Sunday, September 26, 2010

Making Use of NCD for Your First Car?

For those of you who have purchased car, you usually won't know about NCD (i.e. No Claim Discount or NCB or No Claim Bonus) until you plan to sell your car or buying a new car. Your car agent will usually tells you about this NCD/NCB and how you could make use of it.

Well, this post is not really just talking about NCD but whether you should make use of the NCD for your first car purchase. It may be a smart move, but is it? Let’s check it out…

What is No Claim Discount (NCD)? 

NCD is a discount given to the car insurance policy holders when they want to renew their car insurance. If no claim is made (e.g. due to the accident) for a certain period of time (based on the table below), you will get discount in terms of % for the premium that you should pay.

Beginning of Private Vehicle Motorcycle Commercial Vehicle
1st Year 0% 0% 0%
2nd Year 25% 15% 15%
3rd Year 30% 20% 20%
4th Year 38.33% 25% 25%
5th Year 45% 25% 25%
6th Year 55% 25% 25%
Note: This table applicable to Malaysia automobile insurance only.

For example, your insurance is $1K and after a year (2nd year) and you do not claim it, you will entitled for 25% discount. That means you only need to pay $75 for the second years. This applies to the subsequent years. Please also note that the discount is different for private and commercial vehicles and motorcycle as well.

Buy Your First Car to make use of NCD?

If you’re one of the smarter people, you probably already have an idea to make use of this NCD because the NCD can be transferred to your second new car. So, what you do is to buy your first car “as cheap as possible”. That could be the second hand  or used car. The cheapest the better because your 1st year has no discount at all. You buy the second hand car and use it for 6 years (depends on how much discount you want) and sell it later on to purchase your second car. You are then entitled the 55% discount of the insurance premium for your second dream car.

Don’t get it? For simplification, let’s assume your insurance premium is the 5% of your call value and see the following example:

(1) Purchase your first car as cheap as possible:
  • First Car Value: $10,000
  • Premium: $10,000 X 5% = $500
  • First Year Payment: $500
  • Second Year Payment: $500 X 75% = $375
  • The subsequent years: <do your own math>
(2) Sell your first car and purchase your dream car, transfer your NCD to the new car:
  • First Car Value: $100,000
  • Premium: $10,0000 X 5% = $5000
  • First Year Payment: $5000 X 55% = $2250 (You save by 55% – explained below)
  • Second Year Payment: $500 X 55% = $2250 (You save by 30% – explained below)
  • The subsequent years: <do your own math especially your NCD is not at maximum yet>
Note: For a very accurate premium calculation, you can talk to your insurance company or you can refer to this car insurance calculator from Kurnia here. - (Malaysia only)

So what does this tell you? This tells you that by making this smart move, assuming you purchase your second car directly without any NCD, you save up to 55% for your first year and 30% (55%-25%) for your second year and so on. So the smart move is really:

“Buy Your First Car as Cheap as Possible and Use It for 6 Years Before You Buy Your Dream Car”
Is this really a smart move?

Everything comes with a price, you buy a cheap stuff and what is the trade-off? No trade-off? Are you sure? Yes, there is a risk and the risk is the maintenance of your first car. However, there are people saying that the maintenance cost is way lower than the insurance premium if you buy your dream car directly. Well not really, it all depends on how high your maintenance cost right?

The maintenance cost is really depending on how well you understand your car. Huh? Yes, how much you understand your own car. Let’s share my own experience here. I used to have an old car (i.e. > 10 years old) and every time I went to service, averagely it costed me around RM500 and sometimes even more if changing parts was required. I then passed this car to my dad to use. Surprisingly, the average maintenance cost now is less than RM 200 for every services. How could this happen?

This is because my dad “KNOW EXACTLY” what the car needs and don’t need. He knows the car well and able to negotiate with the mechanic and go into technical when possible. Do you need to change the parts if you can fix it? Why can’t you fix it rather than changing parts? Is it because you’re lacking of skills? Do we need to change break oil that often? Well, there are just too many things. The sad thing is nowadays you hardly find any honest reliable mechanic out there. Everyone now is just too money oriented.

Now, back to the question is making use of NCD to buy your first cheap car is a smart move? Yes, only if you can make sure you do not blow up your maintenance cost of your first baby. But how? Let’s see the list if that make sense to you:
  • Make sure the car is really low maintenance (get someone who knows car to evaluate the car that you want to buy). You need to make sure it can last for 6 years too if you want to get the 55% discount.
  • Has a very reliable and trusted mechanic who won’t simply drain out your money (hardly find nowadays – probably only those in the village or “kampung”).  
  • You’ve knowledge on car (mechanical parts), you know what exactly is needed or not needed for your car. In the workshop, you usually instruct them what to do and you pay for their services to do that. As a matter of fact, some mechanics become reliable and trusted only when they know you know exactly what they’re doing. Well, this is our world...
If you’re scare of taking the risk, then you don’t need to buy a very cheap car (e.g. used for 15 years). You can buy the 5 years old car for example. It will still save you some money. Good luck. Now you know this tip, would you ever consider this smart move?

