MPU3353

Personal Financial Planning in

Malaysia

Financial Planning:
Why Its Important to You

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The Financial Planning Industry in
Malaysia
 Introduction
Personal financial planning helps individuals achieve
financial independence.
There is a trend toward increased self-reliance.
Many employers are requiring that employees plan and
manage their own retirement accounts.
Government is unwilling to deal with the funding problems
for Social Security.
There is greater economic uncertainty associated with
job stability and investments. Therefore, financial
planning is increasingly important.

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1) The financial crisis of 2008 and 2009 was a
macroeconomic challenge of global proportions.
Various investment analysts have predicted that
such phenomena will re-occur in mid-2018.
Discuss how do you plan to survive another broad
based financial crisis using the key principles of
financial planning.

2) Preparing financial statements may not be as easy

as it sounds especially if the dividual is doing this
for the first time. Discuss the challenges that can
assist a person to prepare the financial statements.
Using a hypothetical statement, how would you
assess an individuals financial condition.
 Chapter Objectives
1. To understand why setting goals is an important first step in
financial planning
2. To appreciate that trends in the financial environmentinflation,
taxes, and economic cyclesaffect financial success and enhance
the need for planning
3. To see why life-cycle financial planning is important and to
understand the nature of a planning approach
4. To understand what is meant by marginal analysis and
opportunity costs and to know how these concepts are used in
financial decision making
5. To appreciate that financial success builds on a strong
foundation and follows a building-block approach through time

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 Topic Outline

What is Financial Planning?

Why Study Personal Finance?
Achieving Financial Goals through Planning
Making Financial Decisions
The Building Blocks of Success

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What is Financial Planning?

Financial Planning is the process of meeting your life

goals through the proper management of your
finances.

These goals may include buying a home, saving for

your childs education, starting a business or
planning for comfortable retirement.
 Why Study Personal Finance?
Many people study personal finance to achieve
financial success.
Financial success may not have the same meaning to
everyone.
To some, success means accumulating money.
To others, its making the most of why we have.
Financial success is defined as obtaining the maximum
benefits from limited financial resources.

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A Planning Approach
Step 1. Determine your current Financial Situation.
(income, savings, living expenses and debts)
Prepare a list of current asset and debt balances and
amounts spent for various items gives you a foundation for
financial planning activities

Step 2. Develop Your Financial Goals

The purpose of this analysis is to differentiate your needs from

your wants
First state a broad goal such as the purchase of a home.
Determine the specific pieces to achieve that goal such as
the cost of the house, the down payment amount, etc.
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Step 2 : Develop Your Financial Goals

Specific financial goals are important to financial

planning.

Your financial goals can range from spending all of

your current income to developing an extensive
savings and investment program for your future
financial security
 Your Goals in Life
Nonfinancial goals
Family, moral, educational, religious, social, or political.
Finances can affect your ability to attain these goals.
Financial goals
Financial independence is an important goal for many
people. It means having enough income or resources to be
self-reliant.
One major financial choice is between consumption today
versus consumption in the future.
Researchers find that most people, regardless of their
income level, feel they need 20% more wealth than they
currently have.
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 The Principle of Diminishing Marginal
Satisfaction
Economists suggest that satisfaction from current
consumption increases as income increases, but at a
decreasing rate.
For example, the enjoyment derived from the first DVD
purchased is greater than the enjoyed from the 100th DVD.
At certain income levels individuals are willing to
postpone current consumption and save money.
Saving money facilitates the attainment of financial
and nonfinancial goals.

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0-20

teaching them financial planning .

Show them how to budget an allowance.

Open their first savings account.
Once they start earning money, teach them
how to invest for retirement
Ages 21-30 yrs old

Establish good credit.

