Financial management in the current environment

 

Learn new ways to budget, save and invest

“Avoid free/paid courses given by ‘investment guru’ who are not professionally qualified. The public must be aware and know how to differentiate them.’’- Kimberly Law

LOSING money is the hardest misfortune if you have just enough income for survival.

Many people have fallen victims to scams and have lost money in a bad investment.

Some have lent money to others but the loan was not repaid.

There are many reasons why people lose money and in the current times, every ringgit counts.

The costs of buying groceries, clothes, medical supplies and even essential body care items have risen so much that at the end of the month your salary may not be enough.

It is no surprise that a survey by Capital Market Research Malaysia (ICMR) showed that 64% of Malaysians respondents, feel that they are either financially unstable or are living from salary to salary.

Even Deloitte’s recent survey has indicated that 65% and 70% of the local Gen Z and millennials are living from hand to mouth. The global numbers are 51% and 52 respectively.

The majority of those within these categories report suffering from mental stress with regard to their finances.

It said there are still gaps between awareness and application when it comes to good savings behaviour.

There are gaps in financial literacy in the country and the rising rate of people falling to scams is also a concern.

Financial literacy is about how you budget, save, build credit, borrow, repay debt and invest to grow money.

If you want shortcuts by hoping your money will double or triple in the shortest amount of time then you ought to ask yourself if that is really possible or if it is part of a scam.

Everyone knows how to manage money, but the question is how effectively is it managed and whether you are making your money work for you.

There are many management and personal finance courses available to improve your financial literacy skills.

Some are offered free and some charge a fee. It is not wrong to learn and improve one’s skills even though you may be an expert in money management.

Several websites offer personal finance, money management courses available. Some are free, others charge less than RM100.

Some of the sites that offer courses include Udemy, Coursera, LinkedIn.

Often in a few hours of online learning, you will be able to create a format and update your budget or even create a plan using the tools they provide to help you reach your financial goals, according to a report.

However, Uno Advisers Sdn Bhd licensed financial planner Kimberly Law said she would avoid the free courses offered by people who are not from the industry.

“Avoid free/paid courses given by ‘investment guru’ who are not professionally qualified. The public must be aware and know how to differentiate them.’’ she said.

She recommends those interested to attend reliable courses from institutions such as the Financial Planning Association of Malaysia (FPAM) and the Malaysian Financial Planning Council (MFPC)

She says they offer some paid programmes while others are offered free to the public for financial literacy enhancement.

For her, the best way to get free financial education is to attend/listen to events/programmes organised by FPAM/MFPC and that are offered together or with the blessings of the industry regulators such as the Securities Commission and Bank Negara.

These organisations will get professionals to volunteer to offer/teach the programmes.

Some people felt that basic money management courses should be offered in schools to help children prepare for their future. This will surely benefit the larger school going population.

Even if it is not part of the syllabus, it can be a supplementary programme offered for a limited period of time every year at schools.

Law believes the syllabus for the young should include basic money management skills such as basic training or exercise on budgeting, managing expenses and planning that will be useful in their management of money and investments.

This will certainly raise the financial literacy rates over time in the country.

Even if you are doing well in your money management skills, it doesn’t hurt to enhance and learn new ways to budget, save and invest.

But don’t fall for courses that will make you invest even before you can learn something from it.

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THE FIGHT AGAINST CYBERCRIME IN FINANCIAL SERVICES

Generating sustainable retirement income

 

Many Malaysian are EPF contributors and have FDs as well. "You will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses."

ONE of the top financial concerns of retirees is running out of money.

Whether you were an executive earning a reasonable income, or if you are making top dollars as a businessman, the fear is still valid.

For example, Tommy, who left the working world soon after selling his factory to a European multinational corporation. Tommy shared during one of our meetings that he was golfing every week and globe trotting almost every other month.

However, there was a problem that greatly bothered him. He found that he was dipping into his fixed deposit every now and then just to maintain his interesting lifestyle.

“Yap, you will never understand how bad the feeling is when you have to break your fixed deposit to cover your living expenses, ” he said.Combing through all of his finances, we discovered that Tommy’s lackadaisical attitude was to be blamed. He has not been paying enough attention to invest and generate income from the RM12mil nest egg that he had painstakingly accumulated. His investment portfolio was a mess.