Sunday, September 19, 2010

How to make decision to buy? - Buying Decision Guide

I started this topic because I met someone who may influence my buying decision process during my China’s trip. Well, read on and see if that will change your mind too. Here are the 3 steps generic buying decision guide that I come out with...

Almost everyday we come across to make decision whether we should buy or NOT to buy something. Should I buy this product? Should I buy this insurance? Should I buy this house? Should I buy this stock? Should I buy this unit trust? Wow, there’re just so many things we want to buy but how do we make decision? What is the guideline?

Step 1: Understand Your Buying Purpose

The first thing that you should all do before you start buying stuff is to understand the purpose of buying a stuff. That stuff serves certain purpose, what is that? Don’t ever fall into common trap that you do NOT even understand the purpose of buying a stuff. Of course in order of to understand the purpose, you must also need to understand and familiar yourself if the products. Keep in mind one thing very important is a same product may serves different purpose to different people. So you still need to identify your own purpose of buying the product and not to be influenced by the person who sell you the product.

No matter what, there MUST be a purpose. Even though if you buy a stuff for the fun of it, then the purpose is for “fun of it”. It is as simple as that. If you really have no idea of the purpose, then you shouldn’t buy that stuff at all!

Step 2: Does the purpose meet your needs?

Now, you understand the purpose of buying a stuff but is the purpose justifiable? Is the purpose really meet you needs? Is this what you’re really looking for? Do you really want to buy a stuff for the purpose of just for the fun of it? Well, it depends on much you value the “fun” then. In reality we have many needs and what is the most important thing is to prioritize our needs. Do you have needs that you haven’t met yet? Then, why don’t you buy stuff to meet those needs first?

For example, buying laptop or buying an iPad is more critical to you? Which one serves the purpose that really meet your needs the most? If I used $2K to buy an ipad, what are the things I can buy to even more to satisfy my needs with the same amount of $?

Step 3: Are you affordable to buy?

Once you understand the propose of the product that meets exactly your need, it is time for you to buy. However there is one question, is the product too expensive to you? Well, this probably the most subjective thing. What is considered as affordable and what is not? Well, this is my own rule of thumb for a very obvious reason that you are NOT affordable to buy a stuff when:

  • You need to take loan to buy (except for housing)
  • You need to take monthly instalment to buy (although is 0% interest)
So, what if for those NOT so obvious reasons? Does that mean you can buy? Yes, as long as it doesn’t affect the key purpose of your savings. Theoretically in personal finance, there are few purpose of your saving. You save for the purpose of:
  • Emergency fund – E.g. 6 months of your salary fund for family or your personal emergency. Is this fund affected?
  • Investment fund – Every month you invest part of your savings or earning. Do you still have $ to invest monthly?
  • Insurance fund  - Every year, you need to reserve some money for your insurance premium. Is this affected?
  • Other funds – You’re planning to buy something expensive with this fund that you have save for the past few years. Is this affected?
As long as buying this new stuff that doesn’t affect any of the saving purposes that I mentioned above, you can go ahead to buy. Why not? However being said so, if you still has loan or credits that you haven’t pay yet, you may need to seriously consider whether you should settle your debt first. I would pay up all the debt first before I start purchasing any new thing! Good luck!

[Updated on 12 Dec 2010]  You may want to revisit step 2 or perhaps step 1 as well if you find that you're not affordable to buy in Step 3. Is that something that you really need? Is there any cheaper alternatives? Good luck!

What do you think of these 3 steps buying decision process? Does that sound reasonable to you?

Wait a minute!

Speaking or writing is always easier than doing. What if you meet the following people who want you deadly to buy their product? What if your wife or girl friend wants you support her to buy things from her? What if your family member are selling stuff? Would you support them to buy stuff that you don’t need at all? or you make yourself that you need the product?

What about a very pretty girl that have ever met come and approach you to buy something from her? Have you ever approached by a sexy pretty salesgirl? What is your reaction usually? What if the sales girl goes beyond the line especially when your wife is not around? Wow!

Well, in reality we don’t buy stuff based on our logic – like the 3 steps process I mentioned above. We buy stuff based on our emotion and yes, it is love too. Either you fall in love with the product with no reasons, or the sales girl. You make decision by your emotion and you usually don’t think so much without considering much.

Do you agree? What are your experiences?

Sunday, September 05, 2010

What is Your Investment Return?

You may face similar conversation below during your daily activities but not to the second stage of the conversation because we always measure the investment return based on the "Amount"
rather than the "Percentage" .

So, who do you think is the smarter investor? Scooby Doo or Son Goku (Dragon Ball)?

Investment return should always be expressed in "percentage" rather than in "amount" for comparison. In this example, Scobby's investment return is $1K/$5K X 100% = 20% wherelse Goku's investment return is $10K/$200K X100% = 5%. It is clearly Scooby has the higher investment return although the amount is way less than Goku.

Not only just the "Percentage", the investment return should be expressed in the "Annual Basis" too which is kind of a standard way of measuring investment return in the financial world. If you don't want to use "Annual Basis" as a base, it is okay too as long as the comparison has the same common ground (e.g. using 6 months to compare).

P/S: Anyone think that Goku is the smarter investor here? Yes, he could be - using money to generate even more money with low risk investment return? What is your opinion?

Didn't find what you want? Use Google Search Engine below: