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Every single breadwinner works hard for the family, regardless of stress at work or business. We work to raise up our family’s standard of living and to provide for our children’s education, retirement and legacy. The importance of financial planning is just like the importance of car maintenance. It keeps your car in good condition and helps it last longer. Similarly, this is how you’d protect your family through financial planning. With that, here’s a family financial planning guide to get you started:

1. Get the Right Type of Insurance

Many are being encouraged to sign up for different policies with fancy features. How do you identify what is necessary and what is excessive during financial planning? Let’s look at some examples: 

• Medical insurance with an annual limit of at least RM1,000,000
• Critical illness insurance to supplement the limitation of medical insurance and replacement of lost income
• Life insurance policy which can settle all debts and provide living funds for your family

Is there a difference between an assured sum of RM100,000 and RM500,000 on your critical illness or life insurance? Let’s assume your annual income is RM60,000 (monthly income RM5,000):

Scenario 1:

RM100,000 paid out in the event of diagnosed critical illness or death can barely match your income for 1.5 years. Alternatively, you could place this last source of income RM100,000 in a fixed deposit with 2% interest per annum as your “passive income”.

Scenario 2:

RM500,000 paid out in the event of diagnosed critical illness or death could match your income for 8.5 years (RM500,000/RM60,000) or you may invest RM500,000 in any form of investment with a return of 10% per annum as your “passive income”. You have more investment choices to generate passive income instead of just placing it in fixed deposit.

Using the formula above, the more you earn, the more you need to protect your family with a 10x return on your annual income when considering life and critical illness insurance.

2. Diversify Risk on Asset Classes

Are your assets spread out across the business, fixed deposit, insurance policy, shares and unit trusts, properties and single currencies? What is your allocation between liquid (easy to sell) and illiquid (difficult to sell) assets? I recommend that you try to maintain a 50:50 ratio to ensure flexibility. These are important questions that must be asked during financial planning.

For example, many fall into the trap of buying too many properties which limits your liquidity and may affect your cash flow in the event of an emergency like Covid-19! Nobody could’ve predicted this pandemic, and many have struggled to liquidate assets like properties. It’s safe to assume they would not be in such a tough position if they had previously stuck to the 50:50 ratio and assessed their financial standing prior to taking on these long-term commitments.

3. Assess your Dependency Risk

Do your earnings heavily rely on active income? Are there investments that can generate passive income? Do you have cash in hand to last for 3-6 months of household expenses in the event that you lose your job? Financial planning will involve assessing these areas of concern.

If you run a business, does your company have enough cash to cover 3-6 months of overhead costs? Is there a dependency risk on a few customers or suppliers? You may feel the impact during a crisis, with many businesses affected which can trigger tensions linked to credit terms and suppliers. Eventually, all these dependent risks could lead to the winding up of your company.

Whether you are an employee or entrepreneur, always consider your dependency risk before buying or investing in anything.

4. Writing a Will or Setting Up a Living Trust for Family

Unfortunately, most people don’t prepare for sudden death or being admitted for surgery. I’ve received a few emergency calls to write a will for parents in a critical stage. Some couldn’t even sign off on their will due to being in a coma or passing away before the will was ready for signing. This led to assets being frozen during the estate clearance while the family was left waiting for funds to carry on with their lives!

Another example of a worst-case scenario is if both parents die prematurely in an accident while their kids are still under the age of 18, which makes estate distribution even more complicated. Who will be your estate executor? How well will he/she manage your estate fund for your kids? Is there a chance that your estate could be compromised by bad actors? These scenarios are unlikely, but demonstrate the need to set up a living trust on top of writing a will during financial planning in order to protect your family. This ensures your family receives a fixed amount for living expenses and children’s education.

Structured distribution will also ensure that the funds are not spent all at once. For instance, can you imagine what the average 18-year-old would do if they inherited RM1,000,000? There’s a good chance it’d be spent on travel, a luxury vehicle, and just living the good life. Setting up a living trust mitigates this risk and ensures that funds are distributed in a timely and sensible manner.