Over the years, he invested in a few properties but never really bothered to oversee them. When tenants left, he didn’t make an effort to secure new tenants. In fact, some properties were even sitting vacant and idle. His excuse? He was too busy running the business.

Yap Ming HuiYap Ming Hui

Tommy has also invested in some shares and unit trusts but he seldom monitors and reviews their performances. Imagine his surprise when he went looking for some extra cash but discovered that most of the investments were not making money. Prior to meeting me, he couldn’t decide whether to sell or to keep those underperforming investments.

Consequently, the bulk of Tommy’s wealth is in fixed deposit. The trouble is the interest income from fixed deposit barely covers the impact of inflation. As such, if Tommy continues to spend on his interest income, he will risk having the principal depleted.

Asset rich, income poor

Tommy’s problem is a typical case of “Asset Rich, Income Poor.” His situation is definitely not unique. In fact, I find most self-made millionaires or business owners, typically strong at creating wealth from their business or professional career, but poor at generating income and gain from the created wealth.

For one, all the time spent ensuring their businesses succeed also takes them away from making sure that the wealth created is optimised.Let’s examine Tommy’s assets and see how it measures up (see chart).

The RM6mil in fixed deposit generate approximately 2% interest income. However, notice that the 2% of interest is not sufficient to offset the 4% inflation provision. As a result, there is negative net income coming from Tommy’s fixed deposit asset.

Tommy’s properties are worth RM3mil and only generates RM50,000 in rental income per annum. Nevertheless, this can be considered a net income because inflation will be hedged by capital appreciation (at least 4% per annum) of the properties.

The RM1mil in shares gives a total return of 5%. Factoring 4% inflation, the actual income received from share investment is RM10,000.

Unfortunately, the RM2mil unit trust investments didn’t offer any returns. After inflation provision, his unit trust investment has a net income of RM80,000.

The reality is if nothing is done now, Tommy’s wealth will continue to shrink by RM140,000 a year once inflation is factored to the equation. How does this play out for Tommy? The fact that he needs RM360,000 a year to maintain his current lifestyle will not augur well for him.

So, how can you prevent from ending up in Tommy’s situation?

The optimisation measures

> Remember to review the performance of each of your investment asset classes. In order to generate more income and gains, be proactive in getting rid of poor quality and poor performing investments. Look at each investment and ask yourself, should you keep it or should you sell?

> Consider moving fixed deposit into higher return investment.

Any gains from your fixed deposit would probably be eroded by inflation, especially given the current low interest, which will probably persist for quite some time. After calculating and providing for your emergency fund cash reserves, the balance of your fixed deposit should be invested into other investments that can generate higher return and income to hedge against inflation.

> Diversify the source of retirement income

Even if one investment asset can give you a good income and hedge against inflation, it does not mean that you must bet all or the majority of your wealth in it. For example, property investing. Some investors have found success in it. They were able to generate good capital appreciation and rental income.

As a result, they put a majority, if not all, of their wealth into properties. It may sound logical at first but rental income is not sustainable in the long run. It is subjected to changes, some of which cannot be controlled. Therefore, the best practice is still to diversify your retirement income across different asset classes, like share dividends and capital gains, unit trust gains, bond investment gains, retirement income products and others, so that it is not badly affected by any one impact.

The ability to grow your wealth during retirement years is important. Just because you have stopped working, it does not mean your money should stop working too. The idea behind wealth optimisation is to ensure that you can upkeep your retirement lifestyle and protect your wealth from inflation.

Ideally, one should get a plan done a few years prior to retirement to see how your retirement income would play out. After all, you wouldn’t want to have any unpleasant surprise, like in Tommy’s case. When you have time on your side, you can improve your investing skills and adjust your retirement plan accordingly while still in your active income earning years.

Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information https://www.thestar.com.my/business/business-news/2021/01/09/generating-sustainable-retirement-incomeshared is therefore strictly at your own risk.

