The recently launched Skim Amanah Rakyat 1Malaysia is an attention grabber with the statement below by Prime Minister Datuk Seri Najib Razak:
“We guarantee that those who pay cash will get RM134 monthly or RM13,000 after five years. Those who take up a loan will have to pay the bank RM84 a month and receive cash of RM50 a month, or RM5,000 after five years.”
The magic power of compounding is at work here.
So what is the investment return rate the scheme is giving me over the period of 5 years (60 months)? Let’s analyze three cases below.
You need to use an online financial calculator for convenience sake.
First case (Best scenario)
Assuming you invest RM 5,000 in cash, and do not cash out the RM 134 monthly payment. Your initial investment plus the monthly periodic payments now earns compound interest.
Key in these values:
Present Value= -5,000
Future Value = 13,000
Number of Payments = 60
Payment Amount = 134
Payment at: End
Then, click on IR button. The interest rate is 3.496 percent per month.
**Reader, Peter Lim, in his comment below, has corrected my initial calculation above. For a corrected calculation on this, please refer to a newer post, A Corrected Method to Calculate Investment Return of SARA 1Malaysia.**
To put things in perspective, the current interest rate for putting your money into Fixed Deposit account for 60 months is a measly 3.3 percent per annum.
Second case (Good scenario)
Assuming you invest RM 5,000 in cash, and you do cash out RM 134 at the end of every month. For simplicity sake, assume the RM 134 starts to be paid at the end of the same month you invest your RM 5,000. Using the Internal Rate of Return (IRR) formula in Microsoft Excel, you can compute and will get the monthly interest rate of 1.783 percent for the period of 60 months. Not too shabby.
Third case (Bad scenario)
You loan from bank, and you get RM 50 every month. This is not an investment anymore because you are just living on a RM 50 monthly pay cheque from government. You would have received a total of RM 5,000 after 5 years.
My Financial Thoughts
If you are in your early twenties, either as a student or young working adult, this is one of the scheme you want to be in. After 5 years, using Case 1, you can use your accumulated money as down payment for first house or to get your first car free just like KC Lau. But wait, you are only eligible if your monthly income or combined household income is less than RM 3,000. It didn’t state if an undergraduate with no income is eligible.
There is a classic Catch 22 situation here though. Why? Well, if you can afford to invest RM 5,000 cash, then a monthly cash flow of RM 134 is not such a big deal. However, if RM 134 cash inflow a month is a significant amount for you, I doubt you have RM 5,000 in the first place to invest. You have no choice but to take bank loan and be content with RM 50 cash inflow instead. To put things in perspective, that’s about RM 1.60 per day extra pocket money from the government.
Do you feel any richer?
For further readings, refer to these useful links. They provide more comprehensive info on the scheme.