Learn to use credit cards wisely.
Whittle down any college debts as quickly as
possible to free up money for investing and other
financial needs.
Start saving at least 10% - 15% of your income for
retirement.
Learn good spending,debt
management and savings habits
Age 31 40
Children are being born, getting older, getting
more expensive, even if youre earning more.
Continue making contributions to your retirement
fund. If there is a conflict between or funding
retirement, retirement should take priority.
Kids can always find other methods to finance
their way through college.No one else is going to
pay for your retirement.
Update your will and periodically review your life
insurance to make sure it is adequate, especially if
you have children.
41-50 years old

- consider at this stage is aging parents. Will they be

able to financially take care of themselves should
they need home health care or a nursing home?
Consider buying long-term care insurance for them
Expenses may start to ease off in this stage as your
children reach maturity. Beef up your retirement
contributions to at least 15-20 percent
Start getting serious about retirement plan. Get
serious about an estate plan.
50 60 years old

Study your EPF options to make sure you take full

advantage of them. Be sure you dont have gaps
in medical coverage. Consider working part-time
in retirement.
Review retirement plan payout options.
Have an estate plan.
Investments may grow more conservative
but should not be too conservative.
Ages 61 and beyond

Slow down and enjoy your success.

Youve earned it!

Talk to your kids about your estate

 Achieving Financial Goals Through
Planning
Planning is the key to achieving financial goals.
Life-cycle planning a view that financial planning is
a lifelong process.
People experience different phases in their life such as young
adult, family formation, retirement, etc.
Major financial planning areas
The different phases of life impact the importance of
different financial planning areas as they increase or decrease
in importance.

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Step 3 : Identify Alternative courses of Action

- Continue the same course of action? Eg the amount

saved each month is still valid

- Expand the current situation Eg save a larger sum

of money

- Change the current situation Eg Instead of using

saving account, I may use fixed deposit account.

- Take a new course of action Eg use savings to pay

off credit card debts
Step 4 : Evaluate your alternatives

You may need to evaluate possible course of

action , taking into consideration your life
situation, personal values and current
economic conditions.

How will the ages of dependents affect your savings goals?

How do you like to spend leisure time?
How will changes in interest rates affect your financial
situation
Step 5 : Create and Implement Your
financial action plan
Develop an action plan that identifies ways to
achieve your goals.

Eg : increase savings by spending less

Or increase savings by working overtime

Sometimes you may need assistance from others. Eg

use insurance agent to buy property insurance or
brokers to buy shares, or mutual funds
Step 6 Review and Revise Your Plan

Review at least once a year due to changes in

personal, social and economic factors. This will
help to make priority adjustments that will bring
the financial goals in line with current life
situation.
 Important Economic Trends
The economy affects our ability to achieve financial goals.
Continuing Inflation

Price levels tend to increase 24% annually. Inflation must be

considered in financial goals.
Persistent Business Cycles
Instability in the economy creates uncertainty that must be
considered in financial goals (job stability, emergency reserves,
etc.).
Continued Instability in Financial Markets
A High and Selectively Rewarding Tax System
The tax system rewards and punishes certain behaviors.

