Three loyal friends to help optimise your money

HOW ironic it is that many of us are clearly aware of the value of money management but remain stuck in an unsatisfactory financial state despite our constant effort to set things right.

Many Malaysians are good at making money – we are surrounded by people who are successful in business and in their professional careers, work hard, secure promotions and regularly put in long hours to achieve their goals.

All around us, we see evidence of those who have made it to the big league through hard work, prudent investment and the use of acute business acumen. Icons like the Old Town White Coffee franchise and the AirAsia success story of Tan Sri Tony Fernandes inspire us to make our mark in our own fields.

These entrepreneurs can certainly show us what it takes to make more money. But what must we do to succeed in optimising the money that we are so busy earning? What is the key to successful money optimisation that opens the door to financial freedom?

Let’s distill the complexities of money optimisation into three crucial principles that we must internalise and apply in our lives to reach our financial goals. We could treat them like three loyal friends who will stick with us for life.

1. Save

The starting point, of course, is to accrue savings from our income, because only when we have savings will we have something to invest.

It is common for people to save by default instead of by design.

As a rule of thumb, we should save 30% to 35% of our income. However, ideally one should identify the optimal amount to save according to one’s financial goals.

It may surprise some that a high income does not automatically mean a high savings rate. There are senior managers and CEOs earning RM500,000 to RM600,000 per annum but fail to have any significant savings beyond their EPF.

Yet, everyone knows the importance of saving. We would think that it is a familiar idea to Asians who are famous for their frugality. But today, in reality, we are keeping up with the Joneses.

We must set a savings target before spending. To avoid the risk of under saving, we must look at our financial needs and consider things in totality when setting our savings target.

2. Invest

Once we have some savings, we can progress to investing what we have saved. Here, it is common to see people jumping into investing with the expectation that their money will surely “make more money”. Prior to investing, it is crucial to provide for a cash reserve to ensure that we have holding power in case of emergencies and healthcare needs. After all, investing is a volatile activity; if we do not have sufficient cash reserve, we may end up having to divest our acquisitions in a fire sale. For this reason, we often find that people with more cash reserves tend to succeed in investing because they generally have greater holding power.

When the average person thinks about investing, he focuses only on the asset classes he is familiar with. In fact, many seldom consider investing in other assets because they are not used to looking at the big picture when thinking about their financial needs. They focus on the micro instead of the macro level, and so are exposed to risk factors like economic cycles and external events that may leave them stuck with their investment for a long time.

For example, as an avid investor, is it a good idea to invest in more properties if 90% of your investment portfolio is already in property? If the property market suffers a setback, you will be highly vulnerable!

The ideal solution is to think like a professional fund manager. Ensure your investments are diversified and create buffers against risks.

Search proactively for good value investments and keep an open mind to consider alternatives. The average person typically waits for people to approach them with a proposal. The risk here is that the proposer may have vested interest, so we should be careful not to end up losing more.

3. Accumulate

The third step is to ensure that our money grows and that we end up accumulating wealth. There are two main components to this: firstly, active performance management, and secondly, wealth protection and preservation.

In days gone by, it was sufficient to accumulate assets using the “buy and hold” strategy. However, in current times, the escalation of risk makes this method uncertain.

Here’s where active performance management comes into play; monitoring of assets for signs of under-performance, taking profit when the opportunity arises, regular searches for better investment alternatives and portfolio rebalancing as necessary. We must be proactive about our investments or the profit may disappear.

When our investments do not grow as planned, we must cut our losses and reinvest elsewhere.

The second key to accumulation is wealth protection and preservation. It is not wise to merely invest without protecting our assets since untoward eventualities are a fact of life.

Asset protection from fire and other catastrophes is indispensable. Equally important is estate planning, since failure to provide for our estate will incur high costs for our family and potential delays in the transfer of our assets to our family members. It is interesting how people talk excitedly about investment but become silent when the subject of estate planning is raised.

In conclusion, we must recognise that if we have no savings, we will have nothing to invest. Merely focusing on saving without investing is a losing proposition – the value of money is constantly shrinking and we can’t take for granted that the act of investing is sufficient to guarantee profit and asset growth.

Therefore, one must monitor and manage one’s investment risks to ensure wealth accumulation.

So, these three key pillars are like the three legs of a stool. If one leg is shorter than the others, the stool is crooked and unstable, and will not serve its purpose. Let us examine our strengths and weaknesses, to make these three core pillars the basis of our money optimisation plan.

Yap Ming Hui (yap@yapminghui.com) heads Whitman Independent Advisors, a licensed independent financial advisory firm.