Lately, I read an inspiring story from Jason, a reader of KCLau.com. In brief, he is a classic example of rags to riches, where he had gone from being RM 80,000 in credit card debt to amassing RM 1 Million in his 40s. As he wrote his story, he is now happily married, has 3 children, and has RM 900,000 in savings and zero in debt as he has paid off his car loan and owns no property.
But, Jason has no idea on what he should do to grow his money.
Prior to this, he bought stocks and unit trust funds from hearsays.
Then, he met up with a CFP and was talked into getting more unit trust funds. It was not a pleasant experience for Jason and he is now less interested with CFPs or professionals who are mere salespeople of financial products. At the end, he is seeking for real wisdom on how he could manage his money better.
Hence, I like to assume that I’m Jason today and share my thoughts on this:
How Do Most People Invest Their Money
Personally, I grew up with football. As a schoolboy back then, nothing beats the feeling of running around the padang with my buddies kicking a ball.
I recalled times as such. One of those times, there were 30 people on the football pitch and I was one of them. It was a 15 vs 15 game and before it starts, each team would determine a position for each player based on his physique, speed and his skills in handling football. Typically, our pre-game talks would sound like:
‘Zul, kau main depan sama aku, Fikri, dan Acap.’
‘Tai, kau tengah dengan Hilmi, Adam, Chandran, dan Josh.’
‘Ok … Jon, Bala, Bin, dan kau semua di situ … belakang.’
‘Kau ini budak baru … You main goalie.’
And then, the moment we have been waiting for … the kickoff.
Zul initiated a pass to Fikri. Fikri passed the ball to Hilmi. Hilmi held on and then he passed the ball to me. I received the ball, looked up, and found Acap to have sped towards the opponent’s goal line. As such, I sent the ball sky-high, sending it towards Acap, our very own hitman (striker).
And then, guess what happened?
Chances are, most of the 30 people will start to gravitate towards Acap to get in the action. Then, the ball was kicked to the left side of the field and many of us, regardless of our designated roles, will move to the left to chase the ball. As the game progressed, the ball was then kicked to the right side of the field and as a result, almost all of us will move to the right to chase the ball.
We have totally forgotten our designated roles.
We just wanted to kick the damn ball.
It was kampung football.
How often do you find people investing money like playing kampung football?
No structure. No framework. No game plan at all.
They chase stocks, Bitcoin, or anything that rises just like chasing the football. It is often driven by pure adrenaline and if I’m Jason and I have RM 900,000 today in my bank accounts, would this be my preferred method of investing?
If I Enter the Champions League
I can’t be playing our Malaysian kampung football and expect to beat Barcelona or Bayern Munich in a professional football match.
I need to game plan, a system, and a structure to face these legendary teams.
I would need my formation which comprises a world-class keeper, my defensive line, my line of midfielders, and my strikers. It is about the defense and also the offense. One is to protect your goal line while the other is about scoring goals.
In a way, investing is similar to being a football manager like Sir Alex Ferguson.
You need to work on the defense and the offense to win your financial game. In this article, I’ll introduce my style of ‘football’ and if you are Jason, you may feel free to refer to it and build a stronger team to win your Financial League.
Introducing My Defensive Line
Jason said he is married with 3 children and he has RM 900,000 with no debt.
First, let us be clear with the objective of having a defensive line.
It is to maintain your family’s lifestyle, if you lose your sources of active income. This could be due to job loss, a pay cut, slowdown in business, business closure, major illness, total permanent disability (TPD), comatose, or death. As such, we would need to have defensive players in our financial team. They include:
1. Emergency Funds
Jason can stash aside 1-2 years worth of living expenses in FD accounts. It is not treated as investments to gain better returns. Rather, it is for liquidity purposes.
2. Medical Card
This is meant to pay for hospital and medical bills if needed. I would get each of my loved ones their own personal medical card.
3. Life Insurance with Critical Illnesses Benefits
The purposes of getting life insurance coverage are:
a. Fund any medical costs that are not covered by a medical card.
b. Fund living expenses while recovering from a critical illness.
c. Fund living expenses after becoming totally and permanently disabled (TPD).
d. Leave behind a bigger and sizable estate for your wife and children.
I’ll explain the last benefit.
If Jason passes on and at that time, he has RM 900,000. His wife will be entitled to RM 300,000 (? of Jason’s estate) while his 3 children will inherit RM 600,000 (? of Jason’s estate) from Jason. So, each of his children would inherit a total of RM 200,000 from Jason. This assumes that Jason passed on without a valid will and both his parents had already passed on.
Let’s say, Jason chooses to buy life insurance policies where their collective sum assured is RM 1 million, then, his wife and 3 children will inherit a larger sum of money than the above.
4. Will Document
Perhaps, you are wondering the following:
‘Why my RM 900,000 is not distributed equally to my wife and 3 children?’
‘Why is it distributed based on the above ratio?’
That is because the ratio above is based on the Distribution Act 1958 and it is in effect to distribute estates for people who pass away without a will.
So, if Jason wishes to specify ‘Who gets How Much of What from You?’, you will need to consider having a will written.
5. Trust Document
Also, if let’s say, Jason wishes to leave behind an estate of RM 500,000 each for his loved ones but he wishes to distribute their RM 500,000 in installments (like monthly, half-yearly, or yearly … etc), Jason may consider setting up a trust.
Who Shall be My Midfielders?
I would view my active sources of income as midfielders in my financial team.
In general, the midfielders are important as they will finance both my defensive line up and my strike force as described below.
From Jason’s story, I would say he is likely to be okay in this category. If not, it is less likely for Jason to go from RM 80,000 in credit card debts to hitting nearly a million ringgit in cash savings. Thus, I’ll skip this part for now.
Now, Let’s Talk About My Strike Force
Finally, who shall be the Ronaldos in my financial team?
Here, I can’t say which asset classes are better. Instead, I would share what I am doing for my own portfolio. Personally, I believe each of us will have differences in our background, financial status, preferences, … etc and as a result, would be investing our money very differently.
For instance, I’m conservative as an investor and I like to do my studies, before I invest into anything. My objective is to build sustainable wealth in the long run, thus, having a long term perspective when it comes to investing. As such,
1. I prefer to own and hold stocks for the long-term over having unit trust.
2. I don’t trade stocks for short-term profits. I earn dividends from my stocks.
3. I like to own real estate as it is leverageable with low-interest rate debt.
4. I like having long-term rental income from properties. I don’t flip.
5. I’m less concerned about debt as it will be eroded by inflation over time.
So, I kept it simple. My Ronaldos are just stocks and properties.
Instead of placing my money into all kinds of stuff like stocks, unit trust, Bitcoin, Robo-Advisory funds, properties, P2P platforms … etc, I would prefer a focus on two asset classes: stocks and properties and will make it a point to improve and enhance my investment skills in them.
So, why stocks and properties? Why not others?
Simple. This is because they are asset classes that millionaires are investing into so that they can continue to grow their millions into many more millions.
Conclusion: My First Step to Build My Financial Team with RM 900,000?
If I’m Jason today, I would work on the following:
1. Decide if you want to play kampung football or be Sir Alex Ferguson.
2. Work on the Defensive Line.
3. Strengthen My Midfielders to build or increase my active income.
4. Pick an asset class that you’re interested in investing in. Start by learning.
5. Focus on becoming a better investor. Your returns will come later.