Category: business

Insurance planning is the foundation of a good financial plan, ensuring that you have a backup plan to provide enough family income and to fund medical expenses in the event of unforeseen circumstances such as premature death, total permanent disability, critical illness, accidents and hospitalisation, in terms of personal risk.

You should also extend your insurance planning to cover properties risk, liability risk and professional liability risk based on your circumstances and needs.

In the financial planning process, you must first determine your current financial position and make sure you have emergency funds for six to 12 months before you proceed to insurance planning.

With proper assessment of your current financial position, which includes your cash flow and net worth statements, you can determine your insurance needs more clearly in terms of family expenses and outstanding debts obligations.

As a financial planner, I would normally advise my clients to have adequate emergency funds and insurance coverage before they consider venturing into investment. As far as investment is concerned, all investment assets need time to mature to meet your financial goals without any disruption from personal risks, property risks, liability risks or professional liability risks arising from unforeseen circumstances.

Insurance serves as the cheapest and most effective tool to cover potential financial losses without touching your investment assets.

When engaging in insurance planning, seek advice from your trusted professional financial advisor to assist you while working out which insurance plan will best fit the requirements of you and your family, according to the following guidelines:

• What kind of insurance do you need?
• What will your insurance policy cover?
• How much insurance coverage do you need?
• How much will you be paying for the insurance coverage?
• What happens if you fail to pay the required premiums?
• Should you replace an existing insurance policy?
• What happens if you terminate your policy?

Your active participation is required when working with your financial advisor to work out an insurance plan that best suits your needs. Be honest about your financial situation. Communicate your goals and objectives. Do not be afraid to ask questions! 

In the attached charts, I have provided some guidelines as to the types of insurance coverage to consider. You may then determine the quantum of coverage to ensure you and your loved ones are protected. Take time to make your decision. Regard your financial advisor as a trusted partner, and not merely a salesperson.

What Type of Insurance Do You Need?

If you are worried about…	You may want to consider this type of insurance…	How it helps…
Life insurance
Death of breadwinner	Life	Provides some money for your family if you die.
Total & permanent disability	Life	Provides some money for your family if you suffer from a total or permanent disability.
Death of mortgagor/main borrower of home loan	Mortgage term reducing insurance (form of life insurance)	Pays off mortgage if mortgagor dies.
Health insurance
Trauma/critical illness	Critical illness	Pays a portion or lump sum on first diagnosis of serious illness.
Medical bills for major illness or accident	Medical expense, other hospital and medical plans & riders	The main medical expense insurance plan pays a portion of hospital and surgical costs if you are ill or suffering from injuries due to an accident. Complementary plans such as riders cover co-payment portions (eg deductibles and co-insurance) that are not covered under a main plan.
Long-term care for disability	Long-term care, eg supplements	Pays a fixed monthly amount for long-term treatment upon the insured’s inability to perform a number of “activities of daily living” like bathing, dressing, etc.
Loss of income because due to hospitalisation	Hospitalisation cash plans	Provides income if you are hospitalised.
General insurance
Loss of or damage to your belongings	Home contents	Pays for repairs or replacement if you suffer loss or damage to your home or contents.  If you are renting your home, it’s your responsibility to cover loss of or damage to the contents of your home.
Damage to car/theft	Car	Pays for repairs or replacement if your car is stolen or damaged.
Damage to your home	Fire/home	Pays for repairs or replacement if you suffer loss or damage to your home as a result of perils such as fire, flood, and burglary.
Loss of luggage/trip delays/cost of medical care while travelling	Travel	Pays for repairs or replacement if you suffer loss or damage to your belongings. Also pays for financial loss if there are delays or cancellations. Pays for costs related to personal accidents while overseas, including medical and repatriation expenses.

About the Author

Tan Kim Book, CFP, IFP is a Licensed Financial Planner with Phillip Wealth Planners Sdn Bhd and certified member of Financial Planning Association Malaysia (FPAM). 

Working with a financial planner can be an extremely rewarding and valuable experience for you and your family. If you’ve decided to work with a financial planner, it’s important to understand your rights in the professional relationship. By knowing your rights and what to expect from a financial planner, you can take an active role in shaping your financial future.

1. You have the right to a planner who has integrity

Trust between you and your financial planner is central to a successful financial planning relationship. You rely on your planner’s honesty, professionalism and abilities to achieve your financial and life goals.

When you know that your financial planner takes his or her professional obligations seriously, placing principles over personal gain, you can develop the type of partnership that is crucial to the success of any professional relationship.

