Lots of us would like to reach our RM1 million goal, but how do we do it?
What is your MAGIC number to reach your first million?
While it may seem like a number that’s hard to achieve, let’s break it down to see how it’s possible to do so with discipline, time and the power of compounding!
When do you want to achieve your RM1 million?
Keep a time-based goal in mind.
For example, if you set a timeline of 30 years to achieve your first million, that will take you RM2,777.78 of savings a month. But, if you want to achieve it in a shorter time span of 10 years for example, it requires you to save a whopping RM8,333.33 a month without compounding. Therefore, keep in mind that time is your best friend.
Longer time = lesser RM saved each month Lesser time = more RM saved each month
So, the time is NOW! It’s just a matter of how much you want to commit to saving on a monthly basis.
Some of you may be asking what this rule is so allow me to explain.
It’s a fast track to calculate how long it takes to double your money with a fixed interest rate without using a financial calculator.
How does it work?
For example, if you have RM100,000 in a fixed deposit that yields 3% interest, how long does it take to double your money?
Simply take 72 / 3 = 24. This means your RM100,000 will take 24 years to become RM200,000. If you were to get an interest rate of 5%, 72 / 5 = 14.4 years to double your money.
Below is a table with some examples of the rate of return that will affect the amount of years needed to double up. The higher rate of return, the faster you’ll achieve your goal of RM1 million.
Rate of Return
Years it would take to Double Up
3%
24
5%
14.4
8%
9
10%
7.2
15%
4.8
For example, RM100,000 at a rate of return of 15% per annum will accumulate as per the table below. This means it will take 20 years to reach RM1.6 million!
Year
Amount (RM)
1
100,000
5
200,000
10
400,000
15
800,000
20
1,600,000
How much would I need to save each month?
Let’s use an example of 8% return per annum.
This table below shows that the more money you set aside, the faster you can achieve your RM1 million.
If you were to increase your savings from RM500 to RM1,000 a month, you can achieve your first million eight years faster!
Monthly Savings
Years to RM1 Million
500
33
1,000
25
2,000
18
3,000
15
4,000
12
5,000
10
10,000
6
Summary
Ultimately, it doesn’t matter if you’re 10 years or 30 years away from your RM1 million target. Take some time to think of the three steps below and apply the rule of 72 to it.
1. When do you want to achieve your RM1 million?
2. What is your targeted rate of return?
3. How much am I saving monthly?
With the above information now set in stone, you’re now able to clearly plan your destination and search for a vehicle or investment products that are able to drive you towards your goals.
Saving as much as you can now will help you to reach your first million as soon as possible.
The more time you let your money grow, the less you’ll need to set aside each month, and this in turn will mean you can accept lesser returns to reach your designated amount and goal.
While lesser returns may not sound attractive at first, it also means you don’t have to expose yourself to much market risk and simply let time do the work for you.
As the saying goes, better late than never.
So keep in mind that it’s never too late to start saving now and I hope this will help you to achieve your goal with more clarity and direction!
About the author
Nick Lim is a licensed financial planner under Capital Markets Services Representative License (CMSRL) and a Bank Negara-approved financial advisor representative (FAR). He can be contacted at nicklim@imaxfinancial.com.my
Do you really need to own a car today? Should you buy a car in Malaysia? You might think I’m crazy even to ask this question. For most people, the answer to this question is YES! But before we discuss this topic further, here are some points that you need to consider:
Cost of ownership
Some may think that the purchase price of a vehicle is the cost of ownership. In fact, when you factor in other costs such as financing, maintenance fees, insurance, road tax, etc., the cost of ownership is in fact more than just the purchase price of the vehicle. All these costs differ depending on the vehicle, but often, these ancillary costs go in tandem with the purchase price – the higher the purchase price, the higher the other costs.
Utility value of a car
Usually, people purchase a car as a mode of transportation. However, you have more options these days, which means a car may not be as useful as before. These days, rail transportation is extensively accessible, particularly in the Klang Valley and encompasses the services of Keretapi Tanah Melayu (KTM), Light Rail Transit (LRT) and Mass Rapid Transit (MRT). Not only do these public transportation options cost less, utilising public transport also means less hassle as there’s no need to be focused on driving or other common modern-day problems like traffic jams.
In addition, there are ride-sharing platforms such as Grab if you prefer less crowded transportation. So with all these developments, one should really consider the utility value of a car before pulling the trigger to purchase one.
Depreciation
The value of a car will drop over a period of time. Depreciation starts the moment the car is delivered to you and the rate of depreciation can vary for different vehicles. On average, a vehicle tends to lose 10% to 20% of its value annually, and as such, it’s not surprising that cars are often referred to as a depreciating asset!
Credit score
Generally, a credit score indicates a consumer’s credit worthiness. Before qualifying for financing, creditors (lenders) such as banks will evaluate our credit score. Usually, a higher credit score represents a better credit standing and lenders will be more confident that you’re able to repay future debts as agreed – making you more creditworthy.
In addition to this, having a higher credit score might also allow us to enjoy a better financing rate, resulting in a lower amount of interest to be repaid, which means you can save more. The opposite is usually true for those with lower credit scores. But here’s a tip to have a better credit score – repay all your loans in a timely manner. Doing this allows you to get a better credit score than people who don’t have any loans.
Debt Service Ratio (DSR)
This ratio represents how much of our income is needed to service the debts you have, and it’s commonly calculated in monthly terms. Some of the regular debt payments include home loans, property investment loans, personal loans, study loans and car loans. A conservative benchmark for this ratio is around 30%, therefore it’s important to be mindful of your DSR before applying for a loan. Those with DSR of more than 30% should be more cautious on their spending especially, when it comes to applying for new loans.
Rule of 78
The Rule of 78 is usually applied to car loans and is a method of calculating interest where a higher percentage of interest charged is paid at the earlier part of the loan tenure. As such, any early settlement of the loan will not help the consumer save much. This is different from the reducing balance method (usually applied to mortgages) where interest expense is based on the outstanding loan amount.
In short, this form of loan calculation does not favour the consumer but rather the banks. Based on the current Overnight Policy Rate (OPR), the interest rate for a car loan is around 3 to 3.4% per annum for a person with an average credit score. Therefore, consumers need to be aware of this before borrowing.
Net worth and cash flow
Once you acquire a car loan, not only is your cash flow affected by the monthly repayment of the car loan, but you’ll also be affected by other expenses such as petrol, car insurance and toll charges. With higher expenses, cash flow could be tighter which may result in less savings available to be channelled to grow our wealth.
Your net worth will also be reduced once you acquire a loan. Why is this important? Since net worth tells you how much your assets are worth after deducting liabilities, if your net worth is positive, it means that you can pay off all debts that you carry after liquidating all assets. However, this isn’t good news for those with a negative net worth position.
Should you buy a car?
After taking all these factors into consideration, you’re now in a better position to weigh the pros and cons of buying a vehicle rationally. Ask yourself – are you willing to sacrifice all the above considerations just to get a depreciating asset? If you are unsure or unconvinced, then maybe taking a Grab is a better option as you won’t have to worry about the costs and monthly repayments, which could have a detrimental effect on our financial well-being in the long run.
