Money Matters

1. Every now and then, our clients and friends will enquire about savings programmes that assist in reducing taxes and building a retirement nest egg.
2. We dutifully show them the various options available and give them a projected value on maturity.
3. Most plans tend show 2 sets of Illustration, one being the most favourable and the other, the most conservative. In all reality, both will not occur as it is improbable to have a consistent set of returns every year. There will be up’s and equally, downs.
4. A mid-point would thus be the most practical value to gauge expectations. Although simplistic in approach, it is still better than relying on either extreme.
5. At this point, one in two times, we get remarks like “The plan gives back RM100k in 20 years time? What is the value of RM100k then? What can it do with inflation being so high?”
6. Usually, this remark comes from those who are highly educated and holding decent paying jobs. The "normal" ones usually just get things started and move on to other matters.
7. In our years of practice, the ones who got things done are living reasonably comfortable lives and are midway through their retirement plans. When they retire, they will cash out their EPF/CPF as well as live off the Private Pension Plans that we have helped structure.
8. They may not be wealthy, but they will have money to live, eat, go for vacation and enjoy the simpler things in life with dignity. They will not have to beg and depend on anyone else but themselves.
9. The intelligent ones however, keep talking about how inflation eats away values and are constantly seeking for plans that will beat inflation. Even after 10 years, they are still talking and talking but just never getting down to doing.
10. They are just too smart for their own good. They are procrastinators who just keep delaying and delaying. When they do get down to doing it, they will analyse it so much that in the end, they are back to square one.
11. Back to Point 5 above. we agree that RM100k can get a bungalow 20 years ago but can only be the down payment for a cluster house today. Purchasing power has deteriorated over the years due to inflation.
12. But the fact remains, RM100k is still a big sum of money back then and still is now. Just how many ordinary people can casually raise RM100k as and when needed? The sooner we take the first step towards implementing a savings plan that disciplines us, the safer we are in our greying years to come.
13. The decision made by the Young You today determines’ how the Old You will be in years to come. If you have yet to start any, get it done. If you have done one, get a second one started. If you have done an Endowment, get an Annuity started. There must be progress.
14. Here’s wishing you all the best in getting things moving. Just don’t let too much analysis lead to paralysis.
15. To quote the immortalised slogan from Nike, “Just Do It!”.

Money Matters

1. Some say debt is good. Others swear that borrowed money causes misery.
2. Debts, when used wisely and free from emotion, can yield good financial harvests. The implementation however, is not as easy as it sounds.
3. Investing is not for everyone. Many end up losing money due to greed (not cashing out when due) and fear (cashing out too early). If these twin emotions are not manageable, stay away from investments, especially, borrowed investments.
4. So back to debts. Is it good to borrow or should investments be funded with savings only?
5. Let’s analyse the case of two Accountants who are in similar earning capacity and age group but with differing opinion when it comes to creating an investment portfolio.
6. Accountant G is in his mid-30’s and has fully settled his housing loan within 5 years and his car in 2 years. He opines that settling loans as fast possible and saving on the interest via high down payment and lump sum periodical deposits are in itself good returns on investment.
7. Today, he has no loans and truly living a debt-free life. His cash savings are at a decent level equivalent to 9 months living expenses and he fully owns the house he lives in with his young family.
8. The other, Accountant A is highly geared with loans exceeding RM3m and is the owner of 10 properties. All the properties were acquired over a period of 7 years and are generating rental income over and above the respective monthly instalments.
9. When asked, Accountant G says that he is unable to purchase any new properties as prices have moved too fast and even if he could do so, his nature of borrowing as little and short as possible makes it financially untenable.
10. Accountant A has emergency funds amounting to 3 months expenses and wishes he has more liquidity. He however, has no regrets stretching his loans and cash to capture properties just before the wave came.
11. Looking at these two cases, who is better off financially?
12. From a liquidity sense, Accountant G wins hands down. There is no debts, no instalments, hence no worries. He however, is regretful for not being alert to ride on the property wave despite Accountant A’s advice years ago.
13. Accountant A has amassed great wealth via property appreciation and has made paper-profits exceeding 100% on almost all his properties. He is cock-sure that his units will continue to generate rental as they are of prime location. He does confide however, on the worry of servicing the loans should a financial crisis occur.
14. Hence the trade-off between returns and liquidity. Liquid assets generate lousy returns and vice versa. The key is striking a balance.
15. Before venturing into hard assets, ensure that there is sufficient liquidity to withstand financial shocks. Funds should be split into separate accounts, one for unforeseen circumstances and the other as seed capital to acquire assets.
16. This way, the usage of funds from one account will not affect the ability of the other. One is able to grow the Balance Sheet and still have funds for emergencies.
17. Back to our Accountants. In a rising market, the one who bought with very little debt loses out. In this case, his unwillingness to borrow. The available fund was used to finance only a single property.
18. By the time the first asset was settled, prices moved up by leaps and bounds. He could only be a mere spectator as his time has passed. The only thing is to look out for rare unappreciated gems that may or may not come. The consolation is that he is cash rich in an inflation fuelled economy.
19. The obvious winner is the one who capitalised on cheap finance and borrowed just as the market was rising. It was a gamble but as long as the asset generated returns and his income allowed such a loan, then it is a worthwhile risk.
20. In conclusion, when investing or wanting to invest, one needs to keep abreast with the pulse of the economy. Know when to leverage on loans and when not to. Experience is a good teacher but other people’s experience is a better teacher.

