Topic X Personal

Financial
Planning (PFP)

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1.

Explain the importance of financial planning;

2.

Describe the steps involved in preparing a proper financial plan;

3.

Apply personal financial planning to real life events; and

4.

Prepare a retirement plan.

X INTRODUCTION
Personal financial planning is very important for everyone. Personal financial
planning is a process of setting objectives, assessing assets and resources,
estimating future financial needs, and making plans to achieve your personal
financial goals. It plays a crucial role in helping you to get the most out of your
money. However, many of us do not pay sufficient attention towards personal
financial planning. Some may even ignore it at all costs and assume that talking
about money matters is not acceptable, even going so far as to label people who
do so as being money-minded.
In this topic, we will discuss the importance of proper personal financial
planning, the five steps of personal financial planning and how life events have
an impact on financial planning.

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IMPORTANCE OF PROPER PERSONAL

FINANCIAL PLANNING (PFP)

There is a saying by writer Alan Lakein that nobody plans to fail, they just fail to
plan.
The effect of having and implementing a proper financial plan will only be seen
in the long run. Consider the following case:
Mr. A, aged 35 years old, is a professional engineer who graduated from a top
notch UK university, earns a very good salary and is married with two children.
His net savings amount to around RM3,000 to RM5,000 (adjusted for inflation) a
month on average after deducting all expenses. He places all his savings into a
fixed deposit account, earning an average of 2.5% return. He put all of his efforts
into being the best engineer in his field, which earns him a very respectable
salary and has secured him a job until his retirement at the age of 60 years old.
His brother, Mr. B, is 33 years old and is a plumber, earning about half of his
brothers salary. Mr. B is also married with two children. He only manages to
save between RM1,500 and RM2,000 (adjusted for inflation) a month on average.
He invests the savings in properties and shares. He continually sharpens his
investment skills while keeping his plumbing job. He plans and works on his
finances carefully to meet his financial goals.
Guess who will be better off financially, assuming all other things remain equal?
Both brothers eventually retire and achieve financial freedom. However, Mr. B
became financially free at the age of 45 years old when he accumulated sufficient
financial assets to finance his familys expenses including his childrens
education. Meanwhile, Mr. A had to depend on his job until the age of 55 years
after both of his sons graduated from university.
Now, can you see the impact and importance of financial planning? If you were
to choose one, would you want to be in the situation of Mr. A or Mr. B?

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In essence, financial planning is important because it helps us to:

(a) Achieve our desired financial goals;
(b) Make informed and better financial decisions;
(c) Spend, save and invest wisely and objectively;
(d) To live our lives without worrying about our future and our loved ones
future, at least from the financial aspect;
(e) Have better control of our financial affairs;
(f)

Avoid excessive spending, unmanageable debt, bankruptcy or financial

dependence on others;

(g) Have better personal relationships with people around us, because we are
happy with our lives and do not need to borrow money to make ends meet
or expect handouts from others; and
(h) Have a sense of freedom from financial worries because we have planned
for the future, anticipated our expenses and achieved our personal goals in
life.
This is an introductory topic to personal financial planning where you will be
exposed to the basics of financial planning. Hopefully, it will spark your interest
in personal financial planning.

ACTIVITY 7.1
Do you think you need proper personal financial planning to succeed
financially in life? Why?

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99

WHAT WEALTH AND FINANCIAL SUCCESS

MEAN TO YOU

Many people think that being wealthy means earning a high income or having a
lot of assets or a large inheritance. In fact, wealth is very closely related to your
ability to understand trade-offs and to make decisions that generate wealth for
you.
A trade-off means sacrificing current consumption to generate future
consumption.

To succeed financially, one must be able to sacrifice current consumption to save

and invest in order to generate future consumption. Thus, you should learn how
to procrastinate your desire to fulfil some of your wants. The fruit of such
procrastination will be much more valuable than the sacrifice that you make
today.
Financial success is the achievement of financial aspirations that are desired,
planned or attempted.

Success is defined by the individual or family that seeks it. It is not defined by
others, but by you. Therefore, it would be a futile exercise if you begin to
compare your wealth with that of others. Financial success means different
things for different people. There is no absolute definition of it. It all depends on
your values, which translate into what you value most in life.
To some people, financial success is being able to actually live according to ones
desired standard of living and not the standard of living imposed by parents,
friends or society. To others, it means financial security, which provides the
comfortable feeling that your financial resources will be adequate to fulfil any
needs you have as well as most of your wants. Please note that it is quite
impossible to fulfil all your wants due to the fact that you have unlimited wants
but limited resources. Some people want to be wealthy and have an abundance
of money, property, investments and other financial resources. Ultimately, the
decision is yours. Remember, there is always a trade-off in achieving your
financial success, for example, sacrificing something to get something in life. The
fundamental truth of personal finance is that you cannot build financial security
or wealth unless you spend less than you are earning and live below your means.
Put your savings to work, i.e., invest your savings wisely.

