Rahsia RM

by KClau

I am so glad to receive an email from a young reader, Sam ( not his real name):

Hello,I am glad to find a financial blog by Malaysian. I would love to ask advice from you regarding my financial planning.   I am now 25 year old student but I plan to start investing next year after I graduate. I plan to use mutual fund as my financial vehicle. I plan to invest at least RM1,000 per month in fund and I plan to retire within 5 to 15 years. Can you advice me roughly what fund portfolio should I have? my risk tolerance is moderate. Is there any possible ways for me to reach my goal quickly and more effectively?
Thank you. hope to hear from you

In order to give him more accurate suggestion, I need more information. This is the email I sent to Sam:

Regarding your inquiry, I need to have more information to give proper advice:

1. What’s your aim on retirement? Example, having RM5,000/month passive income
2. How do you plan to save RM1000/month? It is not easy to do that especially for a fresh grad. I would love to hear your story.

I am so surprised that Sam actually has all the answers already. He has a very clear goal and also a plan. Let’s see how he plans for his retirement. This is taken from his email:

For now I am studying Engineering in Australia under parents’ sponsorship. 
 
So far after some salary from internship and persistant money saving, I predict when I graduate, in somewhere september 2008, I will have a pool of roughly around RM85k. I predict my final $$$ will be between 60k to 100k RM in my bank. 
 
I would put roughly 80k RM of this money into fund, most likely Public Mutual. One reason is I checked most mutual fund companies offer similar rate everywhere, like 5% load, 1,5% management fees. Sheessh, not much choice in Malaysia. That’s for my initial rate.
 
I would be 26 year old when I graduate. I will adopt max income, min expenses strategy for my first 5 years of working. If I am to work in Malaysia, I will pick a company that is willing to pay me RM4k a month, which I doubt I will get it due to poor appreciation of Human Resource in Malaysia. So I have been planning to work oversea for about 2 years to gain experience, contacts and also high income (possibly over RM10k if I work in Europe or Dubai).
So for the first 2 years, the income will support my investment, between 1k to 2k per month. I think it should be OK, dunno why people invest very little as RM100 per month only.
 
After having enough experience oversea, I think I will be able to find a job with good salary when I come back to Malaysia to cover my investment input.
 
My plan of retirement is having passive income of at least RM4k per month, or having at least 0.5 million in my portfolio, either one of them that has higher value. The time frame for such goal is within 5 to 15 years. I hope it is possible with my initial 80k RM capital and bullish trend recently.
I plan to put my bet in mutual fund, with moderate risk (for now)
 
The first 2 years working oversea will be hard for me to monitor the situation. I plan to have the portfolio of 90% in balanced fund and 10% Bond fund while i am oversea, and when I come back to Malaysia I plan to have portfolio of 10% bond, 50% balanced and 40% equity. I hope I am not too conservative  

I am expecting 15% growth per year at least (my conservative expectation) and I think the goal will reach faster if it is 25% to 30% return per year.
 
I plan to be a persistant dollar cost averaging investor, planting money every one of two month consistently into my fund.

I plan to put my money into mayban account because it has online banking, making it easier to manage my $.
 
For educating myself, I have bought some good books to read. For personal financial planning, I bought the book Your Money or Your Life and Wealth Odyssey. They helped me to manage my relationship with money, by saving more and spending less.
 
Then I bought All About Mutual Funds, to learn about basics of MF and I might buy The Morning Star Guide to Mutual Fund, to learn some effective strategies in fund.
 
I also asked my parents to order monthly Personal Money to gain info about the fund news.

Thanks a lot for helping and sharing 

Retirement Plan

Before we do any calculation, let’s get a clear picture of his retirement journey, as shown in Figure 1

Figure 1: Illustration of Sam’s Retirement Plan

From his email, we know the following information:
1. He will have at least RM80,000 net worth to start with at age 26
2. He will continue to invest at least RM1,000 per month starting from age 26.
3. Expected return is 15% per annum.
4. His retirement goal is RM500,000 or passive income RM4,000/month. In this case, I will use RM500,000 as the main goal because for 15% return, RM500,000 capital will give him RM75,000/year, or RM6250/month which is more than RM4,000. This is a more difficult task compare to RM4,000/month passive income.