Money Matters

1. Not everyone saves for a rainy day. For those who do, we can distinguish them into two broad categories.
2. The first are those who save after they have allocated expenses away and only then try to set aside for a rainy day on whatever little that remains. That will be akin to the equation of Savings = Income – Expenses.
3. Unfortunately, this type of saving is flawed and sadly, most people fall into this category. Worse still are those with inconsistent income who can never save systematically.
4. The other kind employ the concept of Income – Savings = Expenses. This group live within their means. Frugality is practiced to keep within the planned expense. They save first and then decide what commitments to enter into later.
5. When people practice financial discipline, money is never a problem. However, many spend first and depending on how high that commitment is, only then decide whether they can save any money at all.
6. Back to savings. Just how much should one set aside?
7. Well, the amount depends on the following 3 accounts being Emergency Fund, Consumptive Fund and Retirement Fund.
8. Set aside between 3 – 6 months of expenses as Emergency Fund. This acts as a form of retrenchment back-up so as not be pressurised to take the first opening that comes when in-between jobs.
9. Another approach is to save enough to feel confident. If that amount is Rm10k, then that is the amount one should strive for. If RM15k makes you feel secure, then that should be the goal. Although the approach is not mathematical as Point 8 above, it still does the job.
10. Ideally, this amount should be kept separate from the regular salary/income account so as to ensure clear demarcation of funds. The Emergency Fund should be left liquid either as a Regular Savings Account or at most, a Fixed Deposit Account for tenure of no more than 12 months.
11. Next is to create the Consumptive Fund account. As the name suggests, this amount is set aside to be spent once the desired amount is achieved. Big ticket items such as a new car, house, exotic vacation, etc are just some of the things that many of us desire.
12. However, most do not set aside funds in a systematic manner and end up taking out whatever savings they have to finance these purchases. As a result, should an emergency occur, things become very sticky.
13. The savings timeline in this account can be spread between 12-36 months, depending on the quantum. Once the targeted amount is achieved, withdraw the funds and spend it on the item.
14. Due to the longer savings timeline, it is encouraged to place these funds in semi-liquid form such as Fixed Deposit or in low risk Unit Trusts such as Money Market or Bond Fund.
15. Retirement Funds should be placed in illiquid instruments that pay out better returns due to the longer savings timeline. For the majority who are employed, one such option is the EPF.
16. However, due to relatively low contribution rates, the final amount might not be sufficient for a retiree to live on comfortably. Hence why voluntary savings schemes such as Private Retirement and Annuities are additional tools towards a decent Retirement Fund.
17. In a nutshell, the 3 separate funds play different savings objectives. While an Emergency Fund focussed on liquidity, the Retirement Fund concentrated on generating returns. A compromise in the form of timeline trade-off is needed to achieve these objectives.
18. The Consumptive Fund however, is a mid-point since it focuses on various items with differing timelines. It balances returns with matching tenures.
19. In conclusion, make a decision to save an amount on a consistent basis. A starting point between 5%-10% of gross income can be the first step towards gradually setting aside a very significant 25%. It is said that practice makes perfect. That saying applies here too.
20. While it is easy to say, the same cannot be repeated when it comes to execution of a plan. This requires determination and discipline. Only when there’s extra revenue, is there room to manoeuvre for Investments.