Credit card debt Should you settle it immediately if you can?

SO you’ve got credit card debt. A lot of it. But let’s just say that suddenly, you have the means to settle it. Perhaps you won the lottery, or will be receiving a windfall of cash.

So the question is, now that you have the means, should you settle off your debt immediately – or pay it off slowly (like how you were going to initially) and use the money for something else?

The right thing to do
Instead of paying off your credit card debt, perhaps you feel that the money should actually be put to better use – like investment. But is this the right thing to do?

MyFP Services SdnBhd managing director Robert Foo says the right thing to do is to settle your credit card debt immediately.

“Where ever you allocate your money, the chances of you getting 18% per annum in returns, which is the interest rate for a credit card – is unlikely,” he tells StarBizWeek.

Success Concepts Life Planners vice-president Lee Mun Wai concurs.
“Money coming in should be used to settle your credit card debt, unless you can get returns that can generate returns as high as that (the annual interest rate of credit cards).

“But even if you can find something that gives that kind of returns, chances are that the investment could be extremely risky,” he says.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui also believes that settling your credit card debts should be a high priority.

“Right after debts that you owe to Ah Longs, your credit card should be the next thing that you need to settle immediately,” he enthuses.

“Immediately after that, in terms of priority, you need to settle your mortgage and personal loans,” says Yap.

Jessica Wong, who claims to use her credit card for “a lot of things,” says she makes it a point to settle her credit card bills as soon as possible.

“I try not to have it accumulate because the interest rates are really high. I had a huge bill at one point but after that decided to be more frugal with my spending habits.”

If you choose not to settle that debt
Of course, choosing not to settle your credit card debt means incurring high interest rates that you could and should avoid. But if you’re not going to clear your outstanding payments, what’s the next best thing to do with the money?

“From a motive point of view, a person could have other things to look forward to,” says Foo.
“He could have other income or opportunities coming in. If not, then it would be advisable to clear that debt.”

Foo says the important thing to determine is whether the sum owing is “insurmountable.”
“Ask yourself if the debt is insurmountable. If you have plans of setting up a business, then perhaps the best thing to do is to channel the money towards that.”

Foo adds that what amounts to “insurmountable” would depend on an individual’s goals and objectives.

“It depends. RM10,000 might be nothing to some people but for some, it’s a terrible debt to have.”
Jacob Chong, a self-employed businessman, says he was “neck-deep” in credit card debt when he took out a personal loan to set up a catering business.

“I was paying off the minimum sum every month, then took out a loan to use as capital for my business. It was a risky thing to do but I was confident that I would be able to see my business take of.

“We were off to a slow start but finally we were able to break even, and I did end up clearing my credit card debt with the money I was making through my business,” he says

Thetar

What is your financial stamina and how do you improve it?

Teacher: “I’m sorry but I think you’re in the wrong course. Please tell your owner I have no idea how to make you lay golden eggs more regularly.”

 

Imagine that you are retired. But are you aware that you may retire for as long as 30 years, especially since life expectancy keeps going up? So before you retire, you are working hard to earn as much money as you can, but time is running out. What else can you do to build your financial stamina in order to last the long haul? AMELIA HONG writes.

SAVINGS ADD UP: No matter how much you earn, save a little of it. Start as little as 5% and keep moving up. No one is too broke to save because it is a matter of your mind-set and nothing is too difficult to trim.

Make this a real effort for the first 10 years of your money making life because doing this early makes “time” and “returns” your financial buddies.

If you put in RM1,000 every month when you are 25 until 55 at a return of 8% per annum, you will accumulate a whopping RM1.4mil. Delaying this 10 years later, you need to double the effort to setting aside RM2,500 each month to get to the same finish line.

SPENDING WITH THOUGHT: Know the difference between wants and needs. Always ask yourself, “Do I really need this?” Giving up an expensive car now may mean that you have an extra half a million in your pocket 20 years later. Also, take note of the true cost of owning something because maintaining the item bumps up the cost. An example will be an expensive membership with a high annual fee requirement.

STAY AWAY FROM BAD DEBT: Credit card debt of 18% p.a. is going to double your debt in four years. A debt of RM40,000 will take 10 years and seven months to clear if only the minimum was paid and a total of RM16,912 in interests. Imagine what you can do with the interests instead − a holiday for two, a deposit for a new car, a start-up capital for a business or simply an injection into your retirement portfolio.

Will you finish the financial race with a medal? Strengthen your financial stamina with these three simple financial habits. Think about it.

Amelia Hong/Thestar

Leaving a financial and parenting legacy

BEING a parent is a challenging job. It's a job that requires lifelong commitment, and you cannot resign from it even if you feel you can't cope. And what's more, parenting requires skills that are not obtainable from school, college or university. Parenting and managing money are the two most important skills that we learn from our parents or adults with whom we grew up, be they our grandparents, nannies or guardians.

As you go through the process of considering how to communicate with your parents and siblings about managing family wealth, you will realise the need to teach your children about money so that you are able to leave your own legacy behind for your children to communicate and manage money harmoniously as a family.

There is really not one proven or standard method of parenting and teaching children about money because of different personalities, behaviours and attitudes. We teach children about money based on how we were taught about money by our own parents or guardians, and from the environment in which we were brought up. Recall your childhood days, and how your parents taught you about money. Were you taught to save your pocket money or to spend it wisely?

Think about the environment you grew up in. Were there times when your parents had money problems and you often heard them argue about it? Or did your parents hide the fact that money was hard to come by in the family? Or were you pampered by your parents with toys, clothes and going out for fun activities and holidays?

Some parents have told me that because of the poverty they experienced during their own childhood, they now try their best to give their children a better life by lavishing them with the material goods and experiences that they themselves never had. By indulging their children, they are not allowing their children to experience financial responsibility.

Different parenting styles
While most parents learn parenting skills from their own parents or by observing others, they will accept some practices and discard others. Effective parenting requires interpersonal skills that can create some emotional demands. Experts in early childhood development say an important dimension of parenting is the style parents adopt when they interact with their children. According to Maccoby and Martin's parenting style typologies, there are four different parenting styles. Depending on the child's character, different parenting styles lead to different results:

1) Authoritarian parenting is a restrictive, punitive style in which parents exhort the child to follow their directions. The authoritative parent places firm limits and controls on the child, and allows little verbal exchange. These parents tend to be very strict and may control the children by limiting their wants and desired wants. In this case, the children may either grow up to rebel' by spending beyond their financial means to fulfil their childhood desires, or they may become very good at managing their money.

2) Nurturing parenting is a style that encourages the child to be independent but still places limits and controls on the child's actions. Extensive verbal give-and-take is allowed, and parents are warm and nurturing towards children. These parents often communicate and teach their children to spend their money wisely by explaining to them the importance of money.

3) Neglectful parenting is a style in which parents are uninvolved in the child's life. Children whose parents are neglectful often develop a sense that other aspects of their parents' lives are more important than they are. Children who grow up in this environment are often deprived of parental love and a sense of belonging in the family. As a result, they may grow up spending lots of money to fulfil their need for love from friends, and from their life partner. Or they may spend money to boost their self-esteem because of the lack of parental love.

4) Indulgent parenting is a style in which parents place few demands or controls on the children. These indulgent parents will let their children do what they want. Children with indulgent parents may often be spoilt by a variety of material things or an impressive lifestyle. The spending behaviour of indulgent parents may condition the children to spend more than they need or more than they can afford when they grow up.

Imagine a situation where the father is indulgent towards a child and provides gifts, toys, fun and pleasure, while the mother, on the other hand, is a disciplinarian with strict rules about gifts, toys, fun and pleasure. Who will the child prefer to be with, and who will the child learn more from? You and your spouse should decide on a best way to handle your children's money expectations. It is important to be consistent and fair to lessen potential family strife.

Communication
According to experts of child psychology, even from a tender age of 2 or 3 years old, a child learns by observation, and from conversations and experiences they have with adults. Hence, effective parenting warrants a tremendous amount of proper learning methods and communication skills. Understandably, today's parents are faced with more issues compared with their parents; the fact that today's younger generation is growing up in an era of media influence, technology advancement and the Internet makes parenting an even more challenging job.

It can be painful for parents to discipline and teach children about saving money, particularly when their children are easily influenced by their friends even as pre-schoolers. This is further compounded by the barrage of advertisements on television and online media that tempts your children with attractive toys, pretty clothes and accessories.

