Credit Card Tips (2)

I was planning on continuing my post about insurance, but I decided I should not bore you with the same topic in the same week ;-)

So, I will talk about credit card in this post, and continue the insurance discussion next week.

Last week I talked about how to manage credit card payments when you have a sudden need to make a large amount transaction.

This time, I will try to discuss some points that should have been put forward BEFORE the previous post..

The things that should be considered by individuals or families before deciding whether they need a credit card in their financial life..

Why should I have a credit card? My life is complicated enough without one!

This is a comment that I often hear and personally, I can't blame the people who are saying it! Credit card came into our world without the right 'first impression' and it ended up being used without the correct 'manual'..

The main ideas that people have about credit cards are:
1. you can buy the things you need/want now and worry about paying for it later,
2. the more you use it, the more 'bonus points' you will receive.. which you can exchange with various gifts when you have certain number of points, and,
3. you can have discounts at various places (supermarkets, restaurants, outlets, etc.)

Point number 1 is definitely the wrong idea, while points number 2 and 3, even though they are not wrong, still, these advertised purposes of credit cards ARE NOT the main purpose of credit cards! These are just the additional benefits of having a credit card..

The actual main purpose of credit card is TO BETTER MANAGE YOUR CASH FLOW because credit card:
1. has the ability to 'bridge' the timing difference between your salary pattern and spending pattern.
2. provides services that can assist your payment schedules
3. has the ability to provide a quick solution on emergency situations

So, why the banks (or other credit card issuers) never really advertised credit cards with their main purposes?

Well, isn't it obvious? It won't sell! People who have sufficient financial knowledge background probably have about half-a-dozen other alternatives that serve the same purposes with credit cards (financial managers, diversified financial portfolio, or even the simplest self-scheduled payment patterns, etc.) .. ;-)

However, for majority of people, credit card can still provide the personal 'cash flow management service' at a reasonable fee (the annual fee).

So, how does this work?

OK, let's take a look at this example..

Here is what a common family cash flow looks like

		Date Details 5 Electricity Bill 10 Grocery Shopping 15 Phone Bill 20 Insurance (annual) 25 Salary

So, the person must go to the Electricity Company by the 5th to pay the electricity bill,
then, take money from ATM to prepare for shopping on the 10th,
then, go to the Phone Company on the 15th, and,
organise the insurance payment on the 20th.

Some people are okay with this monthly routines (either having an assistant or having the time to do these themselves), but.. some others might not have the advantages of having an assistant or time (especially living in Jakarta, lining up to pay the electricity and phone bills can take half-a-day each).

Some other people choose to have a direct-debit bill payment, which is the bills will be paid directly from the person's bank account. This method works well for people who have a same/similar amount of routine expenses to pay every month and high discipline to set the money aside, untouched for billing at the planned time.

Now, for people who are struggling with schedules, paying some of these bills late will mean DISCONNECTION of services (I'm talking about electricity and phone), while other necessities that come in-between salaries might cause a slight 'shake' of cash flow during the month.

For these situations, credit card is a good option to choose. Once you have listed your monthly bills that you want to be paid through credit card, your credit card will always pay them on time and you will never be late in paying your important bills.

Nowadays, some banks offer the billing date options too for your credit card. You can choose whether you want to be billed on the 10th, 20th or 30th. You can ask your bank about this service and decide which date is better for you (depending on your salary date).

Now, you only need to take ONE trip to the ATM to pay the credit card bill and that's it!

The advantage of centralised billing is that you can easily track your spending trends and make future plans. You know how much you spend on your routine expenses (based on your credit card bill and statement) and you can make plans with the rest of your salary -for savings or holidays, etc.-..

Alright, that was about the 1st and 2nd main purposes of credit card. Now, we move to the 3rd main purpose.

Referring back to my previous post on credit card, it was clear that health treatment in a case of emergency can be arranged more easily with the presence of a credit card.

Most hospitals (especially private ones), require either a health insurance membership card or a credit card to prove that patient CAN cover for the health treatment provided by the hospital. Without either of these cards, patient can be held untreated for a long time! Certainly we do not want this to happen to ourselves or our loved ones..

Some credit card actually have hospital plans for hospital treatments or hospitalisation, where the total bill can be paid in installments; 3, 6, 9 or 12 months (or even longer periods of time). You should ask about this when you apply for a credit card.

Are there other important benefits of credit card?

Nowadays, credit card issuers must compete against others in providing better services to the credit card holders.

Most credit cards now have formed partnerships with various shops and outlets in providing planned purchase service. With this service, credit card holders can purchase goods without paying in full at the time of purchase, instead they can pay in installments over certain period of time.

