This article first appeared in , on April 11 - 17, 2016.
The withdrawal of fuel subsidies, weakening global economy, tumbling currency, post-GST impact on inflation and high property prices are among the biggest concerns of Malaysians.
According to Khazanah Research Institute, the median house price in the country is 4.4 times the median annual household income and is seen as “severely unaffordable”.
Salaries have not risen fast enough to cope with the cost of living over the past decade. As showcased in a video by a law graduate: “The only way I can cope with the cost of living is if I marry a rich man.” Some may criticise her, but she has a point.
From my work with clients, a family of four (working parents, two children, a mortgage and two cars) living in Kuala Lumpur needs a household income of RM7,000 to RM12,000 — and this excludes personal savings.
For most Malaysians, paying the housing loan at the top of their expenses list, followed by meals, transport, childcare and education. It is not just the lower-income group that is struggling with the high cost of living, the middle-income group is also affected.
Sam and his wife, Amy, make more than the median monthly household income, but they are trying to cope with the rising cost of living. Sam, 39, is a manager in the advertising industry and his annual income is RM80,000. Amy works as a personal assistant at a multinational company and has an annual income of RM100,000. They have a four-year-old daughter and they spend about RM1,500 a month on kindergarten and day care.
Prior to joining the company, Sam was not paid for four months by his previous employer because of the economic downturn. As a result, he has accumulated RM6,000 worth of credit card debt for which he has been trying to pay RM800 per month. His income fluctuates as his earnings are based on commissions, on top of his low basic salary. The couple bought a second-hand apartment in KL eight years ago and the monthly repayment is RM1,290.
Their net worth, or their financial worth after repaying all their debts, is RM690,148. This is the difference between their total assets of RM974,395 and total liabilities of RM284,247.
While Sam and Amy’s solvency (70.8%) and debt-to-savings (29.10%) ratios are pretty healthy, their savings ratio is very low — only 8.1%. It is normally recommended to have a savings ratio of at least 10%.
Sam and Amy have five financial goals, which have an effective cost of RM5,089,302 today. The table lists their goals, when they are expected to start and stop, and whether the outlays are to be indexed (cost increases each year). The amount per year is the cost of the goal if they were to begin paying for it this year.
An analysis of their situation is a snapshot of their entire financial life assuming they make no changes to their current financial behaviour. This means that they continue to spend and save as they have in the past and maintain an investment strategy consistent with how their assets are currently invested.
A 6.02% pre-tax rate of return was used when doing the analysis because this is the expected rate of return for the existing asset allocation in their portfolio based on historical rates of return. The graph illustrates how their savings, withdrawals and expected long-term rate of return will impact their investment capital over their lifetime.
The analysis indicates that there is a projected capital shortage of RM2,085,870. This means they would require this amount of money in the bank to meet all their goals today. The analysis identifies the additional amount that they would need to save as RM12,704 per month indexed to inflation to meet all their goals, assuming no changes to other factors.
The shortfall is, of course, not something they can change. However, there are a number of controllable changes they can make to reduce the shortfall.
Remaining employed is the most basic way to prevent debt accumulation. Both of them need to protect their steady income by developing positive work relationships and improve their job-related skills.
Sam and Amy also need to sit down and do their cash flow statement and budgeting diligently. Simply earning an income and paying the bills, but not being engaged in the process of cash flow management, is just survival. They need to understand the components that make up where their money comes from, where it goes and what choices are appropriate for creating a life of greater satisfaction.
Having two cars that are beyond their affordability by having a repayment period of seven to nine years is not appropriate as this incurs a higher interest amount. They should consider a used car or carpool since Amy works in an office.
Both of them need to adopt a “salary minus savings = expenses” attitude by keeping aside a portion of their salaries as savings, either as an emergency fund or for long-term investments.
They should consolidate the balances on their three credit cards and do a balance transfer to save on future interest. They also need to adopt a more detailed repayment scheme and commit themselves to it.
The couple can make their money work harder if they stretch the ringgit further by buying in bulk, using loyalty cards, shopping online with reward points and using credit cards that give cash back. And instead of sending their daughter to a day care centre, their parents with the help of the maid can help to look after her.
Sam may consider taking up a part-time job on weekends or after work to increase his income. He can be a part-time music teacher since he is good at playing the guitar. He could also start a small online business or form a joint venture with friends or relatives.
The extra money saved from cost-cutting strategies and part-time income can be invested to generate passive income. This includes low to mid-risk instruments such as unit trust funds, real estate investment trusts (REITs), shares or even fixed or currency deposit accounts. The more you save, the more returns you will get.
Managing your money wisely is an important skill to help you live within your means and achieve your aspirations. How you spend your money now will determine how you live in the future. It is also intimately linked to our inner life — its presence, or lack thereof, has a profound physical, mental and emotional impact on our life.
Having enough money allows us to provide for our families, plan for the future and enjoy our leisure time. So, start financial planning now. The earlier you start, the less effort you need to put in to achieve your goals.
Catherine Khoo is a licensed financial planner with CWA. She was recently recognised by the Financial Planning Association of Malaysian as one of the top 3 scorers at the Malaysian Financial Planner of the Year Award 2015. For queries, email us at [email protected].
All information contained herein is solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by CWA. No representation or warranty is made by the said financial planner and/or CWA nor is there acceptance of any responsibility or liability as to its accuracy, completeness or correctness.
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