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ACTIVITY 7.2
What do you understand by the terms wealth and financial
success? In your own words, compare these two terms.

7.3

FIVE STEPS OF PERSONAL FINANCIAL

PLANNING

What is financial happiness? It encompasses a lot more than just making more
money. It is about the satisfaction you feel about your financial matters. People
who are happy with their finances are likely to be in control of their money, and
this happiness spills over in a powerful and positive way to feelings about their
overall enjoyment of life. So, how can you be happier as far as personal financial
matters are concerned? Let us look at the five steps of personal financial
planning.

7.3.1

Step 1: Assessing Your Current Financial

Situation

Before you can begin setting goals and developing strategies to achieve them, it is
important to understand where you are today. The first step in creating your
personal financial plan is assessing your current financial situation. Having a
detailed analysis and understanding of your current financial situation is the
basis of formulating realistic, relevant and well-informed financial goals.
A useful way to gain insight into your current financial situation is to calculate
your current net worth. Net worth is defined as a persons total assets minus
their total liabilities. This gives you an idea of your financial position on a given
date.
Utilising the chart in Figure 7.1, calculate your current net worth.

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Figure 7.1: Chart to calculate net worth

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7.3.2

Step 2: Determining Your Value and Developing

Your Personal Financial Goals

Your values are the fundamental beliefs about what is important, desirable and
worthwhile in your life. They serve as the basis for your goals. Every one of us
may differ in the ways we value cars, houses, education, spiritual life, health,
loans, family life, holidays, and other items or aspects of our life. I am sure you
know someone who is a car enthusiast and is willing to buy a car worth more
than RM300,000, even though the instalment will cost him around 50% percent of
his monthly income. Personal financial goals should be derived from your
values. You express your values, to a certain extent, by the ways you spend, save
and invest your money. For instance, parents who value education would spend
a lot or almost all their savings on their childrens education.
Thus, it is very crucial for you to specify your values explicitly before setting
your financial goals. Once you have identified your values and evaluated your
current financial situation, you are ready to move to the next step in the financial
planning process: developing your financial goals. Setting goals will give you a
direction for your plan and a destination toward where you want to head.
Knowing your goals will drive you toward strategising the proper plan to
achieve them. A well-defined financial goal should have the following criteria.
(a)

Set a SMART Goal

Your goals should be SMART (Specific, Measurable, Attainable, Realistic
and Time-based).
(i)

Goals should be realistic based on your income, values and life

situation.
For example, it may not be realistic to buy education insurance for
your children when you have yet to get married, or to buy a RM10
million bungalow within five years of graduation while earning
RM2,000 a month with no financial support from your family.

(ii)

Goals should be Specific with Full Details

An example a specific goals is you want to retire at the age of 55 (20
years from today) with a positive cash flow of RM10,000 a month
from your investments after deducting all family expenses, including
adequate insurance coverage, after retirement and retaining your
current lifestyle in Kuala Lumpur.

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(iii) Goals should be Measurable in Terms of How Much

A rough estimation is insufficient. Many people say, I want to buy a
two storey bungalow in a prestigious location. That is too generic.
The goals should be, I want to buy a 2,000sf three storey bungalow
with gated and guarded facilities, with three rooms, in Wangsa Maju,
Kuala Lumpur costing RM1.8 million in 10 years time. You will then
now know exactly how much you need to save per month so that you
can achieve that goal. This allows you to track your goal reasonably
well. In other words, the goal is measurable.
(iv) Goals should be Attainable
This means that your goals should be achievable given your current
situation. Goals should be attainable so that you will be able to define
how to achieve them later in the financial planning process. If you are
saving RM500 per month, it would be unattainable to buy a
RM1million bungalow in five years.
(v)

(b)

Goals should be Time-based

By making a time-based financial goal, you can calculate how much
time and how much savings per month you need to accumulate. For
instance, if you want to buy a car costing RM60,000 in two years, you
have to save RM1,000 a month, and in six months time you will be
able to pay the down payment of the car. Thus, it is important to set a
timeline so that you have a clear idea of how long it will take to realise
your goal.

