CAUTIOUS : I will talk about borrowing money for investment in this article, so if DEBT is your number ONE enemy, please read no further and just close this article.
At May year 2018,
I wrote an article with the title <<The cost of investment is much higher than we thought>>,
sadly that a lot of people didn't understand what I wanted to mention in that article.
I gotten the idea for that article while I was reading a book with the title of <<WHY THE RICH ARE GETTING RICHER>> by author Robert Kiyosaki,
recently I finished reading the whole book while on the plane,
so I decided to re-write the article.
Robert Kiyosaki used examples of property investment in his book,
and mentioned a lot of "DEBT & TAX".
At here I will use shares investment as example,
and the DEBT is SMF account (Shares Margin Financing Account),
basically is borrowing money to invest at shares.
I will use NESTLE as example since the shares price is around RM146,
so we can just assume it to be RM150 for easier calculation.
Please be reminded that,
the calculation below are all simplified,
if you want to know more details,
please ask the banker who in-charge of SMF account.
BASICALLY,
there are 3 types of PHANTOM INCOME that we can obtain from shares investment.
1ST,
For someone without SMF account,
if the person wishes to buy 1 lot of NESTLE,
then is 100xRM150 = RM15,000.
(Assuming shares price is RM150 for easier calculation.)
If that person earned RM15,000,
will that person be able to buy 1 lot of NESTLE?
If that person really did it,
then government staff will come and find that person,
since that person didn't submit the income tax!!!
Let's say the income tax bracket is 25%,
then the actual income of that person will be just 0.75xRM15000 = RM12,500 only.
Will that person still able to buy 1 lot of NESTLE?
OF COURSE NO!!!
So how much that person should earn to be able to buy NESTLE?
Then answer is RM20,000.
since 0.75xRM20000 = RM15,000.
So that person need to earn RM20,000,
submit RM5,000 for income tax,
then only can invest at NESTLE with the remaining RM15,000.
As a conclusion,
the cost of NESTLE is actually RM20,000!
This is also the thing I tried to mention in my old article,
the cost that everyone didn't think about it.
With SMF,
then things will be different,
since I can just borrow RM15,000 to buy 1 lot of NESTLE.
In another words,
I don't need to earn RM20,000,
then don't need to submit income tax of RM5,000 just to own 1 lot of NESTLE.
The cost of investing at NESTLE with cash is RM20,000,
but the cost of investing at NESTLE with debt is just RM15,000.
The RM5,000 and the time I saved,
are all the PHANTOM INCOME.
2ND,
If last time we bought NESTLE at RM50 with cash,
currently almost RM150,
but the only way to use that money we earned for other investment,
is to sell it.
But things will be different if using SMF,
after NESTLE rose to RM150,
then my debt ratio decreased a lot,
thus I can withdraw some money from SMF account for other investment,
or buy more shares.
I am able to make sure that I keep my current asset without selling it,
then I can invest at more assets for more income,
thus this is another type of PHANTOM INCOME.
3RD,
When shares price of NESTLE was RM50 last time,
if we buy 10 lot with cash,
then every year we will receive RM2000 as dividend.
Thus in order to buy 1 more lot of NESTLE,
we need RM5000,
so we need to collect dividend for the next 2-3 years.
HOWEVER,
after 2-3 years the shares price of NESTLE already around RM70,
can't buy it with just RM5000....
Maybe you will say that the dividend will increase every year,
but don't forget that if the dividend increase,
the shares price will increase too.
Is different if we use SMF account since we don't have to wait another 2-3years and we can just borrow money to buy that 1 lot of NESTLE,
after collecting dividend for 2-3 years,
we not only can pay off the debt,
but we also own 1 more lot of NESTLE which the shares price is around RM70,
thus this is another type of PHANTOM INCOME.
That's all I wanted to share today,
but even though I mentioned about DEBT a lot,
I do not encourage everyone to straight away apply a SMF account and borrow money to buy shares,
same like Robert Kiyosaki also doesn't want all his readers to straight away borrow money and invest at property blindly.
The most important thing is,
do we have the sufficient financial education to help us in investment?
Also,
financial education is not about learning some economic theories or learning how to balance a checkbook,
the REAL FINANCIAL EDUCATION involve a lot of other aspects too,
if not the richest man in the world should be economist or accountant already.
Thanks for reading.
I don't provide any buying/selling suggestion above,
please make your own investment decision and be responsible with it.
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