This article first appeared in Personal Wealth, The Edge Malaysia Weekly on May 11, 2020 - May 17, 2020

Millennials and Gen Z are currently facing their first-ever economic crisis and many of them have found that they are not adequately prepared for it.

On April 6, Bank Negara Malaysia warned that a recession seemed imminent as Malaysia’s GDP is expected to shrink to a low of -2% this year owing to the economic impact of the Covid-19 pandemic.

Malaysia has not witnessed a GDP contraction in a decade. In 2009, it saw a 1.5% contraction because of the global financial crisis and before that, it experienced a 7.4% decline in 1999 owing to the Asian financial crisis.

The situation has been further compounded by the steep decline in Brent crude oil prices — from US$68 per barrel early this year to US$29.31 per barrel on May 5. This is expected to have a negative effect on oil-producing nations such as Malaysia, where the oil and gas sector accounts for 15.2%, or RM142.34 billion, of overall exports, according to the latest annual report by Malaysia External Trade Development Corporation (Matrade).

“I don’t have any savings whatsoever. If I were not living with my family, I would probably be eating instant noodles every day,” says Ilman Faiz, a 24-year-old who works for a local telecommunications company. “I never knew the importance of personal finance. But when Covid-19 happened, it made me realise that I should have at least some savings to get by.”

However, he does have a sizeable investment in Amanah Saham Nasional Bhd (ASNB) unit trusts, which will be able to sustain him for a few months if he were to withdraw them. But he does not foresee doing any redemption unless his situation becomes dire.

He has actively cut down on his expenses by cancelling monthly digital service subscriptions and cutting expensive food deliveries, which has resulted in his having some savings.

After conducting some research on personal finance online, Ilman intends to save up to three months’ worth of expenses as an emergency fund. However, he expects to reach that amount only after two years, because he still prioritises saving for overseas travels.

Samuel Ong, a 26-year-old who works for a local start-up, is worried that more extensions of the Movement Control Order (MCO) will severely deplete his savings. The MCO has stopped all operations at his workplace and he has been forced to take a pay cut.

“I have always been frugal. I have saved a considerable portion of my income, so I should have a relatively comfortable financial safety net,” says Ong. “But the MCO has already been extended three times. If this situation continues, it will definitely affect my savings.”

However, Ong notes that his expenses have gone down as well because of the lack of social gatherings and outdoor activities.

He adds that his expenses are largely limited to food and beverages, and he is saving up to two-thirds of his salary instead of half previously.

Eyeing investments

However, some millennials and Gen Z are looking to take advantage of the situation and are actively looking for investment opportunities.

Tharani Venkidasalam, a 26-year-old digital product manager, says she has wanted to purchase a property for the past few years and thinks that the upcoming recession presents a great buying opportunity.

“I have never bought a house before but with this low interest rate environment, [the repayment amounts could be more affordable for me]. There are also many sellers in need of cash so they will probably be selling their properties on the cheap,” says Tharani.

Although she qualifies for a housing loan, Tharani is concerned that she will not have enough cash on hand to carry out repairs and renovate the property. She explains that ever since the pandemic hit the nation, her savings have been depleting steadily.

“I have a family of six, and I usually spend about RM700 a month on groceries and household items. But with my panicking old-school parents, we are now stocking up supplies for months, and I have had to spend a few thousand ringgit in a short period of time,” she explains.

“Now that I have to pay for my family’s extensive internet consumption, I have zero cash flow. I am glad that at least I am staying at home, so I do not have to spend on commuting.”

Jamie Chan, a 24-year-old private tutor in the gig economy, is also looking for investment opportunities that provide higher returns but laments the low fixed deposit rates. “Right now, I have to take advantage of certain bank promotions to get a fixed deposit rate of above 3%. I have most of my savings in fixed deposits, but now it does not seem as attractive.”

On May 5, Bank Negara cut its overnight policy rate (OPR) by 50 basis points to 2%, a level last seen during the 2008-2009 global financial crisis. 

However, Chan is glad that she had invested in long-term certificates of deposit (CDs) before the Covid-19 crisis, when interest rates were higher. But many of her CDs are maturing and she is actively looking for investment vehicles that can provide greater returns.

“I recently tried robo-advisory platforms to see how they work. I bought in when the markets were low and have seen a 5% return in a short period of time. But I am not confident about the platforms yet because markets are unstable, so I still have most of my savings in long-term fixed deposit notes.”

Ong has also put some of his savings into robo-advisory platforms and the foreign exchange market (forex) via automated trading bots.

“I am not an active investor. Both of my investments are automated, so I had not been actively monitoring them prior to the pandemic. However, I am increasingly concerned about the worsening global market and my financial prospects. So I have been on my toes, constantly checking on my investment portfolio.

“I found that my investments in robo-advisory platforms have suffered a sharp dip in performance since the MCO started. Fortunately, I did not make panic withdrawals because of the advice and explanation given by the robo-advisory fund manager in its newsletter. Now, my portfolio is displaying signs of recovery,” he explains.

“The same thing happened with my forex trading. When there was a sudden negative value in trading, my broker told me that in times of big fluctuations, there are bigger opportunities to get more returns. In the end, I was able to make a substantial profit.”

Advice from the experts

Stephen Yong, a licensed financial planner and CEO of financial education platform MyPF, says it is important for millennials and Gen Z to have ample liquid cash reserves in times of crisis, not just to cover personal and business expenses, but also to take advantage of investment opportunities in the market.

“I have held on to more cash or cash equivalents prior (to Malaysia’s being heavily affected by the Covid-19 crisis) in order to take advantage of a market downturn, which was inevitable,” says Yong.

