How do you like to have a simple exercise that
gives you a glimpse of your own future?
The future also includes the corresponding ages
of your family members at various phases of your life.
Yes, it is a simple exercise, what you need is a
spreadsheet tool, make some assessment of your current financial
situation, plot year by year your cashflow situation, then your future
scenes become clearer.
What is interesting is if you do not like the
plotted future scenes, you could do something different today to
change the course of your life with your preferred outcome.
I develop a template using Excel spreadsheet
whereby you can key in a few essential data to see the future scenes
financially year by year till you say bye bye to this earth at an
average age of 75.
We will use this simple model to discuss a few
A Typical Professional with a Large Corporation
We take a case of an executive with about eight
years to retirement at age 55. He has a few children who are still
schooling. A plan is required for children higher education. It is
obvious that budget can only be made for local colleges or
universities, as oversea education expenditure is beyond the reach.
This cashflow model shows that with whatever
maybe the existing saving in cash, with net monthly saving (after
deducting expenses from income), the cumulative cash is draining fast
due to high expenses in children higher education, you can see from
Graph #1 the initial part of the graph declining.
At age 55, there is an influx of cash due to EPF
and / or gratuity from the company. The graph starts to rise very
sharply. From then onwards, assuming there is no more income, there
will be drain of cash during the retirement period, due to daily
expenses and another major item on medical expenses, other expenses
like children wedding, house renovation leisure, etc.
In this particular case, the cashflow is negative
at the age of 60+ onwards.
The above computation is based on interest rate
of 2.5%, i.e. whatever maybe the cash available, deposit in the bank
to generate 2.5% return. (However, if you take inflation rate as 3%,
the net interest is –0.5%, which will make the cashflow negative at
much earlier age.)
(There are several assumptions made in this
template, with conservative estimate. For example, no income during
retirement, children after finishing study and working for a few
years, they could not contribute much to the parents, as they need to
work hard against the high cost of living etc.)
Note: This is a cashflow model, i.e. real cash
with high liquidity. It does not take into consideration of property
assets, as property is not cash, until sold. Hence if the lifespan
cashflow is positive with real estate property all paid, it is double
Obviously something needs to be done now, or he
needs to remain productive with income during “retirement.”
Investment Strategy to Improve Cashflow
Assuming that this professional takes up serious
study on investment as a way to improve his cashflow situation, i.e.
to find a investment instrument that can give consistent return of
money more than the bank, and see what changes can be made.
This spreadsheet template can take different
values of interest rate or investment rate of return for simulation.
A rate of 5 % is chosen, consistent return of 5%
from now till bye-bye.
Now the graph shows no more negative cashflow
till age 75.
Now try 7% and 10%. The money is growing, even
after deducting the monthly and yearly expenses as per original
Money is GROWING from rate of 7% onwards!
Financial Planning, Focus and Strategy
From the above discussion, it is clear that it is
worthwhile to start with financial planning with the above type of
cashflow scenarios building. Then we determine what type of rate of
return of our saving or capital can bring about a positive cashflow.
We need to study for types of investment instrument
that can bring about such rate of return.
This is the case for those who over years have
good discipline in saving. Now the challenge is how to make the saved
money grows faster CONSISTENTLY, year after year.
Financial Planning Industry – Beware!
Financial planning industry, like Unit Trust
institutions, also carries out such analysis of the financial needs
projecting into the future.
However, as they have products to sell with
vested interest, one has to be careful of the approach they recommend.
Generally they check you risk profile, risk-taker
or not. From there, they recommend to invest in aggressive fund
(equity) or less aggressive (like bond or money market) or mixture of
both. They advocate long term investment and dollar cost averaging.
But the problem with the above is : a) investors
are at the mercy of the market, i.e. even after long term (very
subjective) when one needs the money and the market is depressed,
either you have little return or negative return. b) your return gets
diluted due to diversification.
This QuaSyLaTic has different strategy to help
himself and those interested to grow the money.
Never invest in the equity if market is not utterly depressed,
i.e. very low low price. Worse still, avoid the market totally when it
is hot (like current fever). Choose a steady growth bond fund (8-12%
return, which will improve cashflow tremendously as per above projection) for
consistently performance. Monitor CLOSELY to pull out and park the
money back to bank / EPF if there is instability like last year August
bond “crush”. Then come back to bond again after stabilization.
Wait till the market is totally depressed, switch from bond to
equity and monitor closely to exit as market saturates. Back to bond
or bank again.
Although it sounds simple, it does take a lot of
homework, research and analysis with constant monitoring.
It maybe trilling to invest in equity when market
is hot, with small amount (as investors who do not do homework would
not dare to invest in large stake) and see the money grows daily when
there are more hot news.
There are two dis-advantages : a) even if the
investor pulls out in good timing before the hot market is over, the
quantum of gain is little as he did not invest with big capital. b) if
he does not do good analysis and homework and the hot market bubble
burst, he is either back to square one or suffer large losses.
Well, it is your own decision on how you want to
manage your money and future.