KNOW WHERE YOU STAND TO GET TO WHERE YOU WANT TO BE
Learning from Pakatan Harapan Government’s Financial Management Challenges
Ever since Pakatan Harapan took over as the government of Malaysia, one of the first priorities of the new finance minister Mr Lim Guan Eng was to put substantial time, effort and resources into identifying where the country stands financially. Along the way, he announced that Malaysia’s debt is currently over RM1 trillion; and also, that GST refunds amounting to RM19 billion has inexplicably gone missing. Certain quarters have been quick to criticise him for being too transparent in revealing the information to the public, however I think transparency in its financial position is exactly what is needed by the new Malaysian government to move forward efficiently into the right direction. It is only when the government recognises and acknowledges where they currently stand financially, will they be able to craft effective strategies to achieve their objectives, even with limited financial resources.
In fact, what the new government has been doing – sorting out their books and assessing their true financial state of affairs – is really not much different from what most individuals and households should be doing.
The truth of the matter is, majority of us are bogged down with the rigours of daily life – careers, making money, family obligations and so forth, while at the back of our minds, we know that we should be taking care of our finances. When we finally get down to taking a financial inventory, we may find ourselves in the same undesirable situation, so much so that nothing short of an elaborate treasure hunt is required to figure out where each piece of the mindboggling jigsaw puzzle fits.
“Often, taking stock takes place in the context of a crisis. This is maybe a not-so-painful way to do it.” Jay Allison, independent public radio producer and broadcast journalist.
Do not wait until you are in financial turmoil before deciding to do your stock take because by then it would be too late and you end up spending unnecessary time and resources undoing the current mess before you can even begin any affirmative action. I will share some insights on how you can start doing this immediately. Compared to the mammoth task which the current government is up against, your task would be much simpler and straightforward:
1) Income – current and future
Most of us have no problem knowing our current income sources. However, few individuals actually give much thought to how their future income can be impacted by their financial decisions today. Sources of your future income may include rental proceeds from investment properties, pension payments upon retirement, dividends from shares, etc. When your current income flow stops either due to retirement, layoff, or because of medical or personal reasons for leaving the job market, your future income will become your main if not the only source of income.
A common scenario that many of us can identify with is when the anticipated rental income from investment properties fail to live up to expectations. Therefore, if you were hoping to generate sufficient cashflow to cover your bank loan or even have extra cashflow, be prepared for contingencies in case the deal falls through or did not materialise. If this would happen, you would then need to dig into your savings to make up for the shortfall. This in turn negatively impact your retirement plans.
Take the example of a client of mine, husband and wife jointly took up a mortgage based on their double income repayment capacity. Subsequently one party had to stop working and the huge monthly instalment is left to be borne solely by the remaining borrower.
2) Expenses – current and future
Most of us will have no problem tracking our current expenses as many households typically do that on a weekly or monthly basis. But, what of your future expenses?
Future expenses include dream home purchasing, private school funding (for parents with pre-school going children), tertiary education funding and retirement lifestyle funding. There is a risk of over committing to future expenses based on your current income level. Should your income reduce or stop altogether, sustaining the expenses that you have tied yourself to will come at a cost to your financial future.
We have clients who were set on providing full overseas tertiary education to their children, which may have been a financially doable move when both parents were at their peak income earning years. But by the time it was the youngest child’s turn to go abroad, the parents had already maxed out their cash flow, re-mortgaged their previously fully paid home and dipped into their retirement nest egg in order to sustain the high expenses.
The moral of the story? One would need to have a holistic financial plan in order to know whether there is enough assets to achieve all your financial goals. Without a plan, you are merely playing a game of Russian roulette with your life earnings.
3) Assets – current and future
Current assets go without saying but many individuals surprisingly overlook the significance of their future assets, which are assets that you currently own but have yet to monetise them. Examples include a lumpsum withdrawal from your EPF account, Employee Share Option Schemes, employment gratuities and so forth. A client of mine, a CEO of an American MNC who had been granted substantial share options in his company, never paid much attention to this benefit, failed to take advantage of it and ended up not exercising his option until upon his retirement – right smack in the middle of the global financial crisis. To his dismay, by then the offer price was even higher than the market price!
As such, it is highly recommended to take stock and be aware of any future assets that may be coming your way, so that when the time comes, you would be able to maximise their full potential.
4) Liabilities – current and future
Here, I would like to highlight an example of future liabilities that almost had devastating consequences on the individual’s cashflow. One of our clients had sold off his business some time back and gotten a fairly large sum of money for it. However, 3 years down the road, the new owners called on a profit guarantee clause in the contract which was unfulfilled for various reasons. As a result, the former owner had to compensate the claimants with part of the money he received from the initial sale of the business. Imagine if the money had already been used up for other purposes! With this in mind, never underestimate the impact of contingent liabilities which may come in all shapes and sizes
5) Asset allocation
We need to categorise our current investment assets according to the various respective asset classes. This will enable us to identify which asset class is more heavily weighted, so that steps can be taken to improve overall investment returns and minimise the risks associated with it. Malaysians in particular, seems to have a strong preference for a particular asset class, i.e. property. One of our clients had almost 80% of his net worth tied up in real estate. One day, he found himself in a bind when he was not able to sell his properties despite needing funds urgently. Moral of the story – one should remember to always have a diversified asset allocation and never to put all your eggs in one basket.
6) Achievement of financial goals via a holistic financial plan
Suffice to say, 90% of Malaysians are adept in covering items 1-4. A handful may even have the know how to manage their asset allocation. Yet, most people would fail to appreciate the importance, let alone follow through with the notion of achieving their financial goals. Simply put, to know whether you have enough assets to achieve all your financial goals, you need to have a holistic financial plan. At Whitman, we call it the Roadmap to Financial Freedom. It also tells you how much more wealth you would need to accumulate to achieve financial freedom. Many of our clients who initially perceived that they were in very robust financial health were surprised to discover their actual financial situation after sitting down with us. However, once they got the clear picture, it was easy to develop effective strategies thereafter and very soon, they were on their way to true financial independence.
“Taking stock of what you own, when done correctly and thoroughly, helps dampen the urge to shop frivolously”: Nina Garcia, fashion guru.
When you know what you have on hand, you will be less likely to embark on decisions that do not benefit your financial plan, or worse, is detrimental towards it.
In order to reach our destination, we need to know where our starting point is. Taking stock of where we are financially is definitely the first step in the right direction. Just do yourself a favor, before you follow the second star to the right and straight on ‘til morning, make sure you identify the correct star to begin with. The rest is, as they say, faith and trust in your decision making and no, pixie dust is not required.
Yap Ming Hui (email@example.com) is thrilled that his mission to empower every Malaysian with a roadmap to financial freedom has finally come to fruition with the release of a free DIY roadmap to financial freedom tool on the iWealth mobile app.