Personal finance is the process of planning and managing financial affairs such as budgeting, saving, investing, retirement planning, insurance, and managing debt. Regardless of income level, mastering personal finance basics is essential to lay the groundwork of a solid financial foundation. However, it might prove challenging knowing where to start and understanding how they work together.
On the 11th of June 2020, Co-labs Coworking hosted it's 5th-panel discussion in its LabFam Chats series—Navigating Personal Finances— where financial experts shared insights on the current financial situation amidst the global pandemic and explored opportunities on how individuals can effectively manage and grow their personal wealth.
The conversation was moderated by Amelia Hong, Founder and Managing Director of FinAIMS, Certified Financial Planner, and best-selling author. The panel included Hann Liew, Founder and Director of RinggitPlus; Wai Ken Wong, Country Manager at StashAway Malaysia; and Aisha Preece, Founder, and owner of Outandbeyond.
Amelia kicked off the discussion by asking the panel to identify steps to kickstart better money management and ensure sufficient savings that can cushion against unforeseen circumstances such as the COVID-19 pandemic. Hann stated that when facing unfortunate events, it is vital to recognize one's financial situation by first identifying the input and output of funds, including changes in expenses. Subsequently, one should then decide whether to make savings that are “painless” or “painful”—the former being to maintain current lifestyle choices while making conscious decisions to save, whereas the latter involves eliminating all unnecessary spending.
Ken agreed that revisiting the fundamentals of money management has been more important than ever. Likewise, when looking to invest, it pays to have a structured investment plan. The basics of investing comprise wealth accumulation to increase capital; management of idle cash; and yield generation, where having a stable income ensures a worry-free retirement.
“You must have an emergency fund before anything else because, without it, you are a victim of anything around you that can change suddenly,” urged Aisha. Additionally, high-interest debts need to be paid off as they counteract all efforts towards financial stability. She then suggested the “50-20-30 rule”—where 50% of one’s income should be allocated for bills and necessities, at least 20% should be saved, and only 30% can go towards the monthly expense. To aid this, Aisha recommended the Money Lover app—a free finance app that allows users to track their expenses. Lastly, one could monetize existing skills by creating a side hustle to earn a secondary income.
Next, Amelia shared that only 24% of Malaysians can sustain living expenses for at least 3 months or more if they lose their main source of income. She asked the panel to elaborate on ways individuals could earn a secondary income. Aisha shared that the simplest way to do so is by identifying one’s skillsets and passions before deciding on a secondary trade. Individuals in the creative field with proficiency in graphic design could consider being a freelance designer, while those with good communication skills can try online tutoring.
Hann concurred that “time makes money” and therefore, individuals should take advantage of and monetize the skill sets they have built via their day job. However, many forget that similarly “money makes money” and one way to grow our finances is via investments. Ken adds that any spare cash, such as one’s emergency funds, can also be put to work with some planning and calculated risks, especially when put into bond and money market funds.
On that note, Amelia asked Aisha what she thought about emergency funds being used for investments and whether it should in fact be kept separate for a rainy day. Aisha recommended allocating a large portion of emergency funds in fixed deposit accounts. Only a small amount of reserve funds should go into investing in places such as StashAway, which allows individuals to make small scale investments. She advised that before making an investment, one must always consider what they are investing in, how would the money be returned and how long would it take to obtain the return. Anyone who does not understand any part of an investment should not proceed with it.
Hann jumped in to add that though emergency funds should be kept as liquid as possible, a substantial amount of physical cash should also be kept safely at home. He further explained that with the events of the COVID-19 pandemic and the Movement Control Order (MCO), the world has experienced an emergency that is unlike anything it has seen before. Therefore, emergency funds should no longer just be defined as a reserve for financial emergencies. Instead, the reality is that unexpected emergencies such as a global pandemic must now be considered as well.
With the pandemic, many people are experiencing pay cuts and an increase in household expenses that will consequently increase the demand for personal loans and credit card debts. Aisha reveals that individuals who are neck-deep in credit card debt, they can take advantage of 0% balance transfer credit cards. Some banks allow users to consolidate debts from several credit cards onto one card without any incurring interests or fees! She endorsed RinggitPlus as they have an extensive list of users to compare the different balance transfer credit card plans in Malaysia.
Additionally, those who are struggling to pay off their debts can consider obtaining a personal loan with lower interests—the average credit card interest rate is approximately 18% as compared to personal loans at about 6%. Sometimes it is also as simple as calling the bank to renegotiate said interest rates, especially for those who have been loyal, long term customers. “If you don’t ask, you don’t get,” uttered Aisha. Lastly, she encouraged debtors to take advantage of the free financial resources available in Malaysia, such as AKPK—a local agency that offers debt counselling services.