2. You have the right to objective advice

Your needs should be at the heart of all recommendations made by your financial planner. Your financial planner should use his or her experience and judgment to carefully consider your situation, and provide you with advice that best meets your goals.

Sometimes, this objectivity may require your financial planner to explain that your goals are unrealistic given your current resources and financial commitments. He or she may then suggest alternative goals or priorities.

3. You have the right to be treated fairly

Your financial planner should treat you the same way he or she would like to be treated in a professional relationship. This involves clearly stating what services will be provided and at what price. Your financial planner should also explain the risks associated with his or her financial recommendations and any potential conflicts of interest.

For example, does her or she gain personally or financially from your purchase of a particular product, or from the outcome of a suggested strategy?

4. You have the right to a planner who is professional

Your financial planner should not provide investment advice or stock brokerage or insurance services unless he or she is properly qualified and licensed to do so. If your situation requires expertise that your financial planner does not have, he or she
should suggest other professionals who may assist you.

5. You have the right to a planner who is competent

You have the right to expect your financial planner to demonstrate an appropriate level of knowledge to offer financial planning advice, such as the attainment of CERTIFIED FINANCIAL PLANNER certification, the standard of excellence in financial planning.
Your financial planner should complete continuing education courses as part of his or her ongoing commitment to competency.

6. You have the right to privacy

To get the best results from your financial planning relationship, you need to divulge relevant personal and financial information to your financial planner on a regular basis. Your financial planner should keep this information in confidence, only sharing it with others to conduct business on your behalf, at your consent, or when required to do so by court order.

7. You have the right to a planner who is diligent

Your financial planner should discuss your goals and objectives with you and explain what you can expect from the relationship before engaging you as a client. Once the financial planner has determined that he or she (or his or her staff and/or network of related professionals) can assist you and has gathered sufficient information, the financial planner should make – and, if appropriate, implement – recommendations that are suitable for you.

A diligent financial planner reasonably investigates the products or services he or she recommends. A diligent financial planner also closely supervises any staff working with you.

This article is courtesy of Financial Planning Standards Board Ltd (FPSB).

For many people, there’s nothing quite like taking delivery of your brand new car. However, taking on long-term loan to buy a car can have serious repercussions on your financial health.

We’ll take a look at the key issues and the ramifications of buying a car.

Question:

Hi, I’m Denise. Some people say the one single monthly commitment which can make or break your wealth building is payment of car loans. Is every car loan an upside-down loan as most cars depreciate much faster than we can settle them off, especially if we take a 7 or 9-year loan? In your opinion, how best to finance a car purchase? Is it in cash or a car loan?

First, what does Denise mean with “upside-down loan”?

If your car value depreciates faster than you pay off your loan, you will need to come up with extra money out of your pocket to repay the bank.

For example, when you sell your car at RM20,000, but your outstanding loan is higher, say RM25,000, you will need to fork out that difference of RM5,000.

In other words, it is negative equity.

That might happen in any of these situations:

• If you have a long tenure hire-purchase loan like nine years;
• You buy a car that depreciates too fast i.e. depreciates 50% in two years, versus some brands that only go down 50% after five years; and
• You finance the vehicle up to a maximum of 90%, 100% or even more after the mark-up price.

Or any combination of the above situations, you might end up with an upside-down loan.

Back to the question:

So, what is the best way to finance a car purchase? Should people only buy with cash, and only if they can afford to pay for the car in full?

To understand this issue, you must separate the subjects into two parts:

The Car And Its Value

Let’s get this straight. The value of a car falls over time. It doesn’t matter if you finance it with cash or with a car loan.

The higher price you pay for it, the more you lose. Whether you pay cash, or pay with a short three-year loan, or a long-term nine-year loan, or you only borrow 50%, regardless how you pay for the car, the car still goes down in value at the same rate.

It doesn’t matter.

The buyer of your used car won’t bother whether it the loan has been settled. They don’t pay you more because you don’t have a car loan. They might pay you more if the used car is well-maintained and looks good.

So, can we agree with these?

If you want to lose less money, just buy a cheaper car. Buy a better brand that depreciates less comparatively. Or the best choice, don’t get a car if you don’t need to. Buy the car that fits your needs now.

Don’t make the mistake I made. I used to own a 12-seater Hyundai Starex, and it was too big for my small family. 

So, if you wish to be prudent about it, you may consider having a lower-priced car that serves your daily needs, or not get one for a car is a liability and its value depreciates in the long run.

