Step 1: Get Medical Insurance
Before starting on our journey to financial freedom, it is quite important for us to get sufficiently insured first.
In my 11 years of working life, I was hospitalized twice, one for a minor medical condition (RM3,000) and another for a surgery due to sports injury (RM25,000). I was 'lucky' because they were both paid for by my company's medical insurance. Now what if I was out of work at that time? No worries, I have my own personal insurance. What if I decided to skimp on personal insurance? No worries, I was already at Step 5 and I could dig into my emergency fund.
Now for argument's sake, let's put myself into a more 'unlucky' situation. Say I am RM20,000 in debt. I decided to skimp on medical insurance and focus all my income on to pay off my debt. Five years later, I am ecstatic to have paid everything off and declare myself debt-free.
Suddenly (it's always 'suddenly'), I was laid off from my work and no longer insured by my company. A week later, I met with an accident and had to incur RM20,000 worth of hospitalization fees. Having no insurance coverage, I would have to loan money to pay off the hospital bills, thus erasing 5 years of hard work. You can see when an insurance coverage can come in handy.
The amount to be insured can be debatable. You definitely don't want to be over-insured and slow yourself down towards financial freedom. Medical insurance would be of utmost priority. As a guideline, I'd say to start off with RM150 for Room & Board, RM100,000 for annual limit and highest possible lifetime limit.
Step 2: Save RM 10,000 in bank/wallet
This cash reserve is to pay for small everyday emergencies such as work expenses, auto & home repair, clinic visits, appliance replacements and etc. Whenever it is slightly depleted, top it up to keep it at RM10,000 every month.
I have tried to keep a lower amount like RM1,000 - RM5,000 but I find myself having to dig a little into my 6 month emergency fund quite often. Three months would go by without one small emergency but on the fourth month, I would need to have my car serviced, my ceiling fan fixed and my toaster replaced. So I find RM10,000 is a good amount to keep in my bank account.
Step 3: Pay of all debt (except the house) using the debt snowball
This is a debt reduction strategy where we pay off debt in order of smallest to largest, gaining momentum as we knock out each balance. When the smallest debt is paid in full, we roll the money we were paying on that debt into the next smallest balance. Doing so will give us a sense of incremental wins as we pay off our debt(s).
The usual types of loans are credit card loans, personal loans, student loans and car loans. Of all the listed debt, the car loan is one that we can somewhat take control over. Do the math and if we are able to make a profit of about RM30,000 from selling our car (car value minus mortgage), then take action and sell off the car. Use the profit to buy ourselves a second hand MyVi while we work hard to knock off our debt. Another option would be to dump the RM30,000 into our debt and live off public transportation (commuter, buses & e-hailing).
Unlike Dave Ramsey's original teachings which is to pay off & cut up our credit cards, I still do actively use mine even though they are all paid off. It is just a lot more convenient (and safer) compared to holding large wads of cash around town. My credit card is purely a transactional tool so I ensure it is fully paid off every month. Dave does advocate the use of debit cards but it is still not widely accepted yet here in Malaysia.
Step 4: Save 6 months of expenses in emergency fund
Once we have achieved partial debt-free status (apart from the home), we can begin to build our emergency fund. The main purpose of this fund is to sustain our lifestyle in case of an income disruption (layoff or business interruption).
This emergency fund will be kept in highly liquid funds such as fixed deposits and money market fund. A more 'risk-on' investor may be tempted to invest them into bond funds and that is just fine. However, I just prefer not to have my emergency fund and investment fund mixed up.
Note that I keep 6 months of my EXPENSES, not salary. This way, I would have more funds 'working' for me in my investment funds. My monthly expenses is at RM7,200 per month. So 6 x RM7,200 ≈ RM43,000 is the amount to be held in my emergency fund.
Step 5: (Optional) Buy a home
If you don't already own a home and are wondering when is the right time to buy one, this would be it. However, do not commit yourself to a home mortgage just because it is listed in this step. It is optional for a reason. As a guideline, ensure the monthly home repayment does not exceed 30% of your gross monthly salary.
If you have not found the right home, if you think you won't be staying in KL or even in Malaysia for the long term, or if you are simply comfortable with renting, then don't rush into home ownership just yet. Just head on over to Step 6. I have been a home owner for 6 years now and trust me, it is not all it's cracked up to be.
The definition of 'home' here is one where you intend to stay for the long term. If you are intending to buy a 'house' to profit from capital appreciation or rental yield, then that is considered an investment which belongs to Step 6.
Step 6: Build retirement & investment wealth
With all debt paid off and emergency cash fully funded, our income can now finally go into the fun stuff, i.e. investments.
Being employed in Malaysia, 11% of our monthly salary is already allocated to the Employee Provident Fund (EPF). On top of that, our employer will contribute an additional 12% on our behalf, also called a 'match'. Provided that we don't withdraw a single penny until retirement (and stay employed of course), the savings in the EPF upon maturity should be more than enough to keep us comfortable during retirement. I would not bother taking up an additional retirement fund unless for tax benefit purposes (i.e. PRS).
As for investment funds, take your pick! Mutual funds, ETFs, robo-advisors, individual stocks, home rental, P2P lending, cryptocurrency, forex and etc. Let us try to look for investment vehicles that could at least beat the fixed deposit or money market returns which currently stands at about 2% p.a. The guideline here is to allocate 20% of your gross salary here but if your hobbies aren't costing you much or you are cooking for yourself a lot, by all means, increase the % allocation into your investments.
Step 7: (Optional) Save for children's college fund
If you have no child yet, I'd say just proceed to the next step. For mathematical reasons, I don't see the need to pre-save a college fund for an unborn child.
The average 'art-stream' degree like accounting, business or law costs about RM100,000. To achieve that figure, we just need to contribute RM300 per month into a fund that gives a modest return of 4.8% p.a.
'Science-stream' degrees like medicine and engineering will be double of that but speaking as an engineering graduate myself, the ROI is not looking too good!
Step 8: Pay off home mortgage early
So say we have built enough investment wealth in Step 7 that we are able to pay off the home mortgage. Do we do it immediately? It highly depends on your age.
Home mortgage interest rates are generally very low (3% p.a.) compared to the returns from the equity market (8% p.a.). So it makes sense to keep any extra cash invested into the stock market and delay as much as possible the repayment of your home mortgage.
However, you generally are only able to enjoy the quoted 8% p.a. returns from the stock market if you were fully invested in equities for a period of longer than 5 years. As you age and can no longer stomach the volatility of the equity market, you will tend to allocate more into fixed income funds (bonds). At this point, your returns would have diminished to just 3% - 4% which is close to the home mortgage interest rates. When you hit this stage, by all means, opt to pay off your home mortgage early.
Step 9: Continue to build wealth. Give some away.
Congratulations, you are absolutely completely DEBT-FREE (including your home)! At this point, just continue building your wealth as you did in Step 6. Use all that new found wealth to create more wealth. Get that tenth mutual fund, buy that third rental home or invest in that start up. Go for it!
However, if at any point during your chase for higher returns starts to get a bit hollow, do consider giving some of the money away. Take your friends or family out on a meal or holiday. Donate to a charity of your choice. Or maybe pay it forward, and help to pay off someone else's debt.
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