1.

THE FINANCIAL PLANNING PROCESS

• It’s easier to spend than to save.

• Personal financial planning is an ongoing process—it changes as your financial situation and
position in life change.
• Manage and control your finances with a personal financial plan.
• It helps you achieve financial and lifestyle goals.

Importance of personal financial planning:

• Manage the unplanned

• Accumulate wealth for special expenses
• Save for retirement
• “Cover your assets”
• Invest intelligently

5 basic steps to personal financial planning:

1. Evaluate your financial health
- How much money do you make?
- How much are you spending & on what?
- Use careful record keeping track finances and spending
2. Define your financial goals
- Write or formalize your goals
- Attach a financial cost to each one
- When will you need the money to achieve the goal?
- Analyze and revise your goals
3. Develop a plan of action
i. Flexibility
Plan for life changes and the unexpected
ii. Liquidity
Immediate use of cash by quickly and easily converting an asset
iii. Protection
Prepare for the unexpected with insurance
iv. Minimize Taxes
Keep more of what you earn
4. Implement your plan
- Stick to it.
- Use your financial plan as a road map to achieve goals.
- Keep goals in mind and work towards them.
5. Review your progress, reevaluate & revise your plan
- REview - progress
- REevaluate & REvise - changes in your life.
- Be prepared to formulate a different plan to meet your goals.
The budgeting and planning process

Establishing your financial goals

Short-term Goals (1 year)

• Emergency funds – 3 months expenses

• Pay Off Bills and Credit Cards
• Purchase Insurance
• Purchase a Major Item
• Finance a Vacation

Intermediate-Term Goals (1-10 years)

• Save for Older Child’s College

• Save for a Down Payment
• Pay Off Major Debt
• Finance Large Items (Weddings)
• Purchase a Vacation Home

Long-Term Goals (>10years)

• Save for Younger Child’s College

• Purchase Retirement Home
• Create a Retirement Fund to Maintain Current Standard of Living
• Take Care of Elderly Family Members
• Start a Business

Ten Principles of Personal Finance

1. The best protection is knowledge

2. Nothing happens without a plan
3. The time value of money
4. Taxes affect personal finance decisions
 5. Stuff happens or the importance of liquidity
6. Waste not, want not – smart spending matters
7. Protect yourself against major catastrophes
8. Risk and return go hand in hand
9. Min games, your financial personality and your money
10. Just do it!

2. WEALTH CREATION AND MOBILISATION FROM ISLAMIC AND CONVENTIONAL

PERSPECTIVES

Definition of wealth
• It is a stock of items of economic value comprising money, movable or immovable property
(livestock, crops), etc.
• It is also measured by the access to essential services such as healthcare, education, etc
• It is also considered as an accumulation of past net savings
• It is also defined as surplus net income
• Income is a flow and wealth is a stock

Concept of wealth in Islam

• The Arabic term for wealth is ghina.
• The notion of wealth in Islam derived from the sustenance and blessing of Allah the
Almighty
• Allah is the Owner and Provider of such wealth to His creatures
• Wealth does not merely concern itself with or confine itself to possession or ownership of
material wealth but toward attaining al-falah.

Characteristics of Mal (wealth) by the various Muslim legal school of thought

• It must have commercial value
• It must capable of being owned and possessed
• It must be beneficial in the eyes of the Shari’ah
• The ownership of the thing must be assignable and transferable
• Wealth planning and management is an effort to analyze and organize financial affairs to
achieve the desired financial and lifestyle goals.
• Generally, it deals with generation, accumulation, protection and distribution of wealth.
• Islamically it also includes the proper means of generating and utilizing wealth including its
purification

Components of wealth management:

1. Financial planning
2. Retirement planning
3. Tax planning
4. Estate planning
5. Insurance
6. Cash flow
Rights To Wealth

• Wealth is man’s basic need to acquire other essential needs. However the concept depends
on underlying philosophy adopted by the doctrines of capitalism, socialism or Islam.

Rights to wealth from Islamic perspective

• Allah is the Sole Giver of Bounty

• Man, as Allah’s Vicegerent (Khalifah) on Earth
• As trustee he can utilise the wealth but will be responsible in using it and is made
accountable to it both in generating and spending it
• Islam requires its adherents to strictly follow the prescribed rules of generating and using
wealth

Man’s rights as a trustee

• Everything on earth has been created for mankind.

• However, some are for public consumption while others can be privately owned. Those for
public are:
i. First: public utilities such as large streams, bridges, land around town left for
common use and banks of a stream;
ii. Second: natural resources such as water, grazing area, fire
and salt
• Man has been given propriety rights for all other properties subject to the terms of that trust
(amanah)

Phase of wealth management

1. Wealth creation
2. Wealth accumulation
3. Wealth protection
4. Wealth distribution
5. Wealth purification
Method of accumulating wealth

• Wealth accumulation is considered as the most important function of wealth management.

• The main objective is to accumulate the capital sum required to meet the financial and life
objectives as soon as possible.
• This requires very high level of returns on investment.
• It depends on asset allocation strategies that would minimize risk and maximize returns by
diversifying the investment portfolio
• The primary objective of wealth accumulation is to preserve accumulated wealth under all
circumstances.

Rational of wealth accumulation

• In the conventional approach, any form of wealth can be used in three ways:
i. Immediate consumption (consume)
ii. Savings (store)
iii. Investment (invest)
• Investment will forsake current consumption but will increase future satisfaction in terms of
increasing wealth
• Wealth accumulation can be done through:
i. Working (working with peoples, self employed, business man)
ii. Upgrade your education status
iii. Investment (Money working for you)
iv. Inheritance

Objectives of wealth accumulation

• To preserve accumulated wealth from investment loss, erosion by inflation and loss of
purchasing power.
• To achieve reasonable capital growth. There should be a good balance between strategies
that would maintain existing wealth and increasing it or capital growth

Factors in wealth accumulation

• Savings is important to accumulate wealth because the more we save the less we spend and
the more we have to invest
• Externalities: environmental and health hazards generate extra cost
• Commercial activities that are destructive to natural resources
• Harmful goods and services
• Ethics

Islamic concept of wealth accumulation

• Generation vs accumulation: generation is more akin to Islamic concept because it means

adding from what is already in existence
• Islam insists that wealth should be lawfully accumulated
• Islam abhors devouring of other people’s wealth (orphan, others)
 • It should also be lawfully spent
• Islam allows private ownership because it is a strong incentive to generate more wealth
• Muslims are expected to work hard and efficient
• Example of Abdul Rahman Ibn ‘Awf who was not only very rich but very generous with his
wealth (start with nothing, yet his wives inherited 80000 dinars (RM20mn) sold his land for
40000dinars (RM10mn give to his family members, 50000 dinars to charity
• Islam lays down clear injunctions on how Muslims should accumulate, distribute and spend
their wealth
• Wealth generation is allowed even during the sacred months of Hajj
• Muslims are expected to seek Allah’s bounty immediately after performing the
congregational prayers on Fridays
• Wealth should not be hoarded neither to be circulated only among the rich
• Saying of Prophet Muhammad. “A true and honest trader, o the day of judgement, would be
in the ranks of the Prophets, the Truthful and the Martyrs.” (Sahih Bukhari)

Mobilisation of wealth

• According to conventional perspectives there are three modes of mobilising surplus wealth:
i. Left to the dependents;
- In monarchical countries the estates are left to the eldest son with the hope that his
name and title will descend unimpaired to succeeding generations. But this is not always
so.
- Under republican institutions the division of property among the children is fairer yet
many feel that such bequests are an improper use of their means
ii. Bequeathed for public purposes; and
- Even this method has not met with complete success
iii. Administered by the possessors during their lives

Skills in mobilizing wealth

• Planning and management skills
• Financial skills
• Communication skills
• Marketing skills
• Credit skills
• Technical skills

Spending of wealth

• Glaring differences in spending habits and lifestyles between rich and poor today has badly
affected youths who are encouraged to emulate the lifestyles of the rich. This is not helping
them at all.

