KC Lau interview oh KC Lau interview

I have an golden opportunity to interview KC Lau.

Who is KC Lau???

- Handsome GUY... he hehe

- train as Aeronautical Engineer from UTM

- but never as an Engineer, more as a Pianist, Keyboardist and Vocalist

- doing job that he LOVE. ( how many is doing this)

- involved in financial industry since 2003

- start blogging at http://kclau.com/ since Dec 2006

Author of:

- Top Money Tips for Malaysian - published in 2008

- 1st online personal finance course at http://moneyautomationsystem.com/

- co- founded Bursa Method, Property Method, Blogging Method, BizGetOnline.com, Founder Method and REIT Method  

Source: http://kclau.com/about/

Summary of the interview:

SAVE 30 % of your income and INVEST for 12% return annually.

I knew you have heard about a book “Getting to Point X” by John Vento. Today I would like to ask you based on the 10 point raised by John in Malaysia context.

1) Q1: Live within your means and save for future. What is the best scenario by living within your means and how much we should save? Let’s assume 3 case scenario:

Scenario A: Single with 2.5k salary per month – 25 years old

Scenario B: Married with 2 kids age 1 and 3 years old with 6 k salary per month – 35 years old

Scenario C: Married with 2 kids age 18 and 19 years old with 10 k salary per month – 45 years old

I always recommend a saving rate of 30%, of the net income. The reason is that if one can save 30% all the time, he/she will be able achieve financial independence in around 15 years with adequate investment return of 8-12% a year.

On Scenario A - The net take home pay of a single fresh graduate will be around 2.2k. 30% saving rate is equal to around RM660. Apparently, if this bachelor buys a brand new car and as a result spending RM1500/month (hire-purchase loan, maintenance, tolls, parking fee and petrol) just to own that car is doing much harm than good.

On Scenario B - A 35-year-old parent with net income around RM5000 will need to save about RM1500 per month to maintain the 30% saving ratio. This parent has to be extremely frugal to survive on the remaining RM3500. It is not impossible in Malaysia. But the reality is that in most families, both parents are working to support the rising cost of living.

On Scenario C - A 45-year-old parent with a net income after tax around RM8000/month shall save RM2400. It is also challenging but if you have maintained the saving rate as high as 30% all the time, you shouldn’t get into any financial trouble at all.

You can always upgrade your lifestyle whenever you have an increment. The important thing is to maintain that saving rate. Any extra income should be saved 30% of it and you should be entitled to spend the other 70%. It is still good.

2) Q2: Understanding taxes and how to effectively minimize your tax obligation; Discuss with the 3 same case scenarios.

In fact, in almost all countries, tax law are made by the rich people, or indirectly influenced by them. That’s why the people who pay a lot more taxes are always the employed middle class. As an employee, you have nothing much to do because all you can claim is the tax relief. But if you are an entrepreneur and business owner, you can take advantage of the lower corporate tax. While employees are paying as high as 25% tax, businesses only pay 20% flat if the net income is less than RM500,000.

In my opinion, government should tax more on capital gain and estate distribution. Those are the money you get without doing active work. But in contrary, government tax more on the income you make. But I think in order to have a more productive population, you should tax less on income. This encourages residents to work harder, to become more productive, hence increase the country’s GDP. Meanwhile, the money of the rich can be taxed more by way of imposing high capital gain tax and estate tax. The wealth will go back to the country and benefit all citizens.

3) Q3: Managing debt – Discuss with the 3 case scenarios

On the personal level, debt should be limited only to car loan and housing loan. Credit card debt and personal loan should be avoided at all time.

In Scenario A - A 25-year-old single should avoid car loan if possible. Your credit capacity should be used to own your first house. The logic is simple - housing loan incurs lower interest and the property appreciate. Car loan incurs higher interest but the vehicle’s value depreciates. If possible, don’t buy a new car with loan. Buy a used car with cash!

