A new year is upon us and you are resolute and raring to go about facing the opportunities and challenges 2020 might have in store. The reason for this confidence and preparedness – you have finally completed your personal financial plan and are now in a much better position to move forward with your financial decisions for yourself.
Emergency cash reserves – check. Higher education funds – check. Sufficient life insurance coverage including medical and hospitalisation benefits – check. A diversified investment portfolio to gear towards your retirement – check.
With all your milestones achieved – a stable and promising career, a comfortable home for your family and the kids already in school – it looks like your financial future is secure and you can enjoy the peace of mind knowing that the foreseeable contingencies have been planned for.
While it is commendable you are one of the few individuals who can pride themselves on having thought out their financial goals and taken concrete steps towards securing the financial future for their loved ones, there is still that risk your financial plan may not go as planned.
So, before any of us get too comfortable thinking we have everything covered, it is important to bear in mind that many aspects of a personal financial plan are based on assumptions. And while these assumptions are relevant today, let us not take things for granted and expect everything to remain status quo until our financial goals have been achieved.
If both spouses are currently working, the financial plan will take into account the continuity of a double income household until x number of years. You would also have been strongly advised by your licensed financial planner to take up an insurance policy that pays out the sum assured in the event you are diagnosed with critical illness or total permanent disablement.
What if, sometime in the next few years, your spouse feels he/ she wishes to cease full time employment for various reasons – due to job stress or burn out, health complaints or wanting to spend more time with the growing children? Your spouse is prepared to take on part-time employment such as freelancing, but the ramifications of this decision could have drastic effects on your financial plan as the assumed income level could decrease significantly.
Yet, denying your spouse such an option may not be in the best interest of your family’s mental or emotional well-being. It is therefore a subject matter worth discussing with your loved ones and if necessary, to make the required allowances for such a scenario during your next annual financial plan review.
Both you and your spouse have duly planned for the children’s pre-university and tertiary education and are setting aside the requisite savings to meet the targeted amount when they finish secondary school.
If you had started early, the funds are growing comfortably at a steady rate and you are confident it will be sufficient by the time youneed to draw on it, without having to resort to dip into your own retirement savings or incurring study loans. If your children are in the public school system, your monthly education expenditure would be limited to tuition/ enrichment classes or music/sports lessons, which are within your monthly budget.
What if during your child’s secondary education, you find his/her academic performance becomes less than satisfactory owing to a myriad of reasons including language difficulties, challenges with the school system or a mismatch between the student’s interest and the curriculum?
Would you then need to consider switching your child or children to private education to get them better engaged with their studies? Doing so could mean immediately incurring tuition fees of anywhere between RM20,000 to RM60,000 per year per child.
Or perhaps you and your spouse have already decided to give your children an international curriculum education for their secondary schooling, so these fees have already been budgeted for. What if challenges with the language of delivery is found to impede their progress in the primary years that you may need to pull them out earlier than expected?
If you have more than one child, it would make logistic sense to do the same for the others. You have budgeted for five years of private schooling but what if you now need to spend for a much longer period than expected?
Insisting they stay on the initial planned path of study would leave your education budget intact but it could also potentially demotivate your children academically. As parents who want the best for our children, we may need to foresee such an eventuality and make the necessary allowances for such expenses if ever required.
Some working mothers and fathers may be fortunate enough to have the assistance of their retired parents to help out in the home and with the children. It is indeed a blessing to be able to depend on the presence and help of one’s own parents instead of having to hire domestic help which comes with its own set of problems.
Senior citizens who are still physically fit and healthy are usually more than happy to shuttle the grandkids to school and back, driving them for their extra-curricular activities or tuition, and preparing daily meals for the family. And more importantly, they provide supervision of the household when both parents are working late or need to travel for job-related purposes.
While we hope that such an ideal situation continues, the stark reality is that it might not. There may come a time when the physical or mental health of our elderly loved ones start to decline and they are no longer able to help out in the manner they have been doing. By then, you will need to consider two main issues.
First of all, the cost required to engage external service providers to take over the roles that the grandparents used to do, be it school transportation, after school care, outsourcing of meals, etc. All this will certainly add to your monthly household expenditure if they have never been budgeted for.
Secondly, with the deteriorating health of the elderly, will you then need someone to take care of them instead? This cost may come in the form of hiring a caregiver, opting for assisted living facilities or having one income earner stop working to care for them at home. These changes may happen gradually over a course of time but they will surely impact your financial plan if no contingencies have been made.
In conclusion, while you may have already drawn up your financial plan and taken all the necessary steps towards achieving your financial goals, it is important to avoid assuming everything will go on as planned for in life there are inevitably circumstances that go beyond our control.
The effect of these unexpected costs may have a lasting impact on your ability to achieve your intended goals. A financial plan is designed to give you clarity, confidence and control over your financial situation. However, a regular review of your financial plan is a must. Even though you are financially prepared, it never hurts to be more than prepared.
First published in Smart Investor 01, 2020 Issue
Director of Financial Planning at Finwealth Management Sdn Bhd