SUPPORTING a family in today’s times is not an easy feat.
The decline in the quality of local education means that in order to give your children the best opportunities in life, you would need to provide them with a decent tertiary education, which might entail seeking opportunities overseas.
For many married couples, this will be one of the biggest expenditures of their lives.
As scholarships are limited, your best bet would be to build up your nest savings to be able to fund them from your own pocket. But how will you know how much you are able to afford when the time comes?
This is where I advise my clients to create their holistic financial plan.
Creating a holistic financial plan will enable you to see in detail how much funds you will have at each point in your life, and the adjustments you may need to make now in order to turn your future financial goals into a reality.
Many a time, married couples find themselves trapped in an endless cycle of worry, unable to find the answers that they are looking for.
They may not know how much they need to put aside and invest in order to fund their children’s education.
Additionally, they may lack clarity on whether supporting their children’s education would jeopardise their retirement funds.
These uncertainties can cause a lot of unnecessary stress to married couples and have enduring effects on the family in the long run.
Take for example the case of Dan and his wife, who came to me to achieve similar priorities for their children. They both run a medium-sized trading business and are not very fluent in English.
Being two individuals with limited formal education and having been denied access to a university education, they both recognise how much more competitive the world is becoming today, and the significance of western education in providing their children a good head start in life.
The good news is that both Dan and his wife were on the same page on this financial goal since their children were born.
However, despite that, both have not really been taking steps to ascertain if they are on the right path to this goal.
After learning more about the concept of holistic financial planning in one of my talks, Dan and his wife approached me to help them understand how much they can optimally put aside for their children’s education without compromising their retirement lifestyle.
As usual, I begin the process by conducting a fact-finding meeting, during which the following financial details were shared:
> Dan is 41 years old and his wife is 38. They have a daughter aged 13 and a son aged 10.
> He earns an annual income of RM144,000. His wife assists him in his business and earns an annual income of RM96,000.
> He has the following financial assets:
House – RM720,000 fully paid, property investment – RM1,200,000 with RM600,000 outstanding mortgage loans, unit trusts (bond fund) – RM200,000, shares – RM210,000, bank deposits – RM500,000, Employees Provident Fund – RM330,000 (himself), RM240,000 (wife).
He and his family currently enjoy a lifestyle of RM96,000 per year, excluding mortgage repayment, insurance premiums and income taxes.
> He and his wife intend to retire at 55 with RM84,000 living expenses per year till Dan is 80 years old.
> They spend about RM20,000 per year for their family vacation.
> They would like to provide as much as they can for their children’s education, with at least RM300,000 per child.
> They intend to provide RM300,000 each for their critical medical expenses during their old age.
After reviewing the gathered information, I made a suggestion to Dan and his wife to consider increasing their allocation for education to RM500,000 for each child’s tertiary education, since education was such an important goal to them.
When plotting their holistic financial plan, this is what the current simulation looked like (see chart).
Here, we can observe that Dan’s net worth increases to RM 1.4mil by the time he reaches the age of 45. At ages 46 and 49, he will experience a dip in his net worth, when his daughter and son enter university respectively.
After that, their net worth grows and peaks at RM2.8mil at age 58, when both he and his wife retire and have access to their Employees Provident Fund.
From then on, their net worth depletes steadily until Dan reaches the age of 68. It is worth noting that their current investment portfolio return on investment (ROI) is around 3%.
Given that the longevity of their wealth was less than ideal, I started by offering a few suggestions. First, to reduce their retirement expenses from RM84,000 to RM60,000 per year.
Second, was to cut their annual vacation budget in half.
From the results, we can see that these adjustments increased the longevity of Dan’s wealth, but only until the age of 72. This is still far from making it to Dan’s 80th year.
The next aspect that I suggested them to tackle is their ROI. Currently their investment portfolio ROI only sits at 3.34% per annum, which is rather low, barely surpassing the rate of inflation. However, proposing a higher ROI for Dan and his wife proved to be challenging, as they are both highly conservative investors at heart.
To encourage them to increase their ROI, I suggested we experiment with an adjustment to their holistic financial plan where we increase their ROI by just 1%.
With just this one minor adjustment, Dan’s wealth can now last till his 76th year. This was an encouraging development for both Dan and his wife, who were now open to increasing their investment portfolio ROI.
Recognising the substantial time available for their wealth to compound, I recommended they set their sights on a 6% ROI target.
This adjustment marked the most significant impact thus far, with their wealth now performing beyond their 80th year, which was their goal at the start. Seeing that their roadmap now is able to last up till their 86th year, they had greater flexibility to address additional financial goals. I suggested therefore that they revisit their annual vacation budget and revise it to RM15,000 instead of RM10,000.
We can see in the chart that because of the previous adjustment to their ROI, Dan’s wealth can now last till his 82nd year even if he spends RM15,000 on his annual vacation.
Dan and his wife were elated to finally see their holistic financial plan coming together, where they are able to reach their financial goals and set out to achieve what was truly dear to their hearts - ensuring their children have a more than decent education fund when the time comes for them to enter university.
The slight adjustments that they had to make to their lifestyle were:
> Restructure their investment portfolio so that they achieve a comfortable 6% ROI instead of a 3.4% return at present.
> Reduce their retirement spending to RM60,000 per annum
> Adjust their annual family vacation budget to RM15,000 from RM20,000
> With all these adjustments, they could in fact increase their educational budget to RM500,000 per child, something that they were extremely proud of, having started this process with the expectation of RM300,000 per child
We can see from this example that a good holistic financial plan provides value beyond just ringgit and cents.
Had Dan and his wife not taken the step to prioritise their financial goals and create a roadmap to their financial freedom, they would have likely been constantly questioning if they were making the right financial decisions.
As we can see from the very first roadmap, they probably would not have been able to stretch out their finances till they hit 80 years of age. And most importantly, when the time came to give their children the most important gift of their lives, they wouldn’t even have known the extent to which they could allocate funds for each child.
This is why I encourage everyone to make their own holistic financial plan for their personal and family goals – the value of knowing your roadmap is financial, but also for your peace of mind.
Constructing their financial roadmap empowered Dan and his wife with greater assurance in their decisions, equipped with the knowledge of the necessary financial adjustments they needed to maintain in order to provide their children the gift of a quality education.
With the assistance of a holistic financial plan, the time and energy that were once consumed by doubts and worry about their children’s education can now be directed towards building strong foundations for their precious family.
Yap Ming Hui is a licensed financial planner. The views expressed here are the writer’s own.