1) Buying all the wrong things
Is that tub of Haagen-Dazs ice-cream you’re about to purchase a need or a want? Since it’s a food item, it should be marked as a need… right? It can be difficult to differentiate between the two, especially when you’re faced with so many enticing sales promotions.
However, it’s important to be aware of your cash flow, so as to ensure that more money is coming in instead of going out. This means that you’ve got to have a simple budget planned out, one that will help you channel your money effectively to the right places.
Once you’ve set aside funds for all your needs – housing, food and water, health and hygiene products, basic clothing, as well as miscellaneous items like student loan payments – plus some savings for a rainy day, then only should you start to consider which of your wants are worth spending on.
What’s the solution: If you’re trying to stop your money from going to all the wrong places, you might need a helping hand. With your smartphone, that is. Apps like Level Money and more come with varying sets of functions that are designed to serve range of people, from the financially-savvy to the first-timer.
2) Living beyond your means
When you receive your first paycheque, it can be a rewarding and liberating feeling. Many people would choose to blow it on themselves and their loved ones, rationalising that they ‘deserve it’.
As you work your way up the career ladder and you get increments, your spending will tend to snake upwards as well. This will cause what is known as a lifestyle inflation – where you heedlessly live up to the ceiling of what your current income level is, thus forgetting that you need to save for the future as well.
Sadly, there is already official data from the Employees Provident Fund (EPF) which shows that more than half of Malaysians do not have financial assets of any kind, and one in three Malaysians do not have a savings account.
What’s the solution: Set up an account or two in a bank that is separate from the one that your paycheque is cashed into. This will be your savings accounts, which you can programme to automatically receive a percentage (10% is a good start) of your paycheque – even before you have a chance to look at it. You can also do the same for any investment plans that you’ve signed up for.
As soon as you get an increment, be sure to increase the contribution by the same amount, and you’ll find that you would never need to adjust your budget!
3) Using credit cards in an emergency
It’s very easy to feel invincible when you’re in the prime of your youth; blessed with generally good health and tonnes of energy, you’re eager to live each day to its fullest.
As such, you forget that emergency situations will creep up on you when you least expect it – car breakdowns, medical emergencies, or losing your job in an economic downturn. Any of these could quickly become a very expensive nightmare. According to a news report in The Star which echoes this worrying trend, it states that only 6% of Malaysians have enough savings to last them six months.
Datuk Othman Aziz, the Deputy Finance Minister, was quoted as saying, “It boils down to attitude as most are unable to differentiate between their needs and wants. Low financial management literacy and poor saving attitude were the reasons why most Malaysians lacked sufficient savings.”
Not putting aside liquid cash for a rainy day and relying solely on your credit cards will ultimately land you deep in debt, or dipping into your long-term savings account, which should not be touched at all.
What’s the solution: Make sure you create an emergency fund that’s easily accessible as soon as possible. The general rule of thumb is what the news report states: to have enough savings to last at least six months, preferably deposited in a high-yield savings account which may allow you to earn a higher-than-average interest.
Also, buy a few good insurance plans that you know you would need like health, automobile and disability. These may really save the day should you ever find a hefty bill suddenly hoisted upon you.
4) Not establishing a good credit rating
Never postpone paying off your debt or bills; you’d be hurting your credit health more than you think. This is based on a three-digit credit scoring system by CTOS Malaysia, ranging from 300 (very bad) to 850 (very good). You should keep your score above 697, which makes you generally more trustworthy and deserving of better rates, if you apply for any loans in the future.
Building a good credit rating early on is essential, as it will allow you to make big purchases that rely on that score, such as properties which will grow your wealth faster.
What’s the solution: You can start off by selecting the right credit card that is suited to your needs, as this is a good stepping stone. Make sure to pay it off in full at the end of each month to avoid debt and keep your track record clean. One way to prevent overcharging is to refrain from making a purchase that you wouldn’t normally fork out cash for.
Nevertheless, if you have incurred any kind of debt, the best way to deal with it is to pay more than the stipulated minimum amount. This way, you’d be able to reduce the length of your repayments and the amount you pay in interest.
In addition, with almost everything performed online nowadays, the payment of bills is just an easy click away. You can choose automated payments for fixed costs – your student loan, phone, internet and insurance – so that you don’t have to strive to remember them every month.
5) Assuming that you can’t save for retirement… yet
This is a very dangerous assumption to have since people in their 20s think that retirement is still a long way off and there’s plenty of time before they ever have to worry about that stage. Reality check: if you don’t change your bad spending habits and start saving/investing now, you might just miss the retirement savings boat completely.
A news report in The Star confirms that this is unfortunately the case in Malaysia. According to the EPF once more, a member must have at least RM228,000 at age 55 in order to survive after retirement. As of 2015, two-thirds of members aged 54 only have RM50,000 or less in their accounts. If this isn’t a cause for concern, you might want to get a head check.
Financial planners have described this situation as a ‘financial timebomb’ because by 2035, citizens above the age of 60 will make up 15% of the total population.
What’s the solution: Since a contribution to your EPF account is mandatory, make sure that you do not opt for the reduced statutory contribution rate for employees, which went from 11% to 8% effective March 1 2016. Remember, you’re not ‘losing’ that 11%, you’re actually saving it and getting an additional 13% from your employer!
In fact, you can even contribute more, should you choose to do so. All you would need to do is submit a notice of election to contribute at a rate exceeding the statutory rate.
The earlier you start cultivating good financial management habits, the better. Remember that a smaller amount saved early and consistently will benefit from the power of compound interest and grow into a small fortune by the time you hit retirement age, as compared to a large amount saved later on in life.