Category: Behavioural Finance

Each year in October, the global financial planning profession comes together to help raise awareness of financial literacy, the importance of having a financial plan, and working with a trusted financial planner to formulate plans towards one’s long and short-term financial goals for financial stability.

Smart Investor takes a look at the current state of financial literacy in Malaysia, how the past two pandemic-fueled years have impacted Malaysians, and why a financial planner is an invaluable ally in working towards your financial goals.

Tough Times Called For Financial Stability

“The recent pandemic drove home the fact that financial planning and literacy are essentials, not options. This came about as many people lost their income unexpectedly and matters were made worse for those who did not have a comprehensive financial plan. Unfortunately, financial literacy is very low among Malaysians,” says Vincent Kwo, President of the Malaysian Financial Planning Council (MFPC).

Furthermore, Kwo reveals that, “Various studies, including the Capital Market Development Fund (CMDF) report on Financial Literacy and Utilisation of Financial Advisory Services in Malaysia, reveal that Malaysians generally have a worrying low financial capability, do not know how to manage their money, and do not plan ahead. This does not bode well for their financial sustainability, making them prone to falling into the bankruptcy trap, and becoming prey to loan sharks and get-rich-quick scams. The problems arising from the low level of financial literacy have been magnified by the recent pandemic, which greatly affected the financial well-being of many Malaysians.”

As the body representing financial planning and service providers, MFPC’s objectives – along with developing and enhancing the financial planning
profession in the country – include elevating financial literacy among Malaysians with various initiatives for the public at no cost.

One of the initiatives of note to promote financial planning and literacy, observed globally on 6 October each year, is World Financial Planning Day (WFPD). This year’s theme, ‘Live Your Today, Plan Your Tomorrow’, is very relevant to Malaysians as we continue to face various challenges requiring better financial literacy and planning for a better financial stability.

“As we live with post-COVID challenges, many are now faced with uncertainties as they might have drained their EPF savings, facing difficulty in servicing their loans again after the end of the moratoriums, dealing with rising healthcare costs, and overall inflation causing cost of living to rise. Adjustments must be made to our current personal finances to adapt to these challenges for us to achieve our future goals,” explains Ooi Beng Cheang, Financial Literacy Manager at the Financial Planning Association of Malaysia (FPAM).

As an affiliate of the Financial Planning Standards Board (FPSB), the global organizer of WFPD, FPAM has rallied its stakeholders and financial planners to take part in this year’s WFPD2022 to promote financial literacy and the financial planning industry.

Licensed Financial Planners Are Here To Help

In the forest of questions about money, a licensed financial planner is an invaluable guide in finding the best path for your life’s journey. No one
path is alike, and a financial planner will be able to chart the best roadmap for each individual as they aim for financial stability.

“Malaysians are dealing with many pressing issues related to inflation that may derail their life goals. Plans for retirement or their child’s education
fund may not seem feasible anymore. Will they have to push back their retirement age by working longer? Will their child still be able to afford tertiary education overseas? These are pertinent questions that one should sit down with a financial planner to hash out a plan together,” says Ooi.

He further adds that, “Financial literacy is a life skill that if not picked up early on, may result in personal finance mistakes that may have lifelong repercussions. The earlier one engages a financial planner in their life, the better, as they will have a proper financial road map of where they are headed in life. With a proper financial plan, one is much more prepared in facing the variables and uncertainties of the future as opposed to someone stumbling along, making knee-jerk reactions to major changes in their life. Should they encounter adversity, the financial planner will be there to guide them through the storm.”

Kwo concurs, saying, “A licensed financial planner can help one establish a personal financial plan, set measurable goals to work towards, track progress, reduce doubt and make better financial decisions. This will help one manage cash flow and debt efficiently. Planning can be tailored to suit every personality type and meet different needs, at different times of one’s life stages. A licensed financial planner can provide the necessary advice on changes and adjustments to support one’s lifestyle, resulting in peace of mind and general wellbeing.”