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 Financial planning is a multi-step process that
provides you with two important things:
(1) An in-depth review of your current financial
situation, and
(2) a personal financial plan that shows you how to
achieve your goals and objectives for the future.
It is important to remember that financial planning is
a continuing process not an event.
 Making Financial Decisions
Decision making is a complex process because there are usually
multiple choices with differing attributes.
There are two economic concepts that are helpful in financial
decision making.
1 Marginal Analysisan analysis of the changes in important
variables
Example: choose a public or private university; the public university costs
$15,000 per year - the private university costs $40,000 per year. Does the
private university provide benefits that compensate for the additional
$25,000 ($40,000$15,000)?
2 Opportunity Costsbenefits given up when one alternative is
chosen over another
Example: putting money in a savings account rather than investing in a
mutual fund. The opportunity cost is the higher return that could potentially
be earned in the mutual fund.
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The Building Blocks of Success
(Investing progressively)
First, build a supporting foundation.
Give time and attention to building a career, buying
adequate insurance, buying a house, and building cash
reserves
Then invest in secure investments.
Long-term savings deposits, government securities,
annuities, and retirement plans
Gradually take greater risks.
High quality stocks and bonds, real estate
Avoid very risky investments until you are secure at
the lower levels.
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Growth stocks, gold, undeveloped land
Malaysia, which aims to become a "high-income status" nation by 2020, is
seeing an increase in the number of young people grappling with higher
debts than they can handle.
Gen Ys who borrow for homes, cars and other items have
contributed to heavy household burdens. Bad debts at
Malaysia banks are still low, but there's been a notable
increase in the number of people under age 35 who have
declared bankruptcy.
To the extent that financial difficulties of young people reduce personal
consumption, they are another problem for Malaysia's economy on top of
low commodity prices, a battered currency and a political crisis stemming
from graft allegations involving Prime Minister Datuk Seri Najib Razak, who
denies wrongdoing.
Growth of private consumption has been slowing, and if that continues,
Malaysia's growth rate could be hit.
"Households are accumulating debt faster than their incomes are growing, which
will likely lead to repayment difficulties when the credit cycle turns,"
Standard & Poor's wrote in an August report.
According to S&P, Malaysia has the highest personal
debt among 14 Asian economies, with the rate jumping
to 88% of gross domestic product from around 60% in
2008.
Malaysia's Department of Insolvency says 5,547
individuals under age 35 were declared bankrupt last
year, more than double the number in 2005, the first
year for which it has published such data. Last year's
number under age 25 was 635, triple the year-earlier
figure.
In Malaysia, a person can be declared bankrupt if a
creditor shows there's on unpaid debt of at least
RM30,000.
Hafiz Adam, a vocational school graduate, thought the
future looked bright when he took a bank loan of
almost US$20,000 (RM86,210) to start a Kuala
Lumpur marketing business. But it didn't last, and
two years ago, age 26, he was declared bankrupt.
"I struggle to survive on my own," says Hafiz, who's
now employed as a security guard and is repaying
his debt through an agreement the Department of
Insolvency facilitated as he works to lift his
bankruptcy status.
For Hafiz, the idea of owning a home a goal when he
started his business is remote. "I just sleep after
work because I'm tired. That's my routine."
LM, a 34-year-old mother who asked to be identified by her initials, racked up
loans to support her three children and parents.
"I can't buy a low-cost flat because I cannot afford the deposit," she said.
Asked why Malaysia has seen increasing numbers of young bankrupts, the
Department of Insolvency said by email that after graduation, most "are
burdened with study loans. Once they start working, they need
transportation and accommodation".
Many young Malaysians grew up accustomed to rapid economic growth
and relaxed attitudes to debt. Banks, meanwhile, have been eager to lend
to them.
"Prompted by both national policy and a desire to diversify away from
corporate lending, banks heavily pursued the consumer market," said
Nurhisham Hussein, chief economist at the Employees Provident Fund,
adding that banks were not solely responsible.
"Consumers themselves embraced the new openness and steadily took on more
debt, especially as interest rates gradually fell over the last 15 years," he
added.
Reuters, September 7, 2015
The Building Blocks of Success

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 Whats a Professional Financial Planner
and Do You Need One?
A financial planner is a professional who helps clients create,
execute, and maintain a financial plan.
The best known credential is the CFP.
Hiring a financial planner depends on these personal criteria:
Your available time to plan
The complexity of your situation
Your knowledge and skills in financial planning
Depending on your answers to the criteria above, you may need
to hire a financial planner to assist you with all or part of your
financial management.

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Advancement of Financial Planning in
Malaysia
Fellow Chartered Financial Pratitioner (FchFP) by
NAMLIA (presently known as NAMLIFA) through
Life Prationers Council (LPC) in 1996

Chartered Financial Consultant (ChFC) by MII in 1997

Certified Financial Planner (CFP) by FPAM in 1999

Registered Financial Planner (RFP) by MFPC (initial

promotoers are LIAM, NAMLIFA, & MII) in 2002
Job Activities of a Financial Planner

Promoting & Marketing personal services

Assessing client's needs
Educate the client
Identify client's goals and aspirations
Analyse client's financial position
Construct action plans
Execute action plan
Monitor plan implementation
 Conclusion
Personal financial planning helps individuals achieve
financial independence and success.
Setting financial goals and studying financial trends is
important in personal planning.
Using life-cycle planning, marginal analysis, and
opportunity costs help us make wise decisions.
We must build our financial success on a strong
foundation of planning, acquiring, using, and
protecting assets by using proven methods.

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Next Week Tutorial 1 Questions

1) Discuss the various forms in which wealth can be

accumulated

2) Explain why it is important to set realistically attainable

financial goals.
3) What are some factors to consider when revising financial
plans to reflect changes in the life cycle?

4) What is inflation, and why should it be a concern in

financial planning?