What you need to remember is that, while this is a great way to purchase things that you need without shaking your cash flow too much in a certain month, you still need to be careful about:
1. the real necessity of the the goods you are purchasing
2. the amount of money that you will have to commit to pay each month until you have paid the goods in full.

Moreover, these planned purchases are sometimes accompanied by a small interest (although a lot of credit card now offers 0% interest for planned purchase). If this is the case, then you need to think it over, whether you should purchase the goods you need with your credit card, or just save up for a few months and purchase it with cash (the money you have saved).

When the goods you are purchasing are for your small/home business (equipments, inventory, etc.), then the small interest might still be worth it. But when it is for something that you will only use for leisure (home entertainment, etc.), then you might want to look around for alternatives before you make you purchasing decision.

The main idea that you need to remember is that credit card is there to provide simple financial management assistance to individual or families who need it, NOT to make your life more complicated.. :-)

Have a nice day!

Insurance.. Precaution? Investment? or.. Unnecessary Expense? (2)

First, I would like to apologize for the late posting of this post... :-)

Second, I will get right down to business. As promised, I will talk about insurance from clients' perspective.

What do I mean by that?

Well.. everybody (or family) has specific needs in life, driven by each person's unique situations, opportunities, objectives and choices.

While insurance, as a financial buffer, is simply one of the many financial strategies that can be applied, or added, to a person's (or family's) financial management as a part of the whole financial planning.

When it is carefully and correctly chosen and applied, it can be a great protection and additional investment in the future. However, when it is badly chosen, it can definitely cause further problems.

Hmm.. am I making any sense?

Let's see..

As I mentioned in my previous post about insurance, these days, insurance industry is getting more and more competitive and insurance companies need to make good offers to gain the interests of prospective clients. The most visible part of the competition is, how much return these insurance companies are capable and willing to give back to clients after years of contract.

At the same time..

Prospective clients need to recognize their financial situation as a whole to be able to make the best financial decision on how to structure their financial investment and how they should diversify it.

First, prospective clients need to make a list of properties, they need insurance cover for and for how long.

Second, they need to decide how much of the properties' values they would like to be covered for.

Third, these data need to be cross-calculated against the whole income and other financial strategies applied by the prospective clients or families.

Hmm.. I guess I should give a clear example..

It is something like this..

When you feel the need for an insurance in your family arises (for house, vehicle education or life), start looking around for the type of insurance that fits your needs. Remember to look for:

1. Combined packages: education+health, life+health, house+contents, vehicle+accidents, etc.

2. Additional benefits: how much cash benefit that you can receive from the investment part of the insurance package and after how long.

Then, cross-check it with your current financial situation:

1. How much of your current salary you are prepared to set aside for the insurance (after allocating for daily needs, routine payments and savings).

2. Make a list of dates which you would like to receive the benefits from the investment part of your insurance (children's school entrance payment due dates, family holiday final booking due dates, your retirement expectation year, etc.)

ASK the insurance agent to provide you with TWO or THREE possible choices of premiums that are likely to be met by your calculation.

Remember!

Insurance, even when it is combined with an investment plan, should NEVER be your only or main choice for investment.

Your personal or family investment should consist of a number of diversified choices, such as, savings, short-term and long-term time deposits and/or gold. If possible, properties or land and stock or share can also be considered.

The reason for this is..

Insurance is not savings, although it has an investment part of it. The premiums that you pay each year consist of two parts, insurance cover and investment benefit. Therefore, trying to achieve the full amount of your future needs from an insurance would cause you to pay a high premium, and there is almost no flexibility in regard to the timing of when you can withdraw your benefits.

What you should do..

Secure one-third to half of your future needs with an insurance+investment package, while at the same time, open a new savings account in your bank to achieve the remaining amount of that you aim for.

Whenever you have the enough amount in your saving account to open a time deposit, open one. Time deposit offers higher return than a savings account, so you will benefit more from your money.

Another alternative..

Banks also have programs called 'planned savings', which are aimed to reach a certain goal that you set for a time in the future; school entrance fee, holiday, etc. With this type of saving, the bank will withdraw a planned amount of money from your main account each month for the length of the saving plan.

Savings account, time deposits and planned savings account are good choices to diversify your financial investment (and its risks) and to complement your insurance+investment package.

A good combination of financial strategies applied to your investment can help you secure and grow your wealth for a long time. Not only you can plan your future well, you can also enjoy your life after retirement comfortably.

If you have any additional thought to add to this post, please fill in the comment form below.

Thank you for reading and have a nice day!

Insurance.. Precaution? Investment? or.. Unnecessary Expense? (1)

Yes, I know.. repetitive calls from insurance agents can be very annoying, especially when the calls are blind calls, and you are not considering taking insurance.. ;-)

However, what if you are thinking about having an insurance policy, but you feel that you don't know enough about it, and you are not sure how to decide about which type of insurance you should choose?