If one is looking to engage a financial planner soon, make sure that the financial planner is licensed under Securities Commissions Malaysia (SC)
to practice as a Licensed Financial Planner (LFP). This can easily be done by going to SC’s website (https://easy.seccom.com.my:8222) and searching for the full name of the LFP under Licensed and Registered Persons.

The result should show their license number and the name of their financial planning firm. As for the other qualities in a financial planner, Kwo suggests the following should be considered: trustworthiness, ability to provide evidence of a good track record of success, ability to provide independent advice, compatibility with the client, the ability to provide up-to-date information, and the ability to refer to other specialists if required.

“In short, one should look for professionalism in a financial planner,” he concludes.

It won’t be easy to achieve financial stability, but it is also not impossible to do so.

In today`s challenging economic environment, people from all walks of life are suffering from financial predicaments that also affect their spending.

Rising Inflation, decrease in value of the Ringgit, increase in prices of goods & services, petrol and cost of living in general, is drastically reducing purchasing power and adding on to the woes.

According to the statistics from the National Health and Morbidity Survey 2015, one in three adults in Malaysia, either consciously or unconsciously, suffer from mental health problems.

Financial constraints and stress, as well as family and career problems, are among the key factors which contribute to the rise in mental health problems.

So, what is the solution for this predicament? It’s none other than financial wellness

Financial wellness focusses on knowing how to plan, save and invest your money so that you can successfully work toward achieving your financial goals. It’s not about how big is the pay check; rather, it`s very much dependent on one`s right financial habits or behaviour.

Achieving true financial wellness is more than outward prosperity and has less to do with dollar signs than it does with how money affects your life and your relationships.

Therefore, to achieve financial wellness, individuals must equip themselves with the right financial habits and knowledge.

So, the 5 important steps to achieve financial wellness as described in Figure 1 are as follows:

Step 1: Be a Conscious Spender to Save Money

Step 2: Be prepared for Rainy Days

Step 3: Minimise your leakages by Managing Debts

Step 4: Be Control of Your Money via a Budget

Step 5: Consistent Accumulation & Investing of Money

In the first instalment of this financial wellness article, we will focus on the first step, which is Be a Conscious Spender.

Conscious Spending

Step 1 pretty much implies that you decide exactly where you’re going to spend your money, after you have paid yourself of course. At this stage, you’re also actively choosing to spend on some things and not on others.

According to American personal finance advisor and entrepreneur, Ramit Sethi, who is also the author of the 2009 New York Times Bestseller on personal finance, I Will Teach You To Be Rich, “The heart of frugality is choosing to spend on the things that are important to you while cutting back ruthlessly on the things that aren’t.”

So, conscious spending is very important since it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.

In a nutshell, it depends on the ability to control one`s money by becoming a conscious spender and focus on needs, then wants, and subsequently cultivate consistent saving habits.

As you start to practice conscious spending, your financial behaviours or habits improves, which is really the key to achieve financial wellness.

To put conscious spending in action, you have to learn to ask yourself the questions below before you make a purchase:

• Will I use this?
• Can I get this cheaper?
• Can I wait to buy this?
• Why am I buying this?
• Is there something else I’d rather spend the money on?

Conclusion

Financial behaviours or habits are formed in individuals over time; it cannot happen overnight. However, once you get it going, it would become very difficult to shrug it off.

About the author

Raju Periasamy is a Certified Member of the Financial Planning Association of Malaysia (FPAM) and a Licensed Financial Planner with Phillip Wealth Planners Sdn. Bhd.  He can be contacted at rajuperi@gmail.com

Financial planning has often times been associated with the rich. Most people have the perception that only rich people can afford to plan their finances. Is this a fair observation?

So does this mean that if you are not rich, you should drop the idea of financial planning? What if you are in between these two extremes – the middle class or middle-income people?

I have constantly observed how the middle-income group struggle more compared to the low-income group. When you’re in the latter, you live a lifestyle more driven by need.

