Financial Planning – 20 Important things at every life stages

This financial planning guide provides 20 prudent tips to watch out for in every stages of your life. Prudent financial planning shouldn’t be left to chances; it should always have a contingency plan or Plan B when things don’t go as expected. Take it from a full time financial planner practitioner.

Adulthood – Starting out

adulthood financial planning

Financial planning starts when you graduate from college, believe it or not, although you may realize that your income may not be sufficient to meet your aspirations of the lifestyle you wish to have. This is normal. After all, how many of us are born with a silver spoon in mouth? Nonetheless, it is crucial at this stage of life to instill prudent financial habits which will carry you through over the rest of your life.

Being an adult isn’t a matter of age. 

It is a matter of responsibility

Beware of:

1. Easy credit literally shoved in front of your face by banks, phone companies and other retailers

Suddenly, you realize money ain’t that hard to come by because it is easy to live on credit –  to buy now and pay later. Why need financial planning when credit is readily available by a simple submission of your payslip,right? For example, you may get total credit up to RM 80K easily from 8 different banks when you are earning RM 3,500 per month, even though you may hardly have RM 80k in savings at this point of time.

Don’t fall into this trap because this is where the shit begins if it is not managed well, just like a snowballing effect. Bottom line, make use of these facilities but with caution as it is very easy to be declared a bankrupt in Malaysia (debt > RM 30k) once you default on your payments. Bankruptcy is definitely a taboo we want to avoid in personal financial planning.

Your less than sterling credit rating would haunt you in later years. A bad CCRIS record will make it difficult later when you are applying loans for big ticket items like cars and real estate properties.

Speaking of credit rating, don’t go to the extreme by not having any credit at all. At least get 1 credit card (even though you don’t have any car or house loan) so that your repayment behaviour is reflected in the form of CCRIS report. Not having any CCRIS report is also as bad because banks are not able to gauge your repayment behavior once you apply loans for big ticket items.

2. Medical coverage provided by employer is usually basic and limited in coverage

Multinational companies seem to provide better hospitalization and surgical coverage, compared to SMEs, which may even provide none. Having said that, it is not unusual to get something like a RM 150 room & board and RM 20,000 annual limit coverage from your employer if you are an entry level staff.

Therefore, you may want to supplement that with your own medical card unless you have substantial savings or assistance from FAMA (father & mother) to pay for medical costs if you exceed the limit provided by your employer. Don’t worry about the cost because it is certainly very affordable – costing in the range of RM 100 to RM 200 per month. Don’t be penny wise and pounds foolish, especially if you have money to spend for lifestyle expenses like Starbucks coffee – a medical card monthly premium only costs a fraction of your lifestyle expenses. Trust me on this. Financial risk management in the form of medical card is one important aspect of wise financial planning; its importance only becomes higher as you age.

3. Contribution to EPF for your retirement.

Any working people in Malaysia is required by law to contribute 11% of his/her salary to EPF. Your employer is also required by law to match your EPF contributions starting at 12% up to 19%. Know whether your employer makes the minimum contribution or higher, for many multinational company, the % contribution normally exceeds the statutory required %.

Speaking of which, don’t look at your basic salary only as the only yardstick in determining the best job offer, because perks like X number of months of contractual bonus OR a higher EPF contribution by employer constitutes a better deal for you. Due to compounding effect, even a few % greatly affects the growth of your retirement savings.

Although EPF provides stable dividends, the returns may not be suitable for a person who is many years away from retirement. EPF allows a portion of your Account 1 to be withdrawn for investment with approved fund managers who can earn you potentially higher returns. You need to ensure that you have a proper investment risk profile carried out for you when directing your EPF money to fund managers so that your investments match your risk appetite.

financial planning goals before 30

Getting Hitched and Having a Family

building-family financial planning

In preparation of marriage, it would be a good financial planning practice to discuss money matters with your spouse. Don’t be surprised if your spouse has different ideas about money from your own. It is also wise to clear out any skeletons in the closet (ex: outstanding student loans or personal loans – you are definitely going to bring them into the marriage and nobody likes surprises like this). Calculate all the ways in which you can lower your student loan payments, for example, to balance monthly expenses on the new home. Lastly, bring out for discussion your hopes and aspirations about having or not having children and the direction for the couple or family.

Beware of:

4. Taking a house loan (mortgage)

This may be one of the major decisions you make as a couple. As a general good leveraging level in financial planning, take out loans with installments not exceeding 35 – 40 % of your combined net income. Never mind what the banker/mortgage officer says – it is your money, and you are going to carry that monthly installment for quite some time. Over leveraging (such as buying a house 10 times your annual income) will only bring you financial stress due to over commitment.