Islamic concept of spending

• Should not exhibit wealth by conspicuous consumption of luxuries
• Should not be wasteful but should spend wealth productively for the benefit of society
(creating more employment; reducing cost of production; etc)
• Goal of a Muslim is to attain “al-falah”(Ibn Mas’ud said, “The Prophet Muhammad saw
cursed the one who devours riba, the one who pays it, the one who witnesses it and the one
who documents it.”

Spending as a means of purifying wealth

• Wealth needs to be purified for two reasons:
• One may unknowingly earn illegal income
• There are the rights of the poor and needy in the wealth of Muslims
• The payment of compulsory sadaqah (zakat)
• The payment of voluntary sadaqah (infaq)
• Infaq should start with oneself; dependents; next of kin; neighbours and then others

3. ESTATE PLANNING AND FARAID

The Concept of Wealth Ownership in Islam

What is wealth? Wealth is referred to having property/asset r income that exceeds a person’s
immediate needs. Property has been defined under Section 2 of the Waqf (State of Selangor)
Enactment 1999 as any moveable or immovable property, any right, interest, title, claim, chose
in action, whether present or future or which is otherwise in value in accordance with Hukum
Syarie. A person’s action in managing his wealth falls back to his belief (‘aqidah) system about
the ownership of the wealth. From Islamic Perspective, everything belongs to Allah and we are
mere trustee.

Farai’d – The prescribed portions of entitlement fixed by the Shari’ah to the right legal heirs. A
system devised by Allah as prescribed in the Qura’n. Muslim should not try to circumvent the
system to avoid frictions.
 Father 1/6, 1/6 + residue

Mother 1/6 or 1/3

Husband 1/4 or 1/2

Wife 1/8 or 1/4

Son 2:1 or residue

Daughter 1/2, 2/3 or 1:2

Introduction to Wasiyyah, Hibah and Waqf

1. Wasiyyah – bequest upon death. To gie a right of ownership effective after death –
maximum is 1/3 of estate.
• Wasiyyah literally means ‘connection”. The connection here refers to the good deed
accompanied by the deceased during his lifetime; and upon death, he will continuously
receive the rewards for that.
• Technically, it is a gift of property by its owner to another contingent on the giver’s death. In
other words, it is an act of giving away one’s property lifetime but is effective upon the
death of the owner.
• The same section defines Iqrar as an admission made by a person, in writing or orally or by
gesture, starting that he is under an obligation or liability to another person in respect of
some rights

Pillars (requirement of wasiyyah):

1. Must be alive at time of giving

2. Must not be Haram and must exist at time of death
3. Offer and acceptance

Pillars (requirements of wisayyah):

1. The giver of the entrustment is known as the testator

2. The receiver of the trust known as wasi
3. The subject matter of entrustment
4. The offer and acceptance

2. Hibah – Transfer of ownership of a property its benefit to another without any counter value
during the life of the donor
• Hibah is made during the lifetime of the donor and when the donor dies, the property does
not constitute part of his estate
• The transfer of ownership takes place immediately after the completion of the ‘aqad’. In
other words, it is a transfer of property without an exchange
• It is constitute with the presence of a definite proposal of the owner of the property (the
donor) and the acceptance from the beneficiary (the donee)
 Pillars of hibah:

1. The donor must own the property

2. The donee must exist at the time of giving
3. The subject matter must actually be existence and valuable
4. The must be offer and acceptance (sighah)
5. Handing over of possession and control by donor
6. Accepting possessing and control by done

3. Waqf – Appropriation or trying up of a property in perpetuity for specific purposes. No

property rights can be exercised over the corpus – only the usufruct is applied towards the
waqf charitable objectives
• Literal : detention/ to prevent or to restrain.
• ‘a dedication of property either in express terms or by implication, for any charitable or
religious object, or to secure any benefits to human beings

2 main types of waqaf:

1. Waqf am (general)
- Any waqf that is created for a general charitable purpose according to hokum syarak
2. Waqf Khas (Specific)
- A waqf that is created for a specified charitable purpose according to hokum syarak

Matrimonial Asset and other Islamic Estate Planning Issues

• Matrimonial asset – defined as property jointly acquired by the husband and wife during the
subsistence of marriage. Both parties have contributed either directly or indirectly towards
the acquisition of such property. It only arises when a divorce occurs – lifetime divorce or
divorce upon death.
• Approaches –
- 1/3 indirect form
- 1/5 directly contributing
- Contribution of both parties
- Joint effort or sole effort
• Assets not deemed as matrimonial asset:
- Gift received by way of inheritance
- Gift received by way of hibah
- EPF
 4. TAKAFUL AND INSURANCE SCHEMES
A risk management through takaful planning contributes to taking an imitative to preserve and
protect oneself, family and dependents. It’s an advance imitative to provide material security in the
event of any perils/mishaps.

