July 2020

How to achieve financial freedom?

We discussed about why do we need to achieve financial freedom in the previous article. This week, let’s discuss some of the ways to achieve financial freedom.

The only way to achieve financial freedom easier and faster is through investing. Read more about why investing is important here. There are various ways to invest. The following shows type of investments available in the market:-

Stock investment: This is an equity investment. When buying a stock of a corporation, it means you are owning part of the corporation and this entitles you to part of the corporation’s earnings and assets. This is easier way of running a business yourself and you are leveraging on other’s people expertise in running the business and you get some profits out of it when the corporation is doing well.
Bond paper: this is a debt security in which the debtor (bond issuer) issues a paper to the borrower (bond holder) in exchange for a fixed return (coupon). There is normally a maturity of the debt when the debtor agrees to pay back the borrowed money (principal) to the borrower.
Peer to Peer Lending: This is a borrowing to others within an agreed period in return for fixed return. This is quite similar to bond but it is less complicated as it does not need complex bond issuing process and requiring capital a lot lesser than bond. Investors get access to peer to peer lending through various approved platforms like Fundaztic and Funding Society.
Private equity: Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. The different between private equity and stock is that private equity are not publicly traded.
Real estate: real estate investment consists of buying and selling / renting the properties or land. The profits are gained through capital appreciation of the assets or incomes generated by renting out the assets.
Unit trust investment: unit trust funds are generally favored by retail investors. It generally divided into 2 broad categories, i.e. equity funds and fixed income funds. Equity funds are managed funds to help retail investors to invest into a basket of stocks, hence requiring lesser capital compared to direct stock investment. Fixed income funds are bond funds and money market funds. Bond funds are managed funds to invest in a basket of bonds and money market funds are managed funds to invest in a basket of fixed deposit certificates.
Real estate investment trust (REIT): Through REIT, a company will own, operate / finances income-producing real estate. Mostly, the real estates are commercial properties, industrial properties which given stable rental revenue. Through investing in REIT, one get the chance to own valuable real estate with opportunities to get dividend-based income and capital gain.

As you can see above, there are many types of investment vehicles available to choose for achieving your financial freedom. To be able to select the appropriate vehicle, you need to:

Understand yourself – what is your risk tolerance, how much return you need to achieve financial freedom, how long do you have?
Understand each type of the vehicles – understand the risk and reward ratio of the vehicles
Selecting the portfolio – it is recommended to select a portfolio / mixture of these vehicles. Never put your money in the same basket, diversify! Select a basket of investment vehicles that suits your risk profile and return requirement.

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How much do I need to retire?

This is a frequently asked question. One would need to know the number before one can plan effectively on his / her retirement plan. There are 2 ways to calculation the figure:-

Based on capital preservation method: based on this method, a huge sum of money (capital) will be used to generate income for post retirement expenses. The capital will be preserved and left over for the next generation.
Based on capital liquidation method: based on this method, the retirement fund will be used to pay up the post retirement expenses. No money will be left over for the next generation.

Calculation:-

Capital preservation method:

Key assumptions:

Post retirement expenses is RM 100,000 yearly
1. Post retirement investment return is 6%
1. Post retirement inflation rate is 3%
1. Real return = (investment return – inflation rate) ÷ (1 + Inflation Rate)

= (6% – 3%) ÷ 1.03 = 2.91%

Capital required for retirement

= Yearly post retirement expenses ÷ Real Return

= RM 100,000 ÷ 2.91%

= RM 3,436,426

Capital liquidation method: There are more data to be keyed in, click here to find the Private Pension Administrator calculator.

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Why do you need to achieve financial freedom?

You will achieve financial freedom when your passive incomes (either generated through businesses, systems or investments) are sufficient to cover your expenses.

EXPENSES ≤ PASSIVE INCOME = YOU ARE FINANCIALLY FREE!

