SHOW ME THE MONEY
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
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
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
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
Jeffrey Chiew Kim Chwee
ChFC, RFC(USA), CLU, LUTCF