Cover Different Durations

You should also develop short-term, intermediate and long-term goals.
Developing each of these different terms of goals will allow you to achieve
successes early in the plan while also keeping your eye on the future. Shortterm or intermediate goals may also serve as stepping stones to reach longterm goals. For instance, a short-term goal of saving RM800 a month may
help you accumulate funds for the down payment on a home in five years
time. However, the term duration could be varied based on individual
needs. Normally, short-term goals are targeted to be achieved in one year
(see table 7.1), intermediate goals in 5 or 10 years (see table 7.2) and longterm goals in more than 5 or 10 years (see Table 7.3) duration depending
on the intermediate goals. Nevertheless, it is recommended to have a
shorter duration for intermediate goals and long-term goals to remain
focused on implementation. Of course, you can always set separate longterm goals, such as the goal to retire in 20 years and to travel the world in
15 years.

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Set the Priority for Each Goal

When developing your goals, be sure to differentiate between necessities
and wants. Be sure to prioritise your financial goals in the order of their
importance to assist you later in the planning process. Higher priority
should be placed on necessities. Consider your net worth and realistically
align your goals with your current financial situation.
Once you have set your goals, refer to your target date in terms of months
and the duration (from today to the target date) of your goals to determine
a monthly cost incurred to achieve your goal. Remember, all workings
related to the goals should be stated on a monthly basis for practicality.
Table 7.1: Short-term Goals
Short-term Goals (Less than 1 year)
Priority

Goal

Total Cost

Duration

Monthly
Cost

Target Date

Monthly
Cost

Target Date

Monthly
Cost

Target Date

Table 7.2: Intermediate-term Goals

Intermediate-term Goals (15 years)
Priority

Goal

Total Cost

Duration

Table 7.3: Long-term Goals

Long-term Goals (Over 5 years)
Priority

Goal

Total Cost

Duration

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Step 3: Determining What Actions to Take

The next step of the financial planning process involves identifying and
evaluating alternative courses of action to achieve your goals. Good and practical
strategies must be developed to bridge the gap between your desired and the
current financial situation within a targeted time.
For example, you, a senior manager in a multinational company, are planning to
buy a BMW 328i at RM280,000 in three years time. You want to ensure you will
be able to pay all related expenses on the car, including road tax, tyre
replacement, maintenance cost, insurance, petrol, tolls, polish, etc. That will come
to RM1,200 per month. The monthly instalment would be around RM2,500 for a
nine year loan tenure, with the down payment of RM100,000. Thus, total
expenses for the car would be RM3,700 a month. Lets assume that your current
take home pay is RM10,000 and your net saving is RM3,000.
So what are your options for changing your current situation to make this goal a
reality? In this particular case, you have to either plan to increase your income or
reduce your monthly expenses. Of course, it is always better to increase your
income level should you have the means to do so. You may take up a part-time
teaching job or get involved in direct marketing to earn extra income or even
invest your savings more aggressively to achieve higher rates of return. Besides,
you could decrease allocations to various expenses and shift more of your
monthly income to savings for your car purchase fund. For instance, you may
also reduce eating out to two times a month instead of eight times a month, limit
purchases of new clothes and delay other short-term goals such as buying a 55
TV and sofa set.
You may use the following form to evaluate your alternatives. For each financial
goal, you may identify and evaluate up to three strategies. So, which action is the
best for you? The answer is: it depends on an individuals situation and the effort
one is willing to invest in order to achieve his/her goals. Adequately evaluating
each of your options can help to ensure you select the best course of action to
accomplish your financial goals. Table 7.4 shows the goal strategies worksheet
which can help you with this.

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Table 7.4: Goal Strategies Worksheet

Short/Intermediate/Long-term Goals
Target Date:

Monthly Cost:

Strategy 1:
Pros:

Cons:

Strategy 2:
Pros:

7.3.4

Cons:

Step 4: Formulating Your Financial Plan and

Doing it Right

Formulating your financial plan will require you to make decisions as to which
goals to pursue and the most appropriate strategy to achieve them. The decisions
must be weighed in terms of your current financial situation and practical
projection of your future financial needs and situation. Without these, your
financial goals will be unrealistic and may not be attainable in the desired time.
In particular, developing the plan should cover various areas, such as insurance
plan, retirement plan, debt plan, saving and investment plan, education fund
plan, tax plan and many others, according to your financial goals and strategies
set in the previous step.
As to the insurance planning, many people believe that insurance policies should
be purchased as soon as possible and the higher the coverage, the better it is.
However, this is not always the case. Earlier and higher insurance coverage will
cost you a higher premium, where the money should be invested to generate
more passive income. The ideal situation is where you only take up an insurance
policy that you really need and can afford to pay for. The time and coverage
should depend on your need. Therefore, needs analysis for insurance products
must be done according to your current and near future financial situation before
purchasing the insurance policy.

