By BRIGITTE ROZARIO
PARENTS often worry about their children's future and in particular tertiary education. Will you be able to pay for their education, especially with inflation? Financial planning is one way of ensuring your child's future. For Muslims, financial planning is not just about investing money but doing it the right way.
Muslims can't just invest in any unit trust and insurance or even construct a will according to their desires. They need to ensure the unit trusts are syariah-compliant; they need to get takaful – the Islamic form of insurance, and their wills needs to take into account faraid (the Islamic estate distribution).
The financial planning scene was a much different one years ago when there were fewer Islamic financial products in the market. Although there are many more options today, not everybody is aware of them.
In fact, some Muslims still think that it's wrong to plan and better to just trust in God.
While trusting God is very important, that doesn't mean the Muslim should leave his doors unlocked and his money laid out for all to see.
Planning, the syariah way
Planning is very much encouraged, explains Maznita Mokhtar, co-founder and director at Islamic financial planning services company IIFIN Planners.
She says, “At one extreme some Muslims might believe that money is equated to materialism and hence chasing after money and accumulating wealth is wrong. But it is not; it's actually encouraged.”
According to Maznita, the difference between regular financial planning and Islamic financial planning is that Muslims have to do everything in line with syariah which is according to the Quran and Sunnah. The Sunnah is the Prophet Muhammad's practices and teachings.
“When you look at something general like taking a house loan or a car loan, if it's Islamic there should be no riba (usury). That means that there can't be fees charged with no reason. Everything needs to be justified. In that sense you should not make a profit off the customer.
“So in the banking system now they have changed the contracts for some of these products such as the housing loan, to get rid of the riba factor. So, then you can have Islamic loans or Islamic hire purchase. For insurance you should take takaful because takaful's concept is different from insurance.
“In insurance there is the uncertainly concept whereby you buy something that is uncertain and you might lose it if nothing happens to you. But in takaful, the contract between you and the takaful company is different. In your takaful contract you agree to mutually help other contract holders so there is a communal fund that you contribute to and from which you can get funds if anything happens to you. Takaful is basically the Islamic insurance.”
She explains the contract has been changed in financial products so that every bank or insurance company that wants to have an Islamic products has to have a syariah advisory board that will then make sure that you have conformed to all the rules.
While non-Muslims only worry about taxes, Muslims have to worry about taxes and zakat (alms tax). For investments, Muslims would also want to set aside some savings for the Haj.
Muslims can invest in stocks and unit trusts but they too have to be syariah-compliant.
“The Securities Commission has a listing that is revised every May and November stating which stocks are syariah-compliant and which are not. A particular stock could be syariah-compliant this quarter and not in the next quarter. These stocks may change because it is usually based on the percentage of their interest-bearing loans or the percentage of the alcoholic content of their business.
“Importantly, Muslims need to look for a financial planner who knows Islamic financial planning; they don't necessarily have to be Muslim,” says Maznita.
Everyone needs planning
According to her, everybody needs financial planning simply because a financial planner can look at your real goals – it could be short or long term – and your financial plans can be worked out.
“For example, if it's somebody in their 40s whose goal is to retire at 45. So there's five years to work out a particular lifestyle or a particular income level that they want to achieve by then. The financial planner can work that out based on what assets you have, how to reinvest or restructure your liabilities.
“When that same person is a Muslim, the Islamic financial planner can then advise them on the Islamic matters to look out for such as zakat. It could also be how to go about constructing a will. The Islamic will has a lot more complicated issues.
“You don't just have to go to a Muslim financial adviser. There are also non-Muslim financial advisers who have gone have the certification and know how to handle financial planning for Muslims,” she adds.
Maznita explains that it is important for parents to plan because they're not just responsible for themselves; there's also the children's education to save up for.
“People who don't have goals might say 'Yeah, I'll send them to university when the time comes.' But do you know how much a university education costs if you want to send them overseas? Or if you want to send them to study medicine as opposed to some general course. If you have 15 years to plan, you need to start saving up now.
“A lot of insurance agents will just say 'If you take up this insurance product, when it matures in 15 years that's your (education) fund.' But it may not be enough. You need to see the bigger picture – how much will your child need when she turns 18 to study overseas and you need to factor in inflation as well. If you have a financial adviser he or she will keep reviewing your funds as things change,” she says.
Wills and faraid
Maznita explains that the awareness of the importance of Muslim wills has only increased recently. Previously, everyone thought it was okay not to have a will because there was always faraid.
However, there are a lot of things to plan.
For example, if you have an adopted child, he or she won't get a share if there's no will. So, there's planning involved there. While you cannot construct a will that contradicts the faraid, you can state what your preferences are and perhaps set aside a trust or put some money in a company with the child as a major shareholder. These are some of the ways to protect certain parties like an adopted child so that that amount doesn't go into the estate because whatever goes into the estate will then be divided up according to faraid.
To avoid having things get messy and contested in court after your passing, Maznita advises to have everything in order, all your finances documented, with the right number of witnesses for all the documents. Put everything down in black and white and that includes assets you are holding for others under your name or assets others have under their name but which is actually yours or a loan that somebody has taken in your name. With everything well documented, it will be easier for your family to settle the matter whether it ends up in syariah or civil court.
“Usually, it is only when people want to write their will that they realise all the different assets they have and if they're holding assets for someone else.”
Be aware that you don't just handle your finances according to which investments give you the best returns. You need to ensure it is in accordance with syariah, with the Islamic ways of financing.
“Some people are just unaware of the Islamic ways of financing. Some are slowly switching over. Having said that, if you already have an insurance policy instead of takaful, you don't have to terminate it. That's supposed to be long term. Terminating it will be more detrimental to your family because if you terminate it today and you died tomorrow, that's it, there's no protection for your family.
“But whatever new products you want to take up now, then look for the takaful option.
“If you talk to some of the takaful agents they might tell you that you must terminate your insurance policies because it is 'haram'. Watch out for that. They say it because they want to sell takaful. They cannot do that. They are doing more harm if they ask you to terminate your insurance because when you took your insurance many years ago there was no takaful option, so there was no choice.”
When one parent stays home
Lastly, Maznita advises families wanting to go from a two-income family to a one-income family:
“Firstly you have to look at your income. Can that one income support all that you need as a household? You have to calculate your budget – what is your monthly inflow and outflow? Maybe with one income there are certain things you don't need to pay for anymore – less travelling expenses and personal expenses. So, maybe you can live off one income.
“You will have to cut down on expenses if you're living on one income. Basically the outgoing has to match the incoming and you also need to set aside about 15% of your income as savings or investment. If everything that comes in goes out, then where are your plans for the future?
“The rule of thumb is that you must have an emergency fund which is about three to six months' worth of income – for a rainy day when you need to take something out from that fund. Make sure that you don't touch it otherwise.
“Then you should save 15% of your income. But a lot of people say they have EPF, but that's only 11%, but you still need your own other savings.
“You shouldn't have a deficit every month. You should have a surplus. You should put aside the savings first and then use the rest for expenditures. If you spend first and then want to save the surplus there won't be anything left for savings.
“For a lot of people the SOS usually comes when they have overspent on their credit card. That happens a lot especially with young people because the banks are offering the credit cards with very little criteria. So then there are a lot of unbacked expenses. Then it's all about changing your spending pattern.
“If it's not working out, you may just have to find another source of income. You may not need to go back to work full-time. You may just need to find a part-time job or work from home, just something to make up that difference.”