Unlocking the code of your financial freedom

  • Business
  • Saturday, 11 Aug 2018

WHEN you ask people what financial freedom is, chances are that you will get different answers from different people.

Some may say that financial freedom means having RM1mil in their bank accounts.

Some may say that financial freedom means no more debt and loan while others say it means having enough money to do whatever they like.

I would like to define financial freedom as: “An optimum financial position whereby your wealth is optimised to match your optimum financial needs and wants.”

In order to achieve financial freedom, one has to understand and manage the five essential elements of financial freedom – spending, inflation, ROI, time and saving. Without knowing how to manage these elements effectively, financial freedom will only be a dream, not a goal, for most people.

You will find that all the essential elements are closely related and inter-connected.

For example, how much you spend will affect how much you save. How much time horizon you have, will affect the ROI you need to achieve an accumulation target.

To succeed and achieve financial freedom, one would need to understand the combined result of the elements i.e. spending, ROI, inflation, time and saving in the right combination.

Knowledge is not power. Knowledge is only powerful when you apply it and take action.

Let me tell you about George:

He is 36 years old and his wife is 34 years old.

He has two children aged eight and five.

He works as a senior manager in a multinational corporation with an annual income of RM120,000. His wife is an administration manager with an annual income of RM100,000.

He has the following financial assets:

• House – RM500,000 with a RM250,000 mortgage loan

• Unit trusts – RM30,000

• Bank deposits – RM200,000

• EPF – RM200,000 (himself), RM150,000 (wife)

• He and his family currently enjoy a lifestyle of RM120,000 per year, excluding mortgage repayment, insurance premiums and income taxes.

• He and his wife intend to retire at 55 with RM96,000 living expenses per year up to age 80.

• They would like to provide RM200,000 each for their children’s tertiary education.

Do you think George will be able to achieve his financial freedom goal?

The best way to answer this question is to plot a roadmap to financial freedom for George.

The roadmap takes into consideration a person’s relationship with the five essential elements of financial freedom: spending, inflation, ROI, time and saving. In addition, the calculation has also taken into consideration the individual’s age, number of children, EPF, various financial goals, sources of income and forms of assets and liabilities.

Certain reasonable assumptions have also been made to complete the full picture of an individual’s financial position.

George’s roadmap presently looks like this: (Chart 1: Net worth simulation - current)

Current Roadmap to financial freedom for George

The Y axis represents George’s net worth. The X axis represents his age. From the roadmap, we can see George’s net worth will grow to about RM400,000 when he is 45.

His net worth sharply declines to almost zero at age 46 upon his first child entering university. His net worth then grow slightly but it again drops to zero at age 49 when his second child enters university.

His net worth continues to stays at zero until he reaches 55 when he withdraws his EPF money.

At this point, his net worth grows to about RM1,100,000. At 57, George’s wife withdraws her EPF money and their family net worth grows to RM2,450,000.

From thereon, their net worth continues to decline, eventually reduces to zero when George reaches age 65. Basically, George’s wealth will run out by the time he is 65.

Based on George’s desire to have his wealth last until age 80, the roadmap clearly shows that George’s current wealth management trajectory will not help him fulfil all his financial needs and wants.

It is important for us to possess a roadmap to financial freedom. Having one done up, will enable us translate all our financial freedom dreams into a coherent set of financial performance measures.

With the roadmap, we will be able to:

• measure our progress against our goal to achieve financial freedom.

• know where we stand now on our journey to financial freedom. Take necessary actions to help us get closer to financial freedom.

Without a roadmap to financial freedom, you will not know if you have enough financial resources to meet all your goals.

When you realise the problem at age 50 or 55, there may still be a small window of opportunity for you to leverage on the power of compound interest, but you would need to take action.

Without this knowledge, you may also continue to over-save and under-spend. This is what we mean by compulsive saving.

How would you feel if you’d scrimped and saved for many years just to realise that you have over-saved at the age of 55?

Just think of all the opportunities you could have taken to improve the quality of your life, if only you knew earlier, that you could afford a bit of luxury.

In short, without a roadmap, managing your personal finances is akin to shooting in the dark. You don’t quite know where the target is nor would you know whether you had hit the target.

Back to George, by having a picture of his current roadmap, George will be able to take appropriate actions and reprioritise his financial needs and wants. Here’s what he would need to do:

First, he can restructure his investment portfolio to achieve a higher ROI. His current investment’s ROI is 3.8%. If he is able to achieve 9% ROI for his investment portfolio, his roadmap will look like this:

(Chart 2: Net worth simulation - current & adjusted)

After increasing his ROI, George’s net worth will last until the age of 68. This is a good start, but still not good enough. His target was to have his money last beyond age 80.

Next, George needs to reprioritise and adjust his financial needs and wants. He may opt to reduce his living expenses during retirement from RM96,000 to RM84,000. If he is willing to do so, George’s roadmap indicates that his net worth will last from age 68 to 71.

(Chart 3: Net worth simulation - current & adjusted)

Finally, George will need to adjust the spending from his current lifestyle in order to increase his savings. If he is able to reduce his current spending per year from RM120,000 to RM105,000, he will find that he will have an additional RM15,000 in savings per year.

(Chart 4: Net worth simulation - current & adjusted)

From the latest adjustments, George’s net worth will now last longer, up from age 71 to age 83.

By making a series of corrections based on the five essential elements, George will discover that he is now able to achieve all his financial goals.

That is the beauty of having a tailor-made roadmap to financial freedom at your disposal. George has the ability to realign the roadmap according to his preference.

He can try different actions and adjustments to see their impact.

By doing that, he will identify the most opportune scenario which allows him to pursue financial independence with a peace of mind. Now what’s left for him to do is to take action.

George’s situation is not unique. Many Malaysians are faced with similar situation on a daily basis because they do not know any better.

Neither is their brains wired in a way to process this complex information. Hence having a tool, or resource that can support the management of the five essential elements to achieve financial freedom would be a game changer for everyone.

Yap Ming Hui (ymh@whitman.com.my) is thrilled that his mission to empower every Malaysian with a roadmap to financial freedom has finally come to fruition with the release of a free DIY roadmap to financial freedom tool on the iWealth mobile app.


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Business , Yap Ming Hui


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