1.6 The Financial Planner’s Code of Ethics

Personal financial planning is the process of developing strategies in managing our financial affairs to have enough resources for emergencies, to accumulate wealth over time, and to achieve our personal life goals. Personal financial planning provides direction and meaning to our financial decisions.

As individuals, we are unique. We differ in our background, education level, stage in life, personal commitments and situations, and values and belief systems. These differences influence our risk profiles and financial needs. As such, no two financial plans are the same and financial plans must be reviewed from time to time as personal life circumstances change (e.g., from singlehood to being married, getting divorced, additions to the family, death in the family, etc.).

Personal financial planning is a lifelong process that assists us with achieving financial freedom. This process can be broken down into many components such as budgeting and monitoring net worth, debt management, tax planning, investment planning, insurance planning, estate planning, and retirement planning, all of which will be discussed in the upcoming chapters.

1.1 The Importance of Financial Planning

The main objective of personal financial planning is to ensure freedom from financial worries knowing that our short-, medium-, and long-term financial needs have been provided for. Personal financial planning is important for the following reasons:

• It enhances our lifelong wealth accumulation

There is a saying that goes, ‘Money does not grow on trees’, which means wealth does not happen overnight. Wealth is a function of effort in saving and investing, interest rates, and time. We may say that we will wait until we win the lottery before we start to invest, but this may happen too late or not at all.

To have more consistent and effective wealth accumulation for the future, we need to be disciplined in managing our current income and expenses (including taxes). We need to develop the habit of finding practical and creative ways to save and invest money. Every little bit counts!

• It increases our net worth

The topic of net worth will be discussed in Chapter 2. Conceptually, net worth is a measure of what we own (assets) minus what we owe (liabilities). We can increase our assets by saving up and making wise investments (e.g., in shares, unit trusts, property, etc.). Making wise investments is beneficial because the returns may be greater than the inflation rate and stable passive income can be

generated (e.g., income from dividends, interest, and/or rentals does not rely on our active employment). We will explore investment planning further in Chapters 5, 6, and 7. There are no guarantees, however, in investing. Even ‘good’ investments may suffer losses at times. That is why we should start investing early to give our investments sufficient time to grow and to increase our likelihood of having sufficient funds for retirement.

• It improves debt management

High debts will have a negative impact on our net worth. As such, learning how to properly manage our current debts and avoiding excessive debts (financial distress) are important. There are many implications of improper debt management, such as being blacklisted for future loans, property being repossessed (e.g., cars, equipment, etc.), and in the worst-case scenario, declaring bankruptcy. We will discuss debt management further in Chapter 3.

• It enhances personal risk management

There are many uncertainties and risks in life that could hinder our financial plans: death of the household’s breadwinner; temporary or permanent disability; critical illnesses, health problems, and high medical costs; loss of property due to disaster; etc. Any of these could be a major setback to us if we are not adequately protected by proper insurance coverage. Life insurance provides some financial reprieve to the dependants (beneficiaries) of the deceased, whereas general insurance enables the replacement or restoration of assets so that life can continue with as little disruption as possible. These aspects will be covered in Chapters 8 and 9.

• It helps with distribution of wealth

There is a saying that goes, ‘Nothing is certain in life besides death and taxes’. We do not know exactly how long we will live and without proper estate planning, our intended beneficiaries will not inherit our assets automatically upon our passing. Instead, they will need to go through a very tedious legal process that could take years. In the interim, our assets will be frozen (i.e., cannot be distributed, transferred, and/or sold). Under Malaysian law, a person can make a will if the person is above 18 years of age and is of sound mind. With a will, the probate legal process is shorter and there would be a smoother transition and distribution of assets to beneficiaries. We will look at estate planning in

Chapter 10.

• It improves our relationships with others

Debts, quarrels over property, and other money problems are common stressors, potentially leading to estrangement in a family, divorce, loss of friendship, and