by Kenney Khew
BNM highlighted that about 75% of Malaysians hardly have RM1,000 for emergency purposes.
According to Agensi Kaunseling dan Pengurusan Kredit (AKPK), in a 2017 statistics, only 24% can survive up to three month with own savings and only 10% can remain unemployed for six months.
This goes on to show that Malaysians lack saving habit!
In fact, everyone knows that saving money is a virtue and it can help us have a secure future.
The importance of saving are as follows:-
1. Rainy day
You will never know what could happen next, for example unexpected event from happening such as loss of job, accident, medical bills and car repairs.
The best example will be impact of Covid-19 pandemic where many people lost their job and having living difficulties during the MCO period.
As such, saving money to create an emergency fund is vital with at least six month of your monthly income.
Many also complained that emergency fund does not serve the purpose during Covid 19 after six month.
But Covid 19 was a ‘Black Swan’ event and happens every 100 years! It is better to have a safety net!
You will have a peace of mind after going through all the unprecedented events so that you will be able to pay for most expenses without having to dip into your money kept for long term goals purposes.
2. Settle your debt/loan
After you have managed to save money for a number of years, you can use the money to pay off your car loan or housing loan.
By doing this, you not only increase your networth but decrease your debt service ratio (DSR).
For example, you save 10% of monthly income of RM5,000 for the next ten years. You would have saved RM60,000, which can be used to settle your car loan, for instance.
If your total monthly instalment is RM2,000 (of which, car loan instalment is RM1,000), your new DSR should be 20% ( 1,000/5,000 x 100%).
Your existing DSR was 40% (2,000/5,000 x 100%). You can see clearly that the DSR was reduced by half.
You not only practice good debt management but also increase your networth. Your car market value will become your asset instead of liability.
3. Increase your networth
Saving money directly fall into asset column in your balance sheet statement. In other words, you have made yourself richer than before.
For example, saving RM500 monthly works out to be RM6,000 a year. Therefore, your current assets will show an extra RM6,000, and this raises your networth.
Using the example above, you have managed to saved RM180,000 after 30 years. It saves your time from having to start from zero and you are half way towards your retirement plan.
Having said that, you will not have difficulty in forking out money for your long term goals, which includes maintaining your retirement plan.
There is the benefit of compounding effect in the long term. You can have RM243,408 if you put your money in fixed deposits yearly of RM6,000 with interest rate of 2% p.a for the next 30 years.
4. Children education
If you have started to accumulate your money when you are still single, chances are you will not have difficulties allocating some of your existing savings to children education fund.
You and your wife will be able to plan for other goals such as retirement and insurance.
In other words, you will not stress over money issue and worry about jeopardising your other long term goals.
5. Delayed gratification
In order to have a saving habit, you need to master delayed gratification in the first place.
You need to learn how to differentiate between want and need; and accumulate the money for ‘need’.
For instance, you should postpone buying new phones or gadgets every two years costing about RM2,000 to RM3,000.
You also have the option to select an investment plan that is suitable to you and also have the holding power during a downturn apart from practicing dollar cost averaging.
For example, you can invest in unit trust funds, ETF, equities, futures, derivatives and more.
However, understand your risk profile before you do any investment.
Many people especially youngsters like to travel every two years or so. Using the example above, you can use part of your annual savings say RM2,000 from RM6,000 for traveling within Asean countries.
Or else, save and accumulate some RM18,000 in the next three yeas to plan for a holiday in Europe.
8. Small or part time business
You can also start your small business in order to have more income for your family. For example, after 10 years, you can use RM60,000 to start an online business as another source of income.
Kenney Khew is chairman of FPAM Johor and also a licensed financial planner of Phillip Wealth Planners Sdn Bhd. He can be contacted at firstname.lastname@example.org.