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Snowball Plan

One debt repayment plan that’s popular if you have read many personal finance materials is Dave Ramsey’s “Snowball Plan.” Here’s how it works:

List your debts in order from lowest balance to highest balance. Don’t take into account the interest rate. We’re just focusing on the balance of the debt.

Allocate as much of your monthly budget as you can to paying off the debt with the lowest balance.

Once the debt with lowest balance is paid off, you add the money that had been going to that debt to what you’ve been paying against the next lowest debt. Each time you pay off a debt, the amount you can apply to remaining debts is a little bigger. Thus, the name “Debt Snowball Plan.”

The benefit of the debt snowball plan is psychological. By having success paying off small debts first, you’ll receive instant positive feedback that can encourage you to continue paying down your debt.

The drawback to the snowball method is that you’ll end up paying more in interest than you would if you went after the debt with the highest interest rate first. However, if the idea of paying off a RM 5000 credit card bill seems too daunting, go after the low hanging fruit by paying off the RM 400 bill first. It will hopefully get you started down the path of reducing your debt.

Tags: Dave Ramsey, debt repayment plan, Snowball Plan

Zero Downpayment VS xx% Downpayment

I’m going to buy a new car in several months and I’m trying to figure out how much down payment I should have. I’ve heard tons of different answers from different people. What’s your take?

One rule of thumb that you need to remember when buying a car it is always depreciating in term of values. Logically a larger down payment reduces the size of your monthly payments.

Let’s say I want to buy a car that price RM60K and paid the down payment worth 10% of the car market price. The monthly installment should be RM664.25 if given the interest rate is at 3.65% per annual:

Car Purchase Price (RM) *:      60 000
My Down Payment (RM)*:     6 000
Interest Rate in % *:     3.65 per annual
Repayment Period in Months *: 108
Monthly Installment: RM 664.25

But I changed my mind. I want to go with zero down payments. The monthly installment now should be at RM 738.06.

Car Purchase Price (RM) *:      60 000
My Down Payment (RM)*:     0
Interest Rate in % *:     3.65 per annual
Repayment Period In Months *: 108
Monthly Installment: RM 738.06

At the end of the 9 years tenure I have been paying to the  bank RM71 739 if i go for the option 1 and RM 79 710.48 for option 2.Meaning i have been paying RM 7971.48 extra to the bank on top of the interest.

Remember that I still have RM6000 that was initially plan to use as a down payment but was canceled? To make it interesting, I decided to invest the RM6K into Amanah Saham Bumiputera with no annual addition. If they can give me a consistent return of 6% per year in 9 years the amount will be RM 10,136.87.Minus the extra RM7971.48 that I have paid to the bank with the option 2  I have choose, actually I have already made an extra of RM 2165.39 with the principal untouched !

There’s still a downside on this strategy. Let’s say I go onto the lot with no down payment, pick out a brand new car, and drive it off the lot. The second I drive off the lot, your car depreciates about 20%. Now, I drive it around for a month and suddenly I lose my job – and I realize I need to sell this expensive new car.

The best I’ll probably be able to get for the car is about 80% of the asking price, but if I’ve made no down payment, even selling the car right now will leave me with 20% of your loan unpaid and nothing to show for it. This is called being “upside down” in a car loan, and it’s something to avoid if all of us can and please don’t buy a car with zero down payments without you having any saving in hand with at least of 10% of the car price.

Never in the automotive world of Malaysia, the car is worth the price.

Tags: maybank ezyauto

Just For Protection.Not More Than That

Imagine you are saving a thousand for every month. At the end of the year you will have RM12 000 on your saving account. Unfortunately something bad happened to you. You have been involved in an accident and have been admitted to the hospital. Due to that all the medical cost must been bare by you. Let’s say it cost you RM6000.Whether you like or not, you are forced to withdraw the money from the saving account therefore the balance will be half of the dozen dollars.

As a comparison, Hanis is doing the same like you and have been hit by an accident. The only difference she pays RM100 every month for a Takaful donation that worth of RM 80,000 in protection and there’s no need for her to use her saving account to cover the medical cost.

So which one is smarter?