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In other words, insurance planning should be suited to your current financial

needs to determine the right purchasing time and optimum insurance plan for
your current financial state. The extra savings from the premium should be used
to grow more money other than for protection. To achieve that, you need to
create your own investment planning.
A good tip is that you should save and invest as must as possible for investment
purposes. You should pay yourself first before settling all other commitments.
The money should be put in an investment vehicle that is suitable and consistent
with your financial goals and risk appetite, in order to generate passive income
or to gain future capital growth. The earlier you begin investing, the better it is
due to compounding effect. Besides, an investing habit will force you to spend
wisely and to become more financially literate.
Another area is credit or debts planning.. Most people think that debt is bad to
you financially. In fact, some debts are good and should be leveraged on to
achieve better returns. However, you must be cautious and educate yourself
before leveraging on debt due to the fact that debt may also come with risk. An
example of good debt is housing loans for investment property and business
loans for business expansion or working capital. An example of bad debt is the
misuse of credit cards and personal loans.
After developing the most suitable plan for your current circumstances, you
must implement it. This is the most challenging part of all, where ensuring that
you follow the plan requires huge perseverance. This is especially true if the plan
involves other family members, where every family member will play a role to
ensure that the plan is successfully implemented. There is a very high tendency
that you might want to revise your plan objectively from time to time due to
unforeseen events taking place in your life.

7.3.5

Step 5: Reviewing and Revising Your Financial

Plan

Financial planning is a dynamic and on-going process. It does not end after
implementing a particular strategy. You have to regularly assess your financial
decisions. You should do a complete review of your finances at least once a year
to identify the root cause of deviations and take necessary follow up actions.

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Your financial goals may change over the years to reflect changes in your lifestyle
or events, such as an inheritance, birth, death, marriage, divorce, house purchase,
investment and change of job status. As a result, your plan may not be sufficient
to achieve the new goal and may require adjustment to assist you in meeting the
new goals. While owning a car may not be a priority now, it may be a goal you
have later. As current goals wane from your list of priorities and you develop
new goals, your plan will have to change to help lead you towards achieving
your new objectives.
Additionally, no matter how carefully you strategise and implement each of the
steps in formulating a financial plan, or no matter how perfect your plan is,
unforeseen circumstances will still occur. Changes in the stock market, inflation
rate and interest rates may also affect your income and expenses, which in turn
alter financial planning results. All these circumstances may prompt you to
revise your plan to achieve financial goals.
Remember, be objective when reviewing and revising your plan from time to
time to ensure you are on the right path towards achieving financial success.
In the preceding sections we have discussed the five steps in devising an effective
personal financial plan. Though it is easier said than done the key to your success
is perseverance. You have to plan and take action as early as possible to ensure
you reap good financial rewards. It is also never too early to start financial
planning.

SELF-CHECK 7.1
What is the keyword you would use to remind yourself to implement
all the five steps of personal financial planning effectively?

7.4

REAL LIFE MATTERS

Living your life is essentially about making smart choices, whether it is choosing
a career, or buying a car or house. Making smart choices requires that you plan
ahead, be informed about what is available in the market and avoid impulsive
decisions. You would have gained a lot of ideas about planning your finances
and managing your money in the earlier parts of this topic. You will need to
practice these steps in living your life.

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Your Career

Like most people, you will need a job after you graduate. This job will be the first
of many work experiences you will have that eventually shape your career.
Irrespective of what you choose todo in life, develop an interest inyour field
and make sureyou love and enjoy your job. It is better if what you do at work is
something for which you have the necessary aptitude or talent. If you dislike
mathematics, do not force yourself into a career in accounting. If you enjoy
dealing with people, maybe a career in sales and marketing is for you.
(a)

