Personal Finance Health Check: 7 Things to Look Into for 2018

You service your car every few months to ensure it remains in tip-top condition for your driving. Just as you service your car, so must you check to ensure your finances are in a good state. We share with you interesting ways to keep your finances healthy and organised.

We all know it’s important to regularly schedule a service and maintenance session for our vehicles, just as how we need a yearly medical check-up – to ensure both are kept in good condition. It’s easy to take care of a physical possession like a car or our physical bodies, but how would you take care of something that cannot be “serviced”, like your finances? What sort of “service” would you go for to make sure your finances are in a good state?

1. Begin with the end in mind

What is your financial goal for 2018? Is it to pay off your student loan, eliminate your credit card debt or put a down payment on your first home? Set a goal in mind, together with the amount you need to get there. Then, you would have a clear idea of what you are working towards and make the necessary lifestyle changes or increase in income to achieve your goal. Calculating your net worth or updating your CTOS history (which is a personal credit report you can get online) would also help in setting your goal. In general, net worth is your assets minus your liabilities. Which brings us to the next point:

2. Keeping up with your liabilities

Next, it’s important to keep stock of your liabilities, to know where your primary commitments lie. Most liabilities young people tend to have are debts, which may include PTPTN student loans, hire purchase/car loan, mortgage, credit card debts and other outstanding debts. Keeping track of the payment frequency is one of the most crucial things to take note of while doing a financial health check, as most debts or liabilities will incur interest if you miss your payments. The interest may seem small at first, but remember it is compounding and it will snowball its way up if not kept in check.

If you have been a good payment master, paying each bill on time, this should be an easy thing to do. If you have not been paying on time, this is how you can start: Make a list of each debt/bill/loan and the amount owed, together with the minimum payment or instalment, the due date or date of the next payment and the interest on late payment. This gives you a bird’s eye view on which you should tackle first, by the due date and by the interest rate. Then, prioritise which payment you need to focus on paying off each month. This helps you to better allocate your resources for the coming year.

3. Start an emergency fund

The emergency fund is something most financial planners advise you to have for emergencies such as a job loss – typically a 6-month reserve for your expenses. The amount in this fund goes towards paying off your regular fixed bills and expenses. To start an emergency fund, you can begin by keeping aside 10% of your monthly income for the purpose. You may slowly increase this to 20% once you cultivate the habit over time.

4. Give your emergency fund a boost

If you already have a 6-month reserve as an emergency fund, remember to update your list of monthly expenses to ensure that the amount is sufficient to cover all the bases, including liabilities (see point 2). Some instances which you may require a bigger emergency fund: if you have a child on the way (increased cost of living), changed a new car (higher hire purchase loan) or obtained a new house (monthly instalment to pay).

5. List down the major purchases for the year

Whether it’s a laptop, new car tires, or a vacation, listing down your major purchases of the year helps to give you a gauge of what you have been spending on. From here, you will be able to calibrate your expenses and decide if you have been spending wisely on big-ticket items. Having proof of purchases on hand for items like books, sports equipment and laptop or smartphone also eases the income tax filing process you’ll be facing later in April.

6. Updating your insurance coverage

Life insurance ensures that your family members, especially those who depend on you for a living, are able to carry on with their lives in the event something happens to you. The amount you are covered for is set at your time of purchase but can be adjusted as you grow in age.

As a rule of thumb, you should relook at the coverage if your lifestyle has changed. For example, if you are now earning more than when you previously were, your lifestyle needs and your family’s needs might have grown. Likewise, if you are unmarried two years ago and married with children now, there are more people who look to you for their needs than before. The end of the year is a good way to check and update your life plans, as it helps you to figure out if you need additional coverage for the year ahead.

7. Begin or update your retirement planning

Remember at the beginning we said, to begin with the end in mind? Well, one of the “ends” to look into as part of your financial health check is your retirement. The Employee’s Provision Fund (EPF) sends each member an annual statement, where you will find out how much you have in your account 1 and account 2. The minimum recommended amount to have at retirement is RM228,000.

Most people would not be able to reach this amount at 55 years. Hence they supplement their retirement fund with investment schemes such as unit trust, share trading, Amanah Saham Nasional Berhad (ASNB) or Private Retirement Schemes (PRS). Do some research into your available options and consider which is best for you to invest in, at your phase in life. If you already have retirement investments, an annual check on their performance would be sufficient to prepare you for the new year.

References

https://www.imoney.my/articles/ctos-score-the-most-important-number-for-financial-health

http://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html

http://web.extension.illinois.edu/cfiv/downloads/56755.pdf

http://theeverygirl.com/6-tips-for-getting-your-adult-financial-life-together

http://www.nst.com.my/news/2016/09/177215/minimum-epf-savings-55-year-old-set-rm228k

The above articles are intended for informational purposes only. AIA accepts no responsibility for loss which may arise from reliance on information contained in the articles.