By Hanniz Lam
If you’re groaning about managing our personal finances, you’re not alone. But just like apps that can make our daily lives easier, there are specific things you can do to make money management as painless as possible. Below are five common money traps and what you can do to get on track.
1. Delaying saving for retirement
It’s easy to think that your retiring age is far far in the future and planning for it is the last thing on your to-do list. The thing is, we’ll always be busy. Busy with work, family, daily chores and life. Soon enough you reach your 30s, and your priorities may shift to saving for a house or paying for childcare—still not an easy time to save for retirement. The fact is, it may never be easy. But it will always be necessary.
According to the Employees Provident Fund (EPF), you will need to save at least RM240,000 by the time you retire at 55 years old to cover basic needs such as food and everyday costs.
EPF added that 73% of its members will not be able to meet this requirement.
The fix: As soon as you start a new job, make sure to get your EPF sorted by your employer. Effective 1 July 2022, the statutory contribution rate for employees below 60 years of age has returned to 11% (August 2022 EPF contribution).
For the record, under Budget 2022, EPF had announced the reduction of the statutory contribution rate for employees to 9% until June 2022 after which the statutory contribution rate for employees would return to 11%. You might feel that this extra deduction to your future savings is a bit of a pain but if you don’t get used to having extra money in your paycheck, you won’t miss it when it automatically goes into your retirement savings. Plus, if you start early, your earnings will have a chance to generate more earnings, potentially growing your savings at an accelerated rate over time—that’s the power of compounding.
2. Skimping on an emergency fund
As reported in the National Strategy for Financial Literacy 2019-2023 published by the Financial Education Network (FEN), 52% of Malaysians are not able to raise RM1,000 in an emergency. Saving for an emergency during good times could reduce the burden of having to scramble for funds when you need it the most.
Your emergency fund can potentially prevent you from taking drastic measures, such as having to take out money from your retirement fund or having to borrow money from your family and friends, perhaps even pawning your belongings or resorting to unlicensed moneylenders.
The fix: Stash away three to six months’ worth of cash in a separate account to cover essential living expenses. The number may be daunting, but you don’t have to get there overnight. Funnel part of your paycheck automatically to a separate account and you’ll make steady progress over time. And remember to increase your savings rate as your earnings—and cost of living—go up. You can divide your monthly income into three categories: 50% on NEEDS, 40% on SAVINGS & INVESTMENTS, 10% on WANTS.
3. Taking the short view on investing
Given the performance of the market this year or, looking back farther, from 2007 to 2009, it’s easy to understand why so many investors react rashly when the market takes a dive. During the Great Recession, the Dow Jones Industrial Average lost about 20% of its value between February to March in 2009, and more than 50% from its peak in October 2007 to its lowest point in March 2009. But it’s the investors that have the fortitude to take the long view who tend to prevail. Even with the market’s performance this year, from that rock-bottom point in 2009, the Dow Jones Industrial Average has risen more than 25,000 points. Investors who cashed out back in 2009 or for many years delayed getting back into the market may have locked in losses and consequently missed some or all the upswing.
The fix: Stay invested. If you have a history of making investment transactions right after a major event, consider reducing the number of times you log in to view your account—say monthly or quarterly. Remember: Day-to-day market fluctuations have little impact on your long-term goals. Bear markets typically come to an end and research shows that staying invested over the long haul—and not trying to time swings—can be the best way to participate in the market.
4. Avoiding the market
Market volatility may be scary, but while past performance is not a guarantee of future results, there has never been a 20-year period when stock returns were negative. Keep your time horizon in mind when you’re investing in stocks. Having most of your money in the stock market can be quite reasonable for a young person when investing for retirement. You should consider some exposure to stocks, even during retirement.
The fix: You don’t have to jump in cold. Get in the habit of investing by moving a portion of your cash savings into a diversified portfolio each month. This approach, known as “dollar cost averaging,” potentially allows you to buy more shares of an investment when the price is low and fewer shares when the price is high. If you have a significant amount of money to invest, dollar cost averaging will reduce the impact of market volatility on large purchases.
5. Concentrating your investments
Some of us might have too much of one type of investment in our portfolio. Maybe it’s stock in the company we work at or municipal bonds inherited from a relative. But there’s a benefit to owning many different types of investments. Having that variety in your portfolio—called diversification—tends to reduce its volatility and risk. Each investment responds differently to changes in the market or economy. If geopolitical events shake up your international stocks, for example, U.S. bonds might rise and help smooth out your portfolio’s return overall.
The fix: Make sure that you have investments across numerous sectors, industries, and geographical areas. Once you have a diversified portfolio in place, revisit your portfolio’s allocation mix on a yearly basis to make sure it still aligns with your investment goals.