I have heard people saying that it is hard to achieve. I have also heard people saying that it is not good to achieve because rich people are evil. Let me explain why do you need to achieve financial freedom as soon as possible:-

When you achieve financial freedom, you make life decision without being overly stressed by financial impact because you are prepared. You are controlling the money rather than being controlled by the money.
You can always get more money, but you cannot get more time. When you achieve financial freedom you have the CHOICE to choose to do what you love to do. You can enjoy life based on your term. You can go holiday without worrying your work as you have sufficient money to survive.
You can bless / help more people. When you are financially stable, you can help more people compared to the time when you are not. You can’t control what other rich men do but you definitely can control how many people you want to help! Researches show that authentic fulfillment comes from contribution to others. Your life will be more fulfilled if you have more money and more time to contribute.

So, do you still think being financial freedom is not good? It is a choice of yours. You can choose to act to achieve it or merely dream about it. If you are able to change your mind, you change your destiny too! I’ll be sharing more tips on how you can achieve financial freedom even your salary is not very high. Stay tune!

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Do I need high capital to do investments?

While the deposit interest rate is decreasing following the OPR rate reduction, the money will start to shrink if it is kept in the Fixed Deposit in view of the current inflation rate. Hence, investment is important in the financial freedom journey. But, often people think that one needs to start investment with high capital as many associate with real property which requiring high capital. There are a lot of affordable investment scheme provided for the general public. Here are a few:-

Unit trust fund – Generally starting from RM1,000 lump sum and some funds allow monthly investment of RM 100/month.
Private retirement scheme – Starting from RM100. This is an optional retirement scheme introduced by Malaysian government to supplement the EPF scheme
US Stock – US stock market allow the purchase of single share. Favorite stock like Facebook is now trading at US 220/share and it is requiring less than RM1000 to start investment.
Malaysia Stock – Malaysia stock market requiring minimum purchase of 100 shares (1 lot). Hot and favorite stock now is Topglove which is trading at RM18/shares. It requires less than RM 2,000 to start.
Property related investment (REIT) – Real estate investment trust is available on the stock market and there are several REIT unit trust funds available in the market which requiring min RM 100/month investment.
Peer-to-peer (P2P) Lending – Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Approved platform like funding society allows investment in their financing schemes starting from min RM 100 (click here to open a free account)

The above shows that investment does not need to be costly and everyone can afford to start investment anytime.

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If you have lost your job, can you claim any unemployment benefits?

You shall check whether you are eligible to claim the benefit under Employment Insurance System (EIS)! If you have contributed to EIS, you might be eligible for recent job loss.

What is EIS?

The Employee Insurance Scheme (EIS), administered by the Social Security Organisation (SOCSO), seeks to provide temporary financial assistance for up to six months to employees who are retrenched or have had some form of loss of income.

How to check eligibility?

You must be a contributor! Check your pay slip. If you are contributing, you shall have EIS as one of the salary deduction together with EPF, SOSCO up to RM7.90 per month.
You must have paid contribution for a minimum number of months within a specified period
Be unemployed under the definition of Loss of Employment (LOE):
1. Normal retrenchment and redundancy
1. VSS/MSS (Voluntary/Mutual Separation Scheme)
1. Closure of the company due to natural disasters
1. Bankruptcy or closure of the company
1. Constructive dismissal
1. Resignation due to sexual harassment or threats made in the workplace
1. Resignation after being ordered to perform dangerous duties that are not within the job scope

What is not considered as loss of employment?

Dismissal due to employee misconduct
Voluntary resignation
Retirement
The expiry of a fixed-term contract

What are the benefits?

Job Search Allowance (JSA) or Reduced Income Allowance – will be paid based on assumed monthly wage (cap at max RM3950), which is 80% for the first month, 50% for second month, 40% for the third and fourth month and 30% for the fifth and sixth months.
Training Fee – paid-for vocational training of up to six months.
Training Allowance – incentives for you to attend and finish your training.
Early Re-Employment Allowance – for JSA recipients to get back into the workforce.
Re-Employment Placement Programme – job search assisted by SOCSO.
Career counselling – job search assisted by SOCSO.