Planning your Career

Your career is going to take up the most part of your adult life so do take it
seriously. The development of your career is going to determine the quality
of your life. Therefore, plan it properly. Each time you change jobs, ensure
it is a positive career move that not only increases your income earning
capacity, but would also widen your prospects.
No matter what your first job is, use it to learn the basics of surviving in the
workplace. Develop your communication skills, both written and spoken 
people who can write and speak well are the ones who are most likely to
get ahead in a company. Practice your human interaction skills with all
levels of employees. Take on assignments that can improve your
knowledge and skills. Volunteer to take part in activities for opportunities
to show your talents. Read as many management and self-development
books as you can. Your job is what you make of it. It will not be boring or
mundane if you use it to develop yourself while you are contributing
towards the company.
You may build your career in the same company throughout your working
life or you may move from one company to another. Whatever the
situation, if you are considering changing jobs, assess how the new job will
add, not only to your income, but also to your knowledge, skills and career
development. Will it move you towards where you want to go, career-wise?
Or will it move you closer towards your financial goals? Whatever the
reason you choose to move, ensure that any move will benefit you in the
long- run.

(b)

Your Student Loan

A student loan is an obligation and should not be taken lightly. Once you
start working, begin paying back your student loan, if you have one. The
student loan is a loan, not a gift. It is a legal as well as a moral obligation to
pay it back so that others can enjoy the same benefit that you did.

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If you do not pay back your student loan, it may hamper your chances of
working for a good employer. You may also have a problem in getting
financing from financial institutions later. This could potentially delay you
from achieving your life and financial goals.
(c)

Your Income Tax

As an employed young adult, you need to pay your income tax. This is now
done via Pay-As-You-Earn (PAYE) under the Scheduler Tax Deduction
Scheme. Your income tax is deducted from your monthly salary and sent
directly to the Inland Revenue Board (IIRB) by your employer.
However, this does not mean that you will not pay any more taxes at the
end of the year when the IRB assesses your total income earnings. It is your
responsibility to declare all your sources of income to the IRB and pay the
appropriate amount of tax. Sources of income that are taxable include:
(i)

Salary and wages;

(ii)

Commissions;

(iii) Bonus;
(iv) Gratuity;
(v)

Allowances (in cash or otherwise);

(vi) Directors fees;

(vii) Pension and annuity;
(viii) Dividend and interest income; and
(ix) Rental, royalty and premium income.
You should budget an amount from your monthly salary for income tax
payment, in case the amount you actually have to pay at the end of the year
is more than the amount that is being deducted from your monthly salary.
Remember, under-declaring your income for tax purposes is an offence.

7.4.2

Buying a Car

One of your major purchasing decisions would be buying a car. A car is a

convenient means of transport, not only for work but for other purposes as well,
but there is more to owning a car than buying it. You need to maintain it, repair it
when necessary and pay for costs such as road tax and car insurance.

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Assuming that you have decided to buy a car, you then need to decide whether
to buy a new or used car. People often think that it is better to buy a new car
because the maintenance costs would be lower than a used car. That may be true
but a new car can also have its problems and the depreciation of a new car is
higher.
In order for you not to overstretch your financial resources, buy a used car that is
in a good condition or a new car with an affordable repayment amount. After all,
you only want to get from A to B conveniently, safely and in comfort. More often
than not, you do not need to have a flashy or expensive car to impress others.
You can buy your dream car later when you can afford to pay for it. Thus, a
financial plan plays an important role in buying a car.
The following are some useful tips in buying car:
(a)

Shop around for a car that is reliable. You must be aware that some car
makers focus on building cars that are fun to drive and performance
oriented. Others stress on reliability and fuel efficiency. Thus, you have to
study the strengths and weaknesses of your targeted or preferred car
makers before deciding on the brand and model. You should choose a
reliable car because it is normally more cost effective in the long run. If you
decide to buy a used car, get a trusted mechanic to examine the car first.

(b)

Work out the budget based on your monthly salary. Take into account the
monthly car instalments, monthly running costs such as petrol, toll and
parking fees, annual expenses including road tax, insurance and regular
service, as well as unexpected expenses to cover any repairs to the car in
case of a breakdown or an accident.

(c)

If you decide to apply for a car loan, shop around for a package based on
affordability. It is always good to buy the car with cash if you have the cash
on hand and other important goals have been fulfilled and you cannot get
higher returns on the cash on hand with a reasonable risk level. However, if
using cash is too much of a burden, try saving more cash for the down
payment and apply for a smaller loan. Always ask about the interest rate.
Do not be impulsive when buying a car that would have long-term effects
on your financial health.

(d)

Do not use your credit card to pay for the down payment. You are not
being wise because you will be getting yourself into a loan with higher
interest rates. Effectively, you are spending your future money to pay the
hefty interest on it.