What we need to understand, to begin with, is that insurance is 'transferring part of our future risks to a third party (insurance company)'..

Why do I say 'part'? Because, we still have to pay a regular fee to the third party as a bind. This regular fee is known as a premium.

There are different types of risks that can be covered by insurance, some common examples are:
home/building against theft or fire,
vehicle (car/motorcycle) against theft, break down or accident,
health for hospitalisation or accident,
education for future plans, and
life in cases of accident or death.

There are also other types of insurance, but in this post, I will only discuss the common ones.

There are certain aspects that will be taken into consideration to decide the amount of premium we have to pay for the insurance we take, for instance:
total value of building and contents, in the case of building/home insurance,
age and make of vehicles, in the case of vehicle insurance
age and health condition, in the case of health and life insurance
age of child(ren) to be insured and how much to be collected at due date, in the case of education insurance.

All these aspects are explicitly stated in the insurance application form, and your insurance agent is able to explain in more detail if you need more information.

Once all your details are collected by the insurance agent, the agent can then tell you (based on the insurance company rule) how much premium you need to pay for each insurance period. Most insurance policies require annual (yearly) premium payments, while others, might present their calculation in an annual amount but allow clients (you) to pay in monthly or quarterly installments.

Referring back to the point where I mentioned that having insurance is 'transferring' part of risks to a third party is the only way to save you the shock of learning about the amount of premiums you have to pay for the insurance you need.

Insurance cannot cover any risks suffered by their clients, unless they accept enough money from clients to re-invest in other businesses to grow their profits. Insurance companies are businesses, and more than that, insurance companies are running a high-risk type of business.

Therefore, if the insurance company who approaches you offers a very low premium for a high coverage that you ask, BEWARE! You really need to check further any relevant details about the insurance company background!

However, in this era, with the strong competition in the insurance industry, insurance companies need to 'manage' their clients' expectation very well and make offers that can benefit their clients more.

This condition, resulted in various packages of insurance that do not only require premium payments by clients for insurance cover as a benefit, but also offer additional benefits, such as, retirement savings or investments.

How is it possible?

Here is how..Insurance companies, as a business entity, must ensure their ability to keep running and paying their clients' insurance covers whenever their clients claim it. At the same time, to stay competitive against other insurance companies, they have to keep the premium they offer as low as possible. Therefore, insurance companies must re-invest some of the money collected from their clients in other businesses after allocating the necessary amount to be placed in another insurance company, to insure their business.

The amount that insurance companies invest in other businesses is aimed to generate ongoing profits to support their main business, which is covering people's assets and lives (clients' insurance policy). From this operation, when successful, insurance companies can do a lot more than simply pay clients' claims. They can also offer some return to clients, at least to give back some (or all) premiums that have been paid by clients after a few years.

These types of packages give better offers when clients choose the long-term insurance policy (10 years or above). Some of the common packages are:

health insurance + retirement package, where you have to pay a premium for the health insurance until the age limit (usually around 55-60 years old), and you can collect the retirement benefits a few years after (usually between 75-90 years old). With this type of packages, you might still be covered for sickness or hospitalization up to the benefit collection age, although not all insurance has the same rules.

health insurance + education savings package,where you have to pay a premium for the health insurance until the age limit (usually around 55-60 years old), and you are entitled for some part of the total benefit payout when your children are entering new stage of education (entering elementary school, junior high school, senior high school and university).

The types of packages offered by each insurance company are different, so you should have a look at more than one company to find the one that suits you the best.

A new development of an insurance package is health insurance + unit link. This type of insurance is directly linked to a set of investment units (shares/stock) that are chosen by the insurance company's investment managers.

This type of insurance is riskier than the saving packages, although whenever the share market is going well, the unit link investment is going well too and clients can reap high profits from their investment linked to the insurance.

Why is it riskier?

Here is why.. by offering a unit link insurance policy, insurance companies are transferring back to clients, some of the risks they are facing when they are re-investing their funds to support their business. So, rather than offering a set amount of money, they will pay clients in later years, insurance companies offer clients the choice of having limited control over their wealth invested in the insurance companies. By doing this, insurance companies are limiting their loss, if the businesses they re-invest in suffer losses or even go bankrupt.

Clients having unit link insurance usually are not allowed to change the units (shares/stock) placements. However, they can choose how much (in percentage) of their premium to be allocated in the share market and/or money market. This gives clients some (limited) control over their money invested in the insurance company.

The fact that clients have some control, means that they need to be in a position to take decisions to protect their own wealth. Therefore,clients must have sufficient knowledge about financial markets and keep themselves up-to-date with any development in the financial market, in order to ensure the safety of their investment linked to their insurance policy.

Having discussed about various types of common investment policies, I hope this post can provide some useful information for any of you wondering about insurance.

I will discuss more about insurance from clients' perspective in my next post.

Have a nice day :-)

Credit Card Tips (1)

"Oh no! The credit card statement is here again! I couldn't pay it in full last month, and now, it seems that my bill hasn't gone down a bit at all!"

That's right! This exact situation has happened to a lot of people. One of the common reason is a family member gets sick and needs immediate medical attention. Fortunately you have a credit card on your name so your unwell relative can receive the needed treatment without delay.

The scary thing is, as can be guessed, THE BILL!! Nothing about medical treatment is cheap these days and not everyone (especially in countries like Indonesia) is covered by medical insurance. It is almost like a death trap.. if you don't pay, you don't get treatment, but if you pay, you might have to live in debt for the rest of your life..

Anyway, most people WILL and DO choose to live in debt rather than live with an illness for most people believe that money can be found easier when we are healthy.. that is true!

So, don't panic if you are forced to use your credit card (or even max it out) to help yourself or your family member in the case of medical emergency. The important points you need to keep in mind is:

1. Discuss the patient situation with the doctor
A thorough doctor analysis will help a lot in giving a good idea on the treatment needed by the patient and the budget needed.

2. Discuss it with someone else
Another family member or a friend to talk to will be able to give you a different opinion or complete your plan. The more options you have, the better decision you will make.

Some of the options worth considering are the hospital fees, specific treatments (might need transfers to another hospital), the number of specialists needed by the patient, routine medicines, etc.

The other thing to consider is, how many family members are prepared to help out with the bill, both short-term and long term.

3. Make a calculation
Once you have the complete information about the patient's treatment needs and the available budget, then you can set a rough payment plan to present to the other family members.

~~ In the case of long-term illness, points 1 to 3 should take place BEFORE the patient is taken to hospital. However, in the case of sudden illness, points 1 to 3 might take place AFTER your credit card is scanned for billing by the hospital, otherwise the hospital will not accept the patient for treatment. ~~

4. Following up with the payments
Whatever you decide to do, you will still have the billed amount by your credit card to pay. Some credit cards offer installments while others don't. In the case that your credit card doesn't offer installments, you need to be ready to pay some portion of the bill each month to make sure that the bill goes down (and NOT UP) the next month.

When you receive your credit card statement, you need to have a look at three things:
* Total of the bill
* Minimum payment
* Finance charge

Then, there are a few things you need to remember:

1. NEVER pay for minimum payment amount only, unless you are planning to pay the total bill in full BEFORE the bill due date!

2. ALWAYS pay before the bill due date

The reason for the first two tips is because any amount of the bill that is left unpaid after the bill due date WILL be charged an interest or finance charge in the next bill on top of your usage. These interest and charges will very quickly build up into your total bill amount.

3. You can USE THIS simple calculation to help you bring down your next bill (credit card interest in Indonesia is approximately 2.5%-3.5% per month, with cash withdrawal and late payment fees approximately 4%-6% per month):

First, add your minimum payment and finance charge (which most probably come up to around 15% of your total bill).

Second, add some portion of remaining bill to make up for an amount that is roughly around 20%-25% of your total bill (the more portion you can pay each time, the better).

Do this calculation for a few billing periods until you can see the downward pattern of your bill.

4. Try not to use your credit card until you have successfully brought down your total bill to a reasonable level (similar amounts to your regular bills -without the emergency case-). If you really have to use your credit card for some extra expenses, you need to be sure that you can pay these additional expense in full in the next bill (on top of the remaining bill).

These simple tips should help you from suffering a long-term and building up credit card bill as a result of an emergency spending.

I am not giving any tips in 'real' accounting calculations on purpose. I am only trying to share from past experience.. based on a little part of my education :-) .. In any case you would like a complete calculation or you need to set a payment schedule, you need to see a finance expert/finance manager to help you with it.

If you have any suggestions or advice to add, you are more than welcome to put it in the comment form..

Have a nice day!

Family Finance Tips

I have always meant to put simple family finance tips in this blog but so far I haven't and that is very bad of me.. So now, I will try to do the 'right thing'.. :-)

One of my excuses was that I was waiting for the 'more knowledgeable' author to start posting about finance in this blog, but as he is still swamped with other assignments (the real ones from work), I have to stay patient about his involved in this blog..

My other excuse is that I don't know how far I can help you, since my knowledge is widely based on personal experience, as I am not a finance practitioner -although I do have an accounting degree.

Anyway.. trying to help is always better than doing nothing, and I am confident that you will consult more than one party/source in the process of making a fully-informed decision so, here it comes.. my first family finance tips.. (more will be coming in the future).

Have a nice day!