Financial Analysis & Construction

Present & Future Values of Financial Planning

PV             - Present Value           

FV             - Future Value            

i                 - Interest Rate/Inflation Rate/Return        

N               - Number of years   

PMT          - Payment        

PM1          - First Month

PM2          - Second Month

Mortgage: Multiple Even Cash Flow

Property valued at RM 500,000, 10% downpayment while having 90% of financing which equivalent to RM 450,000 (PV). Interest rate is 3.80% (i) for 30 years (n) long. How much is the monthly instalment (PMT)? 

The answer is RM 2,096.81 per month; RM 1,425 (INT) & RM 671.81 (PRN).

Ley say Mr Y has paid for 8 years for his mortgage or simply put 96 months, how much is the outstanding? Now, we are looking for a duration from 97 to 360 months.

PM1    -    97

PM2    -    360

Total INT        -    178,789.57 (interest outstanding for the bank)

Total PRN       -    374,767.77 (principal outstanding from the borrower)

BAL                -    178,789.57 + 374,767.77 = RM 553,557.34

To verify this number (Total PRN), simply go:

PM1    -    1

PM2    -    96

Total INT        -    126,061.34 (interest paid)

Total PRN       -    75,232.23 (principal paid)

Since you calculate from the beginning = 1, to 96, you are calculating the amount you have paid. If you put somewhere in between of the years, you are looking the total outstanding. To verify this, simply go to BAL and the answer is RM 374,767.77

Bear in mind, at the month of 97, the interest and principal paid are varies since the beginning of the month due to Rule of 78. In other words:

PM1        -    97

PM2        -    97

For this particular month, the interest paid is RM1,186.76 and the principal paid is RM910,04. 

Since you know very well on your monthly instalment, interest & principal paid, outstanding and simply aware the Rule of 78. Now, if  you are being offered by other bank that has lower interest rate, let say 3.4% per annum with 2% of moving cost (stamp duty, loan agreement and et cetera). Should you accept the offer?

Your current outstanding at the month of 97th is RM374,767.77 X 2% = RM7,493.54. Your new loan is RM 382,261.31. If you search for the PMT for the new loan, certainly it will drop to PMT RM2,058.35 per month for the next remaining years (22 years or 264 months) compared to RM2,096.81 per month.

The total interest for the new loan for the next 22 years is RM161,142.31 and the total principal paid is RM382,263.12 with total financing cost of RM 543,405.43 as compared to RM 553,557.34 . That saved you +RM10,151.91 net after 2% of moving cost or worth 5 month instalments if you remained paying your old instalment at RM 2,096.81 per month.

However, 

Calculation 1    -    If you use calculator with

PV: RM 382,261.31 (new loan)

I: 3.5% (new interest)

PMT: 2,096.81 (assume you remained paying the old instalment)

N: ? = 257

That is 7 months different to be precise (264 - 257 = 7 months saving). 

Calculation 2    -    If you calculate manually with its new total financing cost of RM543,405.43 and divide by RM 2,096.81 is 259 months while divide by RM 2,058.35 is equivalent to 264 months (264 - 259 = approximately 5 months saving). 

Calculation 3     -    Other forms of calculation is the difference between the old instalment with a new instalment, which is RM38.46 different times by 264 months is equal to +RM10,153.44, slightly different from +RM10,151.91.

Thus, it is highly recommended to use calculator to get the precise answers. However, manually calculate will give you the approximate answers or an idea where does the numbers coming from. 

Amanah Saham Bumiputera (ASB) Financing

Assuming the interest rate is 4.45% (i), the loan that has been approved is RM200,000 (pv), and the tenure is 5 years / 60 months (n). (FC-200V: END) mode; your instalment start at the end of the month. It means you enjoy the benefits before paying up the instalment. 

What is your monthly instalment? So you are looking at the (FC-200V: PMT). The answer is RM 3,724.06/monthly; to break this down to principal repayment and interest charges, you can find it at (FC-200V: AMRT) > (FC-200V: INT) or (FC-200V: PRN).            

                         PRN = RM 2,982.39         

                         INT = RM 741.67        

                         NET = 3,724.06

By knowing this, it allows you to calculate your Total INT = RM23,443.51 & Total PRN = RM200,000.

You might be thinking, what's the point of having RM200,000 borrowed from the bank and being charged RM23,443.51 for 5 years? Hang on. Let us assume the average return for ASB is 6% per annum. 