How To Finance The Purchase

Now the second part is the one you want to consider – how to finance the purchase?

Short answer: That depends on the rate of return on your fund.

After you decide what specific brand, model and specification of vehicle you are going to get, the next step is to find out the cost of financing the purchase.

If you have 30,000 in a fixed deposit earning 2-3%, you might as well use that cash to pay for a car loan which will cost ~4%-5%.

On the other hand, if you have a stock holding that yields 8% a year, you should take a very long term car loan (nine years). So you keep your stocks… and earn the difference (8% stock yields – 5% car loan interest)

Does that make sense?

In summary, if you are a good investor, and you make an investment return that is way better than 4-5% you pay the bank, it is no-brainer to decide. Take the most extended loan that can offer the cheapest financing cost.

Debt Service Ratio (DSR)

So, let’s say you made that car purchase and your car loan installment amounts to RM 1,100 a month. If you earn RM 5,500 a month, the car loan installment is equivalent to 20% of your monthly income. This works out to be a DSR of 20%, that is if you have no other outstanding debt.

If you have other debt commitments such as a student loan (PTPTN), credit card debts, personal loans… etc, you may want to assess what your DSR is after you buy your car. For instance, if you are paying RM440 a month in PTPTN loan installments, you would increase your DSR from 8% to 28%.

Before buying your car

= (Existing loan commitment / Monthly income) x 100%

= (RM 440 / RM 5,500) x 100%

= 8%

After buying your car

= (Existing loan commitment + Car loan installment) / Monthly Income) x 100%

= (RM 440 + RM 1,100) / RM 5,500) x 100%

= 28%

So, What’s The Significance?

First, calculating your DSR will help you to determine if you can really afford the car purchase with a car loan. For instance, if you find that your DSR after buying the car is above 40%, you may want to reconsider because you could be over gearing. You could put yourself in financial distress if you lose your job, business or your sources of income.

Second, do you plan to buy yourself a home or an investment property some two to three years down the road?

Here is the thing. Little do people realise that the same RM1,100 monthly installment for a RM90,000 car loan is worth as much as RM220,000 in property mortgage.

Essentially, you are committing RM1,100 a month to get a RM90,000 car loan to buy a car that depreciates in value over time while forgoing your opportunity to acquire a property worth RM240,000 that could generate rental income and appreciates in value over time.

So, if you’re looking to buy a property in the near future, it would be helpful for you to refrain from getting a car loan and use your loan eligibility or quota for a piece of real estate.

The Final Piece Of Advice: Don’t Do The Following!

The above discussion is based on the assumption that you already have the money to buy the car. I strongly suggest that you put yourself in this position before considering to upgrade.

A car loan can only break your finances if you are spending your future money to buy it. That means you don’t have the money ready for the car.

So, you take up a loan to buy a car that is not affordable to you, perhaps to impress your colleague who just showed off his latest vehicle.

That’s a big NO-NO. Please refrain from doing that.

Don’t buy something you don’t need, with the money you don’t have, to impress the people you don’t like. That’s plain stupidity.

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

Question:

Hi, my name is Ed. I’m happily married to Pei Pei, my wife and together, we’ve been blessed with two daughters namely, Cindy and Mandy aged 5 and 3. As I write, we reside together with my mother in a bungalow located in Penang.

The property has been a family home since my childhood and its ownership was bequeathed to me by my late father who passed away three years ago. Presently, the bungalow has been fully paid off and is valued at RM2 mil.

If I pass on prematurely, I wish to bequeath this property equally to my wife and two daughters via a will. But, I have the following questions and concerns:

a. Will my mother be allowed to continue to live in the bungalow?

b. What will happen if my wife and two children wish to sell off the bungalow?

c. Is it possible to only bequeath the title deed when my daughters attain the age of 25?

Answer:

Lets say, you have a simple will written for the purpose stated above.

If you pass on, the title deed to your bungalow shall be transferred to your wife and two children by your appointed executor. If Pei Pei is the executor, she then shall hold onto your daughters’ stake in the property until they turn 18, the age when they are legally entitled to inherit and hold onto assets.

This means, if your children are minors, Pei Pei shall have full autonomy to hold onto and manage the bungalow as she sees fit upon your passing.

Your wife has the authority to decide who shall reside in the property, apply for loan facilities by offering the property as a collateral and to dispose of the bungalow to a new prospective buyer based on her agreeable price.