5. Engage a Licensed Financial Planner

You don’t need to be loaded to engage a professional in financial planning. You can expect your assets to be well planned, allocated and distributed, as they would know everything about your financial standing. From your risk profile to your family relationship chart, he/she will draft a customised financial plan for you from A-Z!

More importantly, dealing with one licensed financial advisor who is professionally qualified, independent and unbiased is better than dealing with many different agents who may prioritise selling their financial products instead of your financial health! After all, you’re not just doing this for yourself, but to protect your family.

About the author

Jordan Peh Kian Hong (FAR CMSRL RFP B.BA) is a FA Director, Licensed Financial Planner and Bank Negara-approved Financial Adviser Representative with approximately 20 years of experience in financial services. He can be contacted at jordan@yesfinancial.co

Since the beginning of the Movement Control Order (MCO) in Malaysia, we’ve seen how the COVID-19 pandemic has affected countless individuals and businesses.

The government has done their part to inject assistance and stimulus, and there’s also been the enabling of EPF Account 2 withdrawals via iLestari, which has now been expanded to Account 1 via iSinar.

From the perspective of a working professional, I understand why industry leaders are discouraging Malaysians not to withdraw their retirement savings.

However, from the perspective of a layman, if a withdrawal means I can ensure my family will have a roof over our heads, meals on the table, education and other basic necessities taken care of, why not right? After all, it’s my money anyway.

Whether you are considering to withdraw or not, here are four tips to help you navigate these trying times:

1. Review your Cash Flow and Debt

Sort your debt from those with the highest rate of interest down to the lowest. If credit card debt at 18% interest yearly is weighing you down, speak to the bank about converting the credit card debt to a term loan.

If you have another credit card that you’re not using, consider doing a balance transfer and split the payment to a maximum of 12-month instalments.

Calculate and see which works best for you and your cash flow situation.

Either way, it’s still a better option than being stuck as you’ll pay less than the default 18% interest yearly.

2. Maximise the Returns of your EPF Withdrawals and Savings

Do a forecast from January to June 2021 to see how much you are short of. Trim the expenses you don’t need.

If there’s a surplus from the EPF withdrawals or other savings, reinvest the funds back into investment platforms that yield a higher return on average than what you can expect from the EPF. Always make your money work for you.

However, if this is not an option, do leave your retirement funds in your EPF account as their average returns are still much better than fixed deposit and savings accounts.

3. Get a Professional Financial Planner

There are over 1,000 licensed financial planners in Malaysia. It might be prudent to reach out and see how they can help you with your financial dilemmas.

Sometimes, viewing an issue through the lens of a third party can give you alternative perspectives that you may not have thought about previously.

If you do decide to withdraw from your EPF Account 1, be sure to work out a plan to replenish the amount you have taken, instead of just waiting for future salary deductions to do the job.

4. Innovate and Create

Tap into your inner strength and discover your talents. Turn it into a side hustle and create additional sources of income.

Withdrawing your life or retirement savings should not be the only strategy for survival. A pilot I know is now a Certified KonMari Consultant, while an oil and gas practitioner has turned to freelance copywriting.

What about you?

Covid-19 has shown us that things we used to take for granted can change in the blink of an eye. What used to work has now been replaced by the new normal.

Perhaps this is the season to recalibrate ourselves and enter the season of transformation. Trust that the pain we are all going through has a purpose and allow the wisdom to guide us towards a breakthrough.

You will survive this. Have faith.

About the Author

Aisya Rahman is a Financial Advisor and Islamic Financial Advisor, approved and licensed by Bank Negara Malaysia and the Securities Commission Malaysia. She can be contacted at aisya@harveston.com.my or her website.

So which financial plan predicted COVID-19?

None, unfortunately. In the financial services industry, product pushers will always tell you “failing to plan is planning to fail”.

But is that true? Which product could have predicted Covid-19? No salesman, financial planner or even fund manager could have possibly envisioned this pandemic a year ago.