To apply, The EIS application can be made online

https://eis.perkeso.gov.my/eisport…/insured/appl/instruction or go to the nearest SOCSO office throughout the country including Sabah and Sarawak

For more information, please visit https://www.perkeso.gov.my/in…/…/employment-insurance-system. ************************************************************************

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Insurance or Investment? Which one I should choose?

There are many misconceptions about insurance and investment. This is especially true for those with no experience or adequate knowledge about insurance and investment.

Insurance is used mainly for protection for risk events. Risk events refer to death, permanent disability, critical illnesses. With small amount of premium, the clients or the clients’ family members can get a large sum of money (sum assured) when risk events happen. When the risk events happen, the clients mostly will lose the ability to earn more money (income loss). Hence, insurance payout is very useful during the occurrence of risk events. It uses the concept of using small money to get big money. Generally, nobody will want the events to happen which it has lesser possibility to happen (less than 10% generally for early occurrence). However, no one can predict what will happen in the future. Insurance is used to transfer this huge income loss risk to insurers at small charges. INSURANCE IS A COST.

Investment is used for wealth creation. When one invests, the money is generally compounding at the range of 4% to double digit return. The wealth is created slowly through investment. The likelihood for clients to survive through 55 years old is high. When the age increases, the ability to work start to reduce. The need of the money will be imminent at that time. When one does not work, where the money is coming from? Definitely from the long term investment or saving. This is when investment comes handy for this situation. Wealth hardly accumulated through insurance policies because a lot of costs (insurance charges) are involved and with low return.

In conclusion, both insurance and investment are required. Insurance is for protection for risk events (low occurrence probability but high financial loss impact). It is necessary to transfer the risk to others at low premium. Investment are required for early or on time retirement (high occurrence probability but medium financial impact). One cannot retire early or on time if there is no investment in place. The early one invests, the bigger amount one accumulates (assuming invest the same amount of amount every month). The later one invests, the larger the investment amount required for on time retirement. Else, one would need to continue working to sustain his life.

The money generated through investment is not as fast as insurance. So, if the risk event happens suddenly, no huge sum is available to cater for the family needs for investment. Investment also involves risk which the return is not guaranteed. Hence, portfolio is recommended for investment.

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8 Tips to Manage Your Debt Better

Tips #1 – Have clarity of how much you owe. It is impossible to manage anything unclear. List down all your loan commitments and find out what is the interest rate for each loan. Call you banker to get the “Effective Interest Rate”.

Tips # 2 – Understand each of your debt to find out the cause why you are in debt in the first place. Avoid getting into debts again unnecessarily. For example, using credit card to purchase unnecessary luxurious stuffs should be eliminated when your cash flow is tight.

Tips # 3 – Stop using credit card. You might feel tempted to use credit card when your cash is tight. But, this is not encouraged as it will build up your debt till a stage it is too hard to manage. You shall spend using cash so that you spend only what you have and not what you don’t have. Ask your spouse or family member to hide your credit card.

Tips # 4 – Restructure your loan. With the reduced interest rate currently, if your cash flow is insufficient, it is time to check whether it is possible to restructure your loans at lower interest rate and / or prolong the loan repayment period.

Tips # 5 – Take advantage of balance transfers for credit card debt. An individual can transfer the outstanding balance from one credit card to another, at longer repayment duration and lower interest.

Tips # 6 – Have a budget in place to control expenses. Budget will help one to understand the spending habit and reduce unnecessary spending.

Tips # 7 – Place your extra cash into flexible loans to reduce daily interest. At the time when saving interest rate is low, it is also wise to put your emergency fund to flexible loan to cut down the loan interest. Ensure the loan is the “flexible loan that allows flexi withdrawal of any advance payment”.

Tips # 8 – Find ways to increase your income. When there is more cash, channel them to the highest interest loan.

