A Beginner's Guide to Personal Financial Planning

Alright, so you’re at that stage of your life where managing your own money isn’t just about making it last until the next payday, it’s about building something for the future and saving for future goals.

Personal financial planning might sound daunting, but honestly, it’s like learning how to drive. A bit tricky at first, but once you practice around the circuit and have on-the-road experience, you’ll be cruising just fine. So strap on in and get your expense trackers out!

Understanding Where Your Money Goes

Think of your expenses like little streams flowing out of your wallet. To manage your money well, you first need to see where all those streams are going. 

Whether you use a simple notebook, a spreadsheet, or one of those handy expense tracker apps on your phone, tracking where your money actually goes can be quite eye-opening. Those daily ZUS coffees, the occasional Shopee promos or paid subscription services you barely use, they can all quickly add up over time. 

Understanding your expenses is the very foundation of good personal financial planning. Once you’ve got a clearer picture of your spending, the next thing to do is to actually make a basic plan for your money. 

This is what financial planning is all about for beginners. It’s not about suddenly denying yourself everything, it’s about making some smart choices about your money.

The Financial Planning Pyramid

A simple way to picture the basics of financial planning is the financial planning pyramid. It suggests building a solid base first, before thinking about more advanced stuff.

Level 1: Building Your Safety Net With Financial Security

This is the most important level for beginners. It’s all about having a bit of protection for when things don’t go exactly as planned. Always be prepared for a rainy day, be it  an unexpected furlough, tough US tariff or a sudden emergency.

Starting Small with Your Emergency Fund

Saving up three months’ worth of expenses can feel like a huge mountain at first but don’t be discouraged. Begin with a much smaller, achievable goal, maybe around RM 500 or RM 1,000. Once you reach that, you’ll feel motivated to keep going. Every little bit you save adds to your buffer.

Keep Your Emergency Money safe but separate

This money should be easily accessible but separate from your everyday spending account. A separate savings account with good liquidity (meaning you can get to the money quickly) is ideal. Avoid tying it up in investments that might take time to sell or could lose value when you need the money most.

Calculate Your Essential Expenses

When figuring out how much to save, focus on the absolute essentials for now. This includes:

• Rent/Mortgage payments
• Basic groceries
• Transportation costs to work
• Minimum loan repayments
• Essential utility bills (water, electricity, wifi)

You can gradually expand this list as your emergency fund grows.

Making Saving a Priority

Treat your emergency fund contributions like any other essential bill in your basic budget. Even small, regular amounts set aside each month will accumulate over time. Automate these transfers if possible, so you don’t even have to think about it.

Understanding Basic Insurance

• Medical Insurance: This is crucial in Malaysia to help manage potentially high medical costs. Understand what your basic policy covers and consider if you need additional coverage.
  
• Car Insurance: If you own a vehicle, having adequate insurance is essential to protect you financially in case of accidents or theft. Understand your policy’s coverage.
• Thinking Ahead: As you become more financially stable, you might also consider other types of insurance, like basic home content insurance if you rent, or even term life insurance if you have dependents. But for now, focus on the essentials.

Review Your Safety Net Regularly

Once you’ve started building your emergency fund and have basic insurance, it’s a good idea to review them periodically. As your income or living situation changes, you might need to adjust your emergency fund goal or your insurance coverage.

By focusing on these initial steps, beginners can start building a fundamental layer of financial security that provides peace of mind and a buffer against life’s inevitable surprises.

Level 2: Taking First Steps in Growing Your Money

Once a small safety net is in place, the focus can shift towards making your money work a little harder for you. This stage involves tackling any small debts and starting the habit of saving.

Settling Small Debts

These are typically high-interest debts that can quickly eat away at your financial progress. Examples include:

• Credit card balances (especially if you’re not paying them off fully each month)
• Small personal loans with high interest rates
• Overdraft fees on your bank account

Making a Simple Debt Repayment Plan

Even small, consistent payments can make a difference. Consider these basic strategies:

• The “Snowball” Method: Focus on paying off your smallest debt first, while making minimum payments on the others. Once the smallest is gone, put that payment amount towards the next smallest debt, and so on. This can provide quick wins and motivation.

   

• The “Avalanche” Method: Focus on paying off the debt with the highest interest rate first, as this will save you the most money in the long term.

Whatever method you choose to stick to, the key is consistency and make sure you follow through.

Avoid New High-Interest Debt

While you’re working on paying off existing small debts, make a conscious effort to avoid accumulating new ones, especially on credit cards. Try to live within your means and only spend what you can comfortably afford to pay back quickly.

Interest Compounding

While it might not be immediately obvious with small savings amounts, it’s good to understand that over time, the interest earned on your savings can also start earning interest. This is the power of compounding, and it becomes more significant as your savings grow and you explore basic investment options in later stages.

Understanding Your Credit Score (CCRIS)

In Malaysia, your creditworthiness is tracked through reports like the Central Credit Reference Information System (CCRIS). Banks and other lenders use this information to assess your ability to repay loans. 

Paying your bills (including credit card bills) on time is crucial for building a good credit score. A good score will be important if you plan to apply for larger loans in the future, such as for a car or a house.

Level 3: Thinking About Future Goals

Once you’ve got a basic handle on your financial safety net and have started the habit of saving and managing small debts, it’s a great time to start thinking about some of the things you’d like to achieve in the future with your money. This helps make saving feel more purposeful.

Making Saving Tangible

This is where you can really see the direct benefit of your efforts.

• Identify a Short-to-Medium Term Goal: Think about something specific you’d like to save for within the next year or two, like a down payment on a car, a short holiday, a new laptop, or even contributing to a larger purchase with friends or family.
• Calculate the Cost: Find out roughly how much your chosen goal will cost. This gives you a clear target to aim for.
• Break Down Your Savings Target: Divide the total cost by the number of months you want to save. This will give you a realistic monthly savings goal.

Starting Planning for Retirement

While retirement might seem a long way off for those who just entered the workforce, planning for your retirement early and getting your EPF up and running before your twilight years helps reduce any worry or anxiety.

• Basic Retirement Savings Vehicles in Malaysia: Familiarise yourself with common options like the Employees Provident Fund (EPF/KWSP) contributions from your salary and employer. Understand how these funds work and the potential benefits.
• Voluntary Contributions: Learn if you have the option to make voluntary contributions to your EPF or explore other long-term investment options when you are more financially stable in the future.
• Inflation Awareness: Understand that the cost of living is likely to increase over time. Saving for retirement helps ensure you have enough money to maintain your living standards in the future.
• It Doesn’t Need to Be a Huge Amount Now: The focus at this stage isn’t necessarily about putting away large sums for retirement. It’s about understanding the importance and planting the seed for future action. Even just learning about it is a positive step.

Your First Financial Plan

Here’s a simple example of how a beginner might think about their monthly budget:

A Word On Peer Pressure and Lifestyle Creep

It’s common to feel the pressure to eat out often and spend on lavish cafes or outings with friends who have different spending habits and lifestyles.

This is where understanding your own financial goals and sticking to your basic plan becomes important. Similarly, as your income gradually increases, there can be a temptation to upgrade your lifestyle, this is known as lifestyle creep. 

While rewarding yourself occasionally is fine, it’s important that your expenses don’t increase at the same rate as your income, otherwise, it can hinder your savings and long-term financial progress. 

Be mindful of your spending decisions and always make sure they align with your overall financial well-being, rather than just trying to keep up with others. As the saying goes, life is not a race, it’s a marathon. 

Conclusion On Personal Financial Planning

This isn’t about suddenly living on next to nothing, certainly frugality is important, but the main objective is to build a slightly more secure tomorrow. There might be times when you go a little off track, splurge a little and buy that one Mixue drink to reward yourself after a long day at work, that’s okay! 

The important thing is to practice financial discipline.

It might seem like a lot to think about at first, but start with the really basic stuff, understanding your expenses and trying to build a small emergency fund. You might be surprised at how much more in control you feel, one small step at a time. 

At Accounting.my, we understand that managing your finances effectively is crucial, and sometimes, the complexities of accounting and bookkeeping can feel overwhelming, especially as your financial life becomes more intricate or if you start a side hustle or small business. 

While this guide provides a strong starting point for personal financial planning, we offer expert accounting services that can seamlessly integrate with your personal financial management.

We can assist you with:

• Organising and categorising your income and expenses, providing a clearer picture for more informed budgeting.
• Managing your bookkeeping, freeing up your time to focus on your personal financial goals and other priorities.
• Providing insights into your financial performance, helping you identify areas for improvement and potential tax efficiencies.
• Ensuring compliance with relevant financial regulations, giving you peace of mind.

Taking control of your finances is a journey, and every step you take, no matter how small, contributes to a brighter and better financial future. We strongly encourage you to start implementing these basic principles today, and as your needs and responsibility evolve, remember that Accounting.my is here to support you with professional accounting solutions.