When unprecedented events like these occur, any plans you made, or were sold, are bound to crumble like a house of cards.

Is There No Point in Having a Financial Plan?

Well, yes and no.

Yes, because a financial plan is just a static document. It is only true today, and its authority will fade with each passing day when the assumptions used in the plan turn out to be different in reality. In fact, I believe that the plan has no tangible value at all.

No, because I believe that a financial plan is not the main focus. Rather, the real value lies in the planning process. It is here that the client reflects on their life, assesses their financial position, identifies challenges and issues, thinks of action plans, and sets KPIs that propels them forward.

Evidently, no one could have predicted Covid-19. However, if you have gone through a proper planning process, you may be able to deal with this better than most. Here are a few reasons why.

Liquidity in Net Worth

For many, their net worth is a good indicator of financial health and could even be in the millions. However, if this value is tied to illiquid assets, this means they are asset rich but cash poor.

In this case, the planning process would show the client that most of their net worth is tied to non-liquid assets that cannot be sold quickly. This may help the client to see things in different light, resulting in them using future cash surplus to build a portfolio of assets that is easily liquidated.

Emergency Fund

A fundamental part of my work is ensuring clients have an adequate emergency fund.

The current pandemic has shone a spotlight on emergency funds, as many without one have been caught out and now face a huge mountain to climb.

It is crucial to have emergency funds as this is our fallback plan when unforeseen events strike.

Cash Flow Management

Most people have a strong tendency to opt for instant instead of delayed gratification. Going through the financial planning process allows us to honestly assess our spending habits and lifestyle choices.

Looking at your cash flow also helps you understand if you are being hindered by excessive debt. If your debt-servicing-ratio is high (over 50%, or 60% in extreme cases), you will suffer greatly during salary cuts or retrenchment. Even if ignoring Covid-19, you are likely to be tied down to your job because you cannot afford to lose this income.

Prior to taking on new loans, look at your cash flow situation and be certain that you will still be able to work towards other life goals.

Are You Saving for the Future?

Covid-19 may have disrupted your plans for 2020 and even 2021, but it surely will not destroy what you want to do in five or ten years.

For example, if you began to prepare for a big event like a wedding at the start of this year, the MCO may have prevented you from building the funds required.

However, if you have been steadily saving for years, you would have your wedding money prepared by now. You might have to postpone your wedding, but not because you were not financially stable. We cannot control external factors, but we can certainly control our preparation for life.

Risk Management and Dependent Care

What if you unexpectedly left your family earlier than you wished, like many who fell victim to Covid-19? What about children or elderly parents who depend on you for their living expenses like food and shelter?

The process of financial planning forces you to think about the what-ifs in life. If you have not planned in advance, your dependents are at your life’s mercy. You could (and should) do better.

Diversification and Asset Allocation

If you make investment decisions on a piecemeal basis and only chase after returns, chances are your investment portfolio is not optimised.

With proper planning, you would have an asset allocation and portfolio strategy that fits your risk tolerance, risk profile, and investment objective. When the stock market fell earlier this year, not every asset class fell with it. That is why you will benefit from not putting your eggs in one basket.

If you are yet to sit down and plan your finances for life and finances yet, this is a good time to do so. It will help you build a stronger base so that during the next crisis, you can say, “it could have been worse”.

About the author

Kevin Neoh is a NextGen Money Coach at NextGen Independent Advisors and a certified member of the Financial Planning Association Malaysia (FPAM). He can be contacted at www.kevinneoh.my.

Young investors (or any beginner investor) will often ask: “What should I invest in?”

If you are a millennial, the idea of investing your hard-earned money can come across as complex or perhaps intimidating. While it is important to secure your future, how do you go about doing it?

Unlike previous generations, millennials are comfortable with technology and the convenience emanating from their smart devices. They enjoy co-working and travelling, and value experience above others.

In other words, millennials are breaking away from the conventional mode of spending and saving, developing a pattern of higher risk-taking due to their need for instant gratification. But there is still hope!