Sadly, this could also mean that Pei Pei:

1. Has the authority to ask your mother to vacate the bungalow.
2. Can sell the bungalow, let’s say at RM3 mil, and pocket the full proceeds into her bank account without needing to share her gains with your mother and… your two children.
3. Can obtain a loan facility from the bank via refinancing for the purpose of setting up a new business. The venture may fail which could cause Pei Pei to lose her ability to repay the mortgage and thus, leading to a possibility that the bungalow could be auctioned off by the bank.
4. Can remarry and enjoy her new life with her husband, your two daughters and maybe, her children with her new husband in the bungalow bequeathed to her. Your bungalow or a portion of it could be bequeathed to the new husband and their children via Pei Pei’s written will. OMG!

But My Wife Is Not That Bad…

Of course, your wife is of noble and virtuous character. How could it be possible for your wife to do any of the above mentioned?

I understand. Here, the purpose is to highlight the various possibilities open to your wife legally after having received the title deed to the property if you pass on prematurely and especially if your daughters are still minors.

Thus, bequeathing the bungalow to your wife and two daughters does not offer an ironclad guarantee of your mother’s livelihood upon your passing. This could potentially lead to conflict, strife and bitterness to your loved ones namely your mother, wife, and two children.

So, What Can Ed Do About It?

The answer is simple. Ed could include a testamentary trust in his written will in order to have a say in how the bungalow is to be managed upon his passing.

A testamentary trust is a trust that kicks in effectively only upon Ed’s passing for the trust is embedded within Ed’s written will. Here is how it works:

1. Ed could set up a testamentary trust where he would engage a licensed trustee firm to be his trustee and name Pei Pei, Cindy and Mandy as his beneficiaries of the testamentary trust.
   
   
2. Ed could decide when is best for Cindy and Mandy to inherit their stake in the bungalow. Here, let’s say, Ed wishes for his two daughters to only receive their stake when Mandy, his younger daughter, reaches the age of 25.
   
   
3. Ed could name his mother to be the living tenant of the bungalow. This means his mother is entitled to reside in the property for as long as she lives. The property could not be sold to a buyer as its title deed shall be held by the trustee.
   
   
4. Upon Ed’s passing, the bungalow’s title deed will first be transferred to the testamentary trust. The trustee shall hold onto it for Pei Pei, Cindy, and Mandy.
   
   
5. The property’s title deed shall only be bequeathed to Pei Pei, Cindy and Mandy after fulfillment of two conditions in the Testamentary Trust:
   
   a. Ed’s mother has passed on.
   b. Mandy is 25 years old.  

Conclusion

Ed could protect the interest of his mother, wife and two daughters by having a testamentary trust included in his will and appointing a licensed trustee firm to administer his estate upon his passing.

His mother is guaranteed a place to stay and thus, securing her livelihood in her golden years. His wife and children shall be guaranteed of inheriting their stakes in Ed’s bungalow for as long as they live past Ed’s mother. This helps to maintain harmony among Ed’s family members.

About the Author

Jocelline Chee is the founder of WG Legacy, a leading professional estate planning firm. You can download a Strategy Report at wglegacy.com/report to find out how she preserved her family’s financial future via a combination of insurance, will and trust and how you can do the same for your loved ones too. 

Sometimes people tend to wonder what we can do with the surplus cash that we have at hand. Well, as a start, it is good that there is a surplus in cash, but if we are not careful this surplus may be gone before we even realize and by then it could be too late to think about “what-ifs” and “I-should-haves”.

In financial management, there are parameters that can be used to gauge if one is “financially healthy”. Here are few basic financial ratios one can use to gain better understanding of their state of personal finance:

• Liquidity Ratio: This measures one’s ability to cover unforeseen expenses such as emergencies, car repairs, job loss, etc.
• Debt to Asset Ratio: If there is an solvency issue, you must have assets to cover your debt obligations. If your debt value is too high compared to asset values, then even if you sold off all assets, it may still lead to
 bankruptcy.
• Liquid Asset to Net Worth Ratio: Consider how much of your assets are liquid or “moveable”?
• Savings Ratio: You should be able to save at least 10% of your income each month to go towards your retirement. 

Liquidity Ratio

Should a person have a very low liquidity ratio, the first thing he or she needs to do is to start saving money for a rainy day (the amount of which is measured by one’s liquidity ratio). Don’t think about paying off debts (except to service scheduled repayment), and investing at this point should be the last thing on this person’s mind.  