Objectives of Risk Management and Takaful:

1. Identify risk and categorize it for mitigation of portfolio and risk reduction and to ultimately
justify the cost of risk
2. Creates an instant estate with a small premium:
- Wealth creation, protection and distribution
3. Provide financial security against premature death and disability:
- Illness or injury can strike at any time
- Total or partial disablement, sickness or injury will affect work
Performance

Wealth Protection Needs Analysis

Difference between Mortgage Reducing Term Takaful (MRTT) and Mortgage Level Term Takaful
(MLTT)
MRTT MLTT
Coverage reduced Coverage never reduced
No savings at maturity Savings in return (increase throughout the year)
Proceeds go directly to the bank Proceeds go to the beneficiaries (family)
Non-transferable Various payment frequency (monthly, quarterly, half-yearly
or annual basis)
Single payment (one lump sum) You will enjoy the dividend yearly

Bank make profit (if MRTT attached to the Various methods of payment allowed (credit card, cash,
financing) cheque, SI, autodebit)

Approaches to Quantify Family Takaful Coverage:

1. The Rule of Thumb Method
• Estimates how much a family would need in the event of the death of the breadwinner
• Current annual income multiply by a constant. Five to ten years annual income
• Muslim – expenses as the basis

2. The Income Replacement Method

• Purpose of insurance or Takaful is to replace the income that the breadwinner would have
brought home to his family

3. The Needs Fulfillment Method

• Assumes that the purpose of Takaful is to meet family needs. The amount of Takaful is
required to satisfy these needs may be more or less than the amount required to replace the
breadwinner’s income
Key principles of takaful and insurance
1. Contribution
2. Indemnify
3. Utmost good faith
4. Tabarru’
5. Proximate cause
6. Subrogation
7. Insurable interest

Basic difference between Takaful and Insurance

(CONTRACT)
Insurance
Participants but the policy at a certain price
with the objective to get a certain amount of
compensation should anything happen to them.
i.e – buyer and seller (‘aqid), subject matter
(ma’ qud ‘alayh) and offer and acceptance
(sighah).
The scholar concluded that as a buy-and-sell
transaction, the operation contains unknown
and uncertain subject matter.
This results in the presence of gharar
(uncertainty or ambiguous factor in contract),
which makes the contract void according to
Shari’ah.
Takaful
The participants are the participants who contribute to
a certain sum of money in a fund, which is partly
donated in a special account to be used for payments
when calamity occur.
The Takaful companies are the operators of the fund.
There is no buying and selling.
The contract used is either wakalah or mudarabah,
where Takaful operators earn a commission as wakil or
profit sharing as mudarib

(MAYSIR AND GHARAR)

Insurance
The contract of buying and selling between the
participants and insurance operator contains
gharar and uncertainty and ambiguity
regarding the subject matter of the contract.
Gharar in conventional insurance pertains to
three issues: the unknown outcome of the
exchange, unknown rate of exchange and the
unknown time of exchange
Takaful
In Takaful, it is true that participants do not get back all
that they have paid into takaful schemes.
The balance of the takaful fund will be distributed to
the eligible participants and shareholders according to
the pre-agreed ratio.
The operating profit for the year is determined at the
end of each financial year and will be distributed in line
with the terms of the contract.
The distribution of the operating profit is an essential
element in takaful.
Premium and coverage issues. Participants will get back the contributions scheme less
The coverage is actually an undertaking or the portion donated into the tabbaru’ fund + all
promise by the Insurer to the policy holder to investment returns declared.
pay the sum assured in the event of the insured
peril. If the peril does not happen, the policy
holder lose the amount paid as premium. This
is considered as maysir.

