ALL adult Malaysians know what EPF is and the central role it plays in the retirement preparation of half our population. Sadly, few of us are aware of the vital — markedly different — role of the similar sounding EBF!
EPF stands for Employees Provident Fund while EBF is the acronym for Emergency Buffer Fund.
EPF has about 14.7 million members of whom just under seven million are active. I have been a happy contributor to EPF since March 1990 when I began my first job in Malaysia after returning home from England after completing my A Levels, my degree, and a couple of job stints after graduating from King’s College, University of London.
My first Malaysian job was as a cadet broadcast journalist with TV3, but I quit after 17 working days because of exhaustion.
Despite that truncated stint, my nascent EPF account enjoyed a tiny inflow of cash from TV3. Soon after that, I turned down an offer to join the radio division of the Singapore Broadcasting Corporation (SBC), which is now Mediacorp, to accept an offer to work as a business journalist with Malaysian Business (MB), a magazine published by New Straits Times Press subsidiary Berita Publishing.
Throughout my 49 months with MB, I profited from a deepening network of Malaysian movers and shakers. During that period, I also returned to TV3 as a part-time newscaster for the English news.
While my monthly salary during that four-year stint started in 1990 at around RM1,200 and ended in 1994 at roughly RM2,200, I was overjoyed by my snowballing EPF balance.
In the intervening decades, my wife Rachel and I judiciously used our respective EPF Account 2 balances to purchase our home in 1998 and to then totally pay off our mortgage in 2003.
I also used a portion of my EPF Account 1 balance to invest in well-chosen unit trust funds that were volatile in the short-term yet grew healthily over the long haul.
EPF has been good to me; therefore, I happily share those positive experiences with my financial planning clients.
As my EPF balance grew, I used the intervening years to study risk-on investing in asset classes like equities and investment real estate, and also in the commodities segment of the esoteric alternative investments (alts) asset class.
I learnt how they can — potentially — grow our money faster than inflation erodes its purchasing power.
Simultaneously, I grew to appreciate the value of a reserve or cushion savings account in coping with the crises that life throws at us from time to time.
My term for it is an Emergency Buffer Fund or EBF. Nowadays when I speak at public conferences or in-house corporate seminars on financial planning, numerous questions about the EBF are asked.
My answers to some of those questions are in my online article Soar as High as You Like at www.freecoolarticles.com/FP1.htm
First, though, after you finish reading this column, you should do one of four things:
1. Wake up to the dangers of not having an EBF in place;
2. Recognise your current EBF is too small;
3. Pat yourself on the back because your EBF is the right size for your circumstances; or
4. Realise you are sterilising too much of your portfolio with lacklustre returns by being too cautious!
Life is messy. Murphy’s Law (if anything can go wrong, it will!) guarantees that.
Therefore, if we are wise, we will salt away cash savings to deal with minor emergencies like wardrobe malfunctions to moderate ones such as car repairs to major catastrophes like retrenchments or health scares.
Such savings MUST be kept super safe in a bank savings account, fixed deposit account or money market fund.
To begin saving money, expand your income by, say, volunteering for paid overtime, and slash your expenditure by budgeting ferociously.
Once you start amassing an EBF, don’t stop until you have three to six months’ worth of regular expenses set aside if you’re a paid employee. If you’re self-employed, though, I recommend building a buffer of six to 12 months’ expenses.
If you already have an EBF of the right size, congratulations! You have sufficient liquidity to deal with most emergencies but not so much cash set aside in low-yielding safe haven instruments that you’re sacrificing excessive long-term growth.
Finally, though, if you’re squatting on a larger than necessary buffer, especially if you believe you have a dozen or more years of life left on Earth, I suggest you ferret out a financial planner who recognises your need to balance the tension of paying for present expenses with safe cash savings and building serious long-term wealth through a dynamically rebalanced portfolio containing boring risk-off assets for stability and seesawing risk-on assets for elevated growth rates.
Frankly, that might be your only way to have your cake today and still chomp at it throughout retirement!
© 2017 Rajen Devadason
Read his free articles at www.FreeCoolArticles.com. Connect on www.linkedin.com/in/rajendevadason, rajen@rajendevadason.com and Twitter @RajenDevadason
Rajen Devadason, CFP, is a Securities Commission-licensed financial planner, professional speaker and author.