The key benefits of an EBF
EPF and EBF sound similar yet they play different roles in our bid to build wealth and live well. Understanding both is essential for our long-term financial well-being. Every year around this time Malaysians fixate on our successful national superannuation fund EPF because of its annual dividend announcement. Over the last 35 years (1983 to 2017, inclusive) EPF’s annual dividends have oscillated within the respectable band of 4.25 per cent and 8.5 per cent.
I should confess to you that EPF’s February 2018’s announcement of the 6.9 per cent dividend for 2017 surprised me. It was higher, much higher, than I had anticipated! Obviously, as an EPF contributor myself, I did not complain.
As I write this week’s column, 2018’s EPF dividend has not yet been announced. (While you wait for it, you might like to listen to a recent Feb 8, 2019 BFM Radio interview I gave on EPF’s central role in helping millions of Malaysians prepare for retirement; you’ll find the podcast here: www. bfm.my/101-the-epf)
Personally, I know just how horrific the 2018 investment environment was for both domestic and international investors. Volatility with a strong downward bias was the dominant theme for most investors for much of the year.
Steep asset price drops were on more than one occasion fuelled by Donald Trump’s unhelpful tweets and a damaging trade war initiated by the US which has caused worrisome GDP deceleration in China and, therefore, several global GDP downgrades by the IMF.
That’s why I would like to direct your attention to the need for a personal cash cushion that I advocate for all my financial planning clients and personal finance workshop students: the EBF.
EMERGENCY BUFFER FUND
Every time I mention ‘EBF’, which stands for Emergency Buffer Fund, to a new client during a lesson on financial planning basics at the start of our customised clientplanner engagement, I always pause to ensure my client hears me correctly. You see, it is too easy for my Malaysian clients to let their attention wander and assume I am referring to our mighty EPF!
It might prove useful to you too, if we take a stroll through the 10 basic points of the structured explanation I share with such clients:
1. By now, you know the key focus of my financial planning practice is constructing and then managing retirement funding solutions.
2. Our EPF is a crucial part of most Malaysians’ retirement funding equation.
3. Yet in most cases, our EPF funds by themselves aren’t enough to provide Malaysians with a super-comfortable retirement.
4. I believe the main reason you and I are sitting together today is because you want your still distant retirement to be marked by genuinely golden decades. Am I right?
5. Well then, funding a comfortable retirement necessitates exercising personal responsibility in spending less than you earn, saving and investing the difference, and doing it for a long time.
6. Our EPF — for employees fortunate enough or business owners wise enough to have an account there — is the cornerstone of our retirement preparedness.
7. But we also need to consistently and simultaneously set aside additional money both in stable savings and also in higher risk, more volatile, investments to augment our EPF retirement funds.
8. The key problem, however, with volatile investments that have the long-term potential to generate significantly higherthan-inflation growth rates is that they often perversely sink in value just when an unexpected personal emergency also arises!
9. That’s why I told you earlier that stable savings are needed within our diversified cocktail of retirement preparedness.
10. You see, when a reasonable portion of those stable savings are “storm-cellared” in an EBF earmarked for financial emergencies — like sudden uninsured surgery, loss of a job, or replacing a broken down vehicle — that EBF provides us with financial muscle to permit the riskier portions of our portfolio sufficient time to ride out bear markets, be they lengthy structural downturns, short-lived Trump tantrums, or anything in between.
So do get cracking on establishing your EBF! (You may wish to read my online article on this subject at https://freecoolarticles.com/FP1.htm for additional guidance. For now, though, here are some easy steps to help you get started on constructing your EBF.
BE PATIENT. GIVE YOURSELF TIME.
It takes most people two to five years to fully fund an EBF of sufficient size from scratch. Those with existing savings and investments, though, can reallocate some of what they have elsewhere to set up their EBF much more quickly. (I recommend conventional employees build up their essential EBF to between three and six months’ personal or household expenses. Self-employed business owners (and current employees who harbour ambitions of one day starting their own business) should double their EBF goal to six to 12 months’ expenses because of the vagaries of business ownership.
WHERE SHOULD YOUR EBF MONEY BE STORED?
Somewhere super-safe. I recommend your EBF be stored in bank savings accounts, staggered fixed deposit accounts on monthly renewal, money market funds, and, for Bumiputras, ASB.
Closing note: Establishing your EBF will stabilise first your finances, and then your emotions! Accomplishing both comforting feats will also make it easier to construct your own EPF-complementing personal portfolio of wealth for retirement and other life goals. So, to help you with that, I will elaborate next week on constructing your portfolio of wealth.