LECTURE 1

Introduction to Personal Financial Planning

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 Lectures, Workshops and Tutorials
Lectures can be:
o Mixture of textbook and additional content
o Attendance will be marked and recorded.

Workshops and Tutorials

o Attendance will be marked and recorded via
iCheckin and BB Collaborate [See eLearn]
o Questions provided in advance in eLearn
o Preparation for workshops and tutorials are
crucial to succeed in this module
o Only solutions for selected questions may be
provided on eLearn
o You are encouraged to take notes during
workshops and tutorials.

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Learning Outcomes
At the end of this chapter, you should
be able to:
• Understand the financial
planning process.
• Apply the SMART model in
setting financial goals.
• Discuss the financial planning
environment in Malaysia

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 What is Personal Financial Planning?
Personal Financial Planning is :

 The process of developing strategies to

assist an individual to manage his/her
financial affairs to have sufficient
resources to meet emergencies,
accumulate wealth over time and to
achieve their personal life goals.

 Personal financial planning provides a

direction and meaning to your financial
decisions.
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Basic Principles of Financial Planning

Source : Private Pension Fund Website : http://www.ppa.my/getting-started/retirement-funding-formula/save-invest-retire-enjoy/ 5

http://www.forbes.com/sites/deborahljacobs/2012/01/02/you-can-get-rich-pinching-pennies-like-
warren-buffett/
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MOVIE star Chow Yun Fat (pic), who is known for
his frugal lifestyle, spends only HK$800 (RM424) a
month, Oriental Daily reported.
His wife Jasmine Tan revealed that Chow enjoys
eating street food and has been using her old
handphone for 17 years.
She said he only changed to a new smartphone
after the old phone stopped working.
Despite being an international star worth HK$5.6bil
(RM2.97bil), Chow still sees himself as an average
man, who finds joy in living the simple life.
Often seen commuting on public transport dressed
in old clothes, Chow said that “clothing was not
something to show off and anything is good as long
as he feels comfortable in it”

Read more at
https://www.thestar.com.my/news/nation/2018/10/11/
chow-yun-fat-spends-only-rm424-a-
month/#SOYuAlAEeVdVs7bl.99
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 The Importance of Financial Planning
• Enhancing an individual’s life-long
wealth accumulation

• Increasing one’s net worth

• Improving one’s debt management

• Enhancing personal risk management

• Proper distribution of wealth

• Better relationships with others.

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 LECTURE 1
Introduction to Personal Financial Planning

Part 2 : The Financial Planning Process

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THE FINANCIAL PLANNING PROCESS

Step 1
Review current financial situation
- Current cash flow situation?
- Current assets and liabilities?

Step 2 : Set financial goals

Step 6
- What are your personal beliefs and values?
Monitor the results and
revise plans if necessary - What are your short term, medium term and long
term goals?

Step 3 Identify courses of action

Step 5 - What are the alternative courses of action?
Implement the financial plan - What are the trade-offs?
- Carry out the plan - What are the risks?

Step 4
Develop financial plan
- Shortlist and prioritize goals
- Develop action plans and target dates
Step 1:
REVIEW YOUR CURRENT FINANCIAL SITUATION
Where are you now?

• Review cash flow statement

• Evaluate income, savings and
living expenses
• Review net worth statement
• Personal assets and liabilities

• Available and potential financial

resources
• Are they sustainable?
This Photo by Unknown Author is licensed under CC
BY-NC-ND
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 Step 2 : SETTING FINANCIAL GOALS

 Financial goals depend upon a person’s

beliefs, values, attitude towards money and
social influences

 What are your short, medium and long term

goals?

Source : Adapted from : Maslow (1954; 1943)

 The SMART Model
 S = Specific
 Goals should be simplistically written and clearly define what you are going to
do – Why, What and How?