In a nutshell, good financial planning tells us not to maximize your loan eligibility to the limit. You have to make allowance for other home ownership costs. Besides your loan payments, the costs in having a home include, but are not limited to, furnishing and maintenance of household equipment, fire insurance, home content insurance, assessment fees and quit rent.

Other than than, since we are on the topic of buying a property you may be tempted to follow a thing or two you learnt from the various property gurus to buy more properties for investment purposes. This is great, because property investment is inseparable from wise financial planning, provided the cash inflow (rental income) from your invested is able to offset your mortgage repayments. Otherwise, it will bring you no peace if you are constantly strapped for cash and live like a hermit just due to extreme delayed gratification. It is really no fun at all to live a life!

5. Becoming parents

Anyone can have a child and call themselves a parent. Becoming a mummy or daddy is momentous. But a real parent is someone who puts their kids above their own selfish wants.

Raising children is a huge responsibility in every sense, and it shifts the entire financial planning landscape for an individual. In fact, there is a vast difference between doing financial planning for couples with kids versus couple without kids.

Besides the care and transmission of values from parent to child, financial considerations need to be factored in. Fees to consider include childcare, visits to the pediatrician, hospitalization for more serious medical conditions, schooling, tuition and university. Saving for university should start early, although it may appear silly when you start, but most agree that they feel like a genius when the finish. Furthermore, some employers may not provide medical coverage to children and you may need to supplement that with your own medical insurance cover.

6. Setting up a child maintenance fund

You may wish to consider a life insurance cover. Not for your children, as most people may think, but for each income earning parent. Do not be misled by insurance sales agent who tell you that ‘if you love your children, you should buy more insurance policies in the name of your children’.

Utter Bollocks! Picture this – your children are you dependents, and you are the income earner. Therefore, it is more relevant to insure you because of the financial impact to the family & children if you are not able to generate income. Insurance is a form of replacement of income for the income earners when he/she is not able to work. Any certified financial planner who knows the proper financial planning methodology will not recommend insurance on this misleading above.

In a nutshell, the role of life insurance at this point is to create a fund for the maintenance and education of your children in the event either or both income earning parents suffer an early demise.

financial planning insurance

It is also appropriate at this time to draft your wills to provide clear instructions on the appointment of a guardian for your children as well as how your assets should be used for the maintenance of your children. This is to ensure that the welfare of your children and the distribution of your hard earned assets is in accordance with your wishes. Don’t ignore this – one of the most overlooked aspect in financial planning.


Mid Age – Prime Of Career

mid-age financial planning

When you are at the prime stage of your career, your earning power is likely at its peak. Consequently, your income should rise substantially due to your accumulated experience and value to your employers or customers. However,this comes at a cost – you will most likely spend more time at work due to increasing responsibilities.

This is the stage where most people appreciate the importance of financial planning. Personally, this is also where most of my clients age fall into. They are willing to pay fees for independent fees based advisory services because they have accumulated assets, liabilities, insurance policies and ‘garbages’ here and there. Everything is not optimized, or worse, in a clutter. You probably forgotten even what you had in the first place, until I show it to you!

time energy money stages of life

Your income, perquisites and benefits-in-kind will also improve as your employer structures your compensation package accordingly. Some of your personal costs may be shifted to your employer like travel and entertainment allowances, improved medical cover to self and family, loan subsidy, housing subsidy, education allowance if you are posted overseas and so forth.

Beware of:

7) Medical coverage (still an important aspect! but more important at this stage)

As you rise up the managerial ranks, your medical benefits would normally improve and include cover for your family members. Room & board of RM 300 with annual limit of RM 50,000 is not unusual. With an increased commitment and lifestyle expenses, the other aspects of financial risk management to be reviewed to cover for any contingency which will render loss of income arising from a death, disability or terminal illnesses.

Paradoxically, this is also the time to really review your medical cover and to increase it if necessary to the level of benefits you require, considering market rate. This is to counter the two impactful possibilities (fingers crossed); retrenchment or medical boarding due to illness. In both cases, you will not lose medical coverage previously provided by your employer.

Therefore, before any major medical condition affects you, you should really consider taking up a medical card by now before once you are hit by one major medical condition (angioplasty procedure, for instance), you will NOT be able to buy any medical card anymore from any insurance company. You will be deemed as not insurable…forever.

If cost is a concern and you don’t want your medical insurance to overlap with your employer’s coverage, do consider a deductible medical card > here are the details of a deductible medical card.

