Lim is 35 years old, earns RM 80,000 in annual income, has a wife, a house with RM 350,000 in mortgage balance, a car with RM 50,000 in an outstanding car loan, EPF, and RM 50,000 in liquid assets, consisting of FDs, stocks, and unit trusts. As of now, the question is:
‘If Lim inherits RM 1 million today, how should he manage it?’
Should he spend it, invest it, donate it, or do all of the above? Here, in this article, I would like to address the challenges Lim could face in managing RM 1 million in inheritance and offer pointers to be considered to handle such sums effectively. These considerations are as follows:
1. Mindset
This refers to one’s mental capacity to handle money.
For instance, should Lim inherit RM 1 million today, is Lim now a ‘rich man’ or is Lim an RM 80,000 a year-man receiving RM 1 million? You see. It is one thing to have RM 1 million. It is another to have the mental capabilities to handle such a sum of money. This is similar to football. It is one thing to play and win matches in the Malaysia Super League. It is totally a new dimension to play against other clubs in the Asian Champions League.
So in Lim’s case, I believe it is helpful for him to be quick in appreciating the fact that he needs to grow in financial maturity. It is not savvy for Lim to manage his inheritance of RM 1 million with an RM 80,000 mindset. Humility is really vital at this stage as it could prevent him from unnecessary losses from decisions that are rash and unsensible.
Remember: Preservation is half the battle won in managing huge money.
2. Skills and Experiences
This refers to one’s ability to manage a sizable investment portfolio.
In Lim’s case, once he inherited RM 1 million, he has more options as to how he should invest his money. These options are countless. They include real estate, stocks, unit trusts, ETFs, equity and debt crowdfunding opportunities, futures & options, gold, cryptos, and so on and so forth. Such abundance in opportunities can either be a blessing or totally overwhelming to Lim.
So, the question is: ‘Where should Lim invest his money?’.
My answer is – ‘I don’t know’.
This is because I believe Lim should choose his investments based on his unique plan, needs, preferences, beliefs, investing skills, and experiences. From the above, I believe that it is likely that Lim lacks the game plan, skills, and experiences needed to manage a portfolio valued at 6-to-7 figures as his investment portfolio is now under RM 50,000.
Remember: Managing a RM 50k Portfolio is different from a RM 500k Portfolio.
In Lim’s case, I believe Lim would not be worse off if he decides not to invest his RM 1 million for the next 2-3 years. Sure, Lim’s money would lose a little bit as a result of inflation. But remember, Lim lacks skills and experience in investing, especially with bigger money. Lim might be financially worse off if he decides to invest aimlessly, without the skills, experiences, and maturity in managing them.
So, if I’m Lim, what I’ll focus on is building on my skill sets and experiences as an investor for the next 2-3 years. This can involve learning accounting, investment portfolio management, asset valuation, corporate and tax laws, networking and the list goes on. I might deploy a small portion (below 5%) of my capital into my preferred investments to test out my strategies and gain experience.
I could choose to expand my portfolio, once I’m more skilled and mature as an investor.
3. Friends and Family
This includes one’s immediate and external family members, friends and as well as associates. Will they be a friend or a foe in one’s finances?
Think about it. If Lim inherits RM 1 million, what could his wife expect of Lim? If Lim’s wife is a spender, will Lim be ‘pressured’ to spend? If Lim’s wife would like to invest, would Lim be the ‘financier’ of her investments? How aligned are Lim and his wife when it comes to finances? Do they make decisions together? Or is one of the two couples more dominant in the area of finances?
The above is just a consideration of Lim’s wife.
How about Lim’s siblings, his wife’s siblings, their relatives, and the list goes on? Will Lim’s RM 1 million be deployed into other people’s businesses?
Now, here’s one thing to take note of.
I’m not suggesting that any of the above is good or bad.
Here, my take is for Lim to be more intentional with his RM 1 million. If not, Lim may risk being shortchanged or even abused, if Lim’s family members or friends have bad or malicious intentions on Lim’s money. Remember: Money or capital, like RM 1 million, will definitely attract people (good and bad). It is Lim’s duty in managing this money to protect his capital from bad people.
4. Character
Sometimes, the worst enemy to handling RM 1 million is the person himself. He may shoot himself in the foot and be his own biggest downfall. Ouch!
Here, I believe different people have different characteristics in handling money and finances. Some are compulsive. Some are conservative. Some are active. As I write, there are many who are passive. Some are financially skilled. Others are not. Some are generous. Some are stingy. Some are really mission-oriented and some are relational and people-orientated.
Self-awareness, I believe, is crucial in managing RM 1 million.
If Lim is compulsive, he is prone to spend big, upgrade his lifestyle, buy into various investments aimlessly, and be a victim of greed.
Meanwhile, if Lim is overly-conservative, Lim might settle all his debts (House & Car) and park his remaining into FDs to earn merger interests. Yes, Lim wouldn’t fall flat on his face. In fact, Lim could enjoy some financial peace by having his big cash buffer. But at the same time, Lim would forgo chances to maximize and optimize his financial wealth to the next level.
But I guess, all of these really depend on what Lim wants in his life.
So in this sense, I believe it is better to think and reflect as the use and unuse of capital can add or reduce choices and consequences in life. When undecided, it is helpful to hit a ‘pause button’, stash cash temporarily, and explore what, how, and how much you want in your own life.
5. Advisors
Advisors can either be helpful or detrimental to one’s financial health.
For instance, when asked ‘How RM 1 million is to be managed?’, it is possible to have multiple answers, depending on the individual’s belief and preferences. So here, it is possible for a businessman to invest RM 1 million into business as that is a viable choice for him. Likewise, a stock guy would invest in stocks and a real estate guy would invest in real estate. Unit trust consultants, insurance, and other financial salespeople will reckon a portion to be allocated into unit trusts, insurance, and their respective financial products.
All of the above is neither right nor wrong.
But for Lim, the issue here is ‘Suitability based on his Circumstances’.
In such a case, a licensed financial planner (like an RFP or CFP) could map out the finances of a person and recommend actionable steps to take based on his own situation and circumstances. This is a more comprehensive and possibly, safer approach as they are licensed under the Securities Commission (SC). I believe if Lim is not financially savvy, Lim may consider engaging one to manage the inherited wealth received.
By Ian Tai