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(e)

Try to pay for petrol, annual road tax, insurance and car maintenance with
cash instead of using your credit card so that you can feel the price that you
are paying.

(f)

Avoid upgrading or modifying your car with a sound system, better tyres
or additional accessories. These will not add value to your car. It is always
wiser to invest your money to gain passive income instead of spending it
on unproductive matters.

Owning a car is not cheap. Before you buy one, make sure that you can afford to
own and maintain it!

SELF-CHECK 7.2
What is the key factor in determining your car purchase from the
personal financial perspective?

7.4.3

Buying a House

Buying a house ranks at the top of the financial decisions you will be making in
your adult life, mainly because of the costs involved. The first house that you buy
is usually for you to live in. Why should you buy a house instead of renting one?
By buying a house, you will increase your net worth as you pay down your
housing loan. Owning your own home will also bring a sense of pride and
accomplishment. Not only is there more freedom with house ownership, there is
also a greater sense of security in having a permanent roof over your head.
(a)

Owning or Renting? The Financial Angle

When owning a house, each monthly payment that you make is like putting
money into a savings account. Each time the mortgage is paid, a certain
percentage goes toward your net worth. This is like having money in the
bank because it is something you can draw upon later in life if needed.
While rental rates can increase from year to year, the principal on your
mortgage goes down with each payment you make. Plus, as the housing
market grows, the value of your house increases as long as it is in a good
location. Although buying a house sounds great, it is not for everyone.
Buying a house is time-consuming, complex and may be a costly affair.

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(i)

Owning a house requires investment of your time. You have to take

care of the garden, handle repairs and spend countless hours to keep
things running smoothly. You are, in fact, tied down to your house.
However, as a tenant in a rented home or apartment, you have the
freedom to move around the city or country.

(ii)

Many small home improvements can add up to big dollars in upkeep

expenses. If you rent, maintenance expenses are usually covered by
the landlord.

(iii) If you find that you are not thrilled with your new neighbourhood,
you may find yourself stuck until the value of your house increases
enough to get back your initial investment. This can be avoided if you
have done a proper study. For example, you can rent a unit in the
target housing area or condominium for a short period before
deciding to buy.
(iv) Once you become a home owner, anything can happen to
unexpectedly bring down the value of the house  your area may be
prone to floods during the rainy season or a highway may be built
close by several years later. If you rent, you can just pack your bags
and move.
When you rent, you can have freedom of movement. However, when you
own a house, you will have a sense of financial freedom.
(b)

Location, Location, Location

Before buying a house, do the following first:
(i)

Drive around the neighbourhood at different times of the day and

week to see how the potential neighbours are like, both during the
week and on weekends.

(ii)

Check the area for features that can add value to the house, such as
schools, shops, a park and playground, public transport and
surrounding businesses. Watch out for conditions that may make the
area economically disadvantaged.

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(iii) Check if the property is located on freehold or leasehold land. Buying

a house located on freehold land means that you have the right to the
land for an indefinite period of time. The market value of the house is
usually higher than if it is on leasehold land. A house on leasehold
land means you never really own the land because you have to
return it to the government after the lease period, usually 99 years.
The market value of the house decreases as the date to the end of the
lease gets nearer.
(iv) Talk to property experts who can give you sound advice about the
property market, suitable locations or types of property, such as
apartments, condominiums or landed houses, which will increase in
value.
(c)

Paying for the House

The most important question in buying a house is  can you afford it? Like
most people, you will look at applying for a housing loan. The housing loan
process is complex and you need to carefully analyse your financial
position  income, savings and cash on hand. Be honest about your past
spending habits, present needs and ability in not only getting a loan, but
paying it off. You also need to calculate your debt-to-income ratio.
Look ahead as well in terms of possible increases in your income and the
money you will need to maintain the house or renovate it in the future. All
these affect the affordability of buying a house. However, you should not
be too optimistic in estimating the increase in your income to justify or
rationalise a bigger loan. Remember, you must be prudent when it comes to
financial planning. Slow and steady wins the race.
There are many types of housing loans offered, so shop for the best deal
that meets your financial commitments. Save enough money and try to pay
more than 10% of the purchase price as the initial down payment to avoid
applying for a large housing loan. You also need to have enough money for
expenses such as legal fees, stamp duty and insurance.
You must be able to afford to buy and pay for your house. Otherwise, your
dream home will turn into a financial nightmare!

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So ... you Want to be a Landlord

Investing in property can be a powerful wealth-building tool. Because of
the money and time involved, do so as part of an overall investment
strategy. Here are some questions to ask:
(i)

What type of property investment will increase my financial worth?