Now, what we have to do is to calculate the value X = the retirement age, if all goes well as planned. Use this simple saving calculator.

Key in the following data as shown in Figure 2.

Figure 2: Simple Saving Calculator data entry page

Here is the result:

Figure 3: Saving schedule

Sam will reach his retirement fund goal at year 8th. He will be 34 years old at that time.
Result: Retirement age, X = 26+8 = 34 years old, which is also within the time frame he set (5-15 years).

How about Inflation?

We all know that inflation will cause money depreciation. After 8 years time, is the RM6250/month equivalent to RM4,000/month purchasing power now? Let’s do some calculation, using this Financial calculator:

Figure 4: Financial calculator used to calculate the annual rate.

Input the information as shown in Figure 4, except the interest rate per period, and press “IR”.
The result is 5.74%. This means that even if the inflation rate is high, as long as it is lower than 5.73% per annum, the purchasing power of RM6250 after 8 years time is still higher than the current RM4,000.

Is the passive income inflation adjusted?

In this discussion, it will be a little bit confusing. But I wish that I can give a very simple and clear explanation.
When Sam retires at age 34, he will have RM6250/month to spend. Meanwhile, his capital of RM500,000 is intact and preserved. But if he keep spending RM6250/month, his RM500,000 will still remain the same RM500,000, forever. At the same time, inflation keep depreciating his money. He will soon realize that his RM6250/month is not adequate anymore.

In this case, he can’t practically spend all his passive income. He should leave a certain portion of the return, and put it back into the capital and keep accumulating it to hedge against inflation. If you study financial planning courses, you will know that there is a formula to calculate the Inflation Adjusted Rate (IAR) :

The actual passive income Sam will have at age 34 is RM500,000 x 12% = RM60,000 p.a. = RM5,000/month.
After that, his principle retirement fund of RM500k will grow because he only spend 12% of the return and 3% is injected back into as capital investment. During the next year, the 12% return will give Sam more than RM5,000/month to spend, which will hedge against inflation.

A Plan is Nothing without Action!

Sam’s plan can be implemented. If he does it correctly with the highest commitment, it will work. I think the main challenges are:

• Will he be discipline and consistent to really spend only the minimum and save the maximum?
• How to constantly get a return of 15% per year? It’ll require another post to discuss this matter. I learn that Warren Buffett’s investment returns is about 25% p.a.
• Can he set aside all the other family commitment - getting married, having children, home purchase, car purchase etc. - that might be obstacles during his accumulation period?

Do you think Sam can make it? After 8 years time, I wish that I can write a follow up post about Sam’s financial situation.

Top 5 Financial Tips for Recent Graduates by Elizabeth

Spend less than you earn. This goes hand-in-hand with getting out debt. Getting out of debt can be a huge challenge that can take some people years and years. Be patient and persistent and you will overcome it.

As recent graduate, I couldn’t wait to start earning some money. Unfortunately, with the lack of financial education in schools, the only guidance I had was what I received from my parents and what I read. That only gets you so far. With all the advice dispensed this time of year, I thought a little bit more couldn’t hurt. Moreover, I gathered up some input from other twenty-something bloggers and included that here as well. Enjoy!