Nevertheless, buying a car does have its upside. Some of the benefits include convenience, personal safety and privacy. In the age of Covid 19 – this is also a definite plus! So, buying a car may not necessarily be bad. Alternatively, you may consider getting a second-hand car instead, although this too comes with various costs considerations such as maintenance and repairs. Consumers just have to be aware of all the factors and spend within your means so that you can optimise your money!
About the Author
Wong Chee Yang is a licensed financial planner and is dedicated to promoting financial literacy amongst fellow Malaysians. He can be contacted at cywong@finwealth.com.my
We at Smart Investor and Finwealth are committed to helping you better manage your financials. Get a free consultation from an expert by filling in your details here: https://www.smartinvestor.com.my/SIxFinwealth
Very recently, I’ve been shopping around for property for my own stay. This reminds me of the time I looked for my first property investment over five years ago. I’m still holding on to that property at a loss – both in cash flow and unrealised capital losses.
As a friend once said, things that happen to us could either be a blessing or a lesson.
This loss-making investment has given me three very important lessons that I hold close to my heart when it comes to property purchases.
1. Avoid new developments
As a professional real estate lawyer friend once told me, “Buy certainty when you are looking at investment property”.
The allure of a new development is apparent – minimal to no upfront costs (i.e. affordable), a lot of incentives, looks new and nice, etc.
However, every new development that we buy into is a bet. A bet that the developer will not fail, a bet that the future market is bright so that the value goes up, a bet that it has a market for good rentals.
When I bought mine, it was going to take three years to finish building. It was a mixed development that was supposed to come with a mall right in the middle (the second mall in that area). But, it didn’t happen.
The (prominent) developer decided to take out the mall from the development, SECRETLY! I only found out about it after it was completed in three years.
The mall just disappeared from the plan altogether as if it never existed.
Furthermore, more high-density properties started to pop up around that development. Causing supply to skyrocket around that place. Naturally, the value of my property dropped significantly.
As a result, I’ll be avoiding all new developments, even for my own stay. Nothing’s stopping them from delivering the property to you hastily or taking forever to fix the defects in the property.
Or building up the commercial space, which they promise will be vibrant, but end up becoming a dead place with only a few tenants.
Rather than buying something so uncertain, it would be better to buy into an existing property, where I can clearly evaluate how good or bad the place actually is.
2. It’s all about the maths
From the get-go, it’s all about the calculations when it comes to property investment. I got suckered in by the sales pitch for my first property and being a newbie then I didn’t do my own calculations.
The obvious part is that the rental income has to be higher than the mortgage payments and management fees.
The not-so-obvious part is the indirect costs – agent fees, maintenance fees, assessment tax, income tax, etc. These will eat into the income and hence reduce the net income that we would get.
Which means, we’d require a bigger margin in order to cover all these costs so that it’s profitable in the end.
For example:
– Mortgage + management fees = RM1,500 – Rental Income = RM1,700 – Indirect costs = RM140 (RM1,700 / 12 being the agent’s first month fee) + RM200 (miscellaneous fees) – Loss = RM140 per month (= RM1,700 – RM1,500 – RM140 – RM200)
Don’t hope for capital gains because it’s uncertain. Ask anyone who bought a new property five years ago at the peak of property prices. Most, if not all, are suffering from capital losses now.
Get the profit maths right before any investment. If it’s cash flow negative, forget it. It’ll be a pain somewhere down the road.
The saying of, “at least partially it’s being paid by someone” or “It’s breaking even!” is nonsense at best. Nobody enters an investment to break even!
3. Property investment is semi-passive
When we talk about property investment income, mostly we talk about renting out to tenants to collect rental income. The passive income part is when tenants pay rentals on time throughout the tenancy.
That’s about it.
There is a whole other side of property investment, which demands active participation. Some examples:
– Getting a tenant in involves liaising with the property agents on and off (every month it’s not tenanted is a loss to the P&L) – In between tenancy, there is a period where the property needs to be “cleaned up” and ready for the next tenant. The degree of work (and costs) required depends on how well the previous tenant took care of the place – Tenants with issues can create headaches during their tenancy. This could be delayed payments, pests, broken things, etc. We won’t know any of these for sure until the start of the tenancy
Some investors, especially those with a big portfolio of properties tend to engage property managers to manage the portfolio to get the headache off their minds.
This will bring down the returns but at least it’s converted into a mostly passive income portfolio. However, for most of us, this can take up significant brain juice, time, and effort to handle.
However, it’s all good as long as the profits from the investment better justify the effort required. Refer to lesson no. 2.
Closing thoughts
My first property was a headache. Students are potentially one of the worst tenants ever, in my experience.
In contrast to my trading and other investments, I’d rather put in more of my efforts there. The rewards in property can be huge, no doubt, but it isn’t one that I prefer.
It might be obvious for many but hope this reaches those of you who are looking into your first property for investment. It may help you in your journey!
About the Author
This article was originally published at betweenthemoney.com, a personal finance website by Jason Loh that focuses on money matters and investment topics for Malaysians
This article is written to share some steps for you to consider when evaluating properties as an investment vehicle in Malaysia.
Think of it as a methodology for you to apply during your first round of scouting properties before going into more detailed research.
This selection process can be applied to property investment opportunities in both the primary market (properties under construction) and the secondary market, including auction properties.
The goal is to identify a suitable area and then select property that will represent a logical, financially-suited and tax-effective investment vehicle.
1. Look for established and planned infrastructure
One of the specific elements that influences demand within an area is the degree to which established and planned infrastructure is readily accessible to tenants.
Thus, it’s crucial that the existing and planned infrastructure surrounding property is critically identified and assessed.
Ask yourself why property in areas like Taman Tun Dr Ismail (TTDI), Mont Kiara, Bangsar and Desa Park City are very sought after?
One factor is that these neighbourhoods are matured, secure and self-sufficient townships that offer many modern conveniences — from good schools, access to banks, retail and F&B outlets, and many popular public parks.
Using TTDI as an example, it’s close to popular commercial developments such as 1Utama Shopping Centre, the Bandar Utama City Centre, and the Curve, as well as a number of multinational companies that base their offices nearby like Tesco and IKEA in Bandar Utama.
It also has a green lung of Lembah Kiara as a public park.
Infrastructure can be divided into two broad categories:
i) Accessibility – Local transportation links like access to local bus routes, MRT/LRT feeder buses, train stations, access to highways and also major arterial roads
ii) Local amenities – schools (including international/private schools), shopping centres, parks, hospitals, recreational areas, jogging/cycling paths, public parks etc
An attractive area for property investment is an area with amenities and rich infrastructure, of which there are several in Malaysia.
Alternatively, you could also look at areas that have some upcoming planned infrastructures like new highways (DASH, SUKE), highway access (MEX extension or interchange add ons), new MRT lines, LRT lines, and convenient access to commercial areas with eateries, banks and offices.
Other key indicators include sustainable malls (not just any mall, but those with established management with experience running malls that are well occupied/tenanted and well patronised), government or private/international schools, universities, public transportation, green lungs like parks and recreational areas, and working populations with a heavy focus on professionals in the middle to high-income group.
However, the time it would take for these infrastructures to be resident-accessible is a factor that shouldn’t be ignored.
Remember that you have to take into account the duration for your own target property to be built as well as the maturity of new infrastructures (highway, MRT, LRT, new central business district, malls etc) to be ready.
The faster one expects infrastructure to materialise, the quicker and better the chance of a property investment yielding capital appreciation while simultaneously lowering the risk of the infrastructure project being postponed or worse still, called off entirely.
Many will testify that this is not an uncommon occurrence in Malaysia!
2. Observe the residential vacancy rate and supply of similar properties
The same fundamental economic forces that affect the share market or even the price of coffee in your neighbourhood cafe are the exact same forces that affect the price and rental of the property market: supply and demand.
Naturally, an area with high demand but limited supply will inevitably experience above-average capital growth. An area that is “oversupplied” in contrast to demand will result in lower average capital growth.
A property investor in an oversupplied market may be forced to:
i) experience an extended vacancy period;
ii) be forced to revise the rental rate downwards to attract a potential tenant in a competitive market environment; or
iii) incur a greater than anticipated cash outflow/expense as a result of lower rental yield and/or extended vacancy rate
An area with strong property demand is also more likely to attract tenants and own-stay occupiers to the same area.
One perspective to consider is to think about an area with a lot of units, it’ll be sensible to analyse and identify the vacancy rates in the development and also the surrounding area of the neighbourhood.
If the vacancy rate is high (for example, over 10%), be wary about the competition you may have, not just within the development you have invested in but also neighbouring developments.
In the instance of high vacancy, it is a tenant’s market to pick and choose.
In a competitive tenant-oriented market, you will need to consider ways to manage the vacancy or to attract tenants to pick your unit over others.
Before buying any property for investment, plan ahead for sufficient reserves to act as a buffer to sustain a higher vacancy period and/or putting in more capital to furnish the place or make your unit stand out among the competition.
3. Focus on mass market property and homes with a unique selling proposition
For property investment, consider buying mass-market product homes in the target area, but ensure that your entry price isn’t above similar transacted prices.
In the worst case scenario, purchasing a poorly selected property that has little valuation upside below the average transacted cost of similar properties in the area, at the very least, an investor would not be the first to lose money.
You should also look at the median property price of any one area.
You’ll often hear the saying “location location location”, however, the relevance to that mantra is not quite the same in this day and age.
More importantly, consider whether the price you are paying is around the average of the property market, whether or not the average Malaysian can afford to buy/or rent in the area that you’re targeting.
A typical rule of thumb we recommend is that a property investor invests at a price point within a 15% range of the median property for that particular area or development.
Our observation is that by limiting one’s scope to properties within this 15% price range, an investor is able to obtain an “above average” property that is more likely to represent good value for a future purchaser and prospective tenants.
To put it simply, a property within this price range maximizes represents a home the majority in that area is likely to afford to either rent or buy.
4. Be open to multiple rental strategies
Have an open mind and consider having multiple rental strategies for your property investment to target different rental prospect segments such as students, middle to high income locals, or expats so that you don’t just depend solely on one type of tenant.
For example, a “mass market property” in Bangsar, Mont Kiara, or TTDI isn’t within the same price bracket of a “mass market property” in Puchong, Selayang, Rawang or Sungai Buloh. This also applies to other hot areas within Malaysia.
A mass market development refers to properties that are priced and rented at affordable levels to the locals in that area. There are two parts to this equation:
Firstly, you must find out what the prices are for the various types of properties within an area. For example, segments condominiums landed bungalows and terrace houses to use as examples.
The second component is to roughly estimate who the locals in the area are and how much they’re likely to earn.
Typically, as a rule of thumb, a tenant or own stay would spend a maximum of one-third of their disposable income for housing expenses each month.
So if the usual rental price of a property is RM2,000 per month, the disposable income for that household should be around RM6,000 to RM8,000.
Do plan out multiple rental strategies like having a master tenant, rental on a per room basis, or even platforms like Airbnb, so that if one doesn’t work, you can try another approach.
If you buy a property relying on one stream of marketing, eg. only Airbnb, you run the risk of property management deciding to ban it.
And if your Airbnb unit isn’t profitable or requires too much time to manage or a black swan event like the Covid-19 pandemic leading to a lack of travellers, you’ll struggle with tenancy options.
5. Pay attention to the cash flow rule
Ideally, you’ll want a property investment where the minimum expected rent can cover 80% of your monthly mortgage instalment so that it wouldn’t deplete your cash flow to the point where you need to sacrifice your vacations, luxuries, cars and other basic necessities.
This also implies that with better cash flow, you could be eligible to obtain more loans in the future and therefore can invest in more properties or other assets of your choice.
Let’s use a subsale property that costs RM560,000 as a case study.
Purchase Price = RM 560,000
Loan Amount = RM 504,000
35 years tenure, 4.6% rate, Installment = RM2,416
Assumptions:
There are no new major catalysts (e.g. transport infrastructure, central business district) that affect rental appreciation)
There are similar developments that we can take as a comparison. Rental benchmarks are taken based on the transacted rental of units with a similar layout that’s less than 10 years old
Case A: If your rental = RM1,900
Rental-Installment Ratio = Rental / Installment = 1900 / 2416 = 78.6% → not qualify
We can say that Case A is not good enough to be considered because the Rental Installment Ratio is below 80%.
Does this mean we disqualify Case A straight away? It depends.
We did the comparison based on assumptions that the area does not have any other major infrastructure to induce a more significant increase in the rental. Secondly, there are similar units in the area that aren’t much older than the subject.
Let’s look at another point of view, in which the scenario is that there are major infrastructure developments and amenities where the rental could possibly increase to RM2,000 for example:
Rental installment ratio = 2,000/ 2,416 = 82.7%
Therefore the property now should be taken into serious consideration.
OR
If there is no newer supply of similar units. Most existing developments are already more than 10 years old, and the rental benchmark against these developments aren’t apple-to-apple comparisons, and rent of RM1,900 would be an underestimation of rent potential.
New development with a modern facade and newer facilities has strong property investment potential and is in a strong position to command a higher rent.
Prospective tenants would likely be willing to pay a 10-20% premium to live in a more posh and modern residence, especially if they are expats in Malaysia.
These are just two examples of how one development becomes a “good” or “bad” development based on different factors.
6. Prioritise and achieve balance of rental yield and capital growth
Capital growth isn’t the only factor that makes property investment exciting; it’s also the fact that regular and constant income can be derived from real estate that makes it a sound investment choice for many investors.
Rental income is also a source of cash flow that can be used to pay down debt on the property. Rental yield, therefore, is simply the annualised rental income expressed as a percentage of the value of the property.
For example:
Property value = RM400,000
Monthly rental = RM2,000
The annualised rental income = RM2,000 x 12 = RM24,000
Rental yield calculated as a percentage = 24,000 / 400,000 = 6%
This is not only an important percentage as it helps to determine the return on investment so that the cash flow requirement of servicing and maintaining the property can be calculated, it also provides important information about the rate of capital growth.
A natural response would be to obtain as high a rental yield as possible. However, this may not always be the best route for the investor.
More often than not, an area experiencing high rental yield is more likely to have a lower capital growth, and vice versa.
Usually, when rental returns are high, investors are willing to accept a less than average capital growth rate. When rental yields are lower, investors must be compensated by achieving a higher than average capital growth rate.
Most people will strive to achieve a balance between making a bit more money now (higher rental yield, cash flow and lower capital growth rate) or more money later (lower rental yield, higher capital growth rate).
7. Calculate potential cash on cash return(COCR)
COCR can be used as a metric to quickly evaluate if you should pump in more capital for the investment property.
However, we urge caution when looking solely at this number as this figure may not necessarily be the most useful and accurate way to evaluate the rate of return beyond one year.
Cash on Cash Return = Income / Capital Outlay
Income = Rental income – (installments + maintenance + sinking + quit rent + fire insurance)
To compare buying an undercon and subsale at nett price of RM550,000
a) Buying an undercon
Price: RM611,000
Loan amount : RM550,000
Monthly installment = RM2,637
Progressive interest costs: RM20,000
Downpayment: ZERO
Legal fee, stamp duty = Waived
Renovation = RM25,000
Capital outlay : RM 1,000 + RM 25,000 = RM 26,000
Assuming a first year rental of RM1,900 per month:
Income = (1,900×12) – (2,637+300) x 12 – 1,000 (assessment) = – RM13,444. In the first year, cash flow is negative for over RM13,000 and I spent RM26,000 to acquire the property
A quick calculation of COCR = -13,444 / 26,000 = -51.6%. This shows a negative COCR.
Consider the next investment option:
b) Buying a subsale
Price: RM550,000
Loan amount: RM495,000
Monthly installment = RM2,373
Progressive interest costs: ZERO
Downpayment: RM55,000
Legal fee, stamp duty, valuation = RM22,500
Remodeling / Refurbishments = RM30,000
Capital outlay: RM55,000 + RM22,500 + RM30,000 = RM107,500
Assuming a first year rental of RM2,200
Income = (2,200×12) – (2,373+300) x 12 – 1000 (assessment) = – RM6,676
In the first year, cash flow is at negative RM6,000 but I spent over RM100,000 to acquire the property
A quick calculation of COCR = -6,676 / 107,500 = -6.21%. This shows a negative COCR.
As COCR is only good in the short term, you need a better way to analyse your target property otherwise this number, which happens to be negative, will not tell you much. What can be deduced from this figure? Does a negative COCR tell you that you’re going to lose money?
Both options have negative COCR, but scenario (b) is less negative.
Scenario (a) capital outlay is RM26,000 with COCR -51.6% while scenario (b) capital outlay RM107,500, COCR -6.21%. How can you tell which one gives a better return? Can there be another way to evaluate these two options?
8. Meaningfully analyse your potential return on investment via internal rate of return (IRR)
As investors, it’s important to know the returns you make on your investment because you want to be able to know which are winning plays or losing plays.
For financial instruments like shares, bonds or unit trusts, keeping tabs on how well these investments are doing is quite easy because these investments have to produce some sort of “report card” each year; some may even produce it monthly.
If you don’t know how to check on the status of these investments, it’s probably best you engage a financial advisor to help you out.
However, it’s not that simple for property investments.
Using the internal rate of return (IRR) takes into consideration the cash outflows (your cost) of owning the property over any given investment horizon.
Cash on cash return (COCR) doesn’t give you an accurate picture of how good or bad your investments are, as you wouldn’t be able to make comparisons using COCR with the returns you get from other investments like entering into a business venture, Amanah Saham Bumiputera (ASB) funds, unit trusts, shares, or any other options available to you.
COCR = Annual cash flow / Total investment
Annual cash flow = all income – all expenses. It captures the snapshot year by year. If the COCR is positive, this suggests you’re getting some returns from the money put into this investment.
But what if the COCR is a negative number?
How would you benchmark against other asset classes? Property investment is a long term investment vehicle. Taking a snapshot return of any one particular year does not convey the full picture about whether you stand to make good or bad returns or lose money.
Rental yield = Annual rental / purchase price
This metric gives a quick indicator as to how the property is performing but it does not tell you anything about the expenses incurred to get the property rented out at a certain rental rate.
For example, let’s say owner A has two properties worth RM560,000 each of the same layout and size in the same development.
For one unit, the owner spends RM40,000 and he gets a rental of RM2,800 and for the other, he spends RM25,000 to get a rental of RM2,500.
Rental yield for unit #1 = 2800 x 12 / 560k = 6%
Rental yield for unit #2 = 2500 x 12 / 560k = 5.36%
The rental yield for unit #1 is 6% while unit #2 is 5.36%, but can we conclude that unit #1 is better than unit #2? It isn’t very accurate to make such an assumption just by looking at this equation.
If we restrict ourselves by analysing based just on rental yield, we will ignore the other extra cost of RM15,000 that it takes to be able to charge a RM300 premium on the rental yield of unit #1 compared to unit #2.
One way to address this cash flow is to use the internal rate of return as mentioned earlier. This is the third complimentary benchmarking tool to look at to help you make more informed decisions when evaluating a property, and is also useful for considering other asset investment classes.
IRR is simply the internal rate of return of the investment in which the net present value of all cash flow equals to zero.
When investing in property, it’s important for you to have a plan.
A plan is not the same as being told “let someone else pay your loan”; or “this property is yielding 20%” when you don’t know what those two sentences mean! Like all investments, there is a tried and tested method called IRR or internal rate of return.
One of the worst methods of getting information to validate an investment is through forums or a non-expert.
While we recognise the advantage of getting tips or rumours if you’re going to be spending a lot of money on your investment, why take the risk at all?
To evaluate transacted data, begin by benchmarking the selling price of the target property against the transacted price of similar products in the area for the last 12 to 24 months.
Building a portfolio is just like building up a football team – your team will require good cash flow properties (defensive) and good capital gains (offensive).
You can maintain your portfolio through defensive plays alone, but this strategy wouldn’t give you much cash to grow your portfolio.
The ability to consistently buy successful undercon properties involve many uncertainties that include the workmanship, delays or abandonment of the project, cancellation of nearby infrastructure and so on.
On the other hand, one can get more reliable data about transacted price and rental from subsales properties.
You can also visit the development and check out crucial factors like the profile of the residents and the upkeep of the development to entirely avoid the risk of construction delays or abandonment.
Cash from capital gain plays can be used for several purposes: loan reduction for defensive play properties, portfolio expansion, or used as self-rewards such as travelling, a dream car, or starting up a business.
Others may also use capital gains to fund children’s education or to keep for health emergencies.
You should also consider the time and effort of managing four units of low cost flats vs managing two residential properties for middle-upper income groups.
A low-cost only portfolio strategy does have its drawbacks.
Firstly, it’s more likely that you’ll encounter more issues managing lower income bracket tenants like late payments or even defaults.
Secondly, management spends on amenities improvements is limited. Most of these developments are run down and will not look appealing to future buyers or renters.