 M = Measurable
 Include tangible measurement of achievement

 A = Action-oriented
 Should be able to motivate and challenge you towards greater achievement.
You need to have the relevant knowledge, skills and abilities to achieve the
goals

 R = Realistic/Result Oriented
 Should measure outcomes not activities

 T = Time-based
 Linked to a timeframe to promote a sense of urgency, or results in
tension between the current reality and the vision of the goal.
Did NOT apply S.M.A.R.T model

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Did NOT apply S.M.A.R.T model

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 Example : Applying the SMART concept
• Current age = 25
• Current net take home pay, lets say = RM2,500
• Assume rate of return = 7% per annum
• I want to be a millionaire (Not specific - purpose? how?) by the time I am
40 [i.e. 15 years time – Should state begin and end date]

• How much have you got to invest monthly from now to achieve this?
• Use FV of an annuity formula and solve for PMT :
FV = PMT [ ((1+i)n -1)/ i ]
• Substitute :
FV= 1,000,000 n = 15 x 12= 180 i = 7/12 =0.5833% = 0.005833
Solve for PMT = RM3,154.94 [ Investment per month]
 Let’s say this individual can save 20% of net take home pay
= RM2,500 x 20% = RM500 << RM3,154.94 [Not realistic]

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 Example of application of SMART concept
“ I would like to buy a condominium located at Sunway Gandaria in Bandar Baru Bangi with
a build-up area of 949 square feet currently priced at RM462,000 for investment purpose.
The down-payment required is 10% and the mortgage interest rate is 4.4%.”
From statement above, the monthly instalment can be calculated to be ** RM 2,082 if the
loan tenure is 30 years. This information can be translated into an action plan.

SPECIFIC The location, size, type of property is clearly stated

MEASURABLE The price of the property, down-payment and interest rate of the loan is
quantifiable and clearly stated
ACTION The individual intends to take a 30 year mortgage with a monthly instalment of
ORIENTED RM2,082, to acquire the property
REALISTIC Need to review the current financial situation of this individual.
• For example his current net take home pay, whether he has sufficient
emergency funds and his net debt to income ratio (in Lecture 2)
TIME BOUND The plan needs to have a target starting date and end date.

** For housing loan, we will use the PV of Annuity formula : PV = PMT [((1-(1+i)-n)/i]
Substitute :
PV = 462,000 x 90% = 415,800 n = 30x 12 = 360 i= 4.4/12 = 0.3667% = 0.003667 Solve for PMT
PV = PMT [((1-(1+i)-n)/i]
415,800 = PMT (1- (1+0.003667)-360)/0.003667  PMT = RM 2,082.16
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Step 3: IDENTIFY POSSIBLE COURSES OF ACTION
Kenny Loh would like to buy a new car and needs to pay an initial deposit of RM 6,000 and
monthly hire purchase instalments of RM1,050 for 5 years. His current net take-home pay in his
first job is RM2,800. Assume that his average monthly living expenses are RM1,500 (excluding
the car). He also plans to go for holiday/travelling annually with an estimated cost of RM12,000
per annum. As such before buying the car, Kenny Loh needs to think about the consequences
of his action.
POSSIBLE COURSES OF ACTION REMARKS
Continue with one’s current lifestyle with no  Kenny Loh would commit to buy the car and he would have a monthly
change/status quo savings of only RM250 ( = RM2,800- RM1,500 –RM1,050).
 This will result in him not have enough money for his annual
holiday/travelling plans. Even more important, he may not have
enough savings for emergencies.

Enhancing the current situation.  Kenny could get a part-time job or improve his skills to get a better job
to increase his income
Consider a new course or path of action.  Kenny might accept that buying a new car is too costly for him. He
could buy a good second hand car, with a monthly instalment plan of
lets say, RM500 per month for 2 years. This way, Kenny will be able
to reduce the monthly car instalment expenses by RM550 per month
(= RM1,050 –RM500). If he also decides to cut down some of his
entertainment expenses (e.g. clubbing and movies) by RM500 per
month by being more active in sports after work. This will enable him
to save RM12,600 [(RM550 + RM500) X 12] per year. Now, Kenny
which would not only be able to have a decent car but also go on his
annual holiday with some savings left over.
 TRADE- OFFS IN FINANCIAL PLANNING
 Current opportunity costs
 Personal sacrifices e.g. time, efforts and health
 Financial sacrifices
 Savings for the future will reduce current liquidity
 Less current consumption
 Potential risks
 Future potential rewards
 Long term goal achievement
 Higher retirement nest-egg
 Financial freedom