Some business owner may say – it’s not a financial issue because even a RM 200k medical condition I can afford it. True, but if you are a smart business person, don’t you think it is more cost efficient to pay a premium which is only a fraction of that in exchange for RM 200k?

8) Lifestyle Expenses and Income Surplus

Your lifestyle at this stage may be partially subsidized by allowances and benefits-in-kind provided by your employer to commensurate with your rank. You will thus have more surplus to save towards your retirement. As part of your lifestyle expenses are subsidized by your employer, some of these expenses need to be factored into your retirement income need. Retirement planning is part and parcel of financial planning process.

It would be helpful to carry out a retirement income audit to determine the retirement nest egg needed and to ramp up your retirement savings contributions. During your retirement years, your medical policy will only cover hospitalization expenses. Degenerative diseases or critical illnesses need to be budgeted in your retirement expenses.

9) On time or early Retirement Nest Egg Funding

Normally, the funding of your retirement may take the form of additional assets in the form of investment properties, a stock portfolio or investment funds. For investment properties, you may wish to get help from an independent financial adviser to work out for you the additional loan commitment versus expected income and the securing of your loan liability. When considering a stock portfolio or investment fund, an independent financial adviser can provide recommendations on the most suitable types based on your risk appetite and when you need the invested fund to be withdrawn for use.

10) A more thorough Estate Planning

With your increasing income, your portfolio of assets and investments would have changed and a more comprehensive estate planning encompassing wills and private trust would be timely. If you haven’t done this often-overlooked aspect in financial planning, it is not too late to start.

It is also never too early to begin your estate planning at this stage, in fact it is so important that you need to have a Will and Trust properly drafted to ensure your children’s welfare and their financial needs such as education and maintenance are taken care according to your wishes. With the wealth that you accumulated, you may decide how your wealth should be distributed rather than letting the law dictate by default based on a standard formula in the event of pre-mature death.

11) Tertiary Education Funding – giving your kids the best you can afford

Your kids would be growing up and planning for tertiary education is the next big ticket item to consider. Generally, there are three options open to Malaysians for tertiary education: public universities operated by the government, private local universities and overseas universities.

Evidently, the cheapest option is the former, which tends to be very competitive in their admission requirements. For prudent planning, the latter two options should be considered depending on your aspirations and budget. There are several options to fund for tertiary education including cash, bonds, equities and real estate. Your financial planner can advise you on the most suitable mix of assets. Again, you cannot run away from education planning as part of comprehensive financial planning if you have kids.

12) Don’t underestimate the effect of tax in financial planning

High chances that  your income may fall under the highest tax bracket. You should be aware of changes to your tax benefits when our government revises our annual budget to maximize all applicable tax reliefs. One of the most underused is RM 3,000 contribution to Private Retirement Scheme – one of the only 2 tax reliefs which requires you to save instead of spending money.

If you have offshore assets, get proper advice on your tax liability in those jurisdictions where the assets are located. Tax planning is considered the underdog in personal finance planning – it shouldn’t, even though this part is pretty straightforward for BE form filler (working with no business income). Otherwise, an accounting firm backed financial planning firm like Cheng & Co Wealth Management can further assist you more effectively in the areas of tax planning.


Pre-retirement – Settlement Stage

pre-retirement financial planning

As when mandatory retirement is imminent, you should have (fingers crossed!) built up a sizeable nest egg. Your children would be entering or finishing their tertiary education. Your home mortgages and car loans instalments should be ending soon, if not, aim to settle the outstanding principal amount before your active income stops.

Alternately, you may wish to consider the options of early retirement, or delaying retirement. Your options depend on the size of your nest egg, your health, your desire to remain mentally and physically active or your desire to watch the grass grow (chuckle!).

If you do not plan to retire in the conventional way, this is the time to leverage your network,  start building contacts and opportunities either to secure post-retirement employment or to contribute your experiences to charities, NGOs or causes important to you.

Also read: 3 most overlooked aspects of retirement and what to do about it

Things to watch out for:

13) Outdated/Irrelevant Life insurance policies – cut them

Dust off and review your accumulated insurance policies over the years. I can almost guarantee that some of your insurance policies, especially covering death and total permanent disability, would have served their use at this stage. Some policies may be terminated, surrendered and cashed out. This exercise may free up additional cash flow for your retirement fund – every bit counts! A common myth among most people is that insurance polices must be paid until they die – nonsense! You have the right and the power to restructure your insurance portfolio when the time and needs warrants it. Now is the time.

You may ask – what is the rationale of this exercise?