However, if you belong to the middle-income group, the decision-making process is based more on the want factor, not need anymore.

How then can the middle-income group reduce their disadvantage and propel themselves toward their aspirations and dreams? Below are some ideas that one can explore:

Be Aware

When it comes to investing, you cannot wait until you have enough money, and then only start to think about investing.

The popular belief is that we can only manage our financial affairs once we have surplus. However, in actual, those who have surplus are those who have done planning, and make it a point to ensure they do the needful.

Cash-flow management is crucial

If you manage your cash-flow and debt obligations, you would end up having surplus because without surplus, it’s impossible for one to have savings.

Protect your savings

It’s not easy to accumulate savings nowadays; thus, you need to learn to protect it efficiently. We cannot afford to overlook or ignore risk management as this can help protect our savings when financial losses occur.

Watch your credit behaviour

Those who are in credit card or debt crisis have once told themselves that they would just use the credit card for rebates and free-gifts, and that they would make sure they pay the billed amount every month.

The only trouble with this plan is that before you realise it, you are barely making minimum payments, and the amount balloons into a huge outstanding in no time.

Moreover, interest payment is one of the tiny leakages that will have long-term impact on our ability to save.

Start early but small

According to Figure 1 below, a person who starts investing RM12,000 today with no additional new contributions thereafter, will need an investment that generates 10% per annum to have RM130,016 twenty-five years from now.

However, another individual who started with RM6,000 (50% lesser) would require an investment that is 50% less risky (5% per annum) throughout the same time period, to generate RM134,863. The trick is to cultivate the discipline of adding RM200 a month to the savings pot.

It’s much easier to save a smaller amount than wait for your capital to become significant, as smaller amounts can also grow to become substantial.

Stay ahead of inflation

A person who invests his savings in a way that is right and in-line with his risk capacity, will see his wealth grow and become inflation-proof in the long run.

If you do nothing about inflation, you will find it tougher to maintain your lifestyle. This is due to your shrinking purchasing power, and since it is more likely that your income level will stay stagnant or grow slowly, you will then find that your freedom will be limited by your purchasing power.

The only way to give our wealth some chance to at least maintain its purchasing power is to put it to work.

When you invest, you must bear in mind to invest in instruments that are suitable with your risk profile and is regulated at the same time.

Work on your investment literacy

A person in the middle-income group may have some disposable income, which they would want to invest, after taking care of their lifestyle.

However, be aware of scammers who are out to ‘steal’ our money, influence us to make bad investment decisions, resulting in losses or wasted opportunity.

It is therefore important to have a basic knowledge of investment literacy to conduct appropriate due diligence on investment proposal that is presented to us.

Financial planning is not for the cheapskate

One misconception people have is that when we embrace financial planning, we will have to accept a frugal lifestyle.

However, the whole point of financial planning is to put the aspirations and life goals of a person at the core; as such, it’s rather counter intuitive if you will have to live a frugal lifestyle.

If you embrace financial planning, what you’ll essentially do is look at your personal finance in totality, make decisions that are smarter and less attached to your urge and emotions for instant gratification.

It doesn’t mean you have to eat lesser, or not go out with your friends. We all need a life to build our network.

All said and done, we need to go through a process to manage our financial affairs to ensure that at the end of the day, we will have enough ‘financial muscles’ to help us achieve our life goals.

About the author

Kevin Neoh is a NextGen Money Coach who works with people to help them transform their relationship with money to improve their lives with the money they have. Kevin can be contacted at kevin@nextgenadvisors.my and www.kevinneoh.my.

When I joined the financial industry in 2017, I was so lucky to meet my first customer. Not just because of the first investment business he gave to me, but also the lessons that he taught me.

I remembered the day when I first met him, I was introducing a unit trust fund to him, and he agreed to invest immediately after I finished my explanation. Since he was my first customer, I was being extra careful to avoid any mistakes in the process.

