Financial Planning 101

Financial planning is often necessary for people to realize their life’s goals without having to worry about being short of cash. Financial planning may be necessary to save a sinking ship of personal finances, and financial planning can be done by anyone with the willpower, organization, and intelligence to draw up and execute such a plan.

Smart financial planning doesn’t only consider how to have the most money by the time you die, but actually have the best quality life with the amount of money on hand while saving enough to avoid external risks.

The first step in a solid financial plan is making sure personal income less fixed and variable expenses is positive. If this doesn’t happen none of the other steps really make sense – if you don’t have any savings you really shouldn’t be investing in risky stocks – for example.

Tools to accomplish this include making a budget, getting a good education in order to get a good paying job, and cutting spending. A good financial planner will accommodate to the needs of his/her clients and make changes to a plan as necessary. Sometimes budgeting is unnecessary for certain individuals who have a track record of modest spending vs. their income, at these times budgeting can really be a waste of time. Other-times, however, budgeting can point out significant spending patterns that the client might not realize are eating into his savings. Having a Starbucks every day, for example, will eat into your savings. Eating out expensively every day can eat into your savings.

After making sure your budget aligns with a healthy financial future, it is the job of a financial planner to make sure that their clients are protected against the unforeseen. Do you have health insurance, do you have disability insurance, do you have a rainy day fund bank account that you do not touch unless there is an emergency? A rainy day fund typically should be six months of expenses – unless the client has a working spouse in which case that duration may be cut in half.

A rainy day fund is something that can be used if you are unexpectedly terminated from your job – the amount of such a fund is based on your fixed expenses. If you make 5,000 MYR per month and spend 3,000 then your rainy day fund will be a bit less than 18,000 MYR. I say a bit less because costs associated with getting to work can be subtracted. In the US less than 1/4 of medium income earners have at least 3 months saved based on information from

Once a rainy day fund is established the fun part starts – getting saved up for kids’ educations and retirement. Choosing investment portfolio allocations along with real estate advice, along with tax advantaged strategies. In the US financial planners sometimes recommend putting money into tax advantaged 529 plans, which are based on a stock market portfolio that when cashed out for college doesn’t need to pay capital gains tax. Malaysia has something called SSPN managed by The National Higher Education Fund Corporation.

According to the SSPN website : “The National Education Savings Scheme (SSPN) is designed especially by the National Higher Education Fund Corporation to enable parents/guardians to save for the purpose of the higher education of their children.” I wont be getting into the details of this Malaysia specific scheme but if paying for your child’s education is something you’re interested into it is advertised to pay higher interest than regular bank accounts.

At the end of the road for financial planners it is time to consider how a client wishes to pass on their assets or estate to heirs or anyone/anything of their choosing. This usually involves writing a will and managing gift taxes that are in play in the client’s respective country. Luckily for Malaysians there is no death tax, for people in the US sometimes if they wish to benefit their relatives or “heirs” they will create education 529 plans for grandchildren and fund them all to the max, along with giving away money before their death up to a certain threshold. In the US as of last year the exclusion amount is 5.34 million USD.

So really the job is pretty straightforward from an outside perspective. Keep people from becoming broke throughout life – make money a non-issue so clients can enjoy life.

Frivolous Purchases and You

If you’ve read the tech news lately, you’ll know that Apple is going to release it’s Apple Watch on April 24th in Australia, Canada, China, France, Germany, Hong Kong, Japan, the UK and the US. The most surprising and talked about subject about the release was the price on it’s Edition series of watches, which will range in price from $10,000 to $17,000. These watches are made of 18-karat gold which Apple claims to be developed to be “twice as hard as standard gold” and sport the sapphire screen. While these watches look “nice” they are certainly still pieces of technology. The funny thing about technology is that it depreciates much faster than other durable goods – faster than a mahogany piece of furniture, for example. I’d expect digital technology products to depreciate faster than mechanical products of a similar type (for example a Rolex watch).

If one spends $17,000 on a Apple Watch – a watch that starts out at around $350, then one should expect the rest of the watch to be worth at least $16,000 – which it is not. You’d be able to buy more than 12 ounces of gold for this price. The gold portion of the watch is not described to be compatible with newer versions of the hardware, so when the Apple Watch 2 comes out the value of your watch probably goes down by around $10,000!

As someone concerned with you making the most of your money, while still enjoying life, I would not suggest buying a Apple Watch Edition. Go ahead and splurge a few hundred dollars on a piece of technology if if will, but $17,000 is a fools purchase.