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AREAS OF UNCERTAINTY AND FINANCIAL PLANNING
Area of uncertainty Brief characteristics Financial planning area of concern

Personal  Risk that one may get retrenched due to jobs  Emergency savings
earnings/Income being replaced by new technology

Longevity  Risk that an individual may outlive his/her  Investment planning

retirement savings.  Retirement planning

Personal  Permanent total disablement  Insurance planning

circumstances and  Death of breadwinner of a household
life events  Damage of property due to fire and/or theft

Inflation  Risk of the reduction of purchasing power  Investment planning

due to the increase cost of living.

Interest rate  Increase of borrowing costs if the interest is  Debt management

based on variable interest rates.  Investment planning
 Investments mature but reinvested at lower
rates resulting in lower interest income.
 Unstable investment returns

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 Step 4 : DEVELOP FINANCIAL PLAN
Prioritize and develop action plan details
Financial goal Priority Start Target Estimated Deposit/ Monthly Remark Type of plan
Date Date amount Initial amount amount
required
Buy a MYVi 2 RM54,090 RM5,571 RM 430  Deposit the Cash flow Budgeting
X1.03 (based on sale of her
- Payment of 1/11/21 1/2/2022 =RM55,712 10% of net current old car
initial deposit
(Assume 3% take home (details
inflation) pay) required)
which may
take 3 months
- Settlement of 1/3/22 28/2/27
instalments  Monthly
RM 969
instalments of
RM969 would
be paid from
monthly
income
Build up 6 1 1/1/22 30/10/22 RM 9,000 RM5,000 RM 430 From current savings Cash flow Budgeting
months (estimated at 6 (from current (based on and monthly planned
emergency months of living savings and 10% of net savings
fund expenses) fixed deposits) take home
pay)
Retirement 3 1/1/25 1/1/50 RM 1 million RM 15,678 Make regular Investment plan
plan per year investments in
shares and unit trust

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Step 5 : IMPLEMENTATION OF FINANCIAL PLAN

 Act on the plan

 Get assistance from professionals

if unsure for advice– e.g. licenced
financial planners

 Final decision is YOURS not

anyone else's

In this course, we need to wear the shoes of the individual and also
think like a Financial Planner
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 Step 6 : MONITOR AND REVISE THE PLAN
A review should be done on a regular interval for
instance half-yearly or yearly to :
 Review outcome of financial goals
 Changes in personal circumstances –e.g. new
addition to family, death in family, loss of job etc
 Economic events may include uncertainty in interest
rate, changes in supply or demand, changes in
government policies or other macroeconomic events
that would affect the overall investment risk. If these
changes are expected to be long term, asset
reallocations may need to be conducted to stabilize
the average returns on investments.

This Photo by Unknown Author is licensed under

CC BY-SA

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Opportunity Costs and the Time Value of
Money
1) Future Value of a Single Amount

2) Future Value of an Series of Deposits/Annuity

3) Present Value of a single amount

4) Present Value of an Annuity

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 Example Formula

Future Value of a Single Amount  How much would one get if he FV = PV (1+i)n
saves RM10,000 at an interest Substitute :
rate of 4% per annum in 20 PV = 10,000 i = 4% n = 20
years time? Solve for FV = 21,911

Future Value of an Series of  Ramli intends to invest RM1,000 FV = PMT [ ((1+i)n -1)/ i ]
deposits made at the end of each at the end each month. The Substitute :
period (Ordinary Annuity) expected return on investment is Set END
5% per annum. What would be PMT = 1,000 i = 5/12 = 0.4167%
the amount Ramli would have in n = 15 X 12 = 180
15 years time? Solve for FV = 267,289

Future Value of an Series of  Alicia intends start a savings FV = (1 +i) x PMT [ ((1+i)n -1)/ i ]
deposits made at the beginning of plan where she will put aside Substitute :
each period (Annuity Due) RM2,000 at the beginning of Set BEGIN
every month for the next 10 PMT = 2,000 i = 6/12 = 0.5%
years. Her expected return in n = 10 X 12 = 120
investment is 6% per annum. Solve for FV = 329,397
How much will she have in 10
years time?
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 Example Formula
Present Value of a  Mr Jeya estimates that he would require PV = FV/ (1+i)n
Single Amount RM180,000 for his son’s, Raju’s education in Substitute :
8 years time. If the expected return on FV = 180,000 i = 5% n = 8
investment is 5% per annum, what would be Solve for PV = 121,831
lump sum that Mr Jeya should invest now
for this purpose?

