lending Rate or BLR. New Reference Rate Framework by Bank Negara Malaysia (BNM). Both of these are set by the each bank individually, this is why the rates vary from bank to bank. However there they are very dependent on something called the Overnight Policy Rate (OPR) for the BLR and Statutory Reserve Requirement (SRR) for BR which BNM determines.

BNM meets every two months which fixed schedule in a meeting known as MPC (Monetary Policy Committee). This is where they debate and decide if the OPR and SRR should be adjusted higher or lower. The decision to do so takes in account various economic indicating factors (in no order), such as inflation, economic growth, strength of currency and etc. Basically the overall economic outlook. BNM adjusts the rate according to how much money they want in circulation versus how much should be tied up in savings.

MPC Meeting Schedule in BNM Website

The Effective Lending Rate (which you kena) is also determined by different factors which includes banks' cost of funds, their Statutory Reserve Requirement (SRR) account balances (how much they have in their reserve accounts with BNM proportionate to their eligible liabilities), borrower credit risk, liquidity risk premium, operating costs and profit margin.

The good thing is that the Base Rate must be reviewed by banks at least on a quarterly basis & the same to be disclosed publicly.

Base Rate and Effective Lending Rates of Banks 2nd Jan 2015

The Base Rate is also much transparent because banks are not allowed to lend below the base rate (except for cases specified by BNM).

For illustration purpose:

Loan Amount: RM350,000 (No Lock-In Period)
Loan Tenure: 30 years

	Before 2 Jan 2015	From 2 Jan 2015
Reference Rate	BLR = 6.85%	BR = 3.67%
Interest Rate	BLR - 2.20%	BR + 1.00%
Effective Lending Rate	4.65%	4.67%
Monthly installment (RM)	1,804.73	1,808.93

You will immediately notice that the monthly installment difference is negligible. But of course the above is just an illustration. If you don't believe compare your Dec 2014 housing loan statement vs Jan 2015 housing loan statement. The reason why it differs slightly is because the BLR is dependent on OPR (3.50%) while Base Rate is dependent on SRR (4.00%). The spread is very narrow and therefore the effective lending rate is almost the same (plus minus here a bit la...maybe enough for a plate of Chicken Rice).

The Base Rate will be used for the new retail floating loans and refinancing of existing loans extended from 2nd Jan 2015. After the effective date, BLR based loans prior to 2015 will continue to be referenced against the BLR. Also, when any bank makes an adjustment to the Base Rate, a corresponding adjustment to the BLR will also be made. Currently, the BLR is 6.85% while the prevailing mortgage rates hover between 4.20% to 4.90%.
    
Why use SRR now?
It is a BNM tool for the purpose of liquidity management. Effectively, banking institutions namely commercial banks, merchant/investment banks and Islamic banks are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate.

As explained above, higher SRR means that banks in Malaysia will have to keep more money as their reserve. This translates into lower loans growth for banks. Normally, banks would impose stricter loan approvals for borrowers, because less funds are available for lending. Normally, very high SRR translates into lower profit growth for banks, lackluster borrowing and lower economic growth (who doesn't like to leverage?)

Since SRR is available to BNM to manage liquidity and hence credit creation in the banking system, it will be used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived to be large and long-term in nature. Currently, BNM believes that our banking system is OKAY in liquidity, thus it maintained the SRR since 2011 to "buffer" some money in banks.

"KUALA LUMPUR: Bank Negara Malaysia (BNM) Governor Tan Sri Dr Zeti Akhtar Aziz said the Statutory Reserve Requirement (SRR) will only be adjusted if there is a fundamental change in liquidity in the financial system.

"SRR will only change if there are fundamental shifts that result in fundamental changes in liquidity condition. If it is temporary, then it will rely on open market operations,""

Conclusion
It looks like it is LPPL. However this is because the spread between OPR and BLR is very narrow. It is not as straight forward as it seems. If BNM raises OPR and thus BLR but maintains SRR, consumers will mostly likely refinance. There is a lot of juggling going around.

With the fall in oil prices now at $50, down $5 in a single weekend coupled with further weakening of the MYR at 3.55 to USD, impeding 6% GST, things don't look well for us. It remains to be seen what BNM will do when it meets again on 28th Jan 2015. We as consumers will still need to pay attention to OPR and in addition the SRR now.