How to Strengthen Your Financial Health: Part Two
By Isaac Ooi, Xia WaMay 2022 FEATURE
Disclaimer: This article is a discussion of good practices and not official advice by a financial advisor.
LAST WEEKEND, I went out with a young friend. As we wandered through bookstores, bought pastries in bakeries and lunched at kopitiams, I admired his carefree-ness when it came to spending money. My friend is 10 years old. It is not so much that he desires the unnecessary, or the frivolous; it is that he seems to take money’s availability for granted. I say this admiringly. What liberty.
And he is impressively oblivious to money as a symbol of status and power. Is this not financial freedom at its fullest? Not merely free to spend as he needs, but free from the idolatry of money as well.
But for the common person, financial resources are not unlimited. Like any asset, they require stewardship, and like any garden, they need nurturing.
Last month, we discussed the relationship we have with money, and the rules of thumb for building a rainy day fund (see How to Strengthen Your Financial Health). This month, we look at how we can experience – and enjoy – the world like my young friend, by stewarding our financial assets well.
Once a financial safety net is in place, it is time to get your money working for you. Start by identifying a goal and a timeline for every investment you would like to make. What is the investment for, and for how long will your money stay invested? Are you looking to build a passive income stream for an early retirement, and still enjoy the same level of lifestyle? Or are you simply looking to safeguard your cash from inflation?
Next, understand your risk appetite. Every investment has its risk and reward. How much you are willing to risk for a certain amount of reward matters. Knowing thyself helps you make rational decisions when it comes to selecting assets. Here is one tip: If you are losing sleep and focus over your investments, it is probably a sign that you are biting off more than you can afford to chew.
There are plenty of investment classes and platforms available, but it is advisable to look for those that are approved by the Securities Commission (SC). Some common examples for investments are stocks, unit trusts, precious metals and currencies. More divisive are the likes of cryptocurrencies and non-fungible tokens (NFTs). At the moment, three cryptocurrency exchanges have been approved by the SC.
Regardless of the assets you invest in, always remember that these are your tools in meeting investment goals, whether you are saving for a house or a wedding. Find the right tools to match your goals, taking into account the timeline and returns offered. Never alter the goal to match the tools, unless of course, your goal is unrealistic. Review the asset’s performance periodically to ensure it is working to achieve your goal.
On top of that, start with money you can afford to lose. Gradually invest more after reviewing your asset’s performance.
Maintain a Varied Pool of Investments
Diversification is a friend. In other words, put your eggs in many baskets. This helps in building a portfolio to weather against shocks to specific asset classes or geographies. Imagine if your portfolio only consisted of properties in Malaysia. If their prices take a dip, your returns won’t be looking pretty. On the other hand, if only a portion of your investments is in property, other healthier investments may help to counter the drop and cushion overall portfolio performance.
It is important to diversify across liquidities as well. Liquidity refers to how quickly you can exchange an asset for cash, especially in cases of emergency. Cash is the most liquid form of money, though it will not generate returns. In fact, if left on its own, its value will be eroded by inflation. On the other hand, assets like properties take time to be sold off, and thus are highly illiquid. But they do generate rental and capital gains.
In revisiting last month’s article, it is never too early to think about retirement. Recent statistics from the Employee Provident Fund (EPF) show that 6.1 million members have less than RM10,000 in their accounts. This works out to less than RM500 per year for 20 years after retirement.
However, this does not pigeonhole EPF as a poor choice for retirement investment. Rather, it offers attractive returns of 4-6%, higher than the typical rate of inflation (2-3%), and the performance of many private retirement schemes in the market. Yet, the reason most people run through their savings within a few years is because they invested too late, or too little. Relying on the default employee-employer contributions is not enough. Upsize your retirement pot through lump-sum investments to EPF, and search for passive income streams for the retirement years.
Compound interest is a thing of beauty, and another reason for starting your retirement pot early. It means reinvesting whatever returns you receive, and applying interest to both your principal and returns. Left untouched for long enough, your seed fund will double or triple. Let’s assume your bank promises 6% returns on your savings. If inflation is 3%, you are left with another 3% in real interest. At this rate, a principal investment of RM10,000 will turn into RM13,000 after 10 years. This does not sound quite impressive yet. But wait! After 20 years, this RM10,000 will now be RM18,000. And after 40 years, RM32,000. This is by no means trivial.
Back-of-the-envelope calculations suggest that the average person will need to save at least a third of current income, to achieve an income replacement rate of 65%. If employer and employee EPF contributions total 23-25% of income, all that is required is another 10%.
Think of this laundry list of investment guides as a basic framework to get started, rather than a recipe. There is a vast number of free resources on investing for the curious beginner. To understand how each of the asset classes work, explore educational resources on investment platforms or credible websites, or speak to a financial advisor.
With enough planning, patience and practice, the kind of financial freedom my 10-year-old friend enjoys will not be beyond reach.
 EPF, 2021.
 Assuming a starting salary of RM 3,000 at age 25, 4% annual income increment, 6% annual nominal returns, 3% inflation rates and retirement age of 60 years.
is a co-founder of an IT solution provider company, an online startup, and recently, a financial planner. He is passionate about anything techy and investible (legal ones only). He believes that not only should we work hard and smart, our money should also work for us 24x7!
is passionate about stewarding resources well. She is an economist and also a lover of pineapple tarts.