A GLOBAL survey from the World Bank found that only 36% of Malaysians are considered financially literate.
Although this is higher than Indonesia (32%), Thailand (27%), Philippines (25%), Vietnam (24%) and Cambodia (18%), it lags behind Taiwan (37%), Hong Kong (43%) and Singapore (59%). Take the quiz yourself here https://www.spglobal.com/corporate-responsibility/global-financial-literacy-survey
Financial illiteracy is not without consequences: over the past five years, more than 20,000 Malaysians have filed for bankruptcy.
In September, Bank Negara’s Financial Inclusion and Capability Study reported that only 18% of Malaysians could survive more than 3 months if they lost their main source of income. Only 6% of Malaysians were able to survive more than 6 months.
The fact that many Malaysians have zero savings, are filing for bankruptcy, and are spending money they don’t have is a huge concern and highlights the pressing need for financial literacy starting at a young age.
Financial literacy means understanding the basic financial concepts that lie at the heart of financial planning.
Here are six of these concepts:
You should understand that it is safer to distribute your savings across a wide set of different investments, instead of putting all your eggs in one basket. For example, spreading your savings across savings accounts, deposits, bonds and stocks from multiple countries, industries and companies. This ensures your savings are less volatile and more robust in the event of an economic headwind.
You should have the ability to take into account the increasing cost of living when you evaluate your salary, debt and household spending. This also includes understanding that high inflation is actually a great thing when you have debt, but bad when you have savings. Realise that if you get a 5% salary increase per year, but the inflation rate is 7%, you can now buy less than last year and it is effectively a salary cut.
You should feel comfortable with numbers and percentages. Understand that it is better to pay 5% on a one-year RM 1,000 loan than it is to pay 0% on the same loan but have to pay RM60 administrative fees. Understand that a 12% “flat rate” on your personal loan is worse than an effective interest rate of 20%.
You should realize the time value of money: it is always better to receive RM 1,000 today than a month or year from now. Compound interest starts to have a “huge” effect when the time horizon grows longer, for example with a 30-year home loan, or your retirement savings. When you have RM 1,000 and receive 5% interest, you will not have RM 1,500 after 10 years, but RM 1,629 because you will get interest on your interest.
You should have a basic feeling for how much money is coming into your bank account every month and where it is coming from. You should know how your salary is built up: gross salary, employer EPF contribution, bonus, commission, allowances. Likewise, you should know how your salary is broken down: employee EPF contribution, incomes tax, Socso and your “take home” (nett) salary after all of these deductions.
Also, you need to have insight into how much you spend monthly and on what. Instead of spending your income and saving what is left, you should try to save first and only then spend what is left. That requires you need to know how much you need to save in order to reach your long-term goals, such as retirement, home ownership, an overseas vacation, pilgrimage or a car.
Do you know how much money you need to retire worry-free? For example, did you know EPF recently increased their minimum target savings by age 55 (for 20 years of retirement) from RM 196,800 to RM 228,000?
Budgeting, buffers and flexibility.
You should know how many months you can survive if you would lose your job today.
It is also valuable if you know how quickly you can adapt your spending behaviour. How much of your spending is ‘fixed’ and hard to change in the short term (loan instalments, food, utilities, education) and how much can be changed easily and quickly (e.g. clothing, restaurants, hobbies, holidays, gadgets)?
You should worry if you do not have a lot of flexibility to change your spending level, because you will be ill-equipped to handle financial setback.
Of course, there is more to a financially healthy life than knowing your financial situation and understanding these concepts.
You also need to act the part:
First, you need to have the ambition and discipline to advance your professional development and be a competitive employee in today’s labour market.
Second, you need the resolution to not cave in to peer pressure when it comes to “keeping up with the Joneses”.
If you know it is financially unsound to do so, you will have to lay off the expensive gadgets or trips that your friends are flouting on Facebook or Instagram.
Mark Reijman is co-founder and managing director of http://www.comparehero.my/ dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia.