5 Financial Disadvantages of 'Being Your Own Boss'

While there is no denying that probably everyone’s dream is to be their own boss, it does come with a few disadvantages.

If you are currently working on your own and in any of these categories, you should continue to read on:

• Freelancers
• Contract workers
• Commission earners
• Real Estate Negotiators
• Network Marketing Agents/Leaders
• Self-Employed Service Suppliers

Inconsistent Income & Budgeting

Your income potential is probably higher than when you were in employment, but it may be inconsistent. When it is inconsistent, it is harder for you budget for things in the future. There will be two type of people here.

One, those who will spend all that they earn just enough until the next payment. While they spend lavishly in the first few days, they would probably starve on the last week before payment is due.

Two, those who keeps so much in their current account because they are worry not knowing when their next job/sale will be.  They may only keep cash so much and do not do any investment because they do not want their money to be tied up.

There are also those who uses the excuse that ‘I have not reach a certain income target’ to do anything, especially those doing Network Marketing. However, this delay will continue to build as your dream becomes bigger and bigger.

What Can You Do: Read up a book entirely focused on helping people to budget for inconsistent income.

While Fixed Deposit can provide you higher interest, it will not allow you the flexibility of withdrawal anytime in case of need. You can set your extra cash into a cash fund which earns you interest higher than current or savings account. This fund will also allow you easy withdrawal or redemption without any locked-in period like Fixed Deposit.

Inconsistent Savings for Growth

While it might be luxurious job, most people do not set aside money for investment, but instead the money will be spent on lavish goods. You can actually set a percentage of your profits / sale / payment to be saved. By paying yourself first, this discipline will ensure that you put your future as priority first ahead of your commitments and expenses.

What Can You Do: Arrange for savings for long term with a fixed percentage of your profit/sale/job. It can be done monthly or as and when you receive a payment for your job. Depending on type of business you do, it could start from a low 5% of profit/sale/job and when the amount starts to be bigger, you can have the option to diversify to different types of investments.

No Retirement Planning

Being an independent freelancer or service supplier would also mean that you are not contributing to EPF like regular salaried employees. You may think that it is troublesome, you are getting paid less, or you do not want to ‘benefit’ the government. All these excuses are distractions to the reality that you do not contribute to save for a retirement fund. If you compare yourself to a peer, he or she may have a hundred thousand in their EPF, but you can only look at your own savings account as your retirement fund. Because of the lack of planning, you may need to work far longer years than your peers. You only started to really look at creating a retirement fund too late in life.

What Can You Do: Start a Private Retirement Scheme. It offers similar concept of retirement savings like EPF, but being managed by financial institutions, instead of a government agency.

No Insurance Benefit

Most companies offer medical insurance claims as part of their employee benefits. There is also SOSCO which provides minimal protection in terms of medical and cash benefits. Being self employed and on your own, you basically do not have these benefits. As you are aware, the cost of hospitalization due to accidents or sicknesses increases every year. Some companies do offer discounts or pay for health checks or dental to their staff.

What Can You Do: You would need to take care of medical insurance arrangement yourself. Because your health determines your wealth, you would also need to stay health by engaging into health programs.

Not Taking Advantage of Tax & Deductions

It is a known fact that many freelancers and self employed individuals do not file in their taxes for fear of paying taxes at all. These are the same group of people who complains that that are unable to get a loan to buy property or a car. If you don’t file in your tax return, your income is not recognized, hence the bank would not approve the loans.

What Can You Do: But if you are already paying taxes, there are a whole list of deductibles which you can apply to reduce your taxable income. By taking advantages of all the tax deductions, you are still able to apply for a housing / car loan, while paying lower taxes.

As you can see, while there are financial disadvantages of being in the category of ‘your own boss’, it does not mean you can’t do anything about it. A total financial solutions advisor would be able to help you along the way to make sure all your financial needs are properly advised and taken care of.

What Will Be My 2017 EPF Dividend Analysis

Just this morning EPF announced its Q3 results for the year 2017. With the year end approaching, it is time to analysis if we would have a good dividend for the entire year of 2017.

As usual, press releases are meant to make everything sounds beautiful. Is the result really positive? Let's look into the numbers again.
Based on the annual report and quarterly report of 2016 and 2017 found on their official website, I put these numbers into a chart.

Facts From The Numbers

1. The total asset value increases by 10 to 35 billion ringgit every quarter. By now, the amount should have already breached RM800 bil in Q4.

2. In Q4 2016, there is massive jump in income due to a few reasons such as rising stock prices since Trump's Presidential election win and sale of a few property assets by EPF in London (among other strategies used to regain income)

3. In order to have a good financial year 2017, income in Q4 2017 would need to match or better last year's Q4 results.

4. RM46.56bil total income return in 2016 is about 6.37% of the total asset of RM731.11bil. If the total asset of EPF in Q4 2017 is around RM810bil, the income for the entire year needed to be more than RM50bil to match that return. Which means Q4 2017 need to be more than RM14bil in income.

Speculative Views

Since next year is election year, dividend payout will need to be as 'healthy' and promising as possible. They would need to generate the maximum potential gains from their investments while keeping valued assets for the future.
It is public knowledge that EPF is known to cashout on investments in the last quarter of the year by offloading shares and selling assets to boost its profits. It will only come down to which assets or stakes of company are they willing to let go or reduce?

Your Future Retirement Planning

Now, we are aware that our pension fund is as huge as RM800bil in asset value. The question is will it be able deliver the average of 6% dividend annually? It would mean that it will need to generate income of more than RM50 bil next year and upwards every year after that.
Historically, the average for the past ten years is lower than the returns in 1980's-1990's (Source: EPF Historical Returns)

This is why you would need to reduce your dependency on purely EPF alone. How you can do it is through:
1. Diversifying your retirement fund through EPF's Member Investment Scheme into selected and approved unit trust investments.
2. Start your own concurrent program through Private Retirement Schemes.

Is Property Investment The Only Way To Grow Your Wealth?

Recently there was a news report by Bloomberg stating that Malaysian properties is now priced 4.4 times the median annual household income. The standard optimal price for affordable housing is stated to be only 3 times the median annual household income.
In the past, property has always been used as an investment vehicle to achieve wealth status. Because of this known trend, there are more mid to high priced property projects meant to target these investors.
Meanwhile, youths and millennials are at a dilemma. They knew property ownership and property investment has long been encouraged by their parents but they could not afford it.

Curiously, I did a technical cost comparison if properties in Malaysia (at the current prices and current loan package), are worth investing at all.

Property Investment Scenario 1

So I use a sample property of value RM500,000 for this case study for a comparison if they investor would flip and sell the property after the third year or the fifth year. I am using a conservative increase of value of 3% and also a higher expectation of 5% valuation increase per year. I am using an optimistic monthly rental of RM2500; higher than the loan installment.
With just a simple calculation, the gross profit of property sale within 3 years should yield more than RM100,000. However if we take into consideration all the costs incurred over 3 years, it paints a different picture.

 The net profit is shown here by Gross Profit - Total Expenses + Rental paid over the duration. Because the property is sold after the third year, you will be charged RPGT (which is already incurred into the expenses).

What if the property is sold on the fifth year instead?

So this shows a clearly net profit after we factored in all the relevant costs and expenses. This is a very optimistic scenario with the property having positive net cashflow higher than your loan installment.
But, what if you are unable to match your rental to your loan installment?

Property Investment Scenario 2

For this second scenario, the only change we made is adjusting the monthly rental to match its loan installment. 

Well, it shows that there is a possibility that you can run into a loss if you sold the property at Year 3. 

The property will only earn you less than RM200,000 by the end of 5 years.

Note: This technical comparison does not use the typical ROI or Rental Yield formula, but uses the realistic final net profit to determine ROI.

Assessment Tax : Amount may vary, in these scenarios it uses the standard 4% of annual rental yield.

Maintenance Fees may vary depending on property location and type of property.

Now that we calculated the expected range of ROI from property investment, is there any other opportunities out there?