The purpose of life insurance is to cover your financial liabilities and maintenance for your dependents during your income generating years. Now, if your dependents are already independent, and you’ve essentially settled your financial liabilities, the life insurance policies is not so relevant anymore, compared to the more important matters at hand – post retirement cash flow.

14) Get your own medical policy before you retire 

Most medical benefits provided by your employer will end when you retire. You may not have drawn on your own medical policy while you are still employed, so if you are looking to only get a medical card now, you will need to be in a tip top health condition to be accepted by an insurer for a policy. Having said, that the premiums now are certainly not cheap, so factor in these into your post retirement cash flow. If you have one already, then keep it and don’t let it lapse.

15) Review your retirement nest egg.

Money may not buy happiness directly but it provides choices, so does planning ahead. You may wish to work with a financial adviser to review the adequacy of your retirement fund. Depending on the size of your fund and the cost of lifestyle you choose, you may wish to exercise the option for early retirement to pursue your other aspirations. On the other hand, this is your last lap in the race to build up your retirement fund if it is insufficient. Bearing in mind that life expectancy in Malaysia is around 75-80 years of age (if your parents live, you are an outlier!) ; most people who retire at 55 have to ensure their retirement funds last up to 25 years.

16) Business succession and continuation planning

For business owners and professionals, this may be a suitable juncture to seriously look at business succession planning/cash out and family legacy planning. A successful legacy may promote familial harmony, a shared identity and purpose in order to encourage your offspring to work together. Combining a successful legacy with good leadership may increase the likelihood of preserving family wealth beyond the proverbial third generation. It may carry with it a famous name, unique values and standards, lineage, tradition or a respected position in a community.

Retirement – Striving for Serenity & Peace of Mind

retirement financial planning

Financial planning does not end post retirement stage. On the contrary, retirement opens up new possibilities if you have planned for it. This may include travel, study, learning new skills and serving in causes close to your heart. Some retirees are content with being grandparents, while others may not retire either because they cannot afford to or do not wish to.

Things to watch out for:

17) Managing your retirement fund.

Although you should not place your retirement fund in risky investment schemes, you cannot afford to keep them under the bed (literally and figuratively speaking) earning 0% interest or at a rate below inflation rate.

If you keep your entire retirement fund in a bank account, its value will diminish in purchasing power due to inflation. In financial planning speak, inflation is the silent killer, like you are the frog getting comfortable in a pot of boiling water. Before you realize it, you are boiled to death. Don’t let this happen to you. You should work with a professional to finalize your financial planning for retirement to ensure that the value of your retirement fund at least keeps up with inflation and is not eroded by it

18) Where your retirement fund is inadequate, continuing employment is an option

This would delay the need to dip into your savings and allow you to keep it invested to grow your retirement fund until the day you can no longer work. Remember that inflation never sleeps.

You can get the help of an independent financial adviser to structure an investment portfolio suitable to your situation. Good financial planning sense, this is.

19) Update your wills

Assuming your children have grown up and become economically self-sufficient, your assets should be channeled towards your retirement fund with only the excess designated for transferring to your children. The excess here often means ‘financial support’ given or lend to your children when they need down payment to pay for that new car or new house. It also means supporting their marriage expenses for many (haha!)

True statement by a parents with grown up children:

“I don’t expect my children to give me money. If they are self sustaining without needing me to support them financially, I’d be more than contented already. In this age, we got to be self sufficient for our retirement. Gone are the days during our parent’s time where our parents give us all they have financially, and then expect the children to support them fully in old age. How time has changed, so we should adapt as well.”

Anyway, your wills which was previously written to provide a maintenance fund would require revision. The timing and manner of transfer of your assets would depend on your preference and should be discussed with your independent financial adviser who can help you to anticipate future scenarios that you wish to play out.

20) Philanthropy

An alternative to transferring your remaining wealth directly to your immediate family is to consider philanthropy. If you have substantial wealth, you can set aside a fund in your lifetime for a cause close to our heart. When you pass on, your remaining wealth can be passed on to your favourite charity or be used as a trust fund for the future members of your family.

Koon_yew_yin_Photo_031015An example of this is IJM founder, 82 years old Koon Yew Yin.

In 2015, he donated RM50 million to fund the building of hostels at the Universiti Sains Malaysia (USM) campus in Penang.

“My children don’t need my money” Koon said he does not intend to hold back on his personal fortune either. “I have written in my will that after I die, all my remaining assets will be donated to the poor to make them happy.”

Koon believes he had done his best for his children and they would not be needing his money. “I have given my children the best education money can buy and they can find a good living without my money.

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