On the other hand, low-cost apartments provide better rental yields with limited capital appreciation.
Some people believe that buying landed properties gives better capital gain, sacrificing cash flow. Investing in too many landed developments will significantly affect short term cash flows compared to highrises.
In addition, to aim for better capital gains, people believe in investing in new areas or untested products (small units, new/low occupancy offices towers, landed play, negative cash flow) to hopefully enter at a lower price and exit the market after the boom, (for example, Setia Alam).
New areas and new mega developments involve huge resources and take time to build and there are a lot of dependencies and uncertainties involved.
Developers usually take a minimum of 10 years to build a self-sustaining township. Holding power and cash reserves are the most important considerations in deploying this strategy.
Your ability to maximise your property value depends on your holding power, your own patience, and cash reserves.
There are people who prefer the hybrid investment model (capital gain + cash flow), who would choose investments in high rises below market value while still offering decent cash flow.
And then there are others who use properties as a vehicle for wealth preservation or to provide a steady stream of income and tend to prioritise strong cash flow properties.
It all depends on your own resources in deploying proper investment planning, risk appetite, holding power, cashflow priorities and many factors.
The winning formula is about creating a balanced mix that suits your game plan to meet your financial goals. There are no free lunches out there so keep learning, and apply the knowledge learnt.
The more enlightened you get, you’ll make better, rational choices when building your nest egg for the future. All the best in your investment journey!
About the authors
Rozanna Rashid is a Licensed Financial Planner (CFP, IFP) and has an MSc in Real Estate Economics & Finance from the London School of Economics & Political Science. She can be contacted at rozanna@alpine-advisory.com
William Wong is an avid property investor and has an MBA (Finance) from Universiti Putra Malaysia. He is also the co-founder of Property Buddy PLT, a company that helps property investors strategise to achieve optimised rental returns via refurbishment for their investment properties
When we talk about the concept of financial planning, many people may think that it’s very complex and comprehensive, and may require a lot of information such as total income, overall expenses, liabilities, value of personal assets, investment assets and so on. While this is undeniable, to help you achieve your financial goal, this data can’t be ignored. However, it can also be as simple as ABC – let’s use football as an analogy to relate it to your asset allocation.
What is asset allocation?
In layman’s terms, asset allocation is an investment strategy that diversifies money into different kinds of asset classes. It aims to balance the risks and optimise the returns. In order to have good asset allocation, a financial planner will distribute the capital into various asset classes with different levels of risk and return, so each will behave differently over time. Since each person has different kinds of goals, risk tolerance, and investment horizons, a financial planner will analyse his/her financial characteristics and apportion a portfolio’s assets that’s suitable for him/her.
How to allocate assets?
As mentioned earlier, we’ll use football as an analogy to break down the best way to allocate assets. There are 11 players that make up a team that plays the game, which consists of a goalkeeper, defenders, midfielders and strikers. All of them are unique and have their own role to play. The same analogy also can be applied to our financial planning. Each financial tool represents a football player with an important role to play in personal financial planning. As we always say, don’t put all your eggs into one basket, hence you must diversify the risk and purpose by using different financial tools.
Goalkeeper: Emergency funds
The goalkeeper is the one standing at the last line of defence to make sure that the team won’t lose. His main job is to block shots from the opposing team to avoid giving up a goal. In the context of financial planning, who are our goalkeepers? Insurance and emergency funds probably fit the criteria.
Insurance protects you from financial risks by transferring the risk to insurance companies, while emergency funds are used to overcome unpredictable events like unemployment or sudden loss of income. However, many people don’t pay serious attention to this and even procrastinate on insurance and emergency funds. This results in them being financially vulnerable to unpredictable crises ahead.
Defenders: Capital guarantees
Apart from goalkeepers, the next line of defence are the defenders. Their main purpose is to offer protection to the goalkeeper and goal, and also preventing the opposition team from creating goal-scoring opportunities.
In the context of financial planning, these financial instruments are designed to provide stability for your funds, with capital guarantee often the priority. Examples of these financial instruments include fixed deposits, money market funds, your Employment Provident Fund (EPF), and bonds, which provides you with a stable income and principal guarantees for your investment.
Midfielders: Collective investment vehicles
Midfielders are positioned between attack and defence. These players act as the road maps, determining the direction of the play. They have the flexibility to be either attackingly aggressive or more defensive when needed, depending on the situation. Collective investment vehicles make great midfielders because these financial tools possess a diverse set of characteristics thanks to interventions from professional fund managers.
Strikers: Profit-making machines
Lionel Messi, Cristiano Ronaldo, Harry Kane, Robert Lewandowski – these are examples of world-famous strikers. Their fame is thanks to the goals that they score, often resulting in their team going on to secure victory. In investments, the striker’s main goal is to score for profits!
Take your private businesses for example, which will generate income for you. You’re likely to spend a lot of time, capital, and energy on your business due to the potential it has to give you the best returns. However, if you fail to have a backup plan and blindly chase profits, when unpredictable events occur, it may be hard for you to rise again. Examples of investments or financial tools which play the role of a striker include equities, derivatives, and leveraged real properties.
In a football game, there are 11 players on each team, but aside from the players, there’s still another important role that can’t be ignored. Without a coach giving instructions, there is no game plan for the team.
Coach –Financial planners
This is the 12th man in the game. Although he’s on the sidelines, he also plays an important role. Without the coach, can you imagine how the players can win the game? In the same situation, without players, do you think that the coach can win the game? In financial planning, the role of coach is often played by a financial planner.
He/she will advise you based on your financial goals, risk tolerance, and investment horizon. This information is important as your financial planner will analyse and determine the best course of action based on your unique situation. This results in a very specific financial plan which is tailored just for you.
The way of allocating assets can make a huge difference when it comes to seeking financial freedom. In the long road of a financial journey, you are likely to undergo many challenges in life such as economic cycles of market expansions, peaks, contractions, and troughs from time to time. Going through the four stages of an economic cycle requires great emotional management and smart financial strategies. So, it’s highly recommended for you to engage a licensed financial planner and approved financial adviser to ensure your financial well-being ahead.
About the author
Teoh Shoon Yee (FAR CMSRL RFP BIBM) is a FA Manager, Licensed Financial Planner and Bank Negara Approved Financial Adviser Representative with approximately nine years of experience in financial services. She is well versed in holistic, independent and unbiased approach with a pleasant and friendly personality. She can be contacted at ShoonYee.Teoh@yesfinancial.co
“I heard my friend talking about XYZ investment, do you think it’s good?”
These are just two examples of commonly asked questions on investment.
Yes, I get it. You don’t want to lose out on the “best” investment deals in town.
However, before you start investing, do ensure that you have built a solid financial foundation for yourself.
So how do you know which one is the best investment for you?
All financial solutions are designed for a target audience. The best investment is simply the one that suits you in the following three areas combined:
1. Investment goal 2. Investment time horizon and risk profile 3. Investment vehicle
As everyone is unique, there’s no doubt that an investment plan should be 100% tailored to your situation.