For Hann, it is crucial to understand the reason for taking on debt. “Debt is like fire—it is useful, but it can burn you," he expressed. Some debts are favourable and necessary, such as taking on loans to invest in education, which could lead to better career prospects. Conversely, debt that is taken on to cover other expenses is erroneous and should instead be minimized. Nevertheless, those who have established the need to take on debt should navigate their options through the hierarchy of the lowest interest rates to the highest.
Moving on, Amelia shared that according to Bank Negara Malaysia, the Overnight Policy Rate (OPR) currently stands at 2% to encourage property investments. She asked the panellists about key criteria to consider before investing in property in the current market, and whether individuals should opt-out of the loan deferment.
Hann asserted that individuals who need the deferment should proceed with opting in for this program. However, those who don’t need the deferment and decided to opt-out need to be aware that the “interest on things deferred will not compound”. In short, this means that the money saved during the six months can be placed in an investment fund that gives a higher return than one’s home loan’s interest rate. Thus, even those who aren’t facing any financial difficulties should still opt in the loan deferment as the benefits outweigh the consequences. Regardless, Hann advises that those keen on investing in property should wait as the moratorium has allowed everyone to hold on to their assets, ergo leveling the property playing field till September.
Amelia brought attention to the habit of new homeowners who tend to purchase an expensive house to fulfill the fantasy of owning their dream home. Unfortunately, this may prove to be hazardous should interest rates increase down the line. She advises future homeowners to anticipate these extra costs and those who cannot sustain them should never borrow more than 30% of their earnings to invest in property.
Hann concurs that the leading cause of household debt increasing is the habitual overreaching on property investments. In addition, Aisha stressed that while desiring a dream home is valid, homeowners should hustle towards achieving that goal instead of seeking the instant gratification of rushing to buy what they cannot afford. Besides, it may prove to be more gratifying if one can successfully pay off all their mortgages before retirement instead.
Next, Amelia pointed out that there is a noticeable increase in young investors entering the Malaysian market in recent years. She enquired if now is a good time to invest and if so, what are some investment portfolios that young investors should explore with the pandemic in the picture. According to Ken, young investors have the advantage of compounding their funds, make some mistakes, and learn from them along the way, before establishing the right footing.
With the pandemic, the future for all things is uncertain. Likewise, it is beyond doubt that the returns on any investments made presently are unpredictable. “Nothing in life is really guaranteed, especially with investments,” said Ken. Therefore, individuals looking to invest should understand the risks before taking the plunge. He also noted that there is never a right time to invest, thus his advice is to make staggered and recurring investments to diffuse any risks. Hann concurred, however, he stressed that these risks should be taken within the frameworks of strategic diversification to reduce volatility.
Amelia then wondered about the important lessons that the panelists have learned from the pandemic and MCO. Ken learned to be adaptable and resilient as things changed rapidly at the outset. He recommends revisiting the fundamentals such as setting up an emergency fund, which is essential to safeguard against unexpected circumstances. Resiliency can also be ensured with a diversified investment portfolio that can better withstand a sudden decline in the market.
Hann explains that during these troubled times, employees will need to establish their value by demonstrating higher productivity with working online as this will guarantee an increase in potential earning moving forward. On the other hand, employers may need to rethink their office space and identify what they truly need moving forward.
Aisha advocated against relying on one source of income. “Sometimes businesses need to make decisions that protect the business—it is not personal,” she expressed. Therefore, it is crucial to adopt a secondary source of income to protect one’s own interests by taking advantage of personal interests and expertise. In addition, there are two kinds of individuals in the present crisis—victims who complain and allow themselves to be taken hostage by the situation, as well as those who take the opportunity to pivot and embrace the circumstance.
Moving on to audience questions, the panellists were asked if diversifying one’s current investment portfolio was advisable. Ken explains that diversified portfolios have proven to withstand times of crisis and therefore, promises long term accumulative returns. Diversification can be a sophisticated investment tool if executed correctly. Amelia adds that investors should determine whether they are conservative or aggressive investor, which will help one manage their investment portfolio more effectively.
An audience member inquired about the recommended form of investment for university students, as well as the suggested percentage for dividing earnings from one's first paycheck. Echoing his earlier observation regarding “painless” savings, Hann advised that in this circumstance, one should save as much as one can manage, depending on the lifestyle they desire to have. Likewise, Aisha emphasized that before thinking about wants and personal enjoyment, at least 20% of one’s earnings should be put away to kickstart the habit of saving. She elaborates that many university students and fresh graduates tend to feel overwhelmed when they first step into the workforce. Often the fear of not enjoying life deters them from saving. “Pay yourself first,” she urged. “Saving is a journey.”