What is financial planning? According to the Financial Planning Standards Board Ltd. (FPSB), financial planning has been defined as a process of developing strategies to help people manage their financial affairs to meet life goals. However, many people tend to have misconceptions that can be described as financial planning myths.
“The best time to invest was yesterday. The next best time is now”
Yesterday has passed, so now’s the time for you to plan for your future, which involves learning about money and financial planning. If you master your finances well, then you’ll likely live a great life in the future because delayed gratification helps you to reach your life goals faster.
What this means for you is to overcome the most common financial planning myths that I’ll be sharing with you in this article.
1. Financial planning is only for the rich
It doesn’t matter whether you earn RM2,000 a month or RM20,000 a month. As long as your income is used to pay for expenses, you need to have a financial plan regardless of whether it’s a simple or comprehensive plan. You need to calculate your net worth statement, cash flow statement and well as other relevant financial ratios.
Whether you are driving a luxury car or economical car, you’ll still need to send your car for regular servicing – the only difference is the cost of servicing. Similarly, regardless of income levels, all of us still need to manage our own daily expenses, loan expenses and other allocation into savings or investments.
2. I am too young for financial planning
Financial planning is meant for everyone regardless of age. If you are a child or teenager, it would be great if your parents teach you the importance of savings and growing your money that you received from red or green packets during festive seasons and other celebrations. Parents with good financial beliefs should plan for their children by starting a high interest savings or investment account for them in order to reap the benefits of the long-term returns.
If you’re a working adult, you probably should have a financial plan in place to set aside and build an emergency fund, start insurance planning, retirement planning, travelling fund and or savings for your first house or car, and / or a wedding.
If you’re a new parent, you need to plan for your children’s education, on top of your retirement and insurance planning. Some may probably need to save and invest so that he or she can accumulate enough capital to start a dream business. It’s at this stage that you may want to consider estate planning.
If you’re a retiree, you may review and plan the expenses required for your desired lifestyle, which could include travelling goals, or simply your medical expenses.
3. I will start financial planning when I earn more
Another common answer is, “I don’t have much income to plan financially and I will only start when I earn more”. Let me illustrate why this is a bad idea through this chart blow:
These are two individuals, Mr. Early and Mr. Late. Assuming, both portfolios are growing with an annual compounded rate of 10% over the period of their investment horizon. Mr. Early who has learned the power of compounding from his dad and through reading investment books started saving regularly at age 25 with RM500 per month till age 55.
However, Mr. Late who believed that he should spend first and save later when he started working only realized the power of compounding and saving regularly after attended a wealth seminar recently. He started saving regularly at age 35 (10 years later than Mr. Early) with RM1,000 per month until age 55.
When both reach age 55, Mr.Early would have accumulated RM1.13 million and Mr. Late with RM759,000 (even double the amount of Mr. Early monthly savings). The difference is around RM371,000 just by delaying it for another 10 years.
Hence, do spend some time to learn and establish what your beliefs about money and financial planning are. Otherwise, it could have serious consequences on your financial goals or life goals.
“It’s not your salary that makes you rich, it’s your spending habit” – Charles A. Jaffe.
What are you waiting for in your financial planning journey?
About the Author
Goh Chee Yong is a Licensed Financial Planner under Capital Markets Services Representative License (CMSRL) and Bank Negara approved Financial Advisor Representative (FAR). Prior to becoming a financial advisor, he spent eight years working in Big 4 audit firms and multinational corporations. He can be contacted at firstname.lastname@example.org