Tuesday, November 25, 2008

What do I do with my money during recession?

This week APEC announced that they expect 1 1/2 year for our economy to recover form the current recession. What does it mean? It means things aren't going to go better anytime soon in the next 1-2 years. In fact KLCI is expected to test the 800 level next year while over in the US the big 3 of the US automobile industry is trying hard not to go bust and recently the big Citibank with USD$200billion is only worth USD$20 billion today, trying hard not to follow in the footsteps of Lehman Brothers. Is everything all doom and gloom?

Fret not, for in recession lies legitimate oppurtunities. We always hear that cash in king during recession but if we don't have cash, how to be king? If you're an average Joe of Mary who worked and bought your house a few years back, you are in a good position to make use of the house that you've bought.

How to get more cash in your hand?

1) Refinance your property
Governments all over the world including ours is trying to stimulate the economy by lowering lending rates and this include ours. This is to encourage banks to offer low interest loans so that more people will purchase properties or borrow from the bank for the businesses. If you've bought your house/condo a good few years back you probably would have paid 6-7% interest for your housing loan. Why not make use of the current govt stimulus by refinancing your property? With the current refinancing rates as low as 4.35% p.a. that will mean you will be saving up to 2.65%p.a. What does this mean in $$$ ?

You will be paying less and saving more

If your loan amount is RM300,000 @ 7%p.a. :-
1) your monthly payment is RM1,995 for 30 years
2) interest over 30 years = RM418,526
3) Total paid over 30 years = RM718,526

At 4.35% p.a. :-
1) your monthly payment is reduced to RM1493 for 30 years
2) interest over 30 years = RM237,636
3) Total paid over 30 years = RM537,636

* Savings up to RM502 a month
* Savings up to RM180,890 over 30 years

You have more cash in hand if your property has appreciated

If you are one of the lucky ones who bought your property in good locations and your property have managed to appreciate in value, then you can refinance your property at a higher value and use the extra cash in hand :-

Property bought at RM300,000
Now valued at RM400,000
* You have close to RM100,000 in hand after refinancing (less moving charges etc if applicable)

Putting the extra RM100,000 cash to good use

You still have to repay everything end of the day so it is only beneficial if you can put the RM100,000 to good use. This is where CHGS can be one of your investment tools :-

RM100,000 with 4.35% refinancing interest = RM4,350
RM100,000 with average 8-17% at CHGS = RM8,000-RM17,000
* You have extra passive income of RM3,650 - RM12,650 p.a.

2) Convert your volatile unit trust / shares to investments with fixed income & guaranteed capital protection

If you have volatile unit trust /shares that does nothing but go down in value since 2007, then it is time to stop the rot otherwise you will miss the boat during the next recovery. Assuming recession takes at least 2 years to recover, this is what will happen if you keep your money in unit trust/shares instead of stopping the rot :-

For RM10,000 investment since 2007

2007-2008 at -20% = RM8,000
2008-2009 at -20% = RM6,400
2009-2010 at -20% = RM5120

Assuming recovery at 2010 onwards
2010-2011 at 20% = RM6144
2011-2012 at 20% = RM7372.8

* Even after 5 years you are still in negative

However, if you switch your funds to CHGS during recession :-

2007-2008 at -20% =8,000 (assuming your last year's investment has lost money)
Transfer to CHGS during recession :-
2008-2009 at guaranteed 8% = 8,640
2009-2010 at guaranteed 8% = 9,331.2
Convert to Unit Trust/Shares during recovery
2010-2011 at 20% = 11,217.40
2011-2012 at 20% = 13,460.88
* 34.6% gains after 5 years

Continue at CHGS
2010-2011 at 12% = 10450.94
2011-2012 at 12% = 11705.05
* 11.7% div gains + 40% land appreciation = 51.7% gains after 5 years

* either way, you will be getting positive returns if you convert your volatile investments to stable investments temporarily. Besides that, you have yearly passive income in terms of dividends.

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