I asked him every question in the suitability assessment form:

• Do you have investment experience in the past?
• Do you understand about the investment risk?
• How many percent of fluctuation can you accept?
• Do you read and understand English?

The customer suddenly slapped the table, and said: “Why do you need to ask so many questions? Other banks did not ask all these questions when I invest with them! I told you, I’m ready to take risk when I invest. I can even accept the RM100k investment becoming a total loss.”

Knowledge Is Power

People may think that when one gets older, he/she should be less aggressive in investment. But this customer taught me that when one is fully equipped with knowledge, he/she will be able to make an informed financial decision despite of his/her old age.

Later, the customer topped up his investment after his first investment made profit within five months. But this time, the market was not going as smoothly as the first time. The unit trust fund was badly hit by the US-China trade war in 2018. The fund dropped ~20% in the first year of investing.

I asked the customer whether he want to switch his investment to other funds that were not affected by the US-China trade war?

Surprisingly, the customer did not worry about the paper loss of 20%. He told me that it is normal for the market to be up and down. He does not want to switch the fund because he has belief in China, and he is confident that the fund will rebound; and he has the holding power and patience to wait for it.

A year later, the fund recovered and the investment broke even at the end of the second year. 6 months later, the fund then made a 20% return. The customer was very happy with the annualised return of 7.63% after waiting for two and a half years.

Patience Is Key

In reality, most investors might quit the market and cut loss when the fund is at ~20% loss. Some investors might withdraw their investment when the fund finally breaks even at the end of second year. Only a few are able to see the return after waiting for two and a half years.

The customer taught me another lesson that when one has a clear investing goal and strategy, he/she will not worry unnecessary about the market’s volatility, he/she will always stick to the initial plan without making emotional decision.

It has taught me the importance of financial literacy and it resulted in my faith to become a licensed financial planner a few years later.

Thanks to my customer, I’m now a licensed financial planner currently and I’m also conducting financial management workshop regularly to educate Malaysians on financial literacy.

About the Author

Angel Chan is a Licensed Financial Planner attached to UOB Kay Hian Wealth Advisors Sdn Bhd. Besides providing comprehensive financial advisory to her clients, she is also committed to educate the public about the correct financial management mindset and methodology through article, YouTube video and Financial Management Workshop conducted by her and her team. Do reach out to her for more information.

FB page: https://www.facebook.com/angelchan.financialplanner

FB page: https://www.facebook.com/profinance.my

YouTube channel: https://www.youtube.com/channel/UCf5f7O3vuOhnwy_wflDuuKA

Smart Finance: https://smartfinance.my/planners/chan-aun-kei-rfp

To book a free 1-hour consultation with Angel Chan: https://forms.gle/8Ur46Dox9T6g3yKS8

Perhaps, if you are reading this, you might be in the midst of making some financial decisions. They could be:

• Should I use EPF Account 2 to settle my mortgage?
• Should I invest my bonus first or settle my liabilities?
• Should I invest in unit trust, stocks, or properties?
• Should I buy a new fancier car or a bigger house?

And, the list goes on. You get the idea.

Most people may be overwhelmed by them as a decision either way will move you forward or backward financially. Understandably, many will choose to procrastinate because it will seem to be the “safer” option since many financial decisions can be irreversible.   

However, here’s the real problem: How do you make smarter financial decisions if you are not equipped with the right tools to make them?”  

Here is a straightforward technique that we believe will be helpful for you to make sound personal finance decisions. The tool is known as the “Return on Net Worth Analysis” or RONW.

What is RONW?

RONW tells you how efficient you are in using capital. It is quite similar to the ROE (Return on Equity) ratio we often look at when analysing corporate financial statements.

Calculating Your RONW

Here is how to calculate it:

Step 1: List down all your assets and its value, including the projected return rate of each asset, such as “REITs − RM10k − 6%”, “Cash − RM20k − 3%”, “Rental Property − RM300k − 8%”, etc.