Blindly taking recommendations from friends (who don’t understand your financial situation) could be detrimental to your finances.
It’s just like self-medicating without a proper diagnosis from a health professional, but in this case, you’re putting your financial health at risk!
Investment goals
“Begin with the end in mind.” – Stephen Covey (Author of 7 Habits of Highly Effective People)
It’s important to know what you’re trying to achieve, because without a clear goal, how do you plan for it?
Take a moment to think.
What is your goal in investing?
– To build up emergency funds – To buy a dream house – To provide for children’s education – To further studies – To migrate overseas – To support family – To prepare retirement funds – To start a business – Others
Why is this goal important for you? (Your why)
– To prepare for unexpected expenses – To set up a family – To have peace of mind – To have freedom / choices – To have a comfortable retirement life – Others
Finding out your why in investment is crucial, because it drives and guides you towards the future/ bigger picture that you are seeking to create.
Investment time horizon and risk profile
Once you have defined your investment goal, the next thing to work on is your investment time horizon and risk profile with regards to investing.
To define your risk profile, you may ask yourself some questions:
1. How do you feel about a 20% loss in your investment? 2. What is a decent investment return for you? 3. What will you do during a market crash (sell off investment, buy more or do nothing)?
Investment vehicle
Lastly, what kind of investment vehicle suits you? Undoubtedly, suitable investment tools should fulfil your defined investment goals, risk profile and time horizon.
Investment tools come with three fundamentals: capital preservation, liquidity, and returns.
There’s always a trade off in any investment tool in terms of capital preservation, liquidity and return. Just like life, we can’t have everything we want. We have to give up something in order to get something else.
If you want capital preservation and high liquidity in your investment, you will have to accept that returns will be low.
If you want good returns and liquidity in your investment, you will have to accept that there will be absence of capital preservation.
If you want capital preservation and a good return on your investment, you will need to give up liquidity.
As you can see from above, there is no single investment that can give you capital preservation, high liquidity and high return at the same time. If you encounter one, there’s a good chance that it’s a scam – please do check with Bank Negara Malaysia on said investment!
Let’s use an example on finding the right investment for you. Assume that you have defined the following:
If your goal is to save up for an emergency fund, your investment vehicle should come with capital preservation (keeping your saved money free from volatile or fluctuating markets) and high liquidity (you need access to your money as soon as possible for unexpected events).
So, suitable investments for building your emergency fund can include:
Bank – high-interest saving account
Bank – fixed deposit
Fixed unit price unit trust fund
Please note that bank high interest saving account/ saving account and fixed deposit are protected by PIDM but unit trust funds are not protected by PIDM.
You may repeat the steps discussed above to design your best investment plan that’s tailored specifically to your needs.
All in all, there is no single best investment plan, because the best one is the one suits you the most! You have to define what you want, what you like and have a plan that you are comfortable with.
It’s incredibly dangerous to just follow the crowd and invest blindly, because that means you’re jeopardising your financial future.
If you feel lost when planning your financial future, you may consider investing in a financial professional.
A financial professional would not only develop a roadmap for you, but will also provide advice as unexpected financial issues arise in your life and bring you nearer to your financial goals.
About the author
Kuah Soo Yee is a Licensed Financial Planner (CFP) who is passionate about helping people make sound financial decisions and achieve their financial goals, and recently launched her own app. She can be contacted at soo.yee@ipp.com.my
Reflecting on my childhood, I remember we were given a book to write down our money spending during school – Buku Wang Saku. We also had to listen to a talk about how to manage our money. I remember only writing in it for a week and there was no follow-up after that.
That was almost 20 years ago, yet we’re still here talking about the same issue of money management, poverty and struggling to manage finances. We all subconsciously learn about money as children, with concepts that are good or bad depending on what we hear from our family, society, and even things we pick up from watching television or the news. Therefore, as we grow older, we form these money stories in our heads and couple them with our subconscious beliefs around money that influences our behaviour as adults.
It baffles me that even after 20 years, I’m still struggling with the same subject. I started reflecting on managing my money and how I sometimes unintentionally sabotage myself. Now I know that this was due to deep, unresolved money blocks.
What are money blocks?
Money blocks are negative subconscious beliefs about money that limit you from achieving your conscious desires. The main reason why it’s so hard to implement behavioural change is the part of the brain that is used. When watching a motivational video or reading a self-help book, we’re calm and composed to act better. But when we’re about to go shopping or have lunch, we kind of lose our mind, even though you promised yourself to manage your finances better after reading that self-help book you picked up before.
We keep going through this same pattern because of our brain’s subconscious and conscious compartments. For the first five years of our life, our brain is in the theta wave stage, whereby it’s in a sponge mode to absorb everything and anything. We take everything literally and learn how to be a person. These first, vital five years are when we learn all the emotions and feelings that surround us, which results in the formation of habits.
We learn all this from the adults that surround us. We observe their behaviours and mimic them as we grow older. We are very habitual human beings, and with that, we tend to keep close to feelings that we are familiar with, that is, the similar, regular cycle we’re programmed to react to. We tend to react the same way as we’re taught in the first few years of our lives, with all of this formed early on when we have no conscious control. These habits are then carried towards adulthood.
The conscious part of the brain only starts to develop later in life. So as a child, we unconsciously absorb all things wholeheartedly with no filter, including the good and the bad that cannot be told apart. We form most of our beliefs before the age of 5. Therefore, most days we operate solely out of habit and are on autopilot when we come across familiar situations.
When we try to learn a new habit, this is when the conscious part of the brain works. When we’re aware of patterns and want to change bad habits, but are faced with a specific situation that needs an immediate response, previous habits that are hardwired begin to react. This results in the nervous system reverting to existing patterns in the subconscious based on programming, long before our conscious brain can grasp and take control of the situation. Suddenly, you may see yourself falling back to the same lousy money habits even though you know this isn’t a good thing.
To have control over this is to make yourself conscious of situations that trigger you relapse into bad money habits. Take a breather and question yourself, before making a conscious decision. The recurring pattern from your past robs you of strength to make better financial decisions. If you can make a conscious decision to create new habits around your triggers and to change that narrative, you’ll be able to change past thought patterns!
“Money is 80% behaviour, 20% knowledge.”- Dave Ramsey.
Although I have a degree in Islamic Financial Planning, I still struggle with my money blocks. Most of the time, financial planning focuses on numbers and figures but not the human thought process; I wish I was taught this back in university. Even with an abundance of education around managing our finances as a nation, there are still people falling back to their old habits and sabotaging their finances. I believe what’s stopping them is the deeply ingrained habits they grew up has made it hard to break the pattern.
Some common negative beliefs I learned:
I don’t have the skill to make more money
Money is evil and rich people are mean and greedy
I can’t keep a lot of money or else I’ll lose it
Witnessing parents fighting about money
I have to work hard to make money
You’ll get sick easier if you work for money
When I am rich, there will be poor people suffering
There is not enough money for everybody, including me
A lot of things need to be sacrificed to gain wealth
I have to know someone to be able to gain more wealth
We tend to fall into this pattern of these messages, thus creating a wrong impression about money. These money beliefs tend to stay in our way and form our habits until we decide to identify them and heal consciously.