For young working adults who have yet to invest in the market but have the capacity to do so, Yong says the present crisis is an excellent opportunity to invest at regular intervals or use the dollar-cost averaging methodology. He explains that investing at regular intervals has been proven to show better results than timing the market or investing via a lump sum.

“For those who have already invested and your investment portfolio is in the red, you need to consider first and foremost your cash flow. If your cash flow is insufficient and you don’t have enough emergency funds for at least six months, you may want to catch an upward bump in the market to dispose of some investment assets. Otherwise, you may be forced to sell off your investments at a lower point in the market,” he advises.

“If your cash flow and emergency funds are sufficient and your personal investment plan is in place, you should continue to hold on to your investments and not realise your paper losses. The worst thing you can do is panic and liquidate your investments.”

Yong highlights the importance of having the right mix of investment asset classes, according to one’s investment risk profile and asset allocation strategy. While equities would witness the highest potential returns, investors should consider holding other investment assets such as bonds and gold, which reduce overall portfolio volatility, he says.

“My personal investments are diversified across different asset classes, geographical regions, investment vehicles and sectors. Broadly, I have 70% in higher-risk asset classes such as equities, investment property and alternative investments, and 40% in lower-risk asset classes such as cash and fixed income,” Yong says.

He adds that young working adults whose cash flow is severely affected by the crisis should take advantage of all the economic relief available to them, either through government initiatives or negotiations with their respective bankers.

He says individuals should prioritise relieving cash flow from hire-purchase loans because interest calculations are based on a simple interest rate, followed by mortgage loans. They can do so by opting for loan moratoriums.

“If you lose your job or income due to the outbreak, do apply for various income aids, including the Covid-19 Special Assistance from the National Disaster Management Agency (PADMA), health insurance scheme MySalam and Employment Insurance Scheme (EIS) by Perkeso.

“Most major life insurance and takaful providers are also providing special assistance during the Covid-19 outbreak, which may include upon diagnosis, death and hospitalisation benefits for policyholders. For some insurers, it may include coverage for immediate family members as well.”

Jordan Peh, a licensed financial planner and associate director of Yes Financial Sdn Bhd, reminds young working adults not to discount saving for their retirement and lose sight of their mid- to long-term financial goals.

“You may not need the cash for your children’s education and retirement funds now, but you will be needing it in a few decades. So you should remain calm and prepare,” says Peh.

“You will become old in a few decades. You can’t rely heavily on your active income upon retirement, so it is best to start early. So do reserve a portion of your income for retirement, because you will need to live off it for 25 years or so after retirement.

“I allocate 10% of my monthly income to my retirement fund, and I plan to keep this money untouched until my retirement. By saving and investing RM520 monthly, you will have RM1 million in cash in 30 years, assuming a 10% return per annum.”

Vincent Kwo, president of the Malaysian Financial Planning Council, says young people are primarily concerned about how long the Covid-19 crisis will last. He adds that it is important for them to work out their cash flow for the next six to 12 months, and understand the ins and outs of their income and expenses.

“An individual must be able to reduce expenses to plan for the uncertain future. I must also point out that reducing expenses is more easily done since all of us are staying at home due to the MCO,” says Kwo.

In an effort to reduce his expenses, he has been staying at home and eating healthy and home-cooked food since the Covid-19 outbreak. Staying at home has also reduced his travel, toll and parking expenses, and he plans to channel the savings to a rainy-day fund.

“You can easily save at least 20% of your expenses in this environment, or even more if you take the right approach to managing your money. It is important for millennials and Gen Z to reduce their expenses because the crisis could impact their financial health through salary or allowance reduction.”

To maintain a healthy cash flow, Kwo urges youngsters to focus on sharing expenses, such as living with friends and family to reduce utility costs.

In addition, Kwo suggests young working adults find alternate ways to increase their monthly income by being more productive while freeing up more cash.

“Uncharted territories such as the Covid-19 crisis will allow individuals who are dependent on a single source of income to think of new ideas to earn money. You set up an online business or take up new courses, such as the Registered Financial Planner course,” says Kwo. “I have been able to increase my income during this season by contributing some academic writing to publications.”

Going into debt

Some young working adults are considering taking on debt to sustain themselves during the crisis. Some, such as Tharani, are taking advantage of the low interest rate environment to obtain a loan to buy a new house or for investment purposes.

Nor Akmar Yaakub, head of the financial education department at the Credit Counselling and Debt Management Agency (AKPK), advises against taking on more debt in this current environment, especially for consumption purposes.

“Take up loans only for productive purposes and not merely for consumption. If you are struggling with cash flow, look for information online on the measures announced by the government to ease your cash flow. Take the money and use it wisely. It is not about the low interest rate environment, but rather about the need to take on more debt and your ability to pay it back,” she says.

“But in terms of investment, this is probably not the time to sell, and it is definitely not the time to buy, especially big purchases such as a house or property. If you are already invested, you might want to ride the wave, or if you are desperate, you could choose an asset that has minimal decline (in prices) and bite the bullet.

“The rule of thumb is to have an emergency fund before making any investment. To invest or not requires the individual to seek knowledge and understand the asset and not just follow the herd. One needs to see the signs of potential recovery within the property or stock markets before investing heavily.”

Nor Akmar also believes that young adults should take the Covid-19 crisis as an opportunity to learn the importance of building up a sizeable emergency fund.

“If youngsters have yet to experience dealing with a crisis, now is the time for them to be observant and learn how to manage money well.

“The MCO, in a way, is a good training period for youngsters. This is the time to reflect and adjust their spending and lifestyle. When this crisis is over, we need to maintain the momentum of prudent spending and saving as a way of life,” says Nor Akmar.

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