It does not really matter how much money you have or how much joy you derive from showering your children with material things. As parents, you have got to show some restraint and boundary. You don't have to feel guilty about scaling back on spending for your children. Your children may already have more than they need more clothes and shoes than they can wear, toys and games than they have time to play with.

Be mindful that while you are conscious of good money habits for your children, you need to ensure that your children's grandparents, godparents, aunties, uncles, or other adults around them do not indulge them too much with gifts. This may send your children the message that if they cannot get what they want from you, they can get it from them.

Family values
In some situations, a couple may bring different views and values about money and parenting to the marriage. Because of personality, character, family and life experience differences, couples do face conflicting personal and family issues where money is concerned. Therefore, teaching a child about money really begins with teaching your child about the importance and meaning of life values as a family.

Honesty, integrity, teamwork, helpfulness, trust, love, family support, accountability, unity, filial piety, commitment, communication, sharing, spending time with parents and siblings are some of the most important family values that your children ought to know, even if they may be younger than six years old.

Constant messages to your children about how good family values are important in life, and that money cannot buy such values, are more important than parental love expressed in the form of material things for your children.

Teaching them important life values and let them know that money is a means to an end, and not for self-gratification.

Other than sending them to school to gain knowledge and social skills, the money skills that you teach your children from an early age are the most important life education you can provide them with and it actually starts at home. It is as simple as how you and your spouse manage money and communicate about money at home. Your good money skills will rub off on your children.
May this be your new resolutions for teaching your children good money sense!

Carol Yip/Thestar

How to save when you’re broke

Saving money is not impossible when you're in financial dire straits
SAVING money can be a tall order for a lot of people but it becomes near impossible when you're broke or financially challenged.

Still, it's not a position you can't come out of.
Here are some simple steps to follow to help you save despite being broke.

Set up a budget plan
If you're broke and trying to save money, than it's best to come up with a budget plan, says Standard Financial Planner Sdn Bhd's Jeremy Tan.

“If you're broke, then you need to evaluate what you're doing wrong.
“Have a budget plan. Look at what assets you have?

“Perhaps you could try liquidating some.
“But even before you're broke, you should have contingency or emergency funds,” he tells
StarBizWeek.

Keep working
MyFP Services Sdn Bhd managing director Robert Foo believes that if a person is broke, it's imperative for one to continue working or seek a new form of employment - as soon as possible.
“If you have a job, then you should continue working.The experience that you already have would be invaluable.

And what happens if you've lost your job or unemployed? All is not lost, says Foo.
“Don't feel hopeless. You've got skills and should be able to have contacts that can help you find a new job.

“If you have a job and you feel it's unstable or that you might lose it, then you should ensure that your resume is with headhunters, to ensure your income position remains as stable as possible.”
Tan also points out that age can be a factor

“Of course if you're young, you'll be able to take on multi-tasking jobs. If you're old, then you might need to go easy on the job load,” he says.

Compare prices
Self-confessed shopaholic PS Tan says that when she's “a little bit behind on her credit card payments” and needs to cut down on her spending, she decides to be a little bit more “choosy” with her shopping.

“When I know I need to cut down on my spending, I go several hypermarts or supermarkets and compare prices first before eventually purchasing.


“Also, if I have been using items that were expensive, I just choose to buy ones that are cheaper.
Be open to new brands and products,” she says.

Eliminate costs
While trying to save, also try to rid yourself of whatever debts you have.
“If you're broke, ask yourself if you have debts or not? Find out how you can restructure them,” says Tan.

Tan meanwhile says now would also be a good time to evaluate and consider eliminating the unnecessary financial obligations that one can do without.

“If you have a gym membership for a gym that you've not been going to for a long time, or perhaps a year's subscription for a book or magazine you've been hardly reading, just cut it off.”

Live within your means
If you're broke, than you're going to need to need to change your lifestyle - immediately!
“If you're broke, then you're not going to be able to sustain the lifestyle you've been living.
“The fastest way to solve this is to cut down on your expenses,” says Foo.

He reiterates that one could find a part time job or even a second one to curb debts quickly.
Eric Lee (not his real name), a marketing executive who was laid off for six months, says he was forced to cut down on his lavish lifestyle when he had difficulty finding a job.

“I had to do a lot of things differently.
“My car got repossessed and I had to move out from where I was staying because I couldn't afford the rent.

“I moved in with my parents and also had to rely on public transport to go where ever I needed to, especially for job interviews.

“If I was lucky, sometimes I could drive my parents' cars.
“When I did get a job, I initially still had to live within my means as I was still unable to stand on my own feet. This meant taking home-cooked meals to work.

“Initially, I also had to use t-shirts from friends as I couldn't afford new ones.”

Thestar

Are you in control of your spending?

WITH the holiday season and celebrations happening now till Chinese New Year 2013, we all have reasons to spend. Retail product suppliers are taking this opportunity to tempt us with new launches and festive sales.

Well, how good is your self control? Are you controlling your urge to buy with the money from your year-end bonus? Or are you affected by the never-ending stream of news and endless advertisements promoting new products and fantastic prices? Do you find it difficult to avoid the temptation?

Triggers that stimulate needs
There's lots of “noise” around us every day that influences our spending decision-making process. So, why are we easily swayed by such temptation; wanting more than necessary? This is because our different wants and desires are driven by our five senses: what we see, hear, taste, smell and touch.
Our brain's decision-making process is directly triggered by what we see or hear and how we feel. If something stimulates our brain's pleasure centre through these senses, we want as much of it as we can get. When our emotions are aroused, they often overwhelm our good sense and we end up making a purchase to maximise the “good feeling”.

Merchants and advertisers know our human weaknesses very well. For that reason, I caution you not to be easily fooled by your own biological triggers that stimulate emotional spending.

Illusion of basic needs
In reality, there are many temptations driven by our needs and wants. We must try to control those temptations, but still maintain a healthy level of self-esteem.

We have several basic need drivers: survival, fun, happiness, love, and relationship. Advertisers try to link their products to these basic needs. We often find it difficult to differentiate between our basic needs and the wants that are persuasively substituted via various media. This confusion has a direct impact on our spending decisions.

Survival is our most basic need. Besides survival, we need to have a sense of security and to be physically healthy. Hence, we have biological need that is critical for our continued existence and physical well-being. We must have social needs in the form of love, a sense of belonging with people, relationships by affiliation with and acceptance by others. Some of us spend money to express our love, affection and friendship to the loved ones, family and friends.

Self-esteem needs achievement, respect, approval and recognition from loved ones and people who are important to us. These are the needs that drive our positive self-esteem, self-worth or self-image. Without these needs, we may experience anxiety, depression, stress or helplessness because we will not able to fulfil our personal potential.

None of us are perfect, and daily life brings us into constant collision with evidence of our own incompetence and inadequacies. If we listen to negative feedback and don't create what psychologist call “positive illusions” our self-esteem will go through the floor. Sometimes we will use spending as a mechanism to boost our bruised self-esteem. Does a bad day at the office seem to always end up with a shopping spree at the mall?

If we have a better understanding of our basic needs, and avoid the trap of wants and desires (at least kept to a minimum), we can manage our spending better. And limit the buildup of debt that we may not be able to pay off.

Inner voice of needs
We have an “inner voice”. Sometimes that inner voice can lead us astray. The less skilled or experienced we are at something, the harder our inner voice works to convince us that we are brilliant at it. And that's good, up to a point. When we look to fulfil our needs, we may have a strong tendency to turn our desires, wants and preferences into self-talk or dogmatic thoughts of “I should”, “I must”, “I need”, “I want”, “I always”. These statements overwhelm our otherwise rational spending attitude.
Perhaps you recall your “inner voice” saying things like: “I always hang out with my friends at Cooler Bar on Fridays. If I don't, I will feel that my week is not complete.” or “I need to buy a pair of the top price FastFeet running shoes for my gym workout; otherwise, my feet will get sore from running on the treadmill.” Learn to question these dogmatic statements when you hear your “mischievous inner voice”.

Use the power of the most successful advertiser to your personal benefit. Don't “Just do it” when you hear yourself saying statements like: “I need”, “I always” or “I have to”. Instead of being
misconstrued by your self-talk, “Think different” and make a decision only based on your genuine needs.

The need for convenience'

These days, people seem to be living a hectic lifestyle in an urban city where time is limited. We have so much to do, yet there's so little time. For instance, some will spend hours in the office or stuck in traffic, then end up not spending time to cook dinner. Instead, we have our dinner in the restaurant or make a call for home delivery.