How to know if you have money blocks?
Everyone has them regardless of their financial upbringing. One way to tell is that you’re aware of money, but you’re not getting any results and constantly battle the same issues. Another indicator is that you know how to manage your finances, but you keep sabotaging your success.
This is what I’m currently experiencing. I have the knowledge to manage my finances well and I know how every decision I make influences my finances, yet I keep making the same bad decisions that trip me up.
Create an action plan
The only way to reset your money blocks is to identify your beliefs around money. Write in a journal and answer these questions:
What are my money beliefs, how did my family view money, and how was I culturally brought up around the subject of money?
What are your biggest fears around money?
If you are blessed with an abundance of wealth, how will you use it to help others?
“Self-sabotage is like a game of mental tug-of-war. It’s the conscious mind versus the subconscious mind where the subconscious mind always eventually wins.” – Bo Bennett
Break that pattern
When we were growing up, the fears that adults subconsciously placed upon children helped them cope with their money concerns. However, when they didn’t heal from their subconscious fear, it tended to be passed down to their kids.
In reality, we control how we can benefit and help others when we have an abundance of money. We’re all born with potential, and it’s our birthright to reach for the stars. We form our blueprint with the words used, and the mind tends to interpret it into reality. Our mind is meant to protect us from harm so it starts creating a scenario to defend ourselves. Re-write a better script around your many beliefs. It’s a process, one that never really ends.
I’ve been working on my money blocks and it is still a work in progress. I hope you enjoy diving into your thought patterns and enjoy the journey!
About the author
Nurul Yahi has a background in Business Administration majoring in Islamic Financial Planning. She’s a financial enthusiast and you can find her at dearduit.com. You can also find Nurul on Twitter, Instagram and Facebook.
In my previous article, we covered tips for saving for an emergency fund. In this article, let’s take a deeper dive into other matters related to savings for a financial emergency.
Food for thought, would you consider your credit card your emergency fund?
I guess there is no right or wrong to this statement but it does help that at least we have an emergency fund that’s equal to the credit limit of credit cards. If we have to rely on it to get past an unexpected expense as a last resort, we know very well that we’re able to pay it off without carrying the balance to the future.
So, it’s not wrong if you consider your credit card your emergency fund. However, there’s one problem. In a scenario where you don’t have to rely on credit or loans to save you in a financial emergency, you don’t really have any pressure or commitment to repay it after the emergency has passed.
When you rely on credit to get you out of financial emergencies or unexpected events, once this issue is resolved, you’ll then need to deal with the next time bomb. Depending on how well you’ve prepared and managed your money before this, it could lead to another emergency in the near future. Assuming your money management skills haven’t improved in that time, you might be looking at an even more dire situation!
Firstly, in this second ‘crisis’, you may have less or no capacity to increase your loans or credit limit to help you (since there’s a good chance those limits have been utilised and not cleared from the first time). On top of that, let’s assume for a second that you can still count on credit cards for this second bout; how do you think your monthly cash flow situation will be like after this?
Certainly a much bigger portion of your future income is now tied to repaying those debts. This will reduce your discretionary cash flow (or disposable income), meaning your ability to save for a ‘real emergency fund’ is now much weaker compared to before. Moreover, with lesser discretionary cash flow, it also implies that you are likely to be unable to prepare or save for other future dreams. In a worst-case scenario, you might be playing musical chairs with your debt, using the income you take home each month. If such a pattern is maintained, it may affect your overall satisfaction with life, and even lead to a compromise in your mental health.
So, there seems to be a cost to treating your credit cards’ limit like an emergency fund, and this is more costly than monetary cost (interest rate). It comes with a much bigger price tag like your freedom and ability to plan for the life that you really want to live.
If you’re thinking about keeping a certain card’s limit as your emergency fund, why not consider the alternative that’s much less complicated, and most likely comes with less pain in future?
I get it – this alternative comes with a pain today, as it requires us to not spend that amount of money, save it up, stash it somewhere, and forget that we have that money. With our brain wired to seek pleasure, and that instant gratification is a sure way to reward us with such pleasure, this could be a tough call for some people.
Is there a way to avoid having to sacrifice your lifestyle today while still able to prepare for emergencies? I’d say YES. There are certain emergencies that we can actually ‘neutralise’ and make it a non-emergency. Based on common ‘emergencies’ people have told me about, here are some and how you can prepare for it:
Your Real Expenses
Have you had this experience where you were shocked, or even found yourself wondering how a certain bill that should be due a long time from now ‘suddenly’ becomes payable? For example, your car insurance and annual road tax renewal, your car’s battery that gives up on you every one or two years, your yearly subscription to certain services, yearly insurance premiums etc.
The truth is, these bills don’t suddenly become due today; it’s just that time really flies and while looking at the new renewal or invoice, your mind tells you you’ve just paid for it not long ago. Just like this, you have landed yourself in a financial emergency. You may not have sufficient money at that moment to pay for those annual or quarterly bills which can be very important expenses. That’s how you will notice your savings getting depleted every now and then.
Can you stop these things from becoming emergencies? Yes, you certainly can, and it’s very easy and simple. You just need to add all of these bills up, divide by 12, and set aside this amount every month in another savings account. Settle those bills with the money in this account when they’re sent to ‘surprise’ you and take comfort in knowing that these will stop becoming a surprise to you!
Celebrations, Occasions, Vacations
As social animals, we have people we love, care about and celebrate festivals with, or even birthdays, and other milestones. It costs money to celebrate and in a typical month where you have too many to celebrate, you may find it difficult to strike a balance.
You can also prepare for these ‘emergencies’ in advance. List out important occasions and celebrations. Include your expected spending during festivals like the New Year, Hari Raya, Deepavali, Christmas etc. Divide by 12, and save this amount monthly in a separate savings account.
You can now celebrate with peace of mind and sense of freedom knowing that you are spending money you have prepared for, and best still, your own money (from the past, not the future)! This method is also workable for bigger ticket items such as your dream vacation.
Medical Emergencies
Accept the fact that no matter how healthy your lifestyle is, you’ll get sick eventually. Apart from sickness, it may also pay to make regular visits to the dentist or doctor, including to conduct health tests. Like everything else, these cost money.
Like the previous examples, you can apply the same method to prepare for this. The only problem is that you’re not able to accurately predict how frequently you’ll be unwell and how much that will cost. This is when you have the ‘fun’ to make an estimate. Personally, I put away RM50 a month for clinical visits. When I don’t get sick so often (which is a good thing), I get to carry forward the balance to the following year.
For bigger medical emergencies, like hospitalisation or a long treatment process, you can either save using your own money, or ‘outsource’ this to medical or personal accident insurance.
By preparing accordingly, the occurrence of financial emergencies can be reduced greatly. Moreover, by taking into account and being realistic about the spending that will eventually take place today, you’re taming your instant gratification monster by having less to fuel and feed it.
If you have put aside the set amount, can you pay for these things using a credit card? You can! Because you already have cash in your accounts available to pay for your credit card spending. So, if you want to, why not?