The present value is RM200,000 (pv), which what you have today given out by the bank in the form of certificate. While you have 5 years (n) to maturity, and the return is 6% (i). The future value (fv) will be RM267,645.12. This number can be interpret as your total cash you will have (fv) in five years from now assuming you did not withdraw a single cent every year after distribution of the units.

Now you have the monthly instalment from your ASB-Financing and the Future Value of your RM200,000 in 5 years. Let us calculate the Internal Rate of Return (IRR) through cash flow method (FC-200V: CASH). You will pay your monthly instalment every month for 59 months in total, while on 60th of the month, you got your RM267,645 minus out your last monthly instalment -RM3,724.06 = RM263,920 Your IRR in month is 0.5949% or 7.1390% per annum.  

So, do you lose money? No, that's what I called the power of compounding effect. You will get 7.1390% net, which obviously above your average yearly return of 6% and net out all your monthly obligations. 

Now, let us see on child education plan; both in future value of your current liquidate asset and present value to prepare you for your child education with your current strategies on portfolio, and monthly investment needed to achieve your goals for education taking inflation rate into consideration. 

Child Education Plan

Assuming annual education fee + living expenses at today's value is RM30,000 (pv).

Average inflation rate is 3% (i), and the child will be going to the university in another 4 years (n) because he's only 14 years old now. The future value (FV) of RM30,000 will become RM33,765.26 at the age of 18 years old due to inflation rate every year. 

He will study at the prestige university for the next 4 years (1 year Foundation and 3 years Bachelor degree), and the father invests passively during his study for the next 4 years with an average return of 5% while maintaining the inflation rate at 3%. The inflation-adjusted return will be (5-3)/1.03 = 1.9417% per annum with payment (PMT) of -RM33,765.26 every year. The present value (PV) that is needed today is RM131,250 at the age of 18 years old in order to safely pay the yearly tuition fees + living expenses with inflation-proof of 3% per annum. This calculation will be counted from the beginning (BGN) of the month due to obvious reason; we pay first before enjoying the benefits. 

Now, you know that in the future when your child reach 18 years old, you'll need RM131,250. The question is, how to achieve this goal? First, what is your yearly contribution to achieve your goal? Let's find the PMT. Assuming that you invest into bluechip with a return of 6% (i) for 4 years (n). FV is RM131,250 since it is your goal, and the answer for PMT is -RM28,304.37 per annum to achieve your goal. By knowing your PMT, simply remove FV to get the PV which is equal to RM103,962.29. It means you need RM103,962.29 today when your child still at the age of 14 years old, with a return of 6% per annum for the next 4 years, it will gives you RM131,250 (your child education financial goal).

Recommendations:

Scenario:

1. Surplus cash RM 20,000 pa
2. Income of RM95,000 pa
3. Existing saving of RM120,000 into Fixed Deposit (2.5% pa)

Option 1 - Allocate all the existing saving from FD to bluechips investment with 6% pa. This will leave her with only RM16,037.71 for her emergency fund or other needs. According to Liquidity ratio, it is recommended to have a saving of 3 to 6 months with a 20% and above of saving ratio from the current gross income. With an annual income of RM95,000, it is clearly insufficient to have an emergency fund for 3 to 6 months with a left over RM16,037.71.

Option 2 - Do not touch the existing saving, and achieve the goals by start saving today. However, the surplus was only RM20,000 while in order to achieve the goals, he need RM28,304.37. This will cause deficit in his cash flow by -RM8,304.37.

Option 3 - Allocate RM70,000 cash today from RM120,000, and you need RM103,962.29. Your shortfall today is RM33,962.29 when he is still 14 years old. Obviously if your surplus is only RM20,000 it is difficult to achieve -RM28,304.37 per annum to achieve your goals; unless you are adjusting your lifestyle to reduce your living expenses.

The question is, how to achieve your shortfall? What is your annual investment required in order to close the gap? 

Allocate RM70,000 (pv), for the next 4 years (n) for a return of 6% (i), the future value (FV) will become RM88,373.39 when your child reach at the age of 18 years old. Remember, your financial goal at the age of 18 years old is RM131,250. Since you already have your RM88,373.39. Your shortfall is RM42,876.61 in the future or when your child reached 18 years old. To bring the future value into yearly contribution (PMT) is -RM9,246.44 or RM33,962.29 in lump sum present value. 

The shortest way to calculate this without having to bring RM70,000 to the future and bring back to the present, is simply calculate as follow: PV = 33,962.29, I = 6, N = 4, PMT = is still equivalent to RM9,246.44 per annum. This amount is clearly still within the cash surplus he had for a year. Thus, option 3 is highly recommended strategy from his existing strategy in the portfolio.

Retirement Plan

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