Why You Should Borrow for Your ASB

Why You Should Borrow for Your ASB

Every year the question gets rehashed: Should I borrow money to put into Amanah Saham Bumiputera? It gets a fair amount of debate with people pulling out their Excel sheets to prove either you should or shouldn’t, leaving those less knowledgeable confused.

My answer:

Yes, you should. If you have the cash flow to meet the repayments, it’d bring you a lot more money in the long run than if you do it old-school.

The key point is to not take out the dividends you get at the end of the year. You don’t take money out at the end of the year if you put in money every month, so why would you take the dividend out if your objective is to save?

The rationale:

Arbitrage opportunity, the time value of money and compounding interest.

• Essentially, what you’re doing is to take cheap money to earn a higher rate. You profit from the difference, that’s arbitrage.

• By borrowing (or leveraging), you bring a large amount of money upfront which can then earn interest. 7% of RM100 is much less than 7% of RM10,000.

• Now, if you leave the dividend untouched in the account, THAT portion starts earning. This ties back to the previous point. That 7% of RM100 (RM7) will earn much less than the RM700 (7% of RM10,000). That’s compound interest.

Now, there only two constraints here: Cash flow to meet your repayment obligations, and having the discipline to not touch the dividends. Don’t over-leverage and make sure you have enough to meet your monthly payment as well as your monthly spending and you will maximize your income.

Where people get it wrong:

• The banks are making money off your loan. That’s money from your pocket you could’ve saved.

It doesn’t matter if the banks are making money, what does matter is that YOU are making money.

• Forgetting that there’s a cap to your deposits

You can’t put in money beyond RM200,000 (or is it RM250,000 now?) so you can’t continue contributing into the fund beyond, say, 12 years. After that, you’re just coasting on the RM200,000 (as far as the ASB goes). By taking out a loan up to the max 25 years, you’re effectively paying into ASB over a longer period.

• Forgetting that you get the principal amount when the loan gets paid off.

On some of the e-mails and posts that I read, people are comparing between the amount you get from saving up the amount and taking a loan. Be careful to note whether it measures the returns or what the bottom line is. Many forget that the principal that you’ve been paying for is by that time all yours.