FINANCIAL PLANNING IN 4 STAGES OF LIFELINE.
“When you are doing the right thing, you are getting closer to your goal; when you are listening to the right input, you are getting clearer about your vision.”
Financial needs continually change throughout an individual’s lifetime. Many people follow similar financial pattern during their life. However, everyone has an individualised financial plan that is dependent on many different factors in an individual’s life which vary from one’s expectation; income could be the main factor. Financial planning will help you to achieve your goals and to avoid financial difficulties which is affected by expected as well as unexpected events. By having well-written financial goals and implementing them into a financial plan, a person will be enjoying a comfortable life with peace of mind.
“Money, can turn your friend become enemy, can also turn your enemy become friend.”
FINANCIAL GOALS
SMART goals helps financial plan to get accomplished with proper tracking and balancing periodically
Specific – State exactly what is to be done with the money involved
Measurable – Derive exact required amount for the purpose with inflation and return rate
Attainable – Determine how it can be attained, with individual income and investment return
Realistic – It is a realistic goal, relevant and motivating
Time bound – Goals with timelines.
LIFESTYLE CONDITION AND SITUATION
Lifestyle conditions such as Marital Status, Employment Status, Income, Age, Number of dependents, Economic outlook, Education and health status needs to be considered while designing a financial plan
Life Line is a series of stages in which an individual passes during his or her lifetime. There is a typical life pattern which applies to most of the people. Each individual has their own way to go through the changes. (ages in stages will be differ for each individual)
The broad three series in financial planning are :
Basic Wealth Protection : Cash flow management, Credit & Debt/liabilities management, Risk and Tax Management
Wealth accumulation : Building Financial security for children or family, medium term for education, lifestyle and primary/secondary asset accumulation, Long term wealth for their retirement
Wealth Distribution : Estate Planning; wills, trust, legal assignment, nomination.
People in certain age group tend to have similar life cycle needs:
Stage 1 : Drawing of 1st income towards Financial independence
Young Adult Ages 18-24 yrs
? Earning Financial Independence
? Sharing family responsibilities
? Establishing a household
? Accumulating Savings for car, house, lifestyle, traveling
? Creating a spending plan
? Determining insurance needs
? Developing a personal Financial security
Case study 1: Dr Sing Chok Kang, graduated with a medical degree from average family income, he is hesitating with his financial plan from his first drawn income. He is clearly understands that he has a bright future and he has a plan to become a specialist in the future. Nevertheless, he is juggling between his needs and wants as he needs to buy a car to commute to work, saving for his own house (as he is renting now nearby the hospital) and supporting his family. Besides that, he likes to strike the balance by living a healthy lifestyle.
Suggestion: allocation of income for young Malaysians. (70% saving; 30% expenditure before commit into car or housing loan)
Living (own household, personal necessity) 20%
Hobbies, traveling or lifestyle 5%
Insurance 10%
*Saving for medium and long term 10%
#House (installment or down payment saving) 30%
#Car (installment or down payment saving) 15%
Family responsibilities 5%
*Others (emergency for family/personal development fund) 5%
*saving and others could be used for study loan repayment if any.
With the allocation above as a guideline, Dr Sing should be able to get a car within 2 months with his *savings for the 10% down payment, (ex: RM5k for a car of RM50k, installment of RM937.50 monthly for RM45k loan of 5% interest per annum in 5 years), besides, he will be able to own his primary property within 2-3 years (some with early planning of personal and partner double income will shorten the time to accumulate the down payment for the house).
On top of that, it is very important for Dr Sing to have a medical plan to protect his saving and income. The basic medical plan are the coverage for comprehensive hospitalization benefits and major illnesses coverage. Comprehensive hospitalization benefits protect the saving from paying to expensive medical expenses; whereas the major illness coverage giving replacement of income of 36 months with the option for a person to choose to rest and restore the health with peace of mind of not worrying the living expenses and healthcare expenses with the standard of living unchained.
Stage 2 : Expansion of responsibilities and liabilities exposure
Adult with or without kids-ages 26-35 :
? Establishing new family / marriage
? Childbearing
? Child raising
? building on education fund for children
? Establishing Credits for car, house, credit card
? Managing increasing needs of expenses
? Managing additional insurance needs
? Maximizing financial management by additional household income resources by additional wealth generation plans
? Expanding career goals
? *exposure to business liabilities
“Live within your means.”
