This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 15 - 21, 2016.
Most people attain riches because of their work, investments, inheritance or just plain good luck. Statistically, only a small fraction of the population will ever be truly rich. Why is that so? In most instances, income and expenditure are directly related to each other — the more money you make, the more money you have or want to spend. A new car. A bigger house. Shopping without looking at the price tags. I am not saying you can’t do all these. If you are truly rich, why not? But are you truly rich?
According to the book Secrets of the Millionaire Mind, the rich and the average person think about money, wealth and life in different ways. Rich people adopt the attitude of getting rich so that they can afford to live below their means. Rich people think about money logically and view money as a tool that represents options and opportunities. They spend a lot of time looking into the future, setting goals, taking action and following their passions and dreams. Rich people find peace of mind in creating wealth and always focusing on the big picture and how to earn the big bucks. So, do you have the mindset to be rich?
Earning a high income does not make you rich because your lifestyle is likely to change according to your expenses. Spending more money than you make is easier than you think. So easy, you might do it without realising it. Dipping into bank savings, borrowing from friends and relatives, cash advances, overdrafts and using credit cards are some of the ways you can spend more than you earn.
I have said this a million times: It is not how much you make, it is how much you save and invest prudently. And this mentality helps you keep your spending in line. Having a high income does not make you rich, but high savings do. Excessive spending habits can quickly drain your money even with the most well-funded bank account.
Adam, 42, never dreamt of getting so much income after he quit his government job back in 2012. He was very excited when he got a job offer from a new private company. He had been thinking of changing his job since he had his fourth child three years ago.
Adam is an engineer, and is now working with an offshore oil and gas company. His remuneration is paid in Singapore dollars. He was initially based in the city state but recently moved into a bungalow worth RM2 million in Johor. With his income multiplying three times when converted into ringgit, his wife June stopped working to become a full-time homemaker to take care of their four children.
Adam bought a house using a government loan of RM140,000 but had to settle it when he quit his government job. He has another house in Rawang, Selangor, and is paying a loan instalment of RM2,100 a month (it is not tenanted). The loan payment for his new bungalow is RM8,000 a month.
His net worth was RM426,973 with liabilities of RM445,000 in 2012. Though his net worth has increased, his liabilities have also increased, to RM1.5 million. His debt-to-asset ratio increased from 50% to 55%.
Since Adam’s income increased to RM420,000 a year in 2013, he bought two insurance plans with annual premiums of RM24,000. He also bought a new car for RM140,000, with a repayment period of seven years. He is also servicing a loan for another car. He goes for annual vacations with his whole family and had spent about RM50,000 a year for the last three years.
Adam contributes regularly to the Private Retirement Scheme and invests monthly in some unit trust funds. Everything was going as planned for a year before he bought the bungalow. Though he is a high-income earner, he did not have sufficient capital when he wanted to buy the bungalow. So he withdrew money from his Employees Provident Fund Account 2, sold his unit trust holdings and took the maximum loan to buy the bungalow. His cash surplus remains the same as before, at around RM2,500 a month. The good news is that it is still positive cash flow.
While Adam was spending money on luxury items, I was worried about his future financial outcome. Despite numerous discussions and debates, he continued to splurge. Recently, we had a review of his financial plan. Based on the review (see table), his financial position is worse than in previous years, with not much savings in hand and higher liabilities.
Adam has to postpone his retirement to age 65. His children may need to study locally if he continues to spend like this. In fact, if he had waited a little while to enjoy his lifestyle, he would have accumulated enough money to buy the bungalow and not reached his current unhealthy financial situation. He was worried that if he didn’t buy it at the time, the opportunity to own the bungalow would be gone. But now, he has to either sell his house in Rawang or reduce his spending when the need arises.
Every financial decision you make can affect other areas of your life. When Adam decided to buy the bungalow, he was well aware that his children’s education fund would be affected and he was willing to retire five years later. You are ultimately in charge of your finances and the results you get from working with a licensed financial planner are as much your responsibility as they are the planner’s. The planner guides you to avoid mistakes and helps you to achieve your financial goals. But it is up to you to make a commitment to take action and make the change. With this mutual responsibility and commitment, you can then make the financial plan work successfully.
The more money you make, the more you will want to spend. This equates to a mindless lifestyle inflation. Instead of succumbing to the immediate luxury lifestyle, start planning it out and adopt the concept of delayed gratification, which will help you save more for later use. You could and should learn what type of investment vehicles exist and how they work. Think about every RM10 you spend and what it could look like if it was invested instead. Even if you decide to just live in the moment, you shouldn’t say you regret anything. You should be forward thinking and not live in the past.
Catherine Khoo is a licensed financial planner with CWA. She was recently recognised by the Financial Planning Association of Malaysia (FPAM) as one of the top 3 scorers at the Malaysian Financial Planner of the Year Award 2015.
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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