In partnership with
Managing money can be difficult. You have to deal with bills, living expenses, unforeseen events and at the same time, set aside savings for long term goals. How do you balance all of these financial responsibilities?
Fortunately, having a practical personal financial plan can help. Here’s a seven-step guide to getting your finances in order.
1. Understand your current financial situation
The first step to improving your finances is to understand where you are now. This means taking stock of these areas:
- Returned. How much do you earn from a job, self-employment, rental income or any other source of income?
- Expenses. How much do you spend each month on food, transportation, shelter, recreation, etc. ?
- Debt. How much money do you owe? This could include your home loan, car loan, student loan, credit card bills, and personal loans.
- Emergency fund. How much savings do you have to cover unforeseen costs?
- Net value. What is the value of all your assets, after subtracting all your debts and debts?
2. Set financial goals
Next, think about your financial goals. After all, they are the reason you are so careful with your money!
It is useful to categorize them by time frame and priority. For each goal, determine if it is a short-term goal, a medium-term goal, or a long-term goal. Next, determine if this is a critical goal (i.e. something you need to do in the short term), a necessary expense, or something you just want. For example:
|Time range||Goal||Target date||Priority|
|Short term||Pay off all your credit card debt||By this year||Critical|
|Short term||Set aside 2,000 RM for travel||By next year||Want to|
|Middle term||Set aside RM50,000 for a down payment on the house||By 2030||Need|
|Long term||At 55, retire with RM1.5 million||By 2050||Need|
3. Start creating a budget
You can create financial goals, but ultimately it all depends on your budget. Budgeting helps you live within your means while putting money aside to achieve your goals.
If you haven’t already, now is the time to estimate all of your monthly expenses in each expense category. Better yet, track your spending for a few months. You may be surprised to learn that you are spending more or less than you planned.
Once you know how much you are earning and spending, you can plan your future spending with a budget. You can budget using the 50/30/20 rule, where you spend 50% of your monthly income on “daily expenses and fixed bills, 30% on” savings “and 20% on investment.
4. Create an emergency fund
An emergency fund refers to the savings you set aside for emergencies. This covers unforeseen costs like a car repair or a sudden layoff.
The general rule is to save three to six months of expenses in your emergency fund. You may want to consider a larger fund if your income is uncertain or if many people are dependent on you financially.
To build up your emergency fund, you can automatically transfer some of your savings to a separate savings account each month.
5. Pay off high interest debt
Before you start investing, consider paying off any high interest debt.
High interest debt, such as credit card bills or personal loans, can drain your finances faster than you can grow them by investing. After all, credit cards typically charge a whopping 15% to 18% annual interest rate per year!
To pay off your debt, think about how much you can set aside each month, then set up automatic repayments. You may need to temporarily cut unnecessary spending to spend more savings on debt relief. If you need help, the Credit Counseling and Debt Management Agency (AKPK) offers free debt counseling services.
6. Save for retirement
It doesn’t matter whether you have just started working or are in your career years: you need to plan for your retirement. Indeed, your compulsory savings via the Employee Provident Fund (EPF) may not be sufficient. About 75% of EPF members have a balance of less than RM250,000 at age 54, which could mean less than RM 1,050 per month to live on in retirement. It is barely enough to live comfortably.
Saving for retirement helps you increase your chances of having enough in your golden years. Here are some ways to strengthen your retirement fund with mutual funds:
- Through the EPF member investment program. This program allows you to invest part of your EPF Account 1 savings in approved mutual funds for potentially higher returns.
- By PRS. The Private Retirement Scheme (PRS) is a voluntary investment plan that helps you increase your retirement savings. Under this program, you can invest in licensed mutual funds and receive tax relief of up to RM3,000 until tax year 2025.
- Through regular mutual funds. You can also invest in mutual funds directly through Principal, which offers a range of award-winning funds.
7. Establish a regular schedule of progress reports
Finally, you’ll want to review your finances periodically – once a year, perhaps. This helps you determine if you are still on track to meet your financial goals and if you need to adjust your financial plan. Here are a few areas you might want to consider:
- How Has Your Net Worth Changed?
- How have your income and expenses changed?
- Do you need to reduce your expenses?
- Do you need to top up your emergency fund?
- How much progress have you made against your financial goals?
- Are you still able to reach your retirement goals?
- Do you need to adjust your investment portfolio?
Reach your financial goals with Principal
Getting your finances in order can be difficult, but you don’t have to go it alone. Principal offers a range of investment solutions to grow your wealth, whether you are looking to invest your EPF savings, via PRS or directly in mutual funds. It also offers investment expertise and market commentary to help you make sense of investing, so you can achieve your financial goals.
Our sincere thanks to