Almost everyone has made at least one money mistake in their lifetime, especially in their youth. When we first join the workforce, we are left to our own devices to manage our salary amid temptations, such as freely available credit cards and various other material goods.
According to Bank Negara Malaysia, Malaysia’s household debt-to-GDP ratio has increased from 69% as at end-2006 to 83% as of end of March 2013.
Most debts are created by overspending. In order for us to tackle the issue, Malaysians need to understand the implications of having excessive debts. Leveraging heavily through credit card spending is not the only money mistake many of us make.
Here, we share eight common money mistakes to help young professionals circumvent them and avoid setting themselves up for a financial meltdown in the years to come.
8. Buying a home before you are ready
The idea of owning your first home is appealing. With most Malaysians, it is seen as a benchmark of financial stability, giving one the bragging rights to friends and relatives.
However, it does you more harm than good to purchase a home before you are financially ready. Being financially ready for a house is not just about saving up 10% of the price of your dream home as down payment. There are various other fees and charges that you need to pay upfront, too.
Owning a home is rewarding, but it requires time, money, and a serious commitment to financial prudence.
7. Getting a loan for your wedding
Even more so than buying a property, marriage is a big life commitment. Within the Asian culture, weddings are traditionally grand affairs. However, not everyone can or should afford the grandeur.
Times have changed even for the most traditional families. Where parents of the bride or groom pay for the wedding, most brides and grooms now pay for their own wedding. However, with a meager bank account balance, younger nuptials may not be able to afford their dream wedding.
Being newlyweds is difficult enough, you really don’t want to start off the marriage carrying a huge debt burden. If you do not have the resources, opt for a small and simple wedding ceremony and resist the temptation to max out your credit card or take up a personal loan for a party.
6. Brushing aside health insurance
According to last year’s statistics from the Credit Control and Counselling Agency (AKPK), the number one reason people fell into debt was because of unforeseen medical expenses.
A study by Swiss Re, a global reinsurance company, entitled “Health Protection Gap: Asia-Pacific 2012″ revealed that total healthcare costs in Malaysia are projected to rise by 8.8% yearly to US$25.8 billion (RM83.3 billion) by 2020.
If you don’t have health insurance, you have to ask yourself: Do you have additional contingency funds in the event you fall ill and need extended medical treatment? What about the income lost should you be incapacitated for an extended period of time because of illness?
We shrug off health insurance when we’re young and healthy. However, accidents and illnesses can happen to anyone. When we are sick, we really don’t want the added stress of looking for money to fund our treatment. A medical card may not cover doctor’s visits for every sniffle, but they could save you from bankruptcy for more expensive, unexpected medical incidents.
5. Not saving for retirement
How much will you need in your retirement? You can work it out with this formula:
M = P (1 + I)n to work this out.
M = Annual amount you’ll need upon retirement
P = Principle amount (i.e. 80% of your current monthly expenditure, refer to Step 1 above)
I = Inflation rate per year
n = Number of years you have left before you retire
For more information on how to calculate how much you need, click here.
To maintain a middle-class lifestyle after retirement, you may need RM1 million in accumulated savings by the time you reach retirement age. But according to the EPF’s annual report for 2011, the average savings for active members at the age of 54 stood at RM149,216.
How can you save up RM1 million by the time you retire? If you are earning RM30,000 a year, you will need to save at least 20% of your salary every month for 45 years.
Forty-five years is a long time and it could be the whole span of your career. Therefore, it is imperative for you to start saving the moment you enter the workforce. There are various other investments you can take-up to help you save faster, such as Private Retirement Scheme.
4. Dismissing a good credit score
Not having a loan or a credit card until you are well into your late 20s or early 30s is not necessarily a great idea. Most lenders (banks) refer to the repayment record on your previous or on-going loans and credit cards to gauge your potential to repay a new loan or credit card.
If you do not have a credit history at this stage in your life, most banks will be a bit skeptical towards giving you a loan or credit card.
Remember, a good credit record matters. All you have to do is pay every bill on time to establish a minimal but healthy credit record.
3. Paying unnecessary bank fees
Bank charges are pretty standard in Malaysia due to the strict regulations set by Bank Negara Malaysia. However, there are ways you can avoid paying additional and unnecessary fees. Some of the things you can do to avoid paying extra are:
Use only your bank’s ATM to withdraw money to avoid paying the additional RM1 for withdrawals made at other bank ATMs.
Pay your credit card bills on time to avoid extra interest charges and late payment fees.
Take full advantage of the interest free period on your credit card.
Making extra repayments on your flexi home loan can help you save on interest.
If you regularly practise this, you will make it a habit to not pay extra to the banks.
2. Paying more than you should on your student loan debt
Most graduates want to finish paying off their student loan as soon as possible, so they can move on to servicing other debts, such as car loan and home loan. Hence, it is natural that these graduates would pay more than they are required to every month.
Though striving to pay off a loan as quick as possible is a good thing, but by doing this on your student loan, you are also missing out on other saving and investment opportunities. Only pay more on your student loan after you have set aside a portion of your monthly salary to save and invest. If not, you will be stuck in a situation of zero debt but also, zero savings.
1. Not having a budget
Most young professionals don’t bother with a budget, choosing instead to live from pay cheque to pay cheque. However, in order to live comfortably in the future, plan your finances now.
In personal finance, having a plan separates the men and women from the boys and girls. We have a limited supply of money, so we must decide intentionally what we’re going to do with it.
Having some goals in mind can work as a motivation to stay on your budget. For example, aiming to be able to buy a property at 28 years old or getting an MBA at 25 years old. Without a plan or a strategy, the goals may seem impossible. However, with a plan in mind, you will be able to project the timeline in which you can achieve your goals.
At times it feels like managing your money well is an up-hill climb – it is. However, not managing your money well is a steep downhill slope. By remaining focused on your goals, you can stay financially disciplined.
Ching is the CEO and co-founder of iMoney, a leading price comparison website in Malaysia. Prior to iMoney, he was an investment consultant, advising clients ranging from $5 million to $500 million on investment related matters. He is also a CFA & CAIA Charterholder, two prestigious professional qualifications in the finance field.