Some of us are constantly looking for services or items that can save time, are easy to use and give us the “convenience” we want. We are willing to pay more for services that provide convenience including an express service or online booking. And our credit card provides the convenience for us to spend, spend and spend.

Anything that provides convenience has become a “need” for us, to the point that we will spend money to achieve convenience. In short, we strive for a “lifestyle of convenience” at a price a symptom of a developed country with constant inflationary pressure!

Future needs and wants
In the business world, merchants, service providers and manufacturers who experience overpricing of resources and high operation costs will pass the higher costs to us in the form of higher prices. With the depletion of natural resources, rising labour costs and climate change, we will continually be paying more in the future for the goods and services that satisfy our needs and wants.

If you are a smart consumer, you should be in control of your needs and wants all the time. When you are able to address some of the psychological root causes of your needs and unnecessary spending, you will be in a better position and state of mind to manage your personal finances.

Just spend a moment to reflect upon some of your past decisions. Very likely, you will notice that inside you lurks “a mischievous inner voice” that is forever cajoling you into an inflated sense of your own power.

So, before you spend your next dollar during the festive holiday, you need to keep asking questions like an inquisitive five-year old. It is always safer to make a habit of asking questions over and over again to test your needs and spending decisions so that you don't have regrets later in life.

Carol Yip/Thestar

How to be debt-free

Lee says that it is a matter of discipline and people should cultivate good spending habits and stick to them.

 

BEING debt-free is something we all hope to achieve, but more often than not, it's something that's easier said than done.

However, it's not a goal that cannot be realised. Here are some tips to follow to become debt-free.

Evaluate your position
CTLA Financial Planners Sdn Bhd managing director Mike Lee says being debt-free comes down to one factor discipline.

“It's a matter of discipline. One should cultivate good spending habits and stick to them,” he tells StarBizWeek.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui says a person should “draw up a table” and list down his or her ongoing debt obligations.

“A person needs to take stock of the loan that they have. Make a table, list down the financial institution, type of loan, the loan amount and the interest rate.

“After that, you need to rank it and work out a savings plan to settle it every month. You should of course put more emphasis on the debt with the highest interest rate,” he says.

Pay off your existing debts
Standard Financial Planner Sdn Bhd's Jeremy Tan concurs: “With the cash you have, work towards cancelling debts with the highest interest rates.”

Tan says interest on credit card debt is the highest, followed by personal loans and then vehicle loans.
“Interest rates of personal loans are comparable to those of credit cards. As for vehicle loans, these can stretch up to nine years.

Foo: ‘If one has a lot of consumption debt, it should be paid off as soon as possible but productive debt is okay to build your assets.’

 

“Cars depreciate in value over time and after that time, the value of your vehicle will be far less than the amount you owe the bank. The shorter the loan repayment period, the better.”

The next debt in line that needs to be settled is the housing loan, he says.

MyFP Services Sdn Bhd managing director Robert Foo, however, points out that not all debts are bad.

He says one should distinguish between consumption debt (such as credit cards), and productive debts which one gets when running a business or buying a property.

“If one has a lot of consumption debt, it should be paid off as soon as possible. Productive debt meanwhile is okay to build your assets.”

Yap says not all debts need to be settled immediately.

“If you have debts that have an interest rate of about 4% per annum, but you are investment-savvy and generating between 8% and 10% in returns annually, then you don't need to settle your debts so soon.

“Instead of repaying a loan, you should be investing the money. If you end up paying the loan, then you may not have money to invest and generate more income.”

Yap, however, says that only if interest rates increase should a person consider settling their debt as soon as possible.

Chuah: ‘Most people believe that they will be able to pay off their debts eventually but a lot of times, that’s not the case.’

 

Change your habits
Apart from trying to avoid future debts, Success Concepts Life Planners chief executive officer Joyce Chuah says people should be smart in their repaying habits.

“Debt-trappers to be avoided include instalments plans, which are essentially easy payment plans for a particular product. You should only opt for these if they are interest free.”

Foo says people need to be more forward-looking when taking on debts.

“It is a question of discipline. Many people are not forward-looking. Most people believe that they will be able to pay off their debts eventually. A lot of times, that's not the case.”

Chuah adds that individuals just need to be more cautious and avoid taking on financial obligations if possible.

“Never agree to act as a guarantor. One should also know what he or she is spending on. A lot of us tend to spend mindlessly.”
Tan concurs: “Avoid buying on impulse. Work out what you need and don't need. Using a debit card is also a good alternative instead of a credit card.”

Have a good plan
Of course, it helps to have a good financial plan from the start.

“Look at your financial situation. A lot of things can go against you. For instance, your business may fail or interest rates can go up - which can end up being a problem,” Foo points out.

Lee says someone that does not have a financial plan will eventually be heading for disaster.
“If you have no plan, than you are directionless. If you don't have a plan of your own, consult an expert, such as a financial planner,” he says.

TheStar

Tips on what to do after marriage

“Why? Because I love you, darling.”

 

“I do” is possibly the most romantic two words uttered at weddings. Romantic as it sounds, a whole new financial life starts for the two new individuals starting a lifetime together.
JOYCE CHUAH writes...

Bank accounts
Start a joint account for family expenses such as groceries, family holidays, mortgage, transportation, and schooling. It is still advisable to maintain your own individual accounts for personal spending and hobbies. This also allows you to track your own personal expenses and ensures that the family expenses are tracked separately.
Plan financially for unexpected events

Joyce Chuah

 

Decide how much is required if one of you was left to support your household alone, and consider whether or not life insurance would be appropriate. What about health insurance should you change your current hospitalisation benefits and increase critical illness coverage as your financial responsibilities increase when you are married?

Re-write your will and revisit named beneficiaries
You may have written your will as a single individual. When you are married, your will has become null and void. Rewrite it again as soon as you can.

You may also want to re-visit your named beneficiaries on existing will, EPF, private pension plans, insurance policies and any other assets you may have.

When you have established beneficiaries on these accounts, you can ensure that your assets are disbursed properly to the ones you love.

Financial responsibilities
Decide with your spouse how debts, assets, bills, and even savings will be taken care of. Create a family budget and look at your combined cash flow. What debt payments will you both have? How much can you save? Can you find ways to combine expenses, such as switching to the same wireless phone plan? Answering these questions together will help you develop the most realistic budget for your married life.

Matrimonial assets
Particularly if you are a Muslim, it is advisable to set up a declaration of matrimonial assets (harta sepencarian) to ensure that each partner is protected from any undesired third party claims on your assets acquired during your marriage.

TheStar/ Joyce Chuah

Rich or wealthy – which are you?

IN recent years, the level of household debt among Malaysians has been a matter of growing concern, as the statistics show that the average person is way over his head in debt.

Based on Bank Negara figures, the typical household borrowing is a shocking 140% of disposable income.

That's something to think about, as it means that at least half of Malaysians are struggling desperately with their finances. So, they probably have very little idea of how they can become financially free, let alone wealthy.

Incredible, isn't it? Most people we know would like to be free of financial worries and to enjoy a high standard of living, but so few seem to get it right.

The journey towards financial success begins by first knowing where you are. Strangely, many people in the middle class find it difficult to answer this question: are you middle class, financially free or rich?

In my latest book, Set Yourself Free: How To Optimise Money and Become Wealthy With Minimum Effort and Risk, I have talked about the money matrix, an intellectual tool that I have developed to help you understand the state of your finances and how you can move towards financial freedom, and eventually wealth. (see chart)

Think about the various elements in the money matrix for a while, and let the ideas being discussed here get absorbed into the way you look at money. How you view these situations will determine what you do to achieve your goals.

The vertical axis denotes your ability to generate an active income, which is described as your money-making ability. The higher your money-making ability, the more income you generate. You can take steps to increase your money-making ability by focusing your time, resources and effort on the area that you do best.

Compared to a general practitioner, a heart specialist is able to generate a higher income. Likewise, if you are a small business owner, you could concentrate on becoming a market leader in your industry.
Most people find it relatively easy to increase their money-making ability. In fact, some people become absolutely driven by it, thinking that it is the only way to resolve all their financial concerns. If you are wondering why so many people are constantly chasing their financial goals, but never seem to reach them, that's because they are focusing on making more money but not on optimising what they have!

People who adopt this mentality will always be stuck in the “rat race”. They cannot afford to stop working for fear that they cannot maintain their present lifestyle. If you are one of these people, it may be time to re-evaluate your priorities.

