Money Management

Net Worth - Evaluating Your Current Situation 

Knowing where you stand today in terms of your finances is the first step in developing any financial plan. Net worth (your assets minus your liabilities) is a tool that is able to give you a "snapshot" of your current financial situation. It will help you determine your  and what resources you can apply to meeting your goals.

Net worth is the main measurement of wealth. The most straightforward ways to increase your net worth are to increase your assets (by investing current assets and accumulating more) or to reduce your debts. The other number to look at in evaluating your current situation is your net income (your gross income minus your expenses).
 

Cash Flow Management 

Many people find they are spending more than they bring in. It's difficult to increase your net worth (and meet your financial goals) if you are constantly falling behind on the income front. Hence, cash flow management is key to achieving personal financial security.  

For example, are you spending more on entertainment or other nonessential expenses than your income supports? Or are you spending more than you have to for necessities such as housing, an automobile, clothing, or other similar items? The answers will probably point you to one or more possible solutions, such as cutting back on the non-essentials or finding less expensive alternatives. Then, you can put the money you save to work toward meeting your goals. 

Most causes of overspending can be addressed through use of a budget. Simply going through the process of putting together an annual budget can help you prioritize expenses and uncover areas where you may be able to free up more money to use for savings and investments. 

Many people find that they can develop the discipline needed to put money aside on a regular basis by budgeting for savings and investments the same way they do for other expenses. A good way to make sure your budgeted amounts actually do go into savings and investments is to set up an automatic saving / investing plan with a bank or a mutual fund company. 
 

Trimming Your Budget 

Cutting your expenses will take some effort. You may have to delay some purchases and find ways to spend less on the things that you need to buy. By cutting costs, you should be able to afford to contribute more to your savings and investments. Similarly, if large debt payments are making it difficult to save, you need to look at ways you can reduce this burden so you can move ahead toward your financial goal. 
 

Reduce Housing Costs 

One good avenue to explore is the possibility of refinancing your mortgage. The rule of thumb is to consider refinancing your home when mortgage rates drop two percentage points or more below your current rate. But people who plan to remain in their home for a while can come out ahead with a rate reduction of as little as one percentage point. 
 

Buy Smart 

How and when you shop can make a discernible difference in your spending. Different items generally go on sale at different times during the year. 
  

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Retirement Planning

Are you old enough to remember the good old days when a worker stayed with one employer and retired with a "nice pension"? Those days seem to be gone, maybe for good. Today, you need to take charge and plan for your own retirement security. Relying on EPF for the bulk of your retirement income is an iffy proposition at best. Also, many companies today don't have traditional pension plans. 

How much income should you plan on needing when you retire? A financial planning rule of thumb is to figure on needing 70% to 80% of your pre-retirement income. That income is the income you'll be earning at the time you retire, not the amount you're earning now. 

In doing your projections, be sure to consider the dramatic effect inflation can have on earnings and expenses. Even at the relatively low 3% annual inflation we've been seeing in recent years, someone earning RM30,000 today may be earning RM40,000 in 10 years, RM54,000 in 20 years, and RM73,000 at retirement in 30 years if he or she receives nothing more than cost-of-living raises. 

You can use the our Retirement Planning Calculator to estimate what your retirement income needs might be and how much money you should be investing now to be able to meet those needs when you retire. 

Once you've determined your retirement income needs, you need to plan for meeting those needs. The most advantageous way to invest for retirement is to take advantage of various opportunities to defer or avoid federal income tax on retirement investment earnings. 

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Investment Planning

Good investment planning can turn your goals from dreams into realities. This planning involves more than trying to pick the "right" investments. How you allocate your money among different types of investments can have a greater effect on investment success than the individual investments you choose. So, your first step in investing toward your goals is to work out an asset allocation for your investments. 

 

Asset Allocation 

Very simply, asset allocation is the process of deciding what percentage of your money to put in the different investment classes: stocks, bonds, money market, and other investments, such as real estate. Your asset allocation will depend on your investment time frame, your savings goal, and how much risk you are willing to take to achieve that goal. 
 

Diversification 

After you decide on an asset allocation, the next step is to diversify your money within the different investment classes. By putting your money in numerous different investments, you spread the risk - rather than invest in one stock, you might invest in a variety of stocks. That way, if one stock performs poorly, it represents a smaller portion of your overall stock portfolio. 

Before you can set an asset allocation and diversify your investments, though, you need to know more about the choices that are available.
 

1. Stocks 

Investing in stocks gives you an ownership interest in the corporation issuing the stock. If the corporation does well, your investment should do well. If not, you could lose some (or all) of your money. The advantages of investing in stocks include the potential for higher returns over time than those offered by most other investments and returns that historically have outpaced inflation. Both of these advantages make stock investments an appropriate part of a portfolio designed to achieve long-term investment goals. 
 

2. Bonds 

Bonds and other fixed-income investments pay a set income over a set term. At the end of the term, the amount you have invested is returned to you. Fixed-income investments offer a steady income stream and historically less volatile price fluctuations than stock investments. But fixed-income investments aren't without risk. Sometimes a bond issuer, for example, can run into financial difficulties, default on its bonds, and not be able to return the face amount of the bonds to investors. 

