There are some things that are simply easier said than done – many of which includes managing our resources such as time, people, or our main topic for today, money. Anyone can make a financial decision, but when was the last time you made a financial decision for long-term benefits?
1. Failing to budget, budgeting to fail
We Malaysians easily live by: “Kais pagi makan pagi, kais petang makan petang.” While many of us try our best to save for a rainy day, the pennies we’ve earned easily slip through our fingers. Budgeting is the only way we can ensure we keep track of our spending by helping us evaluate the expenses our pay checks are paying for.
According to the 80/20 rule, 20% of your income should be invested, while 80% is meant for expenditure such as food and paying your bills. Life is full of the unexpected such as layoffs; hence, a safety net consisting six-months of your monthly income can function as an easy-to-access emergency fund in your savings or fixed deposit accounts. If your daily expenses prevents you from saving 20% of your income, it may be time to cut back on habits such as shopping or heading to the cinema.
2. Thinking a man (or woman) is an island
No man is an island, that’s why you need to discuss your finances with your loved ones. While it is easy for us to make our financial decisions purely as individuals, two heads are always better than one. Dual income households can achieve financial goals together by drawing up joint budgets. If you’re single, you’re still part of a family, and it is important for your elderly parents to know if you plan on a life-change such as switching careers especially if they are dependent on your income.
3. Not being able to pay what you owe
Do you know what is the most common cause for bankruptcy in Malaysia? The Department of Insolvency states that 27% of bankruptcy cases in 2016 were resultant from the inability to repay hire-purchase loans, 23% from personal loans and 19% from housing loans. A rule of thumb is: never allow your debt to exceed 30% of your income. Some banks are willing to grant you loans amounting to 70-80% of your income. Just because the loan is approved, does not guarantee you will be able to service the monthly instalment payments.
4. Not taking financial liabilities into account
Civil servants are often viewed as holding ‘stable employment’ which makes a suitable guarantor for relatives or friends. It is unadvisable to guarantee loans unless you have a full understanding of their financial position including their income, outstanding debts, and loan instalments. Although the ‘Bankruptcy Amendment Bill 2016’, protects a social guarantor without personal interest or financial benefits, from being declared as bankrupt, as a guarantor, you are liable to settle the bank loan if the borrower defaults. This is a financial liability you need to take into account.
5. Neglecting insurance
It is wise to, ‘sediakan payung sebelum hujan’, or ‘prepare your umbrella before the rainfall’. One big umbrella is ‘life insurance’. Bank Negara Malaysia aims for 75% of all Malaysians have life insurance by year 2020. Presently, close to half of our citizens have not purchased a life policy. Without insurance, death or permanent disability can impoverish your loved ones. As the cost of insurance coverage as well as the risk of not having insurance increases with age, don’t delay in purchasing a policy.
6. Thinking you’ll be forever young
The biggest financial mistake that most Malaysians make is to fail to plan for retirement! We tend to assume that retirement is ages away. The last EPF statistics released in 2015 alarmingly revealed that more than 66% of Malaysians have less than RM50,000 in their accounts. This amount generally lasts an individual barely 5 years before our funds run dry. It is crucial for you to explore other investment avenues such as the private retirement schemes which offers up to RM3,000 in tax relief till year 2021 and get educated on Amanah Saham and other government bonds.
Always remember that financial management is all about managing your resources. When you take charge of your budget, actively plan, discuss and get educated, you can avoid making financial mistakes and achieve your financial goals. Knowledge is power, so don’t shy away from learning. If you’ve made one of these mistakes, learn from it and move forward!