Any Other Investment Opportunities?

I was mainly a mortgage advisor a few years back when I start to realise that property investment is not the ONLY type of investment I can introduce to my clients. An investor needs to diversify into a few asset class so that we would not suffer when (if) another property bubble hits Malaysia.

So I use the same budget an investor would spend on the above scenario for property investment and invest into Unit Trust instead to compare the potential return.

There are different type of risk level of unit trust investments. This is a projection on a low risk investment which is only targeting 6-8% of return annually. I am using 6% compounding return in this projection to show the lowest return possible from this investment.

As you can see, property investment is NOT the only investment you can do with your money. There are equally and more potential opportunity by diversifying your risks. There is also no risk of missing rental opportunities or handling with house maintenance. 

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What Is Your Retirement Number?

By now you should have read a lot about saving for retirement and why it is necessary to plan ahead early in your life. There are a number of articles mentioning how you should save early and some even mention that you would need a specific number to retire. This so-called ‘magic number’ is what most advisors would refer to as the amount of money that you need in order to be able to retire safely or comfortably. Most important of all, do you know how to get that magic number?

To find out your retirement number, you would need to know the following numbers:

What are my expected expenses (in current money)?     RM ________

How many more working years until I retire?     ______   years until retirement

How many years do I want to save for?        ______ years of expenses

Mr Alan is currently 45 years old.

He is planning to retire at age 60. (15 more years until retirement)

He is planning for his lifestyle until age 80 (20 years of expenses)

*Assuming that annual inflation rate is 3%.

Calculate Your Monthly Expenses When You Retire

First of all you would need to know what your current expenses are. Based on your current expenses, you would need to estimate how much the expenses would be when you retire. Most people would assume that they have settled their housing loan and car loans, but it would depend on individuals if he/she wants to include these debts as well.

Daily Meal	_______  (X 30 days)
Monthly Utilities & Maintenance	_______
Monthly Wellness & Medical	_______
Transportation	_______
Misc. Pocket Money	_______
Yearly Holiday	_______ ( / 12 months)
Other Outstanding Debts	_______
TOTAL:	_________

However, to save you the trouble to estimating your expenses, you can just assume that all your monthly salary is your monthly expenses.

 Let’s assume that the inflation rate is 3%. This would mean that your expenses would increase 3% every year and compounded until the year you retire.

 The formula :

If you just want a rough estimate, use the sample range of expenses below.

Expenses (RM)	Years to Retirement
	10	15	20	30
2,000	2,687	3,115	3,612	4,854
3,000	4,031	4,673	5,418	7,281
5,000	6,719	7,789	9,030	12,136
8,000	10,751	12,463	14,448	19,418
10,000	13,439	15,579	18,061	24,272

An example from this chart shows that if Mr. Alan has a current monthly expense of RM5,000, and he is retiring in 15 years’ time, his projected expenses when he retires will be around RM7,789 per month.

Calculate Your Total Expenses Post Retirement

Now that Mr. Alan knows his projected future monthly expenses, he would need to know what will his total expenses will be for the rest of his retirement life. As a reminder, there is an inflation of 3% per year.

Future Monthly Expenses	Post Retirement Years
	15	20
2,700	602,000	870,000
3,500	781,000	1,128,000
5,500	1,227,000	1,773,000
7,800	1,740,000	2,515,000
9,000	2,008,000	2,902,000
14,000	3,124,000	4,514,000
18,000	4,017,000	5,804,000

As his projected monthly expenses is approximately RM7,800, his total expenses post retirement will be around RM2,515,000. Congrats to Mr. Alan, he would need about RM2.5 million to maintain his lifestyle till the age of 80. That’s a lot of money to save!

Plan Your Retirement

Now that you read how to get your magic number, go back to the top of the page and really start to calculate your retirement goal. Where would this money come from? An individual can have a few sources of funds to reach this goal.

What if you do not have these plans done yet? You should be talking to one of our financial consultants to see how we can assist you to close the retirement gap.

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At FinSonia, we believe in educating the public on the right wealth management philosophies.