By Ng Chee Yong & Aris Looi
Michael (not his real name), 36, is a manager in a multinational company. He is single and has been with the company for more than 12 years. The problem is, he has been unable to save his income. He has no idea where his money goes and, one fine day, decided to seek my advice.
“How do you spend your money every month?” I asked. “I spend on necessities such as food, housing loan installments and insurance premiums. That is all normal, right?” he asked.
“Did you make any big-ticket purchases or any big financial decisions in the past three years?” I probed further.
“Oh yes! I bought a high-end condominium about three years ago, which I want to renovate. I also lent RM20,000 to a friend early this year to ease his financial burden. Could that be why I can’t save?” he wondered.
I paused a second to take a look at his finances, and said, “Your financial decisions today will determine your financial destiny. Sound financial planning will help you identify where you are and where you want to be. It also looks at how you can get there. Shall I walk you through the financial planning process?” He instantly agreed.
I performed a Financial Health Check (asset, liability, income, expenses/ lifestyle and emotion) analysis for him and the results are as follows:
NET WORTH (ASSETS AND LIABILITIES)
According to the net worth analysis, Michael has a high debt to asset ratio of 60.8%. His ability to withstand any insolvency is low at 39.1%. His immovable (fixed assets) or property investment portfolio makes up a bigger portion (80.6%) and his movable or investment assets are 19.2%. His liabilities are mainly bank loans. Michael has no savings and uses up all his cash every month.
LIFE GOALS ANALYSIS
CASH FLOW ANALYSIS (INCOME AND EXPENSES/ LIFESTYLE)
Michael should have a net cash flow of RM37,176 a year, but this amount cannot be traced. It is considered unallocated expenses, which are those that Michael did not expect to have and are usually ad hoc expenses such as entertainment, traveling and medical costs.
Compared with the optimum financial ratio (40:40:20), Michael’s lifestyle versus income ratio is very high. So, I advised him to audit his spending to determine his basic needs and discretionary expenses.
LIFE GOALS ANALYSIS
Michael’s life goals analysis shows that he needs RM4,717,965 to fund his goals (see table).
He has a capital shortfall of RM1,739,386. If he were to become disabled and unable to work, there will be a capital shortfall of RM10,566 a month.
The critical factor for Michael to be successful is to start saving and, once this is put in practice, he has a good chance of meeting his financial goal.