Case study 2 : Kenny Chai is getting married in 3 months’ time, he owned a house of rm400k 4 years after working as an engineer in a multi-national company. At the stage of new family forming, he plans to restructure his financial plan as part of his responsibilities.
Moving into stage 2 of life, the increment of income should have formed additional part of saving for education and additional insurance needs. Kenny should have planned for his basic medical plan including comprehensive hospitalization benefits and also 36 months income replacement on major illness coverage as not burdening the loved one upon any unexpected life event; on top of that, it is a must for Kenny to have a mortgage plan (loan cancellation plan) of the full loan amount in the event of death. (the policy is not advised to assign to the bank. As upon claims, the proceed payable to the family will be given the option of installment payment of the said mortgage and be juggled with other emergency cash needs if any).
Career goals are extremely important in this stage of financial planning, because different outcome will generally either lengthen or shorten your goals. It is crucial to maximize the income resources and save more for medium and long term financial goals. At this stage, the saving (for insurance and investment planning too) must have increased from 10% to 30% ( saving and expenditure ratio 30% vs 70%) of the income for the wealth accumulation stage. By all means, the saving rate of return should be higher than the inflation rate in order to fetch expected standard of retirement life.
? *i) in whichever situation if one involves in personal loan or business loan, insurance for loan cancellation should be well planned to avoid burdening the loved one upon any unexpected event.
? *ii) unexpected illness will cut one’s source of income, the replacement of income to retain the standard of living of one instead the mental burden which could be worsening one’s illness.
“when a person passed away, he took away his life, and also his earning power.”
Stage 3 : Aiming for more wealth accumulation
Working Adult or #Parent Ages 36-45 to mid life ages 46-54
? Better career plans and investment knowledge
? Establishing retirement goals
? Investment for capital appreciation and long term passive income
? Proper and upgraded retirement plans
? Debt reconstruction
At this stage, should be looking at debt reconstruction and comparing the refinancing scheme in the market which gives a lower interest rate; Hence can plan for an early debt settlement with the positive growth of income. And also have a review to set the standard of living and lifestyle expectation. The increment portion from the income will be used for liabilities settlement.
Invest into tools with capital appreciation and passive income generators.
Case study 3: Mr Chin Sio Sim, is a general manager of a media publishing company, has always live life to his fullest and enjoy traveling, with his good income in his career, he always has the mentality that the retirement life needs not to be worried; but when age catching up, he starts to concern about the style of living upon retirement should be maintained, but he is not sure about the proper allocation for income for investment, liability settlement, saving and the expenses.
Career planning is the main core structure for a good financial plan, many people did not have career plans and eventually need to live with a compromised retirement goals. When one has good income, 50% could be the living expenses of personal and family; whereas the 50% will form part of retirement/ education saving, diversified investment with low or high risk and advance principle prepayment for primary asset(s).
“Men works for 8 hours, money works for men 24 hours in a day”
Stage 4: Wealth preservation and distribution
Pre Retirement to retirement Ages 55-60 and 61 onwards
? Consolidating Assets
? Planning future securities and conservative investments
? Re-evaluating property and insurance needs
? Meeting responsibility of aging parents
? Re-evaluating and adjusting lifestyles as per the income and health
? Finalizing Estate plans
? Finalizing will or letter of instructions
At this stage, ideally the best plan is 50% to 80% of last drawn income to be the passive income for a comfortable retirement lifestyle. The difference of 50% or 80% of last drawn income referring to those who has successfully progress to stage 4 with well achieved career and financial goals in the stage 2 and 3 of one’s life. To conclude, there is a capital utilisation or capital reservation retirement plans to be referred to, it depends on individual retirement goals.
“Life has no rehearsal, be present and live it to fullest”
Moving from one stage to another, it’s clearly shown that there could be an early achievement during young age from the track record. Be that as it may, it’s primary to understand the importance of financial planning, let’s start saving fund for best early retirement. Life is all about the process; happiness, health and finding the joy. Start small, plan ahead and set a realistic timetable and goal. Better planning equals better living.
“We breathe in when come to this universe, and we breathe out when we leave.”
JASON KOEH
FChFP, ChIFP, FChLP, RFP, B. Eng (Hons)
Managing Director
www.mqbusinesswealth.com