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5 Tips to Saving Money Fast!

Saving is important along the financial freedom journey. A lot of people focus on high “savings rate” but the truth is that high “saving rate” is more critical to achieving financial freedom (check out the difference between “saving rate” and “savings rate” here published in the last newsletter).

A saves RM1000 monthly at 1% interest per year for 20 years
B puts his RM1000 at 15% rate per year but never put in more saving to his financial freedom account.

Who can achieve financial freedom earlier? The answer is obvious. Followings are the 5 tips to saving money fast!

Tips # 1: Have a budget: the number 1 reason people overspent is because they have no clear idea of what to do with their money. If you wish to save, you should know how much to spend on each category, i.e. necessities, leisure, personal development, charity and saving. In general, one should save at least 20% of his income and spend not more than 80%, 50% for the necessities, 10% for personal development, 10% for charity and 10% for leisure.

Tips # 2: Have daily expenses tracking. What gets measured gets improved. To be able to save, you must know what you are spending on. You will be shocked when you start tracking your expenses as you will realize there are many items that you don’t even realize you spent so much money on. With the daily expenses tracking, you can then work out a plan to cut down expenses easily through cutting the highest 3 expense items.

Tips # 3: Save before you spend. You should set aside your desired saving amount before spending it when your income reaches your bank account. Do an automatic transfer to the bank account you seldom use to safeguard your saving before you start spending every month.

Tips # 4: Avoid or reduce the credit card usage. Spending on credit card is like spending your future money. It is a great pleasure to spend using credit card and hence deplete your saving easily if you do not control consciously. If you cannot pay the credit card payment on time, avoid using it. Use cash to pay instead of credit card. You will be left with no choice but to spend only on whatever you have instead of whatever you will have.

Tips # 5: Separate your needs and wants. Needs includes basic food, transport, utility, housing, etc. to survive. Wants are entertainment, eating out, luxurious items, gadgets for lifestyle. Fix the budget for “want” items. Do not spend over the set budget for “want” items. Wants can provide enjoyment but might be determent to saving. So, balance is the key!

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7 Tips to Overcome Insecured Feeling of Losing Job

It is a few months into the COVID-19 pandemic. Because of the lock down, economy is slowing down, many businesses could not sustain and eventually shut down. This leads to job lost. In the coming months, more job loss is expected. If you are employed, the following tips might be applicable for you if you feel insecure of your job:-

Tips #1: Reduce insecurity by having more clarity in your cash flow projection

People feel insecure because they are unsure how long their cash flow can sustain if they lose their job. Hence, to reduce the insecurity feeling, one must project the upcoming cash flow with 2 scenarios, i.e. job lose in near future and pay cut in near future.

Find out exactly how long your cash flow can sustain, when cash flow will turn negative with different scenario. Once you have the clarity, you can then find the solution.

Tips #2: Adjustment to your emergency fund

If you have done proper financial planning, you shall have at least 3 to 6 months emergency fund. It is now time to make sure your emergency fund is adequate for 8 to 12 months to cater for this bad economy situation. It is time to look at your standby assets, i.e. your investments (either stocks or unit trust) to find extra monies for emergency fund. Make adjustment to these investment assets, make sure they are liquid for withdrawal if required.

Tips #3: Cut down unnecessary expenses

After your cash flow projection, if the negative cash flow comes too fast, you need to look at the outflow. Identify 3 to 5 top expense items. Cut down big expenses, spend only on necessary items, avoid buying luxurious items at this time unless you have big positive cash flow. Postpone any big item purchase.

Tips #4: Re-look at the loan commitments

Loan commitments shall be one of the big expenses. Before things are turning bad, take the chance to refinance some of the loan commitments so that the upcoming financial burden is lessen. Once your job is lost, it is hard to refinance anymore. Start doing this now if your cash flow is not stable.