Also, bond prices move up and down, largely in reaction to interest-rate swings. Thus, investors in bond mutual funds, as well as investors in individual bonds who don't plan on holding them until maturity, face the possible risk of losing principal. 
 

3. Money Market Investments 

Like fixed-income investments, money market investments pay a defined income over a set term. (The income may be fixed or variable.) The advantage of money market investments is that many of them are backed by the Malaysian government, so return of your principal is practically guaranteed. This makes money market investments an attractive choice for investors with short-term goals. The major disadvantage of this investment class is that the investments historically have not produced returns much greater than the inflation rate. 
 

4. Mutual Funds / Investment Linked Funds

Mutual funds or investment linked funds are one of the most popular ways to invest. With an investment fund, your money is pooled with that of other investors to purchase a variety of securities (stocks and/or bonds). The fund is professionally managed as a single investment account. Investment funds offer you automatic diversification because each fund invests in numerous different securities. When you buy units in a mutual fund, for example, you are actually buying an investment in the stocks of many different companies. If one company or industry has a problem, the fund will be less likely to suffer a major loss because it is diversified. 

You can choose from various of stock, bond, balanced (stocks and bonds), and money market mutual funds. Each fund is managed toward a particular investment objective, such as growth, income, or asset preservation. The mutual fund's prospectus will explain the fund's investment objective and tell you what types of securities the fund can hold. 
 

Investment Return 

When choosing investments, potential return is a key consideration. The higher your return, the faster your investments will grow and the sooner you will reach your goal. But be aware that the annual percentage returns and yields you see published in ads, prospectuses, and articles don't take into account inflation or taxes, two factors you need to consider in your investment planning. And the higher the potential returns also mean a higher investment risk.
 

Risk Tolerance

You also need to weigh an investment's risk. Generally, the more risk involved with an investment, the higher its potential return. Consequently, the more risk you are willing to take, the more potential your savings have to grow over the long term. Before choosing an investment, you should make sure you understand the investment, the risk it carries, and how that risk relates to your investment goal. 

For instance, if you are investing for your two-year-old child's college education, you can probably afford to assume more risk in your investing than someone whose child will begin college in two or three years. With more than 15 years before you'll need your money, you should have time to make up any short-term losses your investments may experience. Of course, there can be no assurance that any losses will be made up in a 15-year time period. 

Short-term investments, such as money market funds, offer the least risk. Fixed-income investments offer potentially higher returns with added risk. Stock investments offer the highest potential returns with the greatest amount of risk. A combination of money market, fixed-income, and stock investments can provide potentially higher returns than either money market or fixed-income investments alone, with only slightly greater risk. 

As you near your goal, your risk tolerance may drop and you may want to change your asset allocation. Protecting and preserving your savings might become more important. You may be willing to give up the growth potential of most of your long-term investments in favor of the greater security offered by short-term investments. 
   

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Tips 2 Financial Planning Work For You

You are the focus of the financial planning process. To achieve the best results from your financial planning, you will need to be prepared to avoid some of the common mistakes by considering the following advice:

1. Set measurable financial goals.

Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be "comfortable" when you retire or that you want your children to attend "good" schools, you need to quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals. 

2. Understand the effect of each financial decision. 

Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated. 

3. Re-evaluate your financial situation periodically.
Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your long-term goals. 

4. Start planning as soon as you can.
Don't delay your financial planning. People who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

 

5. Be realistic in your expectations.
Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your financial planning results. 

6. Realize that you are in charge.
If you're working with a financial planner, be sure you understand the financial planning process and what the planner should be doing. Provide the planner with all of the relevant information on your financial situation. Ask questions about the recommendations offered to you and play an active role in decision-making. 

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Steps to the Financial Planning Process:

1. Identifying and setting short, intermediate and long-term goals. Ideally, each goal will have a date and dollar amount attached to it. 

2. Evaluating your current situation - cashflow analysis and calculating your net worth. You need to honestly assess your current financial status, including positives and negatives. 

3. Review your insurance coverage, including life, disability, home, auto, umbrella liability and long-term care. 

4. Review your current tax situation to identify tax-saving opportunities and potential deductions.

 

5. Review your estate plan to ensure that your will, living will, healthcare power of attorney and other estate planning documents (revocable living trusts and durable power of attorney) are up-to-date and valid. 

6. Develop a retirement funding plan that covers when you plan to retire and how much you will need to support your retirement lifestyle.

7. If you have children, develop a college funding plan to help cover higher education expenses.

8. Develop an overall investment plan with proper investment portfolio that supports your goals, while staying within your investment time horizon and risk tolerance.

All of these areas will help you develop your initial financial roadmap.

Finally, review your plan and progress periodically by giving yourself an annual check up to make sure you are staying on track. Life will throw you a curveball from time to time; divorce, a serious illness and an unexpected job loss can all affect your financial plan. So be prepared and be flexible.

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What is Financial Planning

According to the Certified Financial Planner Board of Standard, financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education or planning for retirement.

The financial planning process consists of six steps that help you take a "big picture" look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.

The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. As life and circumstance change, so your financial plan will need to be reviewed and revised on a regular basis: 

• Ensure you are on track to meet your goals
• Identify and address new goals and
• Make sure the financial tools you are employing still meet your needs.

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