TO conclude the first series of our financial education articles, let us review some of the fundamental principles of personal financial planning. At the same time, let us also review how we have been doing and how we can better keep track of our financial health.

Fundamental principles

In our very first article, we mentioned that a financial plan can be a budget, a plan for spending and saving future income. It helps allocate future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings.

A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.

In layman’s terms, financial planning is really about:
- Knowing where you are now

- Where you want to go

- How to get there.

One of the key principles in financial planning is prudence.

We should make it a habit to exercise prudence in all aspects of our lives, no matter what income level you’re at. This is because the money we have is all hard-earned throughout the years (at least for most of us) and if we are not careful, we may lose it all in a blink of an eye.

Spend only on what’s necessary (of course there’s no harm in rewarding ourselves sometimes), save some for the rainy days and share some with the less fortunate. This will not only make us financially fit but spiritually healthy as well.

The other principle to keep in mind is patience. It’s hard to cultivate this virtue nowadays as everything is fast-paced and we’re living in an “instant” society — where everything has to be fast, easy and instant!

Of course, this is great for our public delivery system but not for our money management system.

A lot of people want to make a fast-buck or easy money by getting themselves into get-rich-quick schemes only to discover later that they are essentially get-bust-quick schemes!

In growing our wealth, time is of greatest essence and to quote a Malay proverb, Sedikit-sedikit, lama-lama jadi bukit. It takes patience and discipline for us to accumulate wealth in an ethical manner and this would be the kind of wealth that we’ll cherish and be proud of.

In addition, a lot of young people have little patience in satisfying their wants. You’ll hear them say, “I want it now and I’ll buy it now!” This is instant gratification and yes, it might ease that itch a little at first but they soon become bored of it and find that they still have to pay their credit card debts.

It’s advisable then to practise delayed gratification and it requires a great deal of patience too.

Last but not least, we need to have perseverance. To succeed in anything, we need to have that stamina to follow through our plans.

Start at a comfortable pace and gradually build up your momentum. You may pause for a while but never give up as the finish line may be just around the bend. If your goal is meaningful enough, you will somehow find that extra burst of energy to carry on till you reach the finish line.

Make sure you communicate your goals clearly to your family members so that they will be able to support and cheer you on till you reach your goals.

How am I doing?

In order to achieve our goals, we have to constantly ask ourselves, “How am I doing?” “Am I on the right track?” Otherwise, instead of heading up north to Penang, we may end up down south in Johor! Or perhaps, we may go round and round in circles and head nowhere.

To ensure that we reach our destination, we have to constantly check our map, especially if it’s somewhere we’ve never been before.

Our roadmap here is our financial plan. It tells us where we are now, where we intend to go and how to get there in the most effective and efficient manner.

To keep us on the right path, it’s advisable to have signposts or little milestones to tell us what we have achieved thus far. Try breaking down your big goals into smaller ones and set a time-frame for each of them. Reward yourself after achieving each one and in no time, you would have reached your final destination.

Keeping track

The following may be some useful tools or indicators to help us monitor our financial health and keep it at tip-top condition.

- Budget

Let us re-emphasise: Everyone should have a budget and one of the keys to achieving financial freedom is sticking to your budget. Use your budget to monitor your spending and saving objectives, and fine-tune it, where necessary.

- Net worth statement

This is a one-page summary of all our assets and liabilities. The excess of assets over liabilities is our net worth or what we actually own.

It’s always good to keep track of our net worth yearly to ensure that we are growing financially at a rate that we want.

It’s really no point working so hard year-in-year-out only to discover that our net worth has remained stagnant throughout.

- Emergency buffer

As a rule of thumb, we should have savings of at least three to six months of our expenses in very safe and liquid form. This would come in very handy in times of emergency to ensure that we’re not pushed off-track should something unforeseen happen, like an accident or loss of employment.

- Debt-to-asset ratio

This shows our total debt commitment as a percentage of our assets. Most financial planners would suggest that we keep this ratio well below 50 per cent, that is,. our total debts should never be more than half of our total assets.

- Debt service ratio

This is the total amount of our loan commitments vis-à-vis our take-home pay. Experts recommend that we should try to keep our loan commitments to not more than one third or our take-home pay.

For example, if our take-home pay (after EPF, tax and Socso deductions) is RM3,000, we should ensure that our total loan repayments for the month do not exceed RM1,000.

Yes, it’s tough especially if we have a house and a car(s) to maintain but as we all know, in order to be fit, we’ll need to watch our “diet".

- Savings ratio

We should save at least 10 per cent of what we earn (and that’s over and above our EPF contribution). If possible, we should strive to emulate our forefathers who’d save half of what they earn!

Yes, that’s a tall order but that’s the price we’d have to pay if we want to achieve financial independence upon retirement.

Don’t be surprised if your retirement years are longer than your working years! Remember: “The only person who can take care of the older person that you’d someday be is the younger person you are today.”

We sincerely hope that you’ve benefited much from our articles thus far and we will be featuring more articles throughout the year.