Money optimisation is beyond investing
MONEY & YOU BY YAP MING HUI
Eight areas that need to be understood and managed well
WHEN I talk about optimising one’s money, many people tend to equate that with investing. To them, investing is the only way to grow their money. Is that true? Will investing alone help them to optimise and grow their money?
Imagine running a business but only paying attention to the sales department, and not bothering with the production, human resources, finance and operations. Clearly, it will wither before long.
Surprisingly, when it comes to growing their money, the majority of people put their hearts into just one activity – how to invest their money – without giving sufficient thought to a host of issues that can deeply impact their financial growth.
Be warned: investing is only one of the eight core areas of personal money optimisation that require attention. “Optimising” our money involves understanding and managing all eight.
1. Investment Planning & Management
Investment planning – the hot favourite for most people – helps you grow your money to achieve financial freedom. To do this, identify your risk tolerance, emergency fund requirements, short and long-term goals and review current investments. Do your investments match your risk profile? If not, restructure them immediately. A number of proven scientific investment methodologies can help to optimise returns while minimising risk. These include:
·Asset allocation strategies
·Best of Breed investment selection
·Dollar cost averaging
Investment planning with the right methods can grow your wealth steadily with minimum risk, just as we nurture a young plant by fertilising the soil, watering it, weeding and pest control.
2. Risk management and insurance
Risk management and insurance planning help to protect your income streams and provide security to your family in the event of premature death or disability. Although many people recognise the importance of this, most are a long way from doing it right. To start, analyse the risk factors you are exposed to, quantify your possible financial loss and identify the necessary insurance products for your needs. Secondly, review and summarise your current insurance policies and decide whether to maintain, amend or cancel them. Take a holistic approach and adopt a balanced approach, otherwise, you might be perfectly covered, but have little or no money left for your other financial needs.
If you have bought life insurance for your children but not for yourself, consider what that actually means if you’re the sole family bread winner. While your children are certainly precious, they are most likely not contributing to the family household income.
If anything untoward were to happen to them, you are bound to be devastated. However, if you were to die unexpectedly, your family will lose the financial support that you provide. The financial loss will compound their physical loss and leave them utterly devastated. Think Big Picture!
By taking appropriate steps in risk management and insurance planning, we can minimise wealth leakages due to excessive insurance payments and protect against unexpected income loss and medical expenses. Be safe.
3. Children’s tertiary education planning
When planning for your children’s further education, consider whether you opt for a local or international institution. Will your child aim for a scholarship or would you pay for the tuition? Plan now for these expenses and identify suitable investment instruments. If your children are ready for tertiary education, minimise your investment risks and be prepared to liquidate your assets fast. If your children are young, you can take more risks with your investments.
Planning early for your children’s tertiary education expenses gives us time to save for their needs, compound our savings, and avoid losses due to currency fluctuations.
4. Retirement planning
Have you thought about when you aim to retire? What is your investment risk tolerance and how much do you plan to live on? Also consider inflation. What’s the nest egg you need to retire? Do you have any source of retirement income and assets to set aside for your old age? Knowing how much you should be saving now for your retirement is crucial. Knowing it when you retire is fruitless. Identify suitable investment opportunities now for your retirement planning.
Planning for retirement expenses gives us time to save for our sunset years, to compound our savings and build sufficient passive income for the retirement lifestyle of our choice.
5. Asset protection
Your assets carry various risks like fire, loan exposure, business, professional or personal liability. Find ways to protect these assets. Perhaps set up a trust. If you are self-employed or a business owner, you may have bigger risks than those who are employees.
Protecting our assets helps to minimise wealth leakages due to unexpected losses.
6. Estate planning
When a person dies, his heirs must obtain either letters of administration (where the testator leaves no will) or a grant of probate (where there is a will). The process can be long and complicated. To smoothen the process, ensure that you have a will in place now. Go that extra mile by creating a trust for your children and nominate your beneficiaries in your insurance policy and EPF. If you need to appoint a trustee to look after the children’s welfare, check that the fee is reasonable. Trustees’ fees can vary by between 50% and 200%.
Estate planning helps to minimise wealth leakages due to unnecessary estate administration expenses, delays and family disputes. If proper arrangements have not been made, these problems may create a big dent in the wealth you leave behind.
7. Debt and Loan management
Review all your property loans, personal loans and credit card facilities. Do you need to restructure them for better financing terms and interest rates? For instance, mortgage rates differ and often fluctuate. If you are paying an interest rate of BLR +0% on a property loan, for example, check the current market rate. Talk to the bank to reduce your mortgage interest rate. In addition, your debt and loan exposure should remain at healthy levels based on your unique circumstance.
By taking these steps, you can minimise wealth leakages due to excessive interest payments and liability risks that can deplete your assets.
8. Tax planning
It’s simple: the less tax you pay, the more income you can accumulate. Therefore, explore various ideas to reduce your tax payment (of course, legally). Here, we are talking about tax avoidance, not tax evasion. If you use illegal ways to evade paying tax, you may be investigated and penalised by the Internal Revenue Board. Instead of optimising and growing your assets, they may suffer a major depletion.
Tax planning helps to minimise wealth leaks due to unnecessary tax payments and penalties.
So, to fully optimise your money, look at all these eight areas. You cannot afford to miss any one of the eight areas.. There is no point in scoring 100% in one area and failing in the other seven. The smart thing to do is to work on all eight.
Interestingly, high net worth individuals tend to be very determined to cover all bases. The same cannot be said about the middle class, who are largely quite relaxed about it. During my public education talks, many people are surprised that they were not seeing the full picture.
Get informed now, your future depends on it.
YAP MING HUI (firstname.lastname@example.org) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their money and achieve financial freedom since 2000.