Despite the common misconception, investing isn’t just for the financially established – you can start investing for as little as RM50 per month and begin your journey to building wealth. To brave the high seas of investing, it is important to remember the key is not just randomly betting on different investments but learning to save and making informed decisions for your future.

Smart Investor reaches out to several experts in the field for their perspective on the topic.

SURAYA ZAINUDIN, FOUNDER, RINGGIT OH RINGGIT

Based on my interactions with the Ringgit Oh Ringgit audience who are primarily within the millennial age group, many of them invest their money in a combination of unit trusts and mutual funds.

Amanah Saham Bumiputera (ASB) and Private Retirement Schemes (PRS) are popular, with many taking advantage of the PRS Youth Scheme a few years back, and collecting the RM500/RM1,000 bonus upon RM1,000 deposit.

Other popular investment options are stocks (especially dividend stocks), fintech platforms like Wahed Invest, Stashaway and MyTheo (robo-advisory platforms), gold (HelloGold), P2P lending (Funding Societies) and crypto assets (Luno).

In terms of the recommended proportion of their income to be put aside for savings and investments, I recommend anyone to save at least three to six months of living expenses as soon as possible, regardless of income level. You need the savings to protect yourself against any of life’s unexpected expense.

After you hit that amount, feel free to choose either to save as much income from salary, add more income (increase salary or do a side hustle), or both. Taking willpower out of the equation by automating investments is a great way to get rich slowly.

The stock market, generally speaking, intimidates any beginner, millennials included. However, it is great that there are personal finance content creators nowadays that share their stocks portfolios online using relatable language. It makes the whole process – from research to reallocation – easier to visualise and thus implement.

Getting help from a financial adviser, a robo-adviser or opting for a do-it-yourself (DIY) approach or investing in mutual funds or exchange-traded funds (ETFs) – these are great ways to get started. Personally, I’m an advocate for the DIY approach since it’s the most cost-efficient approach.

Investment information and advice is very easy to get for free online, via a quick Google search. I would personally save for the services of a financial adviser for estate planning instead.

STEPHEN YONG, CHIEF KNOWLEDGE OFFICER, WEALTH VANTAGE ADVISORY

The concept of ‘pay yourself first’, which is to set aside funds every time you receive an active income, is advocated by many financial advisers.

The whole idea behind paying yourself first is to consider as if you were an employee of Me Sdn Bhd, and ensure that you get paid every month. That being said, the moment you receive your pay, set aside an amount into another account that you will not touch.

Once you have accumulated three to six months’ worth of emergency funds, paying yourself first should be channelled towards investing. This is especially important for young adults to allow for early investing and compounding to build serious wealth. Here are a few practical steps to pay yourself first:

• Decide how much you will pay yourself. It can be a percentage (20% of your pay, for example), or a fixed figure (RM1,000 monthly);
• Set up an automatic transfer every month into a separate account designated for investing; and,
• Set objectives for the money in your account to be allocated into various investments.

You can also automate some investments if there is a regular savings plan option to gain the benefits of dollar cost averaging.

For those who have just started out in their career, there are an increasing variety of investment vehicles available. Rather than start investing based on recommendations from friends and family (which is something young investors are prone to do), a smarter approach to selecting your investments is to have a customised personal investment plan following your desired asset allocation.

One of the most important determinants comes from deciding on asset allocation which determines ~90% of volatility and gives ~40% of returns (Determinants of Portfolio Performance by BHB published in the Financial Analysts Journal).

What is asset allocation?

Asset allocation is to set how much of one’s investments goes into various asset categories to get the best balance between returns and reduced overall portfolio volatility. Here are some smart investment options for each asset class:

• Equities: Stocks, ETFs;
• Fixed income: Bonds, money market funds;
• Properties: Real Estate Investment Trusts (REITs), investment properties;
• Commodities: Gold, silver, precious metals; and,
• Alternate investments: P2P lending, cryptocurrency.