Step 2: List down all your liabilities, including the effective interest costs, such as “Credit Card − RM5k − 18%”, “Mortgage − 200k − 4.5%”, etc.

Step 3: Calculate the RONW

RONW = (Total return – total interest) / Net Worth

What does RONW Tell You?

If you have calculated your RONW and discovered:

Your RONW is Negative:

It means your net worth will shrink every year. You may start by clearing out debts with high interest rates such as personal loans and credit card debts to ease your financial burden. Then, you may follow up by adding productive assets to further improve your RONW figures from negative to positive.

Your RONW in Positive:

Congratulations! You have more productive assets than liabilities. If your net worth is still small, then, you may continue to grow both your net worth and your RONW. If both your net worth and RONW is significant, most likely, you are wealthy and are enjoying financial freedom.

To Answer Above Questions Using RONW

1: Should I use my EPF to settle my Mortgage?

Let’s say you have RM30,000 in your EPF account 2 and you are considering withdrawing it to clear RM30,000 off your mortgage. Is this a smart financial move? Let’s see. Based on the RONW, we would consider:

Returns from EPF:

RM30,000 x 6.9% = RM 2,070.

Interest Payable from Mortgage:  

RM30,000 x 4.5% = RM 1,350

If you withdraw EPF to clear mortgage, we would save RM1,350 in interest payment but will forgo RM2,070 in EPF dividends. Thus, you would net out RM720 per annum if you go for it. Hence, the answer is a straight “No” based on the RONW formula.

2: Should I Invest or Settle my Liabilities?

First, it depends on how good you are as an investor and what liabilities you owe currently.

For instance, let’s say, you are a good stock investor who knows how to make 6% dividend yields from your stock investments. You have the following debt such as credit card debt of RM10,000 where the interest rate is 18% and PTPTN loan of RM10,000 where the interest rate is 1%. Today, you are given RM10,000 to either invest in stocks or pay off any of the two debts mentioned. What should you do?

The answer is obvious. You pay off the RM10,000 in credit card debt because its interest rate is higher than the 6% dividend yield from investing in stocks.

But, if there’s no outstanding credit card debt, then, you may invest in stocks that pay 6% in dividend yields as it is higher than the 1% interest charged by your PTPTN loan.

3: Should I invest in Unit Trust, Stocks or Properties?

Your investment objective is to maximise your RONW safely without taking unnecessary risks. So again, it depends how good you are in investing in unit trusts, stocks and properties. Some seasoned investors go all out to invest in stocks and properties.

4: Should I Buy a Fancier Car or a Fancier House?

Let’s start with a fancier car. Apparently, a car depreciates over time. But, the amount of your car loan and interest payment will increase after you’ve purchased or upgraded to a new fancier car. So, should you refrain from getting a brand new car? If you are now into improving your RONW, then, don’t do it. But, if you are not, then, you may go for it if it makes you happier.

Meanwhile, a fancier house might not affect your RONW as severely as having a more elegant car as properties appreciate over time. Nevertheless, you will still end up with lower RONW after upgrading to a bigger house.

Again, there is nothing wrong with upgrading your home as it does bring more joy to your family. RONW is a measurement of the efficiency of your capital and not the level of your happiness.

In conclusion, RONW is very similar to the way we look at the ROE of a company. Value investors love to hold shares of stocks with high ROE because that shows the efficient use of shareholder’s fund. On the personal level, if you know how to maximise your RONW, you will be doing way better than 95% of the population.

About the author

This article is co-written by KC Lau and Ian Tai.

Ian Tai is a Dividend Investor. Financial Content Machine. Producer of 200+ Articles, Weekly Host and Presenter at KCLau.com. Co-Founded DividendVault.com, an online educational membership site that empowers retail investors to build a stock portfolio that pays rising dividends in Malaysia and Singapore.

KCLau is a financial educator, having published seven books including the current bestseller Money Smart, and co-created a dozen online financial courses. He gives away his popular Money Tips e-book volumes free at his website: https://KCLau.com