(ii)

Because property is not liquid (i.e., it cannot be sold quickly) will this
be a problem for you when there is a need for cash?

(iii) Will you be able to handle long-term ownership and maintenance of

the property, even if your cash flow is not consistent?
(iv) What type of property investment will contribute to your retirement
income?
(v)

How much income do you expect from your property investment

when you retire?

(vi) Do you expect it to provide immediate income or long-term capital

appreciation?
Are you willing to deal with theresponsibilities of being a landlord? It is not an
easy task. You will haveto collect rent and there might be instances where it is
unpaid or paid late. Your tenants may beunsatisfactory and you may have to
evict them. There are repairs to attend to, paperwork to be updated, income or
deductions to be declared, taxes to be paid. Of course, you can hire professionals
to take care of these matters for you  but at a cost. The same considerations
apply whether you are buying a house to live in or as an investment, the primary
one being that of location. A good location helps you to attract tenants, get the
rental income that you want and increase the value of your house. Start with a
small piece of property first so that you can manage the financial aspects. With
experience, you can move on to bigger pieces of property, especially when you
have made money from the capital appreciation from your sale.

ACTIVITY 7.3
Do you prefer to own or rent a house for your own use considering
your current financial situation?

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7.4.4

Matters of the Heart

Marriage is a big commitment and should be entered into only if you feel capable
of handling the responsibilities. With the romance come the real issues, including
finances.
(a)

The Wedding
Be realistic about your wedding expenses. You will be surprised at how
much gifts, ceremonies, dinners, clothes, shoes and wedding photos can
add up to.
Like in other aspects of your life, have a budget. List the things that are
necessary for the wedding. Discuss with your spouse-to-be on how much
money you can afford to spend. Get tips and advice from those who have
been through it all on how to spend wisely for this important occasion.
Do not try to live up to the expectations of other people by going to the
extent of borrowing from family members or friends, or even from the
bank, to pay for your wedding. In fact, you should have been saving for
your wedding as part of your overall financial plan. There have been many
cases of couples encountering problems due to the large debt incurred
during their wedding. Very often financial problems lead to other
difficulties.

(b)

Marriage and Family

As money is a sensitive topic, many couples can go through their entire
married life and not talk openly about it with one another. It is extremely
important that you and your spouse see eye-to-eye on money matters.
Please note that these pointers assume both of you are working:
(i)

Your financial plan has to move from being an individual to a shared

one involving your spouse;

(ii)

Decide on how to handle routine bills, paying for the family and
children, household budgeting, as well as savings and investment;

(iii) To pay for common expenses, save money on a monthly basis in a

joint account. Remember to review the list of the common expenses
often, at least once a month, to see if these expenses are increasing due
to inflation or your lifestyle as a couple;
(iv) If you decide to use credit cards to pay for some of the common
expenses, it is important that the person who is going to use the credit
card has access to the money from the joint account, so that there are
no complications later in paying the credit card debt;

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Just as in your individual financial plan, you need to set aside an

emergency fund as a couple to take care of those unexpected expenses
that can happen to you, your spouse and your family members.
Decide on an amount as common savings; any unused funds can be
added to a joint retirement fund;

(vi) Talk about each others investment style, including your respective
risk appetites and preferences. It is wise to have a common
investment portfolio to meet future financial goals, such as retiring
together and living a comfortable life. These investments are also
usually used to pay for your childrens living and education expenses;
and
(vii) You may need to increase your insurance coverage to include
different types of policies, such as life insurance, critical illness
insurance, medical insurance and personal accident insurance.
(c)

Financial Debts
This may sound harsh but do discuss with your intended spouse the debts
that you will bring into the marriage, if any. You should make a
commitment to settle personal debts within a period of time after the
wedding, if those debts cannot be paid off before getting married. Should it
become necessary to apply for a loan or even a credit card once you are
married, you will need to discuss your ability to pay for that new debt
commitment. Both of you must agree on the terms of payment and period
to settle the debt. You should not hide from each other the topic of debt.
Some marriages are reported to fail due to financial debts incurred by
spouses.

(d)

Financial Check-up
It is a healthy practice for a couple to prepare a monthly budget and
spending plan, and track spending at least once a weekusing a family cash
flow statement. The familys net worth (assets and liabilities) should then
be reviewed monthly.
You must review the household financial commitments and net worth
every month. Make it a monthly affair and a fun exercise to do together.
Talk about positive ways to improve the household financial commitments,
find creative ideas and reasons to grow more money for each other and
your family.