Money optimisation, as measured on the horizontal axis of the money matrix, reflects your ability to turn your active income into assets and then using those assets to support your lifestyle in the optimal manner. In other words, money optimisation is about making your accumulated assets work for you. The higher your money optimisation ability, the more assets you will accumulate and preserve.
To achieve financial success, you must fully understand how money making and money optimisation interact with each other. Let us look at the various sections in the money matrix:

Poor: You are in this group if you have low money-making ability and low money optimisation ability. Your income is low and you spend most of it on your living expenses. If you lose your current source of income, you risk being unable to look after your basic living needs.

Middle Class: In this group, you have medium money-making ability and low money-optimisation ability. Your income is above average but you spend most of it on a comfortable lifestyle. If you lose your current active income, you risk being unable to maintain your lifestyle.

Rich: You have high money-making ability but low money-optimisation ability. Your income is very high but you spend most of it on a luxurious lifestyle and your financial resources are not optimised. You will not be able to maintain this lifestyle if a financial disaster strikes and you lose your current active income.

When we understand the behaviour that puts us into one of these three categories, we will be able to take the right steps to optimise our money. Now, let us look at the column on the right, which shows the financial health status that a person can work towards:

Self-Sufficient: If you have low money-making ability but high money-optimisation ability, you can be in this category. You may have a low income but you manage your finances very carefully. You may live a simple life, but you do not have to depend on anyone else for your survival.

Financially Free: If you have medium money-making ability but high money-optimisation ability, you can be in this group. You control your expenses so that they do not grow in tandem with your increasing income. Instead, you focus on saving or investing your extra income and as a result, you manage to accumulate a reasonable size of assets to maintain your current living standard.

Wealthy: If you have high money-making ability and high money-optimisation ability, you are in the wealthy group. You have an extremely high income and enjoy a comfortable, but not luxurious lifestyle. You turn a very high percentage of your income into savings and invest it wisely. As a result, you generate a huge passive income which is more than sufficient for your living expenses. In addition, you have taken the necessary measures to ensure that your wealth can potentially last for generations.

The money matrix is, therefore, a guide to help you find out if you need to increase your money optimisation ability or money-making ability to improve your financial position. Without fully comprehending these two elements, many people feel lost and focus on the wrong things in their journey to seek wealth.

Let us take the case of Michael, who has identified himself as belonging to the middle-class section in the money matrix. Michael wants to get out of the rat race and be financially free. However, he makes the mistake of focusing solely on his money-making ability to generate more income, and ignores all aspects of money optimisation. Michael will end up in the rich section.

Along the way, if something were to happen to Michael and he stopped working, Michael may find himself back at being middle class, or worse, in the poor category.

If there's one thing which could help you achieve financial freedom, and eventually become wealthy, it would be this: you must not just focus on making more money, but must optimise what you have.

Thestar/Yap Ming Hui

The secret of being wealthy

I'VE been an independent financial advisor for more than a decade and one of the questions that I am periodically asked is, “What is the secret of being wealthy?” The answer, and you may be taken aback by what I am about to reveal, is not about getting richer.

Growing up in a typical middle-income family, I often wondered how wealthy people managed and grew their wealth. In particular, I wanted to know what separated the truly wealthy people from the rich. Both shared an undeniable ability to make money and could afford to lead comfortable and lavish lifestyles. Yet, those in one of these groups were clearly the front-runners because their wealth had the ability to last generations.

In 1998, I enrolled in a Chartered Financial Consultant (ChFC) course to study personal wealth management. In 2000, I started my own independent financial advisory business. In the process of growing the business, I was privileged to learn from some of the best wealth managers and professionals from the United States, Australia and Europe.

I also discovered a unique approach used by the likes of John Rockefeller, Andrew Carnegie, Li Ka-shing and Bill Gates to become not only rich but also tremendously wealthy. Armed with all this knowledge, until 2008, I focused my business on serving clients with a high net-worth, which included a niche group of multi-millionaires and owners of listed companies. In time, I identified a common pattern in the characteristics, behaviour and habits of all these wealthy people.

The wealthy know not to keep or hold on to too much cash in the bank. They are aware that interest rates offered by the banks will not be enough to offset actual inflation. Therefore, one of the most logical steps to take is to keep a minimum amount of cash in bank deposits while investing the rest.
The wealthy constantly review the performance of their investments. They have no reservations in getting rid of underperforming investments that do not meet their expectations. They will not hesitate to take on investments that will generate a handsome profit.

The wealthy are never lulled into a false sense of security over the assets they own. They demand to be made aware of any risks that might reduce or deplete the assets, and will explore methods to safeguard, protect and preserve their wealth.

The wealthy are also very conscious of unnecessary living expenses. For example, they don't like the idea of over-purchasing life insurance policies and paying expensive premiums. They regularly review all their insurance policies and will take action to cease or surrender irrelevant ones .

The wealthy demand more
The fact of the matter is that wealthy people demand more for their money. They are never satisfied with just having money sitting in the bank or having it invested in one or two investment vehicles. If anything, they want their money to work even harder for them. With such a high regard for their money, the wealthy place enormous emphasis on optimising their money. In fact, I'd say it's bordering on obsessive and rightly so!

By contrast, these characteristics and habits of wealthy people tend to be absent in the rich and middle-class. Certainly, the rich generate a high income. They may put their money into fixed deposits, buy one or two properties and invest in unit trusts or shares. However, they are too busy to spend more time optimising what they have. They hope that by earning more money, they will one day become wealthy. The same can be said of the middle class. When their income increases, they fail to optimise their hard-earned money.

Other than the lack of time and discipline, one of the main reasons they failed to optimise their money is that they feel lost and do not know where to place their investments. As a result, they assume that if they make more money, they will become wealthy.

In short, those who are not wealthy focus on one thing and one thing alone how to make even more money.

Moneymaking capability is the ability to generate an active income. Therefore, anyone who works as an employee or business owners has this capability. What most people underestimate or fail to appreciate is the power of money optimisation, defined as the activity of optimising the income and assets that you already have. Money optimisation is about making your accumulated assets work for you to support your lifestyle

Without money optimisation, your hard-earned income may not be translated into meaningful savings. Furthermore, your hard-earned assets will not be able to grow at an optimal rate or be properly preserved and protected against various risk factors. Without money optimisation, chances are you're probably not going to be in a position to support your various needs and wants in life, especially if you stop earning an active income. Most disastrous of all is that you will never be on the fast track to becoming wealthy or get out of the rat race.

Think of it this way: to succeed in any sport, one must not only focus on playing on the offensive all the time. Champions and their coaches will tell you that to win a championship, it is necessary to strike a balance between good offence and having a tactical defence.

So, to come back to the question: “What is the secret of being wealthy?” The secret of being wealthy is not about getting richer; it's about optimising what you have and striking the balance between focusing on both your moneymaking and money optimisation capabilities in equal measure.

Yap Ming Hui/Thestar

Can you retire with RM1mil?

A MILLION ringgit is a lot of money. In the past, it was always considered “the benchmark” in terms of a person's success. After all, having RM1mil officially makes you a millionaire.

However, realistically, is RM1mil big enough to survive on today, especially once you retire?
According to official statistics, the average Malaysian male has a life expectancy of up to 75 years, while for females its up to 77 years. This means that a retiree aged 55 has to support hinself or herself for another 20 years or more.

But let's be a little bit conservative for the purpose of this article, let's put the average life expectancy at 80 years old. With RM1mil at 55 years old, you would need to divide that money to last you another 25 years, which comes to an average of RM3,333 a month.

Dwindling value: With the high cost of living and rising inflation on an annual basis, RM1mil won’t be sufficient to retire for long.

 

Is that enough to sustain you?
“It really depends on your living standards,” says Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui. “With rising inflation on an annual basis, that monthly sum (of RM3,333) will be worth a lot less as the months and years go by, so it's definitely not enough to sustain you for 25 years,” he tells StarBizWeek.

Yap nevertheless believes that a person is able to “make do” with RM1mil once he or she retires.
“You would definitely need to readjust your lifestyle,” he says, adding that a person without financial obligations, such as a pending house or car loan can still survive on RM3,333 a month.
“Of course, if you have a posh lifestyle, especially when you're living in Kuala Lumpur, then that amount won't be enough. But if you live outside Kuala Lumpur and live within your means, then it's still possible.”

MyFP Services Sdn Bhd managing director Robert Foo says living for 25 years with RM1mil in today's environment “would be tough.”

“If you're married and have a few children and ongoing commitments such as a loan, it's tough. If you're not generating any more money after 55, it will definitely run out.

“By the time most people are 55, their children are probably working but some of them might still depend on their parents. They could be living under the same roof or might need financial help to buy their first car, for instance.”

CTLA Financial Planners Sdn Bhd managing director Mike Lee also feels that RM1mil would only sustain a person for a limited period of time.

“RM1mil might be enough for the first few years. However, with the high cost of living and rising inflation on an annual basis, that sum won't be sufficient.”

Foo maintains that it is ultimately up to how the individual manages his or her lifestyle.
“It truly depends. For some people, RM1mil might not be enough to even last them 10 years.”
He says RM1mil might not be sufficient for a bachelor with no commitments to retire on.
“As a bachelor, you're probably going to want to go out with your friends and see the world. You're unlikely to be cooking your own food, staying at home everyday and living hand-to-mouth every month.

“That's not considered living, that's existing!”

How to retire with RM1mil
While RM1mil might not be enough to retire with, it's still a lot of money, which can be used for investment purposes and to grow your wealth even further.

Foo believes the best thing to do is to continue working well into your retirement years if health permits,.

“Don't retire! We advise our clients that if it's possible, they should continue working. At 55, you're still young enough to generate more income for yourself. Even if it's just half of the amount that you used to earn, it's still money coming in,” he says.

Yap says readjusting your living standards would also help, adding that an individual could further invest his or her money in shares, unit trust or even property.

In terms of shares, Lee says a retiree should put some of his money in stocks that provide good dividend returns.

“Real estate investment trusts also give good dividends. Have a mixture of investments and don't just leave everything in your fixed deposit account.

“Leaving all your money in the bank is not a good idea, as it won't generate good interest rates. With the inflation rate growing at an even faster rate, you'll just end up losing out.”
Foo says it's also a good idea to start your own business.

“By the time you retire, you would have acquired valuable skills that still make you marketable,” he says, adding however that starting your own business can be either a rewarding or risky endeavour.
“Starting your own business can generate high returns. But you can either make it or lose everything.”

EUGENE MAHALINGAM/Thestar

Why money matters in marriage

Financial goals and priorities need to be set together
THEY say that love is the most important ingredient for a successful marriage. However, money (which some people say isn't everything) is also a vital component for a sustainable matrimonial union.

Dinesh: ‘When you take the comfort out of the comfort zone, the marriage won’t sustain.’

 

“People marry and hope for an eternal comfort zone. But when you take the comfort out of the zone, the marriage won't sustain,” says divorce lawyer Dinesh Kanavaji.

According to a 2004 study commissioned by SmartMoney magazine, some 70% of couples surveyed talked about money at least once a week, while 36% of men and 40% of women admit that they lied to their spouse about the cost of what they bought .

Indeed, knowing how to manage your finances and working them out together is important for a successful and sustainable marriage. But this can be a feat that's easier said than done.
The following are some financial mistakes to avoid in a marriage.

Failing to plan
Unfortunately, many couples go into a marriage not planning for the financial obligations that come into play when running a home.

Foo: ‘Everybody needs their space, but in a marriage, financial decisions need to be shared.’

 

The pitter-patter of little feet in the house or a job loss can put a real strain on a marriage if there is no financial planning for the change in circumstances.

“Many people, especially young couples, go into a marriage feeling very optimistic about the future and believing that things will only get better,” says Robert Foo, who is the managing director of MyFP Services Sdn Bhd, a licensed financial planner.

“It's not that things won't get better but will it be better for you? Things are constantly changing. Today you may have a cushy job, but tomorrow you might be retrenched!”
Of course, one could always try to find a new job.

“You can get a new job but will it be the same for you,” Foo asks.
AmBank wealth management head Joshua Lim says couples should plan ahead for such circumstances.

“We always advise our clients to have accessible cashflow or savings of at least six months to help buffer against difficult times like if you lose your job,” he says.

Unworkable accounts
One of the most common things for married couples to do after getting married is to set up a joint bank account.

“If you believe in sharing and planning together, then it doesn't matter,” says Foo.
Lim notes that with the high cost of living today, it's common for couples to “pool their resources” via a joint bank account to better manage their finances and spending power.

Financial planner Wilson Low points out that having a joint account makes it “easier to manage.”
“However, having a joint account also means one spouse is able to take out money as and when desired, which may not sit well with the other partner.”

“Both parties may be more comfortable with separate accounts and be free to access their respective accounts whenever they want,” enthuses Low.

Unhealthy spending
Problems tend to arise when one party happens to be a frugal spender while the other spends money like water.

“Buying that BMW might sit well with the husband but not with the wife,” says Foo, adding that a couple's spending habits should not be so bad that it disrupts their long-term goals.”
Dinesh concurs that bad spending habits can easily lead to divorce.

“For instance, a husband goes into a business deal, but things go wrong and he loses everything. The wife then wants out,” he says matter of factly.

Low says it's vital for couples to discuss their problems as soon as possible.
“Never put off till tomorrow what you can do today. If there's a problem, deal with it immediately. If you put it off, it's just going to escalate.”

Keeping secrets
Keeping financial secrets from your spouse can also lead to a break up in marriage. Says Foo: “Everybody needs their space, but in a marriage, financial decisions need to be shared.”
Low says hiding that ridiculously high credit card bill or taking money out from a joint account without your partner's knowledge can lead to unwanted consequences when your spouse discovers what you've been doing.

“You should be as open as possible from the beginning. If you can't trust your husband or wife, then who can you trust?

“Also, how is your partner going to trust you again when it is discovered that you've been doing things behind his or her back? Marriage is about trust. Keeping secrets will only doom your union, sooner or later.”

Thestar

Tips from a financial planner

Rajen Devadason, a Securities Commission-licensed financial planner with MAAKL Mutual Bhd provides some insight to three key questions on financial management. He is also CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd.

Given the growing uncertainty globally and rising inflation, what would you recommend investors to do with their money?

Three things manage your money better, delay your retirement and work your money harder.

Rajen Devadason

When it comes to managing money better, mature adults might consider going down the do-it-yourself (D-I-Y) route through extensive personal reading and studying, or choose to hire a financial planner.

A good place to begin the vetting process would be the CFP (Certified Financial Planners directory of the Financial Planning Association of Malaysia //www.fpam.org.my/fpam/cfp-directory/list-of-featured-cfps/)

Those who opt for the D-I-Y route should begin by getting a handle on their personal net worth statement and personal cashflow statement.

For younger Malaysians who wish to learn how to manage their money better, there is a brand new, free educational initiative launched by Bank Negara and run by its agency, Agensi Kaunseling dan Pengurusan Kredit called POWER! managing your debts effectively.

When it comes to delaying personal retirement, the reason is easy to comprehend. Our lifespan can be represented by a long ruler. Those who are middle aged, are at about the mid-point of that ruler, let's call it point A. The point at which we retire is some distance to the right of where we are now, we'll call that point R. Our life in full retirement is represented by the remaining distance between R and the end of our time on earth, which I'll call point D.

If we delay retirement, we increase the distance between A and R, thus raising our lifetime's total active earnings. This will translate into more money to last through a reduced time period, represented by the new point R and the unchanged point D.

Finally, in terms of working our money harder, we need to figure out a way to grow more aggressively our initially unspent ringgit to stay ahead of inflation's erosion of our future purchasing power.

Given the surge in prices of several asset classes last year such as property, emerging market currencies and equities, should people continue to put their money in these portfolios or should they look elsewhere?

Blind diversification can lead to unwise over-diversification. This can result in what legendary fund manager Peter Lynch referred to as “diworseification” in his excellent 1989 investment classic One Up on Wall Street.

Intelligent diversification on the part of smart retail investors should mirror the route taken by the most economically successful individuals. We should aim to follow the leaders in this game of wealth accumulation.

In the annual World Wealth Report published each June by Capgemini and Merrill Lynch Wealth Management, there is an analysis of where the world's richest individuals invest.

The five asset classes listed are cash, fixed income, investment real estate, equities and alternative investments.

According to the latest (June 2010) report, the projected breakdown of high net worth individuals' financial assets for 2011 is 13% cash, 31% fixed income, 35% equities, 14% investment real estate, and 8% alternative investments (a catch-all category that includes structured products, hedge funds, foreign currency, commodities, private equity and venture capital).

Two reasons for food and fuel inflation are supply constraints and debased currency. In my opinion, the bigger reason of the two is the ongoing, seemingly unstoppable, gradual erosion of the true purchasing power of fiat currency, which is the type of paper money the entire world is awash with.

Whether we're talking about the greenback, euro, yen, sterling or even our very own ringgit, what we call “money” nowadays is fiat currency, which is money that is backed by nothing other than general confidence in whichever government issues the currency.

In the evolution of money, mankind has moved through the barter system to commodity money (where coins made from precious metals like silver and gold were used) to representative money (where a certain amount of a precious metal backed each currency note) to today's fiat money.

As such, wise investors should brace themselves for extreme volatility in different investment markets this year. Those who arrange their affairs to always have some cash at hand will be able to react best of all meaning most profitably when short-term price collapses take place.

The key to success is dynamic asset reallocation that permits us to effectively buy low and sell high among the various asset classes we choose to populate our personal portfolios.

Furthermore, over the very long term, the single best major asset class of all has been equities. Since equities represent business ownership and since the capitalist free-market system is the best man-made economic system humanity has ever come up with to create wealth, it seems to me that even in the future, equities will reign supreme but only over the very long term.

My advice, therefore, is always have some equity exposure, either directly in stocks or indirectly through well-chosen, well-managed unit trust funds, in any serious wealth accumulation programme.

I also like commodities, both hard and soft, because of the ongoing debasement of fiat currency and the inexorable growth of our planet's human population. There are now 6.9 billion people alive. Later this year, that should cross seven billion.

Within that context, commodities represent the very “stuff of life” that we need to feed, clothe, warm and move ourselves.

Finally, as Malaysia continues to prosper, the opportunities available in judiciously selected investment properties should be excellent. However, for those who either don't have enough money or interest in real estate or to buy directly owned rental property, purchasing well selected listed REITs or REIT funds is a safer option.

Although I continue to have bond fund exposure in my own portfolio, the expected exported inflation from the West to the emerging markets through repeated rounds of quantitative easing (printing yet more fiat money) will mean interest rates in Asia will continue to rise throughout 2011 to counteract those inflationary moves.

Since bond prices move inversely to interest rate movements, my view on fixed income products this year is somewhat muted.

Also, 2011 will be volatile, possibly further exacerbated by waves of dissent throughout the Middle East.

As such, those smart investors who retain sufficient levels of cash to take advantage of short-term dips in the equity, commodity and property markets, in particular, possibly caused by hot money suddenly leaving a sector or entire region, will do especially well.

If someone has extra cash, should he or she balance the ledgers by cutting down household debt or should they stomach the debt given the low interest rates?

As someone who has had to battle with excessive credit card debt twice in my life, I'm strongly inclined to advise my clients and your readers to focus on paying down as much bad debt as possible.

Bad debt is spent on direct consumption (such as charging new clothes and fancy meals on credit cards that are NOT paid off in full each month) or incurred purchasing bad assets that go down in value over time.

There is no reason for the financially savvy to worry too much about paying off good debt, which by definition is debt taken on to purchase good assets that appreciate in value over time or that cause more cash to flow in to us than flows out from us for repayments on the good debt.

It is also good discipline to use at least a small portion of extra cash and a predetermined slice of regular income to flow into a long-term savings and investment portfolio.

That portfolio, to begin with, should focus on bank savings and bank fixed deposits.

After that, additional savings can be allocated into money market funds. As the level of sophistication of a new saver-investor grows, a dollar-cost averaging programme into a well selected portfolio of equity funds ranging from domestic funds to international funds, right now focusing on China, Indonesia and the entire Pacific region, should result in excellent long-term returns, over periods of a decade or more, that stay ahead of inflation.

Thestar

Eight ways to protect your income

If you were to be incapacitated tomorrow, would your family be cared for? Would you be able to cover your medical bills? Life is full of uncertainties. Worried about being unable to generate an income if something were to happen to you? The concern is that the bills don’t stop arriving even then. “With income protection, there is income for you and your family to pay ongoing expenses, in the event of your premature death, illness, disablement or lay-off,” says Lawrence Seow, head of financial planning for VKA Wealth Planners Sdn Bhd. “You will also feel more secure and don’t have to worry about funds.” Sean Lee, CEO of Oscar Wealth Advisory Sdn Bhd, agrees that pre-planning to protect your income is vital. “In case of serious illnesses, your income-earning ability will be affected for a long time, perhaps even a lifetime. Besides the basic necessities of living, there may be medical expenses that you need to fund.” Good financial planning includes preparing for the unexpected. The best part about protecting your income against the risk of unemployment, accidents or sickness is that you get to enjoy the amount accumulated in the event you don’t face those situations at the end of the day. Here are eights ways to protect your income: 1) Emergency savings An emergency fund helps to protect you against unforeseen expenses and loss of income. “Start building your emergency fund, which should generally about six months of living expenses or income,” says Seow. “These savings allow you to survive financial hardship and pay your bills in the short term. If there is talk of lay-offs at work, increase the amount that you put into this fund.” A key feature of an emergency fund is that it must be accessible. “Put your emergency monies into highly liquid accounts like savings accounts or short-term fixed deposits,” says Lee. “The danger here is that you can be ‘susceptible’ to tapping into the funds for impulse spending if you are not disciplined.” 2) Diversify your income Remember that your current income supports your daily expenditure and wealth accumulation. “Everyone, whether an employee or self employed, should proactively look for ways to reduce his dependence on his day job. Start building passive income streams. Reorganise your financial life so that you do not solely rely on your monthly salary or pension,” says Lee. Building sources of passive income also reduces your financial burden if you lose your job. To generate passive income, start by building your financial knowledge and invest in financial vehicles. “Boost your income by investing in high-yield stocks, unit trust funds or real estate, or a combination of these assets,” says Lee. “Patience and consistency is required to execute an investing strategy. If you do not have the time and aptitude to do so, hire a financial planner to help you.” 3) Disability income insurance “When you are unable to work because of sickness or injury, disability-income insurance provides you with a partial replacement of your pre-disability earnings,” says Seow. “This is offered as an additional rider that you can attach to your existing life insurance policy. For example, you can insure RM36,000 per annum in the event that you cannot work due to a disability. If this does occur, you will receive RM36,000 every year until the rider expires.” 4) Critical illnesses insurance It is not uncommon to see headlines on increasing illnesses around the world. “Critical illnesses insurance is important as a severe medical condition can cost a bomb and wipe out your savings and assets,” says Lee. Says Seow, critical illness cover pays the insured a lump sum when he is diagnosed with any of the stated diseases. “This cover can support additional medical costs that the insured will need, for example, when afflicted with stroke, cancer or kidney failure. This insurance provides for loss of income when you are ill.” 5) Total permanent disability cover A sudden illness or accident can render one permanently disabled. “Total and permanent disability usually means the insured suffers from continuous disability and is unable to work for at least six months,” says Seow. Except for the circumstances explained in the total and permanent disability exclusions, the insured is eligible to receive a lump sum amount if he is totally and permanently disabled, he adds. “Do note that most insurance companies in Malaysia do not pay benefits on partial disability.” The coverage helps offset part of your medical bills while you face the challenge of being permanently disabled and may need long-term support and care for the rest of your life. “The insured can use the lump sum benefit to settle debts so that family members do not have to deal with this obligation and to make life as comfortable as possible for everyone,” says Lee. 6) Personal accident policy Personal accident plan is an affordable supplement to life insurance. “Personal accident insurance is essential because the policy gives the insured cover for a variety of accidental injuries. Some policies can give you cash benefits if you are hospitalised or unable to work for a period of time, or both,” says Lee. The compensation from a personal accident policy helps to cover living expenses due to your accidental injury. It is important to ensure that your personal accident plan comes with weekly indemnity benefits (income replacement as a result of short-term absence from work), accidental death and dismemberment benefit and medical reimbursement. “If you sustain temporary total disability due to an accident and are unable to perform your normal work duties, you will receive an amount every week for the period of time as stated in your policy. This is the weekly indemnity benefit and your condition must be substantiated by a medical specialist,” says Seow. For instance, if the insured breaks his leg in an accident and has to stay at home for two months; he will receive his weekly indemnity cover for two months. Accidental death and dismemberment benefit provides a lump sum if the insured survives an accident but suffers a total and permanent disability, says Lee. If the insured passes away due to the accident, the amount received is net of the amount that has already been paid for the accidental dismemberment. Personal accident insurance can be extended to cover medical expenses incurred for the treatment of an accident that is covered by the policy. “With medical reimbursement, the insured is able to claim the medical and surgical expenses, whether it is outpatient or inpatient treatment, for any injuries caused by an accident,” says Lee. “This certainly reduces your out-of-pocket expenses and the need to dig into your emergency funds.” 7) Life insurance Life cover or death benefit can provide immediate cash fund for your loved ones in the event of your death. “Factor in your personal situation, present debts and future liabilities and you will be able to gauge how much life coverage your family would need,” says Seow. “For example, provide RM50,000 every year for your family, RM25,000 for final expenses and RM15,000 to pay for probate and administration. Assuming an inflation-adjusted return of 3.85% a year and 45 years of need [years that your family is to be provided for]. This means that you need about RM1.3 million in life insurance coverage now.” You can also look at term insurance, whole life insurance or an investment-linked policy. 8) Medical cards Seeking treatment and care at private hospitals can exhaust savings. “Medical costs are increasing at an alarming rate of about 6% a year,” says Seow. “Medical costs will double in 12 years or less. The question is, can your investments and incomes grow that quickly and consistently? The answer is no.” A medical card gives you additional cover over and above your income protection plan. The card generally covers room and board, ICU stay, surgical fees, aesthetic fees, medical treatments, and post- and pre-hospitalisation treatments. Some cards also cover claims for medical treatment received outside the country but only for the cost that you would incur to seek the same treatment locally. “Upon hospital admission, the medical card will pay based on the benefits provided [usually hospital admissions and bills]. You do not need to use your cash, thus your monthly cash flow will not be interrupted,” says Seow. “If your hospital stay is longer than a week, the cost starts to escalate to thousands of ringgit. With a medical card, you can reduce this financial burden.” Some may consider the premiums paid for these medical cards as being “burnt” if the card is not used. However, it only takes one or two hospital admissions to use all the premiums that you have paid over the years. “Most medical cards impose a yearly limit on the number of days for room and board, as well as annual limits [on cost incurred], adds Seow. theedgemalaysia.com

Maximising savings

WITH longer life expectancy, escalating medical and education costs, most people’s Employees Provident Fund (EPF) savings will diminish over time.

The worst case scenario will be that retirement savings will run out in a couple of years if one has to finance their children’s tertiary education and pay for private medical bills.

So what should a person do to boost his or her EPF savings without losing out on their retirement savings?

Prudential Assurance Malaysia Bhd chief executive officer Charlie Oropeza says depending on a person’s risk appetite, investment time horizon and income, one can opt to invest in, among others, properties, equities, unit trusts and investment-linked insurance plans.

It is important to invest in the right financial instruments to ensure a comfortable retirement.

Citing a retirement survey commissioned by Prudential, Oropeza says Malaysians tend to be conservative when it comes to the type of investment tools they use to save for retirement.

He says most people rely heavily on low yielding bank savings or fixed deposit accounts to grow their retirement nest egg.

Contrary to the common belief that keeping money in the bank is the best way to preserve capital, Oropeza says this may not be good enough given that interest rates of bank deposits can hardly outrun inflation.

He says regular investing and saving is an effective and convenient way to help one reach his retirement goal.

“Even a little money saved regularly can grow to a tidy sum over time. The easiest way to reach your financial goals is to start investing through a regular savings plan. By setting aside an amount each month, you will be well on your way to developing substantial funds for retirement,“ he says.

Besides putting money aside regularly, he says choosing the right fund and diversification of portfolio is equally important to ensure successful retirement savings.

Portfolio diversification helps spread the risk so that the retirement portfolio is not heavily impacted by one investment. Diversify within the asset class and among several assets, Oropeza advises.

Robert Foo, who is principal consultant of MyFP Services Sdn Bhd, says EPF funds should also be invested into unit trusts. He says investments should be diversified into different funds.

Although EPF has limited the upfront sales charge on unit trust investments to a maximum of 3% of the investment amount, Foo says it is still too high and should be reduced to 1%. Another alternative, he says is to spread this 3% over three years instead of having the investor lose the whole 3% upfront.

If possible, investors should invest through fee-based financial planners who can get funds at net asset value (meaning 0% upfront sales charge), which will be a substantial savings for them, he says.

If the Government is serious about providing ways for Malaysians to fund their retirement, they should allow EPF contributors to invest into offshore funds for greater choice and diversification.

Foo recommends buying a home if one does not own one yet because it is indirectly an investment. He, however, cautions not to over commit and buy a house that will stretch a persons’s finances too much.

Licensed financial adviser Jeremy Tan of Standard Financial Planner Sdn Bhd says another option available for EPF contributors is to withdraw for the purchase of owner-occupied home or settlement of mortgages.

It would only be wise for them to withdraw for this purpose, especially the latter, if the mortgage rate charged by the bank is higher than the average EPF dividend rate.

Based on current mortage interest rates, Tan says it will be more appropriate to keep the monies in EPF to harness the return rather than withdraw for repayment purposes.

On unit trusts, Tan says although this asset class is an option to grow savings, it may or may not provide an increase in returns higher than the EPF’s dividend rate.

The strategy to adopt is to invest regularly and diversify into different asset classes of mutual funds taking into consideration one’s risks appetite, to potentially gain higher returns than EPF rates, he says.

Great Vision Wealth Management Sdn Bhd associate director for tax and financial consulting Darian Lim says those who are not quite sure which unit trusts fund to invest into (there are about 223 approved unit trusts funds) and who “cannot stomach” the market volatility, might be better off just leaving the funds in EPF since it gives reasonable returns at much lower risk.

From EPF’s findings, Lim says about 72% of the members who withdraw their savings at age 55 tend to spend all the money within three years.

He says: “Proper retirement planning is of utmost importance as we slowly move towards a developed nation with better healthcare and medical advancement. People around the world are living longer with those in developed nations having an average mortality age beyond 80.

“As such, everyone needs to have sufficient funds to retire comfortably. It helps to find ways to maximise returns from EPF investments to increase one’s retirement fund.”

Thestar

The rising cost of education

One of the biggest worries for parents nowadays is how to fund their children’s education, which does not come cheap.

In addition, as with everything else, education expenses, be it in foreign and local colleges/universities, private primary and secondary schools, are expected to trend upwards in future.

According to CTLA Financial Planners Sdn Bhd managing director Mike Lee, the trend is upwards as far as education costs are concerned.

“In predicting the future, we can only use assumptions such as cost and inflation factors in child education planning.

“The general increase for local studies is about 3% per year and foreign about 5% and this applies to a general business degree of three years,” he tells StarBizweek. (see table)

The increasing cost is due to rising inflation as a result of hikes in food and accomodation expenses, travelling costs, books and exam fees as well as salaries, among other factors.

E.T. Education Services Sdn Bhd managing director Matthew Gan sees an average increase of between 5% to 7% annually in education costs for studies locally and in countries such as Britain, United States, Australia, Canada and Singapore (excluding foreign exchange rate fluctuations).

“Moreover, there are certain years where the increase can be in a lump sum instead of percentage depending on the circumstances,” he says.

Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui has tagged a 6% inflation rate per annum for the cost of a university education locally or overseas.

“Parents nowadays have higher expectations when it comes to their children’s education unlike before so there is a tendency to send them to private or international schools and foreign universities.

“So education becomes more expensive,” he says.

For example, business for private school Sri KDU has been flourishing since it opened its doors in 2003 with enrolment increasing to some 2,400 students currently from 500 when it first began.

Marketing manager Rina Thiagu-Kler says school fees for primary and secondary education range from RM15,000 to RM17,000 per annum with an average 10% increase in fees every two years.

Sri KDU is also expanding – its international school for secondary education is expected to be ready next year. In general, primary and secondary education in an international school is in the range of RM30,000 per annum.

So how can parents have sufficient funds for their children’s education? Lee says three things have to be considered simultaneously to ensure that money is available when needed - investment for returns such as units trusts, equities and property; insurance for protection and will needs to be written to protect the child or family in case the breadwinner dies.

“The common advice is to save and invest your money as early as possible. Let your money grow with your child,” he advises.

He says one should save according to what one can afford for the time being which is a good start. As one’s income increases, then the savings goes up as well.

“This way, parents do not feel the pressure and find that starting early will allow a smooth continuation of the funding over the years,” Lee says.

AbacusForMoney.com founder and chief executive officer Carol Yip says the ideal approach is to start saving as much cash as possible and then multiply it by investing in investment vehicles to hedge against the increase in cost of living and education.

Yip says there are several approaches to savings and investment strategies. First, choose a strategy where the investment product has capital growth and if possible has income yield in the long term, for example, property investments.

Second, have a portfolio of several types of investment assets that will give you investment returns over a period of time to meet the education costs. Third, select an investment strategy that enables you to buy and sell your investments for capital growth such as company shares and venture capital investments.

“More importantly, the chosen investment strategy must suit the parents’ style and preferences in managing investments because it is a lifelong pursuit until the child is financially independent and able to make a living for himself or herself,” Yip says.

Whitman’s Yap says some of the common mistakes parents make when saving for their child’s education fund are starting too late, saving without investing and not considering foreign exchange fluctuations for those who aim to send their children overseas.

“It is important to determine what the education costs are in current value and identify a suitable savings and investment vehicle.

“Some parents don’t even have a clue how much education costs,” he says

Thestar

Book urges couples to get 'financially naked

If you’re willing to undress in front of someone in a relationship, you should be able to undress financially as well, say the authors of a new book. Money can be one of the most difficult subjects for couples to talk about, and Get Financially Naked aims to help them share not only details of their finances but also their thoughts, attitudes and fears about money. “People feel this intense feeling of shame around money,” said co-author Manisha Thakor, stemming from people feeling judged by how much they earn, how much they know about finances and how they handle their money. The steep recession and dire job market has been a blessing in disguise that has pushed couples and families to talk about money, she told Reuters in an interview. “Losing a job or getting furloughed or having your hours cut forces you to have this conversation,” she said. “Unless there is a catalyst, people will avoid this conversation like the plague.” Get Financially Naked encourages couples to consider their financial compatibility — looking at each person’s interest in dealing with money, knowledge of money and behaviour toward money, she said. “You meet someone special, and society encourages you to analyse whether or not you are physically compatible, spiritually compatible, emotionally compatible and intellectual compatible,” she said. “But this dimension of financial comparability is not something that is ever talked about.” Couples can identify gaps and conflicts in their financial compatibility and address them, she said. “You have to work out a compromise the same way you would in any other area of your married life,” Thakor said. For example, if one person is a spender and the other is a saver, they could set a dollar amount, above which the spender agrees to consult the saver before spending, she said. Maybe they set an amount that each one can spend per month, no questions asked, or maybe they meet regularly with a financial planner, she said. “You should be willing to get financially naked,” said Thakor. “At the point that you feel that you’ve found the person you want to be with for the long term, that is the point at which you should start having that conversation.” Thakor and co-author Sharon Kedar wrote an earlier book, On My Own Two Feet: A Modern Girl’s Guide to Personal Finance. - Reuters

Understanding capital terms Capital Protected vs Capital Guaranteed

There is always an element of risk where investing is concerned. It is just a matter of whether people take the time to read the fine print and understand the risks they are exposed to when they invest.

Most investors in financial products would have come across the terms “capital guaranteed fund” and “capital protected fund”, but whether they understand these terms well is another matter, even if these terms are explained in the prospectus.

Basically, a capital guaranteed fund is a fund where the investor’s principal is fully protected. The fund usually invests most of the money in low-risk instruments such as government bonds, with only a small amount in riskier assets. Consequently, the returns are lower.

In a capital protected fund, the protection may involve a variety of instruments, the performance of which will determine whether investors retain, lose some or all of the principal amount invested.

In many instances, capital protected products have been sold to investors, with the impression – perhaps unintentionally – that they will not lose the principal sum at maturity.

However, the fine print will inform the investor on how the banks or other financial institutions intend to protect the sum invested. In the years before the global financial crisis, this usually involve securities known as options, swaps or collateralised debt obligations (CDOs).

Unfortunately, many investors, including seasoned ones, do not understand the risks involved when such assets are used to securitise their investments.

There are those who cannot even differentiate between capital guaranteed and capital protected.

We now know that CDOs, especially those with asset-backed securities linked to subprime mortgages, were among the chief culprits in the collapse of the US financial system.

The stark reminder of what can happen when people invest their money with only half an understanding of the risks involved, hit closer to home when the financial crisis peaked more than a year ago with the bankruptcy of Lehman Brothers Holdings Inc, which also saw the near collapse of insurer American International Group Inc.

Among those affected were investors in Hong Kong and Singapore, who invested in the Lehman minibonds, which were first issued in 2002. Investors of Singapore-based DBS Group Holdings Ltd’s “high notes” as well as Merrill Lynch & Co’s “jubilee notes” were also affected.

These people invested in what is known as structured deposits or structured notes, which were capital protected not capital guaranteed.

Anecdotal evidence gleaned from news reports from last year show that often these investors do not understand what they were investing in or have been misled into believing that they had invested in risk-free products.

Most of them, whose demonstrations outside the banks were captured on television, saw a significant part of their life’s savings evaporate in the wake of the financial crisis.

One consequence of the massive losses incurred by investors last year was the banning of the term “capital protected” by the Monetary Authority of Singapore (MAS).

In a statement in early September, MAS said the ban on the term would apply to mass-market products familiar to retail investors, including structured notes, unit trusts and investment-linked life insurance policies.

According to Singapore’s Straits Times, financial institutions in Singapore now have to provide customers with simple, user-friendly ‘product highlights sheets’ and providing ‘health warnings’ on complex investments in appropriately large font.

There are those who will also post the question of how sound the financial institution providing the guarantee for capital guaranteed products are, especially since the financial services industry have seen so many banks get in trouble or go bust between July 2007 (when the subprime crisis began) and now.

One way to find out is to look at the credit rating and balance sheet of these guarantors, which are usually public information.

Otherwise, information on the guarantors are also available on the prospectus of the fund.

A website on investment education had this to say about capital guaranteed funds: “When we invest with little or no risk, we pay for it by compromising on potential returns.”

Thestar

Three key elements in savings

So, you’ve worked for some years now. How do you know if you are doing “well” when it comes to saving your money for a rainy day? Is there a magic number which tells you how you are faring?

“As a rough guide, one should set aside 20% to 30% of one’s net income every month for savings,” says licensed financial adviser Jeremy Tan of Standard Financial Planner.

“Saving is important because when you save you are preserving wealth for future consumption,” he tells StarBizWeek.

Generally, there are three key elements to one’s savings.

“If you have these in place, or are on your way, you are faring ‘well’,” Tan says.

“First, one should have what is called an emergency fund, this should equal at least six months of your current net income.

“This fund is set aside in the event you lose your source of income unexpectedly, so this should keep you going until you find another job,” he said.

Next is your life-risk fund, which is basically funds to be used when a person loses the ability to earn an income, i.e. becomes paralysed or ill.

This is normally accumulated via an insurance policy. Here, one should ensure that the funds are equivalent to at least five years’ annual income, according to Tan.

“So, for example, if you earn RM5,000 a month, which translates to RM60,000 a year, then you should buy a RM300,00 policy,” he says.

Third, you should set aside some money for generally safer investments such as property and blue-chip stocks.

“This should garner you some decent returns but you have to be careful of your choices,” he says.

“Following these principles is a good start to securing your stash,” Tan adds.

Comparing the amount you have tucked away with that of individuals of your same age simply to gauge how “successful” your savings strategies are is not a good benchmark, says another industry player.

“People like to do that but there is no point in comparing yourselves, say, if you are a 30-year-old to another 30-year-old, because every one has different goals and different lifestyle, not to mention different income levels” says Keith Hiew, wealth adviser at Freebase Wealth Advisors Sdn Bhd.

“There is no golden rule that says that at age 30, you should have this amount and so forth. You save within your means but you have to save,” he says.

“You know you are saving ‘enough’ when that savings are able, in your comprehensive and integrated financial plan over your lifetime, to cover your education, retirement and other goals,” says MyFP Services Sdn Bhd financial planner and managing director Robert Foo

“The wisdom in financial planning is save what you have first and then spend the rest,” he says.

For R. Kumar, a single, 30-year-old engineer who earns about RM40,000 a year in net income, savings are top priority, simply because “I cannot afford not to save.”

“I scrimp to save and invest a little every month but I make sure I do because I know my Employees Provident Fund (EPF) money is not going to be enough for my old-age,” he says.

A recent survey by the EPF showed that around 90% of the 5.7 million active members had less than RM100,000 in their accounts and more than 70% would have exhausted their money within three years of withdrawing the lump sum upon retirement.

Generally, Malaysia enjoys one of the highest savings rates in the world at 34%.

In the United States, during the economic boom that took place between 2005 and 2008, a credit-fuelled consumer spending craze effectively brought the US savings rate to zero.

Ahmad (not his full name), a 40-year-old private school teacher says he supplements his income by giving tuition. “The extra income earned is saved and invested,” he says.

“Based on my income alone, I am not able to save much, that is why I do extra work.

“You’ll be surprised to know how much I have saved over the years,” he says gleefully.

Thestar