PERSONAL FINANCIAL PLANNING: ISLAMIC PERSPECTIVE

As noted in my second article written in English (Micro Finance vs Personal Finance), personal financial statements  cover personal balance sheet and income statement. For personal finance, balance sheet attempts to determine our net worth while income statement or statement of cash-flows to know whether we have a surplus or deficit net income.

Personal finance is very important for us to ensure that our assets always exceed our debts in order for us to have a positive net worth and hence avoid burdening us with heavy debts. Moving forward, if we do not spend money more than our income, we will very likely have additional income for savings and investments.

Steps for Personal Financial Planning:

If it is very common for working Malaysians to plan for their family vacations, personal financial planning looks easy as it requires only the following four simple steps:

1. Determine our financial position

We can determine how healthy or poor our personal financial position by preparing our own balance sheet.

2. Define our financial objectives

We can set our financial objectives or goals by looking at our personal income statement or cash-flows to determine our surplus income for current saving and future saving

3. Develop and execute our plan of action

We can develop our plan of action to be followed by executing it by referring to our personal financial statements to match with of our budget for positive net worth and net income

 

4. Monitoring and reviewing our personal financial plans

We can monitor our progress by reviewing our personal financial plans meet our objectives or not. Therefore, if we could not achieve our financial goals, we must take corrective actions to ensure that our personal financial statements remain healthy and healthier from time to time.

As young Malaysians who are working in public or private sector, they can use their personal balance sheet to determine their financial capacity in meeting their contractual obligations, either short-term or long-term debts. As a responsible borrower, we must repay our debts when they fall due and will always try hard to avoid any outstanding debts by paying our debts according to the monthly repayment period such as personal loan.

The following financial ratios are adequate but not be limited to measure our annual financial position:
 

1. Liquid Ratio

This relates to liquid or quick ratio to determine our ability to meet our short-term obligations within a year. In most cases, we can use liquid ratio to determine our financial capacity to meet our short-term contractual obligation. For instance, our credit card facility which shows how many times our liquid assets can cover our credit card payment as  our monthly scheduled current debt. The higher the figure means the better because higher liquid assets mean we can cover more current debts that mature less than one year.
 

2. Long-term Debts to Fixed Assets Ratio

This ratio relates to our capacity to meet our long-term obligations more than one year. By using the long-term debts to fixed assets ratio, we can determine how much our fixed assets are financed by bank borrowings. To get this ratio, our long-term debts will be divided with our fixed assets to get the percentage of our assets that have been funded by bank loans notably a housing loan.
 

3. Cash Ratio

Cash ratio relates to cash at hand (money in wallet) and cash at bank (saving account). Cash at bank is always required to buy the necessity goods such as pay a pack of sugar or a bottle of edible oil or pay meals at restaurants or buy food at roadside stalls that normally involve smaller amount less than RM100. However with the wide uses of debit card since 2010 and e-wallet since 2019, the need to carry cash is lessen in which it is not only convenient but also safe and secured. Likewise, we also hold cash in order to meet our daily transactions for emergency cases such as a car breakdown or house repair that requires immediate cash.
 

By having the above three simple ratios, we can know quickly our cash position and capacity to repay our loans. In fact, statement of cash-flows that shows pattern of our monthly expenses will help us to know more on our rising expenses on non-essential goods. As such, we can take corrective action quickly  to cut unnecessary expenses in stages but consistent such as overseas holidays and fine-dining in hotels.
 

From Islamic perspective on personal financial planning, our income must come halal sources, be it working  in the government (public sector) or companies (private sector), or running our own business entities. In generating personal wealth via personal financial planning, Muslims are also encouraged to create, spend, preserve and purify their personal assets.
 

In pursuit of accumulating wealth, every Muslim in Malaysia that has surplus income can save and invest in income-generating assets. Many personal finance experts propose Malaysians to allocate 20% for saving and investment. However, according to the study by FIMM in August 2020 as reported by DagangNews, only 16% of the respondents have sufficient savings for the purpose of investment. 
 

Following suit, Muslims in Malaysia now have wider opportunity to invest in shariah securities in money (such as Islamic Malaysian Treasury Bill), bond (such as Khazanah Sukuk), share (such as al TNB shares), unit trust (such as al Ittiqal), real estate investment trust (such as al Aqtar REIT),  gold (such as Bank Muamalat gold bar), and commodity (such as crude palm oil futures) markets that are available as shariah instruments in Malaysia. In addition, we can protect our personal assets by buying family and general takaful policies to protect our landed property such as houses or movable property such as cars against theft, fire and natural disasters.
 

From statements of cash-flows and balance sheet, if we have a surplus net income and positive net worth, it signifies that we have sufficient savings for investment plans. As a Muslim, we have to ensure that our sources of income are coming from permissible sources (halal) and our personal investments are free from any elements of interest, ambiguity and gambling. Therefore, next article will pose a critical challenge to testify that syariah shares in Bursa Malaysia Securities Exchange as one form of investment plans can provide or not  better returns than conventional shares. Yes, we have to prove that shariah shares can provide “lower risk higher return” or “buy low sell high” investments; or else syariah shares may merely prove the otherwise?

The writer is a former finance professor at UiTM Shah Alam; Fulbright Fellow, US Department of State, Washington DC since July 2011; and Principal Fellow Researcher at Lamka Advisory, Petaling Jaya since July 2020.