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All of us have to go through a series of life events such as going to school, graduation, a first job, purchase of a house, the marriage, raising kids, someone in the family falls sick or died, putting the kids to college, our own retirement and family death.

Precisely because of these life events, we have to practice good money management. The process of doing this is called personal financial planning.
Personal financial planning is the integration of your personal resources, your risk profile to optimise returns thus enabling you to meet your financial goals and objectives.

Typically, a financial planner would takes you through the investment pyramid as shown in the graph.

After doing an in depth fact-finding and feel finding, also known to financial planners as information gathering, the financial planners would then move the client up the investment pyramid.

The first step is to look at the Protection Needs. Here, the financial planner would look at the contingency gap and identify those major events that would have a great impact on the financial plan. Some examples are family income protection, disability, liability coverage, medical expenses plan, emergency fund, critical illnesses coverage, long term care fund and general insurance or your properties and assets.
In our business, we find that most people do not provide for the other Large Expenses Fund and at such they keep drawing on their savings meant for other purposes. An example is the drawings of the Employees Provident Fund(EPF) for computer purchases, house, medical and education needs. Proper financial planning would ensure that all these contingencies are taken care in the event of such a need. Usually we would not move up the investment pyramid unless we are certain that the major contingencies are being taken care. Much as the issue of protection needs is not as exciting as making money through investment, nevertheless it must be addressed because of its relevant importance to your life plan.

The second step after taking care of the protection needs is to move up to the Savings needs.
Money that is not saved is spent. In my earlier article, I mentioned that the appropriate formula for saving should be INCOME-SAVINGS = EXPENSES. Most people said to us that they can’t save. This mean two things: -

1. They have very poor self-discipline towards saving.
2. They are overspending at present in maintaining their lifestyles.

Most of these saving problems happen to business people. They told us after paying of their expenses they have nothing much to save. We give them this analogy. If a huge department store is celebrating its anniversary and in view of the support given by the locals, it would be giving away “free money” by putting up a huge cash register in front of their departmental store. All a person need to do is to dip their hands into the cash register and take away the money and its theirs.
Mr. Businessman, where do you like to stand in the queue? Most of them said they would like to stand at the FIRST position in the queue. We said, why are you and your family now choose to stand at the END of the queue. When you receive an income and when you start to pay of your expenses, you are paying yourself last. Starting today, pay 10%-20% to yourself and your family first.
Of course, the propensity to save depends on the propensity to earn. The higher your earning curve, the higher your saving curve. If you are not earning enough to save, consider some part-time jobs to supplement it. Alternatively, cut down on unnecessary expenses such as eating outside the home, taking public transportation, having less entertainment and other budgeting exercises. If you are earning enough but a poor saver, go for saving instruments that force saving such as life insurance (semi-compulsion methodology), auto debit through dollar cost averaging. A simple way to explain dollar cost averaging is to put aside a fixed amount every month through the auto debit instrument.

The third step after the saving needs are taken care of is to move to the Growth Needs.

Growth needs mean to increase your returns through the process of wealth accumulation. In the earlier articles we talk about the need to hedge our money against inflation, failing which our wealth could be eroded in terms of real purchasing power. We also learned about the impact of personal inflation rate on our growth needs. Unless, you are very well informed financially, it is best to work with a financial planner who is competently qualified on the various growth instruments. Financial planners with qualifications, such as Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP) or Registered Financial Consultant (RFC) is a good start. Ask questions and find out more.

The fourth step is Speculation. This step involves taking risk to achieve a high returns. It also deal with client’s hobbies such as stamps, painting and other collections. The ability to match the prospect interests with speculation would be meaningful because speculation needs require close monitoring. Investment vehicles used in speculation include commodities, future trading, business ventures, forex trading and many others.
The complexity of the investment instrument must match the client’s investment savvy.

Jeffrey Chiew Kim Chwee

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