Debt to Asset Ratio

If you have a good liquidity ratio (healthy savings) but also have high debt to asset ratio, then you are advised to pare down some of your debts.  For instance, a person may have a huge positive net worth, but most of this comes from immovable assets such as real properties. If this is the case, this person should consider increasing the proportion of movable assets by investing in other paper assets such as stocks or fixed incomes to diversify and also to provide some liquidity to the balance sheet.

Savings Ratio

Savings ratio is quite easy to measure, but if you cannot save any money you bring home, then obviously you have a lifestyle or income problem. You need to tackle that first before thinking about putting your money to work hard for you.

See the Big Picture

What I advocate as a financial planner is that no matter what we decide, we must see the bigger picture, the bigger picture being a person’s life, and what he wants out of it. It is important that our decision correlates and supports our aspirations, and if a decision does not derail our goals and dreams but brings us nearer to them, then this is the right thing to do.

In financial terminology, financial planning is described as a systematic process to organize our finance to help achieve our life goals.  That being said, any amount on top of the threshold a person feels comfortable treating as their rainy-day fund should be put to work via investments.

Depending on your marital status, income sensitivity or fragility, health condition, and so on, it is rather advisable to have emergency funds worth at least six months of your take-home income (some will say six months of monthly expenses but I would strongly suggest you look to your take-home income as it is more conservative).

If you would like to strengthen your foundation, you may even create an emergency fund that is worth six months or more of your take-home income plus your loan repayment commitment for an additional 12 months. This will help make sure you avoid defaulting or failing to repay your loan obligations.

Of course, it is rather impossible to save enough to help cover emergencies such as serious diseases and so on. This is why you need to be aware of risks and potential losses and take up insurance. After saving enough to feel comfortable and at peace, you must then invest the surplus and let it work for you. Be a master of your cash; not a servant to it.

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. 

This is a story about Andy and Amy (not their real names). Andy is an enthusiastic entrepreneur with a reputable position
in his industry. A successful man and earning a good income, however, his expenses were high as well.

After marrying Amy, he became stressed with his finances, which worsened with the birth of their first child. The pressure of the monthly deficit of approximately RM2,000 and worrying about the future expenses triggered the couple to engage our services. I was then able to we help them through with our holistic financial planning service.

Andy and Amy have different attitudes towards managing their personal finances. Andy is a very positive person who anticipates that good things will happen in life as long as he strives for it. “Tell me what I need to do and I’ll make it happen!” is his
favourite motto.

He applied this attitude to his finances, which often resulted in him committing to things he cannot afford today, but with the conviction that he will be able to grow his income and pay for it in the future.

Amy is almost the polar opposite when it comes to money. She’s cautious and prefers to plan ahead and be prepared for the worst situation. Indeed, the desire for a more secure future was amplified after having a child. A clear visual reality of their current
family’s financial situation was provided to them through our holistic financial planning process.

The hard facts and numbers seemed ruthless but it showed them the gap between their goals (purchasing a bigger home, tertiary education funding, retirement security, etc.) and their available resources.

In addition to the risk of not being able to achieve their desired goals, as a single income family with a child, there were other potential risks that needed to be addressed, such as Andy’s insufficient insurance coverage for the family’s income needs (should something untoward happen to him) and the lack of estate planning tools in place to safeguard his family.

We helped Andy and Amy tidy up their cashflow, focusing on their expenses as there were many loopholes and excesses that could be avoided or minimised with good budgeting. For example, we noticed the huge amount spent on dining out and impulse purchases. During the financial planning process, there were some unavoidable differences of opinions between the couple, but fortunately we were able to help them manage their expectations and bring them to work together towards their common goals.

The role of a financial planner is unique. We not only provide clients with relevant and timely financial advice, but we also take on the responsibility of educating them to cultivate good financial habits. In this case, tracking their monthly family budget and inculcating a habit of saving before spending were their immediate priorities.

Trust me when I say that financial planning is a long journey. We help clients understand their current financial situation and plan for their fi nancial future. But as circumstances change over the years, we also need to accompany them as they make major
financial decisions in their life, and keep them updated on the latest happenings along the way.

Although Andy and Amy are still striving to be more financially stable after their first year of engagement with our service, their progress have been remarkable as their finances are now more organised. They were able to address their immediate gaps and
started adopting good fi nancial habits.

These new habits will help them form a strong and healthy foundation as they work towards their goal of achieving financial freedom.

About the Author

Ocean Pon is a Licensed Financial Planner with Finwealth Management Sdn Bhd.

We at Smart Investor and Finwealth is committed to help you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth