Business & Finance

"We survive on adversity and perish in ease and comfort" - Mencius (Chinese Philosopher)

We were In Over Our Heads

Posted: 2 July 2007.

This week, we received the final payment to the house we sold in Malaysia. We were so happy to complete this transaction, that we celebrated with dinner at White Spot (after our Family Trip to Granville Island). Selling the house was an extremely painful process (buying and owning the house was an extremely painful experience too), and not because we were attached to it emotionally in any way. But since it's all over, it's time for a little closure, and maybe talk about the financial aspects of owning a house for those of you considering to do so (at least in Malaysia).

Buying the House:

I was still working in the United States when we started shopping for houses. I had calculated a budget of RM450K. But unfortunately I didn't heed to that budget. Not only that, but the house itself was in dire need for fixing. The house was located in an expensive neighboorhood, just across the street from my parents. If you read the book "Millionaires Next Door", you'll know that these are all tell-tale signs of a bad purchase. Children can rarely afford houses in the neighborhood of their parents. And receiving financial help from parents (in this case to help fix up the house) would only deepen our debt, reducing our chances for Financial Independence.

People kept saying that it'd be an investment, which it's not. According to Robert Kiyosaki (author of "Rich Dad, Poor Dad"), a house is only an investment if you rent it out. If you live in it, then it's a liability. We were going to learn the hard way what a 'bad investment' the house really was. In August of 2002, we closed the deal.

No 44 ss1/11, Kg Tunku

Maintaining the House:

We were in WAY over our heads with this house. After spending tens of thousands fixing up just the house basics (we didn't even get a chance to replace the roof, which was old. We only patched it up), we had used up most of our savings. And our parents also contributed a considerable amount in the renovations. Costs of the renovations were well above our original estimates. I think we'd make terrible house flippers.

View of Dining Area from Living Area
  I was now back in Malaysia, working on a Malaysian salary, which is significantly less that what I used to make in the US (factoring in the conversion rate). The house payments took up about half our household income (my wife also has a full-timke job, and works part-time additionally to help out). Any financial advisor will tell you that you should spend NO MORE THAN 30% OF YOUR INCOME on house payments. We were spending half.

We had a negative cash flow. This means that every month, we spent more than we earned. And we were seriously trying to live within our means. But it was hard. We didn't own a car (our parents let us borrow their car), but we paid for car insurance, and life/health insurance. We also had 2 small children, which means extra food, health costs, and a small education fund for their future.

The house was slowly deteriorating through's roof patch work. Small leaks began forming, and our original contractor that fixed the house fled. I guess he didn't want anything to do with the house anymore. The small leaks became big leaks, especially in heavy rain. And before long, it got pretty bad. The awning covering the front porch collapsed one weekend while we were out of town, and had to be replaced. Another costly incident.

We were not happy in this house. The financial strain caused a lot of grief in the family. Not only we were slowing growing more and more in debt (after depleting our savings), the house itself was not the best of houses. The state of house made it seem like it was uninhabitated. People frequently (especially people visiting the neighbors across the street) parked in our driveway. We couldn't get in or out. And all because they thought nobody lived there. That really did a number on our self-esteem.

Selling the House:

We considered selling the house about a year after moving in. At first, we did it passively. We weren't prepared to lose money on it, and it seemed like there was no hurry to sell the house. But with my wife starting her PhD program in 2007, we had to step up the pace. The house was on the market for over two years. And despite all that, we weren't able to fetch a good price on it.

According to Robert Kiyosaki, appreciation of property valuation is the FOURTH reason for investing in a house. And here we are, expecting to make money of property appreciation. Due to our urgency of having to leave the country quickly, we had to let the house go for below the price we purchase it. Which means we lost ALL the money spent on renovating the house, and ALL the money we paid on interest. Plus, we had accummulated debt from several years of negative cash flow.

After settling on a buyer, the sale and purchase process took several months. We confirmed the deal at the end of August 2006, and received final payment at the end of June 2007. That's a whole 10 months from start to finish. It didn't help that the lawyer we hired to represent us, switched and represented the purchaser without informing us. That's a whole other matter altogether. Final tally? Let's say we lost a lot of money...

View of Living Area from Dining Area
Lessons Learned:

Staying in this house wasn't all bad. There were moments we just didn't care about our financial situation, and swept everything to the back our minds (it's quite financially irresponsible to do that). But we were happy momentarily. The house is great for toddlers. It's an expanseful single-storey bungalow, which our kids enjoyed roaming about without fear of falling down stairs. But in the end, it was rough... Our take aways (which can be confirmed if you read the books I mention in this article), are as follows:
  • A house is NOT an investment if you living in it. It's a liability. If you want to invest, rent it out.
  • You should not spend NO MORE THAN 30% OF YOUR HOUSEHOLD INCOME on House Payments.
  • Do not accept monetary aid from your parents. You'll just grow a dependency on it. And it sucks!
  • Don't Buy A House Near Your Parents. You most likely CANNOT AFFORD IT.
Right now, we're in Vancouver. And though we still have to make up for a lot of debt we accummulated in Malaysia, at least our cash flow isn't negative. And we have a lot to look forward to. We are a lot more happier without that house, which was for a while, the bane of our existence.

Think twice before you buy a house.

Frugal, Frugal, Frugal

Posted: 7 April 2007.

It's April, and I'm reading this book called "The Millionaire Next Door" by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. You can expect my book review some time this month. So far, I've only read the first 3 chapters, but the second chapter entitled "Frugal, Frugal, Frugal" really inspired me to do something about my wealth situation.

I'm jumping the gun a little bit on my book review, but the book basically defines wealth as a person's net worth. And you can calculate your expected net worth based on the following formula:

(Your Age) * (Your Current Annual Salary) / 10

I won't tell you what my expected net worth should be, but my current net worth is ZERO. Yup... nothing, nada, zilch. Interestingly enough, at the end of 2002, after working 3 years in the US, I accumulated wealth amounting to approximately RM80,000. But after living in Malaysia for 4 years, my accumulated wealth was reduced to nothing. Not only did not increase my net worth, I actually squandered it. And I attribute this to my behaviour as a UAW.

That's right... The book defines 3 types or people, the Prodigious Accumulate of Wealth (PAW), the Average Accumulate or Wealth (AAW) and the Under Accumulate of Wealth (UAW). A PAW has a net worth of at least double the expected net worth estimated from the formula above. A UAW has a net worth of less than half the estimated net worth. I am (at least currently) a UAW...

It's so strange that when I was in the US, I was a PAW, if not an AAW. I lived well below my means, and saved a significant portion of my salary. 80K in 3 years is quite a sum of money. The Malaysian lifestyle is that of the hyperconsumer. Almost everyone in Malaysia is a hyperconsumer, buying things for their status. I'm not sure if I'm a hyperconsumer, but one thing's for sure.. the house we purchased was well above our means. The book states that statistically, millionaires own modest homes. Most of them don't have mortgages. And here I am spending close to half my income on mortgage payments. A BIG NO-NO if you want to accumulate wealth. And for what? A big bungalow in an affluent neighborhood...? Buying that house in Malaysia really affected my life.

So what now...? Well, I'm living from paycheck to paycheck... still. But I'm starting over. The house is being sold, and the debt I accumulated while owning that house is being paid out. I'm earning a lot more now that I'm in Vancouver. Vancouver is an expensive place to live, especially if you have children. Childcare in Vancouver is border-line highway robbery. But at least it's good childcare. I don't earn enough to simply put aside 30% of my income, and go about my merry way. So I'll need to take a more pro-active approach to finance. I'll start with (1) an annual budget (which I don't have yet), (2) a plan to save 10% - 20% of my pre-tax income, and (3) an investment plan for my wealth, as I accumulate it. I'll try to learn as much as I can from the Millionaires Next Door.

Financial Independence

Posted: 11 March 2007.

I don't get it. This should be one of my most important goals, yet it is the one area that gets the least attention!

I became aware of the concept of 'Financial Independence' when I first started working with Aris at Maestro Planning Solutions, back in 2003. I've known Aris since we were kids... well 'kind of'. My mom and his aunty Sam both worked for MARA, and my mom frequently tried to motivate me to do well in high school by comparing me with Aris. I think Aris and I were both high-achievers. But I didn't get to know Aris personally until college. We both studied Engineering at Cornell University.

Anyway, Aris is now an entrepreneur, pursuing his dream. He quit his 'day job' in Silicon Valley, got together with some friends, and started a new technology business in Malaysia. This is after winning Malaysia's Venture 2002 Best Business Plan award. Even though we're of the same age, and worked together on many occasions (we also worked together promoting Malaysia at the Malaysia Association at Cornell University), I look up to him in many ways. Aris is a man of vision, a man who knows what he wants. And having a vision for the future is half the battle for going to where you need to go.

I think my biggest obstacle achieving more financially, is the fact that I've had it easy. Like the quote at the top of this page says, "We survive on adversity and perish in ease and comfort", and I've been living quite comfortably most of my life. And there's another saying "Good is the Enemy of Great" by Jim Collins, which I also agree with. I just can't settle for good. I HAVE to strive for GREATNESS! But what do I want? How will I achieve Financial Independence? Do I need to start my own business? Am I ready? So many questions...

Well, the good news is, I kinda know where I need to go. My vision isn't clear yet. But with some direction, and a lot of reading, I should be able to go to where I need to go. I'll start by putting into practice, the things I've learned from all the motivational books I've been reading (well so far, I've only read one).

Let's plan for the future!

By the way, my definition of 'Financial Independence' is having enough passive income such that one does not HAVE to work, and would pursue work in something one truly desires. I couldn't find a better definition of 'Financial Independence' on Wikipedia. Maybe it's called something else to other people. Anyway, it's like retiring, but does not imply a retirement age.

Make it BIG!

Copyright Azroy Kandan 2007

Last Updated: 2 July 2007