“Strategies to Grow your Wealth in 2023”, Published in The Star, On 15 April 2023.
As the first quarter draws to a close, many people remain uncertain about their financial well-being and pondering what lies ahead for their wealth and financial stability throughout the rest of the year.
With so much economic and financial uncertainty in the world, it’s natural to wonder what the future may bring and how we can prepare ourselves for it.
In this article, I wish to highlight some fundamental housekeeping practices requiring consistent attention that could help individuals improve their wealth and financial well-being for 2023.
As a fee-charging licensed financial advisor, these are the strategies I frequently recommend to my clients to help them achieve all the important financial goals they have set out to accomplish.
To start, there are five key areas of personal finance that should be reviewed at least once a year. By delving into these areas, we can be assured that 2023 will be better than it was in the previous years.
# 1: Reviewing your SAVINGS strategy
Building your savings is a big foundation to your wealth-growing strategy. It is here that you begin to accumulate the funds you will need for a rainy day (emergency fund) , investment, and resources for other lifestyle goals.
There are two ways of accumulating savings: Saving after spending and saving before spending.
Relying solely on saving after spending is not an effective strategy as it lacks discipline and clarity. This approach can make it challenging to build up savings in the long run.
The more effective way to save is to put aside money from your salary before you start spending for the month. Along with paying your monthly bills, you should think of savings as a bill that you pay to yourself first, before spending the rest on leisure.
If you’re not sure how much to save, the rule of thumb is to save 30% of your salary before deductions if you are an EPF contributor. This equates to 19% extra savings in addition to your 11% contribution to EPF. If you are a non-EPF contributor, you should be putting aside 35%.
It is important to keep in mind why you are building your savings – to invest and grow your wealth. Therefore the 30-35% is just a rule of thumb for those who have more time i.e, active income earning years, to build their wealth.
To ensure that you’re saving enough to reach your financial goals, it’s best to create a comprehensive financial plan that takes into account major life events such as funding your children’s education, buying a property, and funding your retirement. Working backwards from your goals, you can determine how much you need to save and invest to achieve them. If you’re unsure of how to create a financial plan, it’s recommended to seek the help of a licensed independent financial planner who can provide professional guidance and advice.
# 2: Reviewing your INSURANCE plans
Review your insurance plans to ensure you are not over or under protecting yourselves. While insurance plays an important role to safeguard your financial well-being, over-investing out of fear could also hinder your ability to grow and accumulate wealth.
For instance, suppose you have purchased RM1.5 million life insurance to safeguard your family’s future. In that case, it’s advisable to review your policy periodically to determine whether you still need the same amount of coverage. If you’ve accumulated RM1 million in assets over the last ten years, for example, you may only require RM0.5 million in life insurance coverage. This could result in a significant reduction in your insurance premiums, giving you more capital to save and invest.
The rule of thumb is to limit your insurance premiums to no more than 15% of your income. If you have no dependants who are relying on you to take care of them, this percentage can be much lower. To determine just how much coverage you would need, it is best to create a holistic financial plan that can assess your risks over your lifetime.
# 3: Reviewing your RETIREMENT progress
The inflation rate combined with the economic downturn has rendered it more difficult for Malaysians to put aside money for their retirement.
According to EPF, individuals who are retiring in 20 to 30 years will need at least RM 900,000 to RM1mil to cover basic necessities in retirement. This would be the bare minimum after taking into account inflation. Meanwhile, those who are retiring in 5-6 years will need RM600,000. The reality is, only 4% of EPF contributors could afford to retire.
It is tempting to think of retirement as a problem for the future and not a concern for the present. However, ideally one should start planning for retirement at least 20 years in advanced of your expected retirement age.
Let’s be honest, from the statistics above, EPF alone will not be enough to fund one’s retirement lifestyle. If you are approaching retirement within the next 5 years, it’s crucial to start exploring alternative sources of retirement income, such as liquid investments or property investments with rental potential.
If you fail to plan, you may have to resort to drastic measures such as selling your property and downsizing your home in order to have sufficient funds to cover the basics. This can be very challenging and difficult feat to do, especially in your later years.
To understand exactly how much you need when you retire and at what age you will achieve this financial goal, the best way is to do a holistic financial plan with the necessary monthly projections based on your life expectancy.
# 4: Reviewing your ESTATE PLANNING
Another important part of financial planning that is often overlooked is Estate Planning. After all, nobody wants to contemplate their death and the reality that they may leave their loved ones.
However, without reviewing your estate planning, all the efforts made to growing your assets for the benefit of your loved ones may go to waste.
How much are you leaving for your family upon your death? Is the amount enough to sustain your family’s loss of income? Can this amount fund your children’s tertiary education and sustain your spouse? Those are all important questions to consider in estate planning.
To help determine the appropriate amount to leave for your loved ones, it is highly recommended to seek clarity with your financial advisor. Many tend to put their trust in their insurance agent’s advice. However, insurance agents may have limited knowledge of your overall financial situation, such as the full picture into your assets, lifestyle, and children’s needs. Thus their “advice”, may not be comprehensive enough.
If you have already made a Will, ask yourself when is the last time you’ve reviewed it? Have you acquired any more assets since then? Have there been any changes in your family, such as an addition of a kid, or a divorce? Is there a proper executor appointed for your Will that can be trusted upon your death?
If you have not put together a Will yet, perhaps it’s time for you to draft up one for your family.
# 5: Reviewing you INVESTMENT strategy
When reviewing your investments and strategy, it is important to ask yourself how much ROI you need from your investments in order to achieve your financial goals?
While it may be tempting to aim for a high ROI, such as 20-30%, it is important to keep in mind that such investments also come with a high risk of losing your capital. This is not the type of risk you want to be taking, If these investments are aimed at financing serious life goals such as your children’s education or retirement funding.
Investing for serious financial goals requires a long-term perspective and aiming for an annualized ROI of 8-12% is a reasonable approach to grow your money with high certainty over time. This range takes into account the impact of inflation and rising costs of living. Remember, anything more than this is speculating, and not investing. Anything less than this may not beat inflation and the rising costs of living over time.
When it comes to investing a significant amount of money, I always recommend my clients to adhere to the SRB standard of investing, which I introduced in my latest book “Financial Freedom Investing.” The SRB standard for investments requires that investments fulfill the following criteria:
Safe (S) – Ensure that your investment has clear underlying assets of a moderate risk, be regulated by Securities Commission and the relevant authorities, and have a proper trustee structure in place.
Rises (R) in the long term– Your investment and underlying assets should appreciate in value in long-term.
Best of breed (B) – It’s essential to compare your investment fund to others of the same category and underlying assets. For example, if you’re investing into a China equity unit trust fund, you will want to compare this fund with other China equity unit trust funds to ensure you’re selecting the best quality fund.
Another important factor to investing is to understand the trends of the market and to invest when the market is low. Many investors know this theory of buying low and selling high, however putting it into action is tougher than it seems, as many fear losing money in a bear market. However, investing in a low market can lower your purchase price, which can lead to increase capital growth when the market recovers.
In summary, as we head into the second half of 2023, it is important to closely review your personal financial planning and the growth of your wealth according to the 5 areas mentioned above. Regular monitoring, be it twice a year or on an annual basis, will help ensure you are on track.
Remember, knowledge is not power unless you practice it. It is never too late to review and make the necessary changes to your financial health and reap the benefits from it.
Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.
The article is featured in The Star Online, at the following link: Strategies to grow your wealth in 2023 | The Star