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7.4.5

Your Retirement

You are never too young or too old to plan for retirement. The earlier the better,
but it is also better late than never. Nonetheless, it is desirable to inculcate the
saving habit at a young age. In fact, saving should be part of your lifestyle. It is
wise not to rely solely on your EPF as your retirement fund because you may not
have enough in your account to provide you with a comfortable lifestyle after
retirement. This is becoming more common due to the high inflation rate.
Young adults normally do not think they are going to retire one day. Retirement
is difficult for people of all ages. Even people in their 40s do not want to face the
prospect of retirement. They have obligations, for example, the house, the
childrens education, the parents health care and 1,001 other things to take care
of first.
There is also the fear of the unknown. Not knowing what will happen to you
when you are old may sometimes prevent you from taking stock of your
financial welfare. You prefer to live for now rather than plan for the future.
Perhaps you are afraid of being told that you are not on track when you start to
plan for your retirement fund. You know that you have spent too much money,
your income-earning ability is not improving and you are not able to increase
your savings.
If you start saving as soon as possible, you will be in better shape than you might
expect. If you have been regularly saving some money and cultivating saving
habits, you will find it empowering for your personal self-worth. By saving early,
you may find that you have enough to enjoy some of your money even before
you actually retire.

ACTIVITY 7.4
When is the best time to plan for your retirement?

(a)

Basics of Retirement Planning

As in any planning process, you need to know where you are at present.
(i)

How much do have now in savings or assets?

(ii)

What is your monthly income?

(iii) What is the percentage of your income contributed to EPF or other

retirement plans?

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(iv) What rate of return do you want on your investments?

(v)

How many years do you have until retirement to earn your money?

After analysing your current assets and liabilities, estimate your spending
needs and adjust them for inflation. Then decide when you want to retire 
at age 45, 55, 60 or 65? Calculate the monthly retirement income needed for
your desired retirement lifestyle. Your retirement planning should include
debt reduction, budgeting, diversifying investments and, believe it or not,
maintaining good health through diet and regular exercise.
The question of health is vital during old age. Health costs can be a major
expenditure and a drain on retirement savings. Even if you have medical
and life insurance which cover critical illness and disability, this may not
include all the procedures and prescriptions that you need to have.
Sometimes certain illness are only partially covered or not at all covered
under insurance benefits. Therefore, adequate retirement planning has to be
done for maintaining and living a healthy life.
(b)

Retirement Timeline
(i)

Sign up for EPF on your first day of work. However, due to inflation,
the money you will have in your EPF may not be enough for your
retirement. Create a personal retirement account by opening a savings
account with the bank and start saving at least 10% of your disposable
income.

(ii)

For each increment in your age, increase your savings in your

personal retirement fund by a certain percentage of your disposable
income per year. For example, if you started working at age 25 with a
savings of 10% (from your disposable income) and decide to increase
your savings by 1% each year as you grow older, at age 26, you will
save 11% of your disposable income and by age 35, you will be saving
20% of your disposable income.

(iii) Ear mark a portion of each raise or yearly bonus to your retirement
savings. Make sure you provide in your monthly budget the amount
of savings meant for retirement.
(iv) While you are saving for retirement, review your investment portfolio
for retirement annually to ensure that your money is growing
according to your retirement plan.

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7.4.6

A Balanced Life

While money is necessary in todays world, it is not everything. Do not make it

the sole reason for what you do in your life. Health, family and spiritual wellbeing are important elements that contribute to happiness. You should also make
regular donations and give to the less fortunate to alleviate their hardships and
misfortunes. It is very important to create a balance in your life.

Personal financial planning is very important for every individual who wants
to achieve financial success in life.

There are five steps in devising an effective personal financial plan. Though it
is easier said than done, the key in achieving success is perseverance.

You need to have strategies for living your life with the help of personal
financial planning.

Career planning is important so that you can increase your incomegenerating capability.

In buying a car, affordability is the key.

Buying a house is a major financial decision. Weigh out the benefits of renting
versus buying a house.

You and your spouse must be willing to frankly discuss financial issues,
draw up a financial plan and achieve it together.

You are never too young or too old to plan for retirement.

Work towards having a balance in your life, where money is not the sole
reason for your existence in this world.

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NNING (PFP)

Affordaability

Fin
nancial successs

Balanceed life

Neet worth

Career planning
p

Reetirement plan
nning

Financiial happiness

Weealthy

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Financiial planning

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