For risk appetite, investor risk profiles are generally categorised into the following from the highest to lowest risk:

• Aggressive;
• Moderately aggressive;
• Balanced;
• Moderately conservative; and,
• Conservative

Examples of high-risk investments include shares, commodities, cryptocurrency and alternate investments. Examples of low-risk investments include bonds and money market funds.

In terms of how much risk millennials should be willing to take to build their investment portfolio, it is important to note that every millennial investor needs to decide for themselves how much risk is suitable.

As a millennial, time and compounding are on your side, so you may be able to take on more risk than someone who is retired or near-retirement. There are various investor risk profile assessments available which help you to know your investment risk appetite.

Overall, one can reduce risk by practicing diversification and having a personal investment plan. Diversification can be done by diversifying across the following:

• Diversification into different asset classes;
• Diversification by time using dollar cost averaging;
• Diversification into different countries and regions;
• Diversification into different sectors and industries; and,
• Diversification into different companies or funds.

On the question of whether millennials are generally apprehensive about investing in the stock market, I would say millennials today have access to a wealth of information and resources.

As such, everyone has their own preferences with some feeling comfortable investing directly in the stock market while some prefer using other investment vehicles. The key thing for millennials is to get trustworthy professional advice on how to invest.

Overall, we are seeing a blended approach working out well with a combination of working with a financial planner, robo adviser, and maybe handling some areas using a DIY approach.

MARSHALL WONG, FOUNDER, planNERD

The ‘pay yourself first’ concept is a good practice, and as a financial planner myself, even I have created an automated system to make sure that I am getting paid first. The keyword here is ‘automated’.

To do this, I have two bank accounts. The first is what I call the ‘Holding Account’, which is the main account which I use to receive my income. In this particular account, I set a recurring transfer of funds to another account, which I call the ‘Parking Account’, which is set up for the sole purpose of accumulating money for my next investment.

When it comes to smart investment options that a young person can consider, as cheesy as it may sound, I believe that investing in one’s own knowledge is always the first thing a young person should do. Without proper knowledge, the line between investing and gambling can blur.

Take cryptocurrency as an example. Most people that do not understand blockchain beyond it being ‘just a system behind Bitcoin’ may think that cryptocurrency is a gamble. But for those that truly understand the potential and the value that blockchain can bring to us in the future, cryptocurrency is seen as an investment.

Don’t get me wrong, I am not saying that everyone should jump into cryptocurrency. A young person should start reading articles on business and finance to be equipped with the necessary knowledge to understand the true value of where they put their money into.

On the topic of mobile-friendly investment platforms, I have personally invested with StashAway, Wahed and MyTheo. These platforms are great for beginners as they are simple, seamless and do not require investors to do as much homework before they invest.

However, it is important to be reminded that we should diversify and not put all our eggs in the same basket.

Recently, we have seen a US$7.6 bil online brokerage firm, Robinhood experienced a massive outage due to technical problems. Nevertheless, I encourage young investors to use platforms like these but remember to consider other traditional investments.

Are millennials apprehensive towards investing in the stock market? I personally don’t think so.  Whether they ought to get help from a financial adviser, a robo adviser or opt for a DIY approach, I think millennials should start by doing their own research and try out the DIY approach.

That being said, if they do not have the time or confidence, or they have tried the DIY approach with unsatisfactory results, they should consult a fee-based financial planner. A fee-based financial planner will identify and quantify their life objectives and assist them in choosing the correct investment.

Investing in mutual funds, index funds or ETFs on a piece-meal basis without knowing the bigger picture is dangerous as each investment has different levels of volatility and time horizons.

Risk-wise, there is no hard and fast rule, but then again, it all depends on the investors’ investment objective. If the objective is a short-term one, you should not take too much risks. But if the objective is a long-term one, millennials should consider taking on more risk and pay less attention to the short-term fluctuations.

All in all, as a financial planner, I encourage young investors to have multiple investment portfolios to achieve different investment objectives. As such, investors can have both portfolios with high and low risk simultaneously.