 

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Financial literacy vital when investing in funds

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By LEONG HUNG YEE hungyee@thestar.com.my

 It pays to be updated on investment knowledge

LOOK before you leap. That's the advice experts in the unit trust industry have given to investors, either old or new, when deciding to put their money into any fund.

Their reasoning behind it is that the products being offered to investors are no longer simple and basic. With the ever growing diversity and sophistication of unit trust products, consumers have to continuously enhance their knowledge and capabilities to maximise as well as protect their investments.

Fund managers say unit trust funds offer an option to retail investors especially those looking at the possibility of earning higher returns compared with conventional savings like fixed deposits.

However, a lot of investors do not really have a good understanding on what they are investing in and they think they can simply park the investment in some funds and let it grow.

 

Lim Hong Tat says it is a challenge for investors to stay informed on market movements in today’s environment.

“Over the long term, education on the basics of financial planning was important for the growth of the unit trust industry,” a fund manager says.

MAAKL Mutual Bhd CEO Wong Boon Choy opines that more can certainly be done in investor education. “I am sure the Federation of Investment Manager Malaysia would have probably started working with all relevant parties who are involved in promoting financial literacy.”

Malayan Banking Bhd (Maybank) deputy president and head of community financial services Lim Hong Tat points out that one of the issues it is facing is educating its customers on unit trust investment.

He says it is a challenge for investors to stay informed on market movements in today's environment.

“Educating our customers on unit trust investment is one of the key areas the bank is embarking on. Unit trust investments are meant for a medium to long-term investment horizon, and generally provide better returns according to the risk that accompanies the investment,” Lim says.

The dollar cost averaging concept, he says, is another focus where the bank is highlighting to customers, such as to invest the same amount of money over a period of time, especially now when market volatility is high.

“By doing so, investors avoid entering the unit trust funds at the peak or bottom of the market cycle, and hence spread out the risk,” Lim says.

HwangDBS Investment Management Bhd (HwangDBS IM) chief product officer Steve Lim says that despite the growth of the unit trust industry over the past 10 years, there is still a need to increase investors awareness and understanding about unit trusts and its benefits.



Good returns

“Many of them expect good returns, for example double-digit returns, within a year, hence defeating the purpose of investing in such instruments for retirement and financial planning. Since they have a short-term investment outlook, they tend to time the market. Many of them have a herd mentality and will continue to sell and redeem when bad news flows in.

“Also, mis-selling and lack of product understanding have been the bugbear of our industry,” Lim says.

 

He adds that this had resulted in losses by many investors and a prevailing misconception that unit trust investing as a whole is a highly risky and complicated venture.

“Nevertheless, we believe that with the right financial education, we will be able to address the unit trust industry issues and misconceptions as well as contributing to the growing confidence and popularity of the industry segment.”

Steve says the level of personal financial literacy today is low and with growing consumerism as well as changing customer expectations, there is a need to reinforce greater financial literacy to help people better manage their personal finances. Proper consumer education is needed if new growth engines, such as private pensions, wealth management and asset management, with their more complex and sophisticated products, are to take off.

While industry players are advocating a greater need to increase investor education, some investors do not really have a basic grasp of what a unit trust is or even why they should invest in unit trust.

Lee Khee Chuan, a Securities Commission-licensed financial adviser representative, says unit trust as an investment vehicle has distinct advantages over other asset classes of investment.

He says, for example, unit trust has better liquidity compared with land banking products.

Wide selection

“It (unit trust) can start with a minimum capital of RM1,000 but it is impossible with property or blue chip shares. Unit trust also offers a wide selection ranging from bond funds to aggressive equity funds; furthermore it gives investors exposure to multi regions. It also allows investors to invest regularly using the dollar cost averaging method with a minimum capital as low as RM100 per month through bank account deductions,” Lee says.

Lee cautions that investing in unit trust does carry investment risk; the price of units may go down as well as up.

“It is still prudent to diversify among unit trust funds with differing fund objectives even though unit trust fund sales agents may tell you that unit trust is diversified among different stocks or stock markets.

“One can also check out value-added services provided by some licensed financial advisory companies in Malaysia which offer a model fund portfolio which is effectively diversified to clients because they have an in-house fund manager to construct and monitor the portfolio of unit trust funds,” he adds.


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