1. Find a something that you enjoy and do it for a living. This tip was originally find a job that you enjoy, but I realized that many people don’t consider the way they earn a living a “job.” If you find a job you truly enjoy, the money will follow. At least that’s what everyone says. I know I enjoy helping people (like doing service work). Even if I don’t do this for a living there are other ways to help people. Here are some suggestions on how to do that on a small budget.
2. Spend less than you earn. This goes hand-in-hand with getting out debt. Getting out of debt can be a huge challenge that can take some people years and years. Be patient and persistent and you will overcome it. Grad Money Matters offers some great advice on how to get out of debt.
3. Save. There’s great beauty in compound interest. If you need convincing that you should start saving now, take a look at this chart. Here’s a good post from I Will Teach You to Be Rich about saving and budgeting.
4. Have fun. Just because you’re not in college doesn’t mean you can no longer have fun. Here are some tips from others on spending less while having fun. Remember you don’t have to be totally cheap to have a good time. Read this post from Ramit if you need to be convinced. Here’s some advice from Grad Money Matters on Frugal Ways to Spend Time with Friends. Noah from Okdork offered this advice: “Pre-party. Drink a little before you go out, taxi to the place and you just saved a ton of money on drinks. Or bring a flask to the bar.”
5. Wear Sunscreen. This is very cliche, but it’s true. If you don’t have your health you can’t effectively take care of yourself or your finances. Find an activity that helps you stay in shape and participate in it frequently. This can be anything from running, to tennis, to yoga. Just take the time to take care of yourself.

Top 5 Tips for the College Grad by Kim Roach

There are people in China and India who will work 3x as long as you and 10x as hard as you to try and compete for the same job.

1. There are people in China and India who will work 3x as
long as you and 10x as hard as you to try and compete for
the same job.

We are not living in the same economy that our parents did.
We are now living in a global economy. And in a global
economy, anyone can have your job, regardless of whether
they live in Tokyo or New York.

It’s up to us to stay competitive in a global economy in
which every country can compete for your job. Only you can
set yourself apart from the students who still haven’t
quite caught on. It’s up to you to take on the summer
internships, work the unpaid jobs, make network contacts,
and gain valuable skills that will market yourself to
potential employers.

A college degree no longer entitles you to a job. In fact, a
college degree will barely get you in the door. We are
living in a new economy and most grads simply aren’t
prepared for it.

2. Learning doesn’t stop after college.

The world is changing at an exponential pace. Technology is
changing every day. Because of this, we must continue to
learn new skills. Otherwise, we will be left behind while
others charge ahead to more advanced positions.

It is essential that you become a lifelong learner. You can
learn anything you desire through books, online material, or
classes. But remember, knowledge doesn’t belong to the
University. You can learn anything your set your mind to.

3. Find what you love to do.

Happiness is the key to success. As once said by Dale
Carnegie,

“People rarely succeed unless they have fun in what they
are doing.”

Research has shown that the most successful people in life
are those who love what they do.

Steve Jobs once said,

“You’ve got to find what you love. And that is as true for
your work as it is for your lovers.

Your work is going to fill a large part of your life, and
the only way to be truly satisfied is

to do what you believe is great work. And the only way to do
great work is to love what you do.”

Too many people simply fall into the job that comes their
way. Live is too short to work in a job that you don’t
enjoy.

The world is too big and the opportunities too great not to
find what you love to do.

4. You must learn to network.

In the end, life is really about relationships. You’ve
probably hear the saying, “It’s not what you know, it’s
who you know.” This is true. Although it may not always
seem fair, the person who gets the job promotion is
often the person who eats lunch with the boss, is
good friends with the family, and is an all-around
likeable person.

People hire those that they like and trust. Therefore, you
must make it a habit to build a network of friends. Life
will be much more rewarding because of it.

Unfortunately, this skill isn’t taught in schools.
Networking simply can’t be learned from a book. Instead,
you have to get out in the real world, meet people, make new
friends, socialize with coworkers, spread your positive vibes.

By becoming a more sociable person, you’ll be surprised at
all of the new opportunities that come your way.

5. It doesn’t matter how much money you make if you don’t
know how to manage it.

One of the greatest downfalls of public education is that
they do not teach financial planning. Graduates know all
about writing essays and memorizing facts, but very few know
how to manage their own finances.

In fact, the mmajority of graduates end their schooling with
a pile of debt. What good is it to earn $100,000 a year if
you don’t know how to invest it properly.

We must take the initiative to educate ourselves on how to
properly save money, eliminate debt, and invest wisely.
Otherwise, it really doesn’t matter what your paycheck
looks like.