In Scenario B - Please resist from moving to a bigger house, unless you can still maintain the 30% saving rate. I see that most people couldn’t resist to move into a bigger home when they have more children and they get a pay raise. If you keep stretching your credit limit just to stay at your dreamhouse, at the end, you’ll probably end up with only the house, while your peers have a bigger portfolio of investment properties.

In Scenario C - Parents in their forties will be worrying about funding their children’s tertiary education. Please provide them within your means. You shouldn’t mortgage your house for another 20 years just to send your child oversea. The most expensive option is not always the best option. There is always cheaper alternatives.

4) Q4: Insuring yourself and your family in case of extreme illness or death; - Discuss with the 3 case scenarios.

This is a simple guideline to calculate your protection needs:

1. Hospitalization and surgical benefits (a.k.a medical card) is a must. Review it every 3-5 years because the medical industry changes rapidly and there will be a better plan every 3-5 years for you to upgrade

2. Critical illness - insure a minimum of 3 years of your income. Just incase a dread disease strikes, you can afford to take a 3 years unpaid leave.

3. Death benefit - insure an amount that can sustain your family’s expenses for 20 years.

4. Personal accident - insure at least 10 times of your income. This plan is very affordable, costing around 1% of the sum assured.

a) Should I buy another health card if my company already insured me?

Why not if you can afford it? You employment is not a lifetime arrangement. But your healthy condition now is not a life long guarantee. Be insured while you are eligible for it and able to afford it.

b) Instead of buying another health card, is it better that I fund myself by investing the premium of health card into share market which can give me a dividend yield of 7%?

Nothing creates money as fast as an insurance plan. If you pay premium RM100/month now, you immediately created say a RM150,000 annual limit worth of medical funds. How long would it take to invest RM1000 a year with 7% return, to accumulate RM150,000? It takes 33 years! Investing the money and insure yourself with your own money (not buying insurance) is not viable, unless you have a crystal ball that can tell your future with 100% accuracy.

5) Q5: Protecting your property; - MRTA vs MLTA vs Term Insurances – what is the best option based on the 3 case scenarios

For a property that your family is staying in, MRTA, MLTA or any type of insurance that serve the purpose of cancelling the respective mortgage is really advisable. But for investment property, it is not really necessary because the bank can always sell your investment property to get back their money.

As for what option of mortgage cancellation plan is better, I would recommend to buy from insurance agents or financial advisors. In that case, you don’t have to assign the policy to the lenders. This means you can nominate your own beneficiaries, therefore having more control and flexibility over the insurance policies.

6) Q6: Planning for the education of yourself and your children – what is the optimum way to save for your children- Endowment policy vs Property(rental yield) vs PTPTN

Return wise, property is the best way to go compared to endowment or SSPN (Skim Simpanan Pendidikan Nasional). You should take advantage of the tax relief given for education policies (RM3000/year) and SSPN (RM6000/year) if your income tax bracket is on the high side. Then the rest of the saving should be invested in properties or stocks.

7) Q7: Investing intelligently and productively; - What is the best option for investing based on 3 case scenarios, Share Market vs Unit Trust vs REIT vs Property

Most financial planners take into consideration your risk profile, investment horizon, financial goals and expected return. This is based on the assumption that you don’t know anything about investment, or don’t bother about doing investment on your own and would rather let the professionals handle your money.

What I think is more important is to invest based on your knowledge in certain investment. If you are good with property investment, do more of it. Why bother with diversification with share, unit trust, REIT etc? To get really good investment return of 12%-25% or even more, you got to master the investment game. That’s the one crucial thing you should learn up in order to achieve financial success.

8) Q8: Planning for retirement – What is the best planning to retire for 40 years old with 2 kids at 1 year and 3 years old and average 6k per month, intention to retire at 50 years old?

There is not enough information to plan the retirement for this scenario. The work out the maths, you still need to know how much the parents already have now? What is their retirement goals? How much they want to spend after retirement? What kind of investment return they are getting now?

To put things simple, just remember this two things you should achieve:

1. Save 30% of your net pay

2. Invest it to get at least 12% return a year

If you can do the above two things most of the time, you will be able to retire comfortably.

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