Tips #5: Restructure your insurance premium

If your cash flow is projected to be negative very soon, call you insurance agent to enquire about the cash value of your investment-linked policies. Check whether your policies can sustain without paying for few months or 1 year. It is important to make sure your insurance policies are kept enforce during this different period to protect your family for any unforeseen circumstances.

If you have saving plan, you can consider using the unwithdrawn guaranteed cash payments as your emergency fund.

Tips #6: Up your skills

During MCO period, there are a lot of e-courses available online. Check out which one relevant to your job and take up some courses to up your skills. When you are better skilled, the chance of being made redundant is lesser. Even you lost your job, with better skills, you can find a job easier.

Tips #7: Getting 2^nd income stream

You are feeling insecure because you are dependent on single source of income. You shall start to find 2^nd income stream via doing some freelance jobs utilizing the same skills that you have. The upcoming trend for companies is to engage freelance rather than permanent employees to lower down the fixed cost. You can also seek opportunities to sell items online. For example, if you like to make up, you can consider selling make up (something that you know a lot and like using). In short, you must first have clarity on your cash flow. When you know you have enough to sustain for upcoming few months, you will feel more secure. When you have clarity, you know what the next step is, either to cut cost or increase income. You are then able to act accordingly!

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4 Mistakes to Avoid While Finding a Financial Consultant

There are a lot of Financial consultants out there in the market. How do you choose who to trust?

Here are the 4 mistakes you should avoid while finding a financial consultant.

Mistake #1 – Finding a wrong consultant who is not licensed to promote your required financial products

There are various stages in life, i.e. starting out in new career, getting married, becoming parent, retirement, etc. Different life stages requiring different types of financial products. The followings show the 4 wealth pillars with its respective products:-

Wealth protection: Insurance products
Wealth preservation: Saving products
Wealth creation: Investment products
Wealth distribution: Will and trust products

Promoting different products requiring different license. In fact, many do not know this. For example, Bank Negara is issuing the licenses for consultant to promote insurance products while Security Commission takes charge on the consultants’ license to promote investment products. A consultant will require a separate license to carry out fee based financial consultancy service and hence most financial consultants do not charge fee because they are not allowed to do so.

If A is in his mid-age planning for his new-born kid, A shall not only engage insurance consultant for protection. A shall also look for financial consultant who has the investment products license and trust license to cater for the changed needs. What I normally see people doing is just to seek advice from financial consultant (who can only promote insurance products) on the changed needs. Easy to guess, at the end, the client will only have more insurance policies as the consultant is not licensed to promote other products which the client needs. Best to get a licensed financial consultant who can do financial planning, having license to do all the above wealth aspect to able to get the big picture of your finances. Ask what license the consultant has before engaging him / her!

Mistake #2 – Engaging consultant who is promoting products first without understanding your need

When you see consultants come to present about their financial products without doing an analysis of what you have already, chances are, they only want to sell you their products. They do not care what you need.

If you are looking for independent advice, look for one who charges fee rather than earning through product commissions. If one does not need to earn from selling products, he / she can give more independent advice. If the fee is a concern, look for consultants who can offer various financial products from different banks / institutions. The clients can benefit from wide range of products rather than just few products from selected banks or financial institutions.

Mistake #3 – Engaging consultant who promises you for certain investment return within a short period of time

There are financial consultants promising that fixed return for investment products. How can that be true? Think about it, nobody can control the market. How can he / she promise the absolute investment return when no one is able to predict the market movement. Be aware if the consultant promises fixed return within short period of time for certain investment products. If it is too good to be true, it probably is!

Mistake #4 – Engaging consultant who does not purchase his own promoted products

The requirement threshold to become a financial consultant is rather low. Hence, the market is flooded with many financial consultants who is hoping to earn their big commissions or incentive trip by selling products. They do not believe the products at all and hence do not buy themselves. How congruent is this consultant to sell a product if he does not even have one in place? Ask the consultant whether he has his insurances / investments / will & trust in place when they promote you one!

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