(RIBA)
Insurance
In the event of an insured peril, an insurance
company pays out from its internal funs
(because when a premium is paid, it belongs
to the company).
For insurance company, any deficit is
underwritten by the company because any
underwriting surplus is also owned by the
company.
Takaful
The sum assured or any other compensations is paid
from a fund belonging to the participants collectively.
If the fund is insufficient in the Risk Fund for Family
Takaful or General Takaful Fund, the Takaful operator
will advance the shortfall amount to the respective
funds at no cost to the participants

TUTORIAL EXERCISE

The Kamil family has a basic health insurance plan that pays 80 percent of out-of-hospital expenses
up to RM 3,000 a year after a deductible of RM 250 per person. If three family members have doctor
and prescription drug expenses of RM 980, RM 1,840, and RM 220, respectively, how much will the
Kamil family and the insurance company each pay? How could they benefit from a flexible spending
account established through Mr. Kamil’s employer? What are the advantages and disadvantages of
establishing such an account?

5. DEBT MANAGEMENT
• Islam highly discourages heavy use of debt.
• It is considered to have a serious and direct effect on a Muslim’s belief or conviction for it
could lead to harmful consequences.
• Islam permits its believers to cater for all levels of benefts and interests for the betterment
of life. However, Islam has imposed certain limitations and constraints concerning the use of
debts for acquisition of luxury goods and maximization of satisfaction.

Type of debt – personal debt

1. Personal loan/financing
2. Hire purchase
3. House of house financing
4. Bank overdraft
Debt From Islamic Perspective
• Imam Shafie, debt is the transfer of the use of a property by the owner to another person.
The borrower must return the property in the same condition as before or replace it with
goods of equal value to the borrowed property.
• Malikis scholars defend debt as a valuable property provided by the creditor to the
borrower, solely for the benefits that arise from the property. Creditors obtain periodically
parts of the property that are repaid by the borrower according to the amount of liabilities.
• Hanafi’s scholars also has a similar view, that is, debt is a special
contract where a product is given for the use of the borrower by
the creditor and it has to be repaid in the equivalent value
• Imam Hanbali also explained that debt could be recognized
as a contract made by the creditors, which involves an agreement to transfer the property to
the borrower with the borrower’s promise to return it.
• The main feature of the practice of borrowing in Islam is based on the concept of ta’awun
(mutual cooperation), which is mutual help to assist a person in need. Loans serve to
strengthen the relationship between the borrower and lender.
• A loan is also known as salaf which means an advance that refers to the amount of the loan
extended to the borrower with an expectation of repayment in the future (Zuhaily, 2002)
• The contract of loan or qard, the borrower acquires an absolute right of property on the
things lent and comes under an engagement to return an equal quantity of things of the
same kind (Haqqi, 2009).

Side effects of debt

1. Bankruptcy – wage garnishment/ foreclosure
2. Eviction – Emotional troubles/ suicidal tendencies

Planning for Debt Management

There are certain steps that anyone facing a debt problem will need to go through.
i. They will need to establish exactly how much they owe and to whom. A schedule of
debts should be prepared that also identifies repayments due and interest or profit
charge. Priority debts need to be identified so that they are acted upon first
ii. A personal or household budget should able prepared that identifies the expected
income and expenditure over the coming months and the amount of funds, if any,
that will available to pay creditors.
iii. Option for dealing with the debts should be explored.
iv. Implementation
v. Review

Managing debt
1. Move to an interest/profit only mortgage for a specified period
2. Request for mortgage holiday, a short period when mortgage repayments do not have to
made.
 3. Downsizing
- An option open to homebuyers with adequate equity in their property could be to sell their
existing home and buy somewhere that is cheaper.
- Often smaller property and it may sometimes be in a less desirable location.
- In downsizing, it’s also can reduce debts from the other types.
4. Government help for home buyers
- The last option for homebuyers
- Countries practiced: England, Wales, Scotland, and Northern Ireland.
- Strict criteria applied.
- All the schemes are intended to provide help as a last resort
- For those needed – at risk of being made homeless.
- Such schemes, government-backed scheme which targeted households with children,
disabled people, the elderly