In February 2021, the Employer’s Provident Fund (EPF) announced dividends of 5.2% for conventional savings and 4.9% for shariah accounts for 2020. Overall, I believe contributors were satisfied in view of the effects of the pandemic caused by Covid-19 which greatly affected both the local and global economy. At least their retirement fund continued to grow!
In Malaysia, EPF contribution is mandatory for both employers and employees as long as they are under full-time employment. This scheme allows workers to automatically save for their retirement from the day they start working. However, there is another category of people consisting of self-employed or business owners that might not contribute to EPF as it isn’t mandatory under business entities such as sole proprietors, partnerships or private companies (Sdn. Bhd.) and do not draw a salary from their company. Instead of drawing a salary, they get paid through director fees or dividends.
So should such income earners opt for voluntary contributions to EPF? Let’s look at this from various perspectives:
Compounding Interest Effect through Long-term Savings
In order to have a comfortable life after retirement, we have to set aside money to create a pool of funds which must adequately cater for 20 years of retirement costs. Therefore it’ll be much easier to hit this target if you start saving immediately when you begin earning an income. If you understand the power of compounding interest, you’ll know that by starting to save early, your money will be put to work for you. Therefore a self-employed person should set aside a certain percentage of income or business profits for the purpose of retirement as early as possible.
The next question is why EPF? Why can’t I save the money in the bank? Firstly, we’re currently in the low interest era and it’s likely to remain that way for the foreseeable future. EPF dividends are much higher than what banks are offering for fixed deposits, currently between 1.8% and 2.2% depending on the amount and period.
One might argue that contributors can’t withdraw the money as they wish except under certain criteria from time to time, such as the i-Sinar scheme due to the Covid-19 pandemic. The restriction on withdrawal serves its purpose to secure your future; otherwise, there’s a good chance that it will be withdrawn and spent for a variety of reasons along the years.
Discipline in regular savings is one of the key success factors in achieving your desired retirement goal. Another will be the determination of keeping those funds for your later years and not simply withdrawing it for unimportant matters. This should be your last resort of getting financial assistance, as naturally it’s much easier to spend money than save it. Furthermore, early withdrawal of the funds has a long-term impact on the accumulated funds due to the effect of compounding interest.
Tax planning
Apart from the benefits of compounding interest, as business owner should draw monthly salary from the business and contribute to EPF according to the mandatory contribution rate. In such a scenario, there’s an advantage in terms of tax savings as the amount contributed by the company is tax deductible against company profits up to 19% of the salary drawn from the company. As the business is self-owned, it’s just a matter of transferring one side of the pocket to another while enjoying tax savings simultaneously! Of course the criteria is that the company is profitable and has sufficient cash flow to do so.
Fixed Income in Your Investment Portfolio
Some might argue that instead of comparing to bank savings, why not invest in other investment tools like shares or unit trusts which can generate better returns. Provided the risk is well-managed, it could indeed be a better option than to keep savings in the bank.
To structure an investment portfolio for retirement purposes, it’s advisable to split into different asset classes for risk diversification and liquidity. Normally a conservative asset class will form part of the portfolio to provide security. In this case, you can treat EPF savings as the more secure tool that generates a fixed income of 5.5% returns on average. Other resources in the form of cash will be allocated to more aggressive tools such as unit trusts that aim for higher returns of 8%-12% for example, to enhance the overall returns of your retirement portfolio.
After much discussion on the importance and benefits of long term savings through EPF contribution, it’s advisable for the majority of people to do so. The exception will be an individual that has the capability and time to manage all their direct investments and is very disciplined in setting aside money for retirement funds, in addition to managing risk and return very well.
Otherwise do start your retirement planning as early as possible and leverage on the expertise of our country’s established retirement scheme to ensure you have a comfortable retirement. Last but not least, it’s also recommended that non-income earners such as housewives also contribute voluntarily to EPF for their future security with support from their spouse.
About the author
Dennis Chin is a financial advisor, approved and licensed by Bank Negara Malaysia and the Securities Commission Malaysia. He can be contacted at dennischin@harveston.com.my
Financial planning has been defined as a process of developing strategies to help people manage their financial affairs to meet life goals. However, many people tend to have misconceptions that can be described as financial planning myths.
“The best time to invest was yesterday. The next best time is now.”
Yesterday has passed, so now’s the time for you to plan for your future, which involves learning about money and financial planning. If you master your finances well, then you’ll likely live a great life in the future because delayed gratification helps you to reach your life goals faster.
What this means for you is to overcome the most common financial planning myths that I’ll be sharing with you in this article.
1. Financial Planning is Only for the Wealthy
It doesn’t matter whether you earn RM2,000 a month or RM20,000 a month. As long as your income is used to pay for expenses, you need to have a financial plan regardless of whether it’s a simple or comprehensive plan. You need to calculate your net worth statement, cash flow statement and well as other relevant financial ratios.
Whether you are driving a luxury car or economical car, you’ll still need to send your car for regular servicing – the only difference is the cost of servicing. Similarly, regardless of income levels, all of us still need to manage our own daily expenses, loan expenses and other allocation into savings or investments.
2. I’m Too Young for Financial Planning
Financial planning is meant for everyone regardless of age. If you are a child or teenager, it would be great if your parents teach you the importance of savings and growing your money that you received from red or green packets during festive seasons and other celebrations. Parents with good financial beliefs should plan for their children by starting a high interest savings or investment account for them in order to reap the benefits of the long-term returns.
If you’re a working adult, you probably should have a financial plan in place to set aside and build an emergency fund, start insurance planning, retirement planning, travelling fund and or savings for your first house or car, and / or a wedding.
If you’re a new parent, you need to plan for your children’s education, on top of your retirement and insurance planning. Some may probably need to save and invest so that he or she can accumulate enough capital to start a dream business. It’s at this stage that you may want to consider estate planning.
If you’re a retiree, you may review and plan the expenses required for your desired lifestyle, which could include travelling goals, or simply your medical expenses.
3. I Will Start Financial Planning when I Earn More
Another common answer is, “I don’t have much income to plan financially and I will only start when I earn more”. Let me illustrate why this is a bad idea through this chart blow:
These are two individuals, Mr. Early and Mr. Late. Assuming, both portfolios are growing with an annual compounded rate of 10% over the period of their investment horizon. Mr. Early who has learned the power of compounding from his dad and through reading investment books started saving regularly at age 25 with RM500 per month till age 55.
However, Mr. Late who believed that he should spend first and save later when he started working only realized the power of compounding and saving regularly after attended a wealth seminar recently. He started saving regularly at age 35 (10 years later than Mr. Early) with RM1,000 per month until age 55.
When both reach age 55, Mr.Early would have accumulated RM1.13 million and Mr. Late with RM759,000 (even double the amount of Mr. Early monthly savings). The difference is around RM371,000 just by delaying it for another 10 years.Hence, do spend some time to learn and establish what your beliefs about money and financial planning are. Otherwise, it could have serious consequences on your financial goals or life goals.
“It’s not your salary that makes you rich, it’s your spending habit” – Charles A. Jaffe.
What are you waiting for in your financial planning journey?