Present Value of an  Mr Micheal intends to retire at the age of 55. PV

Annuity Due He expects to live until the age of 80. He = PMT + PMT [ (1- (1+ i) –(n-1) )/ i]
also estimates that he wold require Substitute :
RM60,000 at the beginning of each year to Set BEGIN
live his desired retirement lifestyle. He PMT = 60,000
estimates that the post retirement rate of n = 80-55 = 25
return would be 5% and the inflation rate i =( 5-4)/1.04 = 0.9615%
would be 4%. What would be the amount PMT = 60,000
that Mr Micheal would need for his Solve for PV = 1,702,755
retirement nest-egg at the age of 55?

Note :
• If the annuity payments are required at the end of the period then use the ordinary
annuity formula.
• Many other possible combinations of calculations. These are the basic/normal types.
• PV and FV calculations are assumed knowledge.
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 Housing Loan Monthly Instalment Calculations
Using PV of Annuity Formula

PV = PMT [((1-(1+i)-n)/i]

Substitute :

PV = 270,000 n = 300 i = 5/12 = 0.4167% Solve for PMT = RM 1,578.39

Time Value of Money – Future Value of a Single Amount
Future Value of $1,000 (single amount), Future-Value Interest Factor

Future value of RM1,000 @ 5% in 10 years time = 1,000 x 1.629= RM 16,290

 Source : https://www.imoney.my/articles/need-for-speed-the-time-value-of-money
Note :
• Year 1 interest = 10,000 (1+6/12) 12 = 616.78
• Assumes monthly compounding
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Time Value of Money – Future Value of an (Ordinary) Annuity
Illustration of a 5-Year $500 Annuity Compounded at 6%

Or Use this formula :

FV = PMT [ ((1+i)n -1)/ i ]
Substitute : Set END
PMT = 500 i = 6% = 0.06 n=5
Solve for FV = 2,818.54

Note :
Normal annuity - This example assumes the deposits are made at the end of the each period.

Annuity due :
If deposits were made at the beginning of each period, then should use the annuity due
formula, The FV would be $2,987.66
Future Value of a Series of Equal Annual Deposits (annuity),
Future-Value Interest Factor of an Annuity

From previous example : PMT = RM500

Future Value of annuity using this table = 500 x 5.637 = 2,818.50
Time Value of Money – Present Value of a Single Amount
The Present Value of $100
Time Value of Money – Present Value of a Single Amount
Present Value of $1 (single amount)
Present Value of an Annuity
Illustration of a 5-Year $500 Annuity Discounted Back to the Present at 6%

Or use this formula:

PV = PMT [((1-(1+i)-n)/i]
Substitute:
Set END PMT = 500 i = 6%=0.06 n =5 Solve for PV

PV = 500 (1-(1+0.06)-5)/0.06) = $2,106.18 (rounding)

 Present Value of a Series of Annual Deposits (annuity)
Present-Value Interest Factor of an Annuity

From previous example : PMT = 500

PV of an annuity using this table = 500 x 4.212 = 2106
Formulae
Annuity Annuity Due
Payments made at end of each year Payments made at beginning of each year

Present value of Annuity Due

Present value of an Annuity

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Source : https://www.imoney.my/articles/need-for-speed-the-time-value-of-money 38
Food for thought……

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 The financial planning regulatory environment
• In Malaysia, financial planning activities are regulated and governed by the Capital Markets
Services Act, 2007 (CMSA 2007).
• Licensed independent financial planner requires
• Capital Market Services Representative License (CMSRL) or if he/she is having a
financial planning firm a Capital Market Services License (CMSL).
• Be above the age of 21, be deemed to be fit and proper, possess the proper
qualification and experience as well as have undergone the relevant licensing exams.
They also need to abide by a strict code of ethics and undertake the stipulated
continuing professional development requirements by the professional bodies.
• In Malaysia, full membership of the financial planning professional bodies such as
Financial Planning Association of Malaysia (CFP/IFP) , Malaysian Financial Planning
Council (RFP/Shariah RFP) and Malaysia Financial Planners and Advisers Association
(ChFC) are acknowledged for application for CMSRL/CMSL.
• For dealing in derivatives, clearing for securities or derivatives, fund management, dealing in
private retirement schemes, advising on corporate finance and provision of investment advice
 Need to sit for licensing exams by Securities Commission Malaysia
• In Malaysia, insurance and takaful activities are regulated by Bank Negara Malaysia. As
such individuals need to have the relevant Financial Advisers’ License and Financial Advisers’
Representative License under the Financial Services Act 2013 (FSA) and Islamic Financial
Services Act 2013 (IFSA).
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 The role of the financial planner
Important considerations before engaging a financial planner:

• Financial planners must possess the relevant licenses and

professional qualification

• Financial planners must be trustworthy and adhere to a

professional code of ethics.

• A financial planner needs to be able to provide

comprehensive/holistic advice according that is relevant to the
risk profile of the client for good and bad times and be available
to review financial plans and asset portfolios on a regular basis
and able to clear any doubts/queries that the individual client
may have.

• Ideally there should be a written agreement to list down the

planner’s job scope and objectives in detail to avoid future
disputes.

This Photo by Unknown Author is licensed under CC BY-NC-ND 1-41

 Financial Planner’s Code of Ethics

1. Putting the client first

2. Integrity
3. Objectivity
4. Fairness
5. Professionalism
6. Competence
7. Confidentiality
8. Diligence

Source : This Photo by Unknown Author is

licensed under CC BY-NC-ND
Financial Planner Code of Ethics and Professional Responsibility by the Financial Planning Standards Board (FPSB).
Retrieved from https://www.fpsb.org/wp-content/uploads/2016/01/110000_pub_CodeEthicsProfResp-A4-LR.pdf
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Reflection Activity:

What does wealth mean to you?

https://docs.google.com/forms/d/e/1FAIpQLSe8FPcJvLqPrDaloEfx1R51BkmX
Dm5T7k80w1nIrvJbGqMYHQ/viewform

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What does wealth mean to you?
August 2021 Semester Poll

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• Financial Independence Have enough money for my future generations to sustain Rich enough so I can travel the world
• - Have funds to use after retirement - Save money to use for emergency purposes such as medical or accident - Paying off
the debts
• To be able to achieve financial freedom and be debt free by the age of 50 To be able to own several investment properties.
To be able to earn a monthly employment of more than RM4,500
• Millionaire
• 1. Financial freedom.
• Financial Freedom, hobby become work, entrepreneur
• -have own car and house -financial freedom -can invest in long term investment
• In order to survive
• My financial goals are to have sufficient money to support families and to have better life after the retirement.
• own my house and car by age 30, and at least 3 mil of savings in the bank when I retire
• Pay PTPTN loan, earn enough money to pay for everything I need, live a better life
• to be able to buy a house
• Saving enough for a vacation all around the globe with my other half, and Don and Ernest. Saving enough for a sport
vehicle and ultimately a house.
• vacation, retirement investment, financial freedom
• 1.Complete degree 2.Have good ability to earn money in investment market 3.Have a good result in my personal journey
• 1. To have passive income at least RM5K a month 2. Have all my debts paid before I retire 3. Retire asap
• Adequate Sustainable Income Savings Investment
• Myn financial goals are to be able to achieve financial stability by the age of 30 and hope to have a healthy life to enjoy
with my family members
• Medium Financial Goals: Gain decent active income from work Long term financial goals: Achieved abundant amount of
passive income inflow
• - able to receive stable passive income from investment - to have earned RM1million in 30 years old - able to go for a
vacation at least once a year
• Economic freedom, Pay PTPTN, RM20k savings
• Pay off my student loan, unlock T20, achieve financial freedom
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