Here Are 3 Simple Steps To Start Saving 20% Of Your Income

On a daily basis we hear from our readers and users about how they need to get more loans because their income is insufficient for them to survive after repaying all their existing debts. It is also not unheard of for Malaysians who are just clueless as to what happened to their salary by the second week of the month.

These stories, though heart-wrenching, can be frustrating to hear.

Our millennials survey last year found that the biggest concern most Malaysians have when it comes to their finances is the high cost of living. But if I may be brutally honest, I believe the biggest problem we have is the lack of financial planning.

I mean, sure, cost of living has skyrocketed and income is trying to catch up, albeit in snail-pace. But I the disparity between income and cost of living is not that great that it is impossible to survive.

Perhaps, we should do some self-reflection and look at our finances to figure out how we can cut and trim to match our current cost of living. We can’t have it all – buying our first home and shopping every weekend, something’s got to give.

So, how do you do it? What can you sacrifice and what do you spend on? Here I break down budgeting in the easiest way for you, and show you how you can benefit from it:

The 50/30/20 budgeting method

We can’t say it enough times: Don’t spend more than what you earn! And the best way to do that is to keep track of what you spend.

One simple way of keeping track of your money is through percentage budgeting. It is a simple and straightforward concept – instead of allocating fixed amount to every line item, you establish a target percentage for each expense category.

One guideline that we like to use for percentage budgeting is the 50/30/20.

Here’s the breakdown:

FIXED COSTS 50% Bills and fixed expenses such as rent,  mortgage, and subscriptions

FLEXIBLE SPENDING 30% Flexible day-to-day expenses  such as food, groceries,  transportation, entertainment,  etc.

FINANCIAL GOAL 20% Trip to Europe Down payment  for first home Retirement

1. Fixed costs – 50%

Fixed costs mostly consist of essential expenses, and it makes up half of your income.

For an average 20-something, fixed expenses are usually made up of rent (if one is not staying with his/her parents), phone bill, Internet subscription, car loan (if one owns a car), monthly parking at work, insurance premium and more.

Fixed spending – 50%

Nett income	RM3,500 a month
50% for fixed expenses	RM1,750
• Room rental	RM600
• Mobile phone bill	RM98
• Internet subscription	RM178
• Car loan repayment	RM650
• Student loan repayment	RM200
Total fixed expenses	RM1,726

However, if you’ve listed down all your fixed costs and they come up to more than 50%, it’s time to take a hard look at your expenses. Perhaps you can downgrade your phone or Internet subscription, or even sell your car and turn to public transportation.

The beauty of a budget is, you will immediately identify where the problem areas are and you can make adjustments in your finances.

2. Flexible spending – 30%

Allocate no more than 30% of your take-home pay toward flexible spending.

These are day-to-day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies, entertainment, or petrol.

To determine your flex-spending amount, first deduct your fixed costs and financial goal contributions from your income. This way, you’ll know that the balance for flexible spending is truly yours to spend however you want.

Flexible spending – 30%

Nett income	RM3,500 a month
30% for flexible expenses	RM1,050
• Eating out weekdays	RM200
• Eating out weekends	RM100
• Groceries	RM250
• Household items	RM100
• Petrol & toll	RM300
• Entertainment	RM100
Total fixed expenses	RM1,050

Flexible spending will require you to exercise discipline in order to be on track. If you have splurged on a nice dinner with your friends, then you will need to cut your spending elsewhere. Perhaps, by preparing your own lunch for the next few days, or forego paid entertainment for the month.

The key here is to ensure the overall spending allocated for flex-spending does not exceed 30% of your nett income.

3. Financial goals – 20%

Not sure what your financial goals are? Ask yourself what do you want in five, 10, 20, and 30 years down the line? How do you envision your retirement?

Financial goals are not set in stone, and should be reviewed every few years. However, having a rough goal will help you work towards achieving them.

If you allocate 20% of your income for your goals, you will ensure that your finances will be on track to reach your target.

Assuming you start with RM3,500 nett income per month, and on average you get a 5% salary increment every year. Here’s how 20% of your nett income makes a difference:

Year	Monthly salary	Total savings	Financial goals
1	RM3,500	RM8,400	You would have saved RM15,000 within 1.5 years for your Europe trip.
2	RM3,675	RM17,700
3	RM3,859	RM28,000	You would have saved about RM52,000 for the down payment of your first home (RM520,000)
4	RM4,052	RM39,400
5	RM4,254	RM52,000
23	RM10,750	RM692,000	You would have saved RM692,000 for your children’s college education.
35	RM19,306	RM1,978,600	You would have saved up a sizeable retirement fund to supplement your EPF savings.

* Assuming 6% per annum average returns.

Though this budgeting method sounds simple enough, it takes some discipline to stick to it. And it does not work like a miracle where your finances will improve and your debts will disappear overnight. You still need to work hard to make an sustainable impact on your finances.

The most important thing about budgeting is, it should be personalised to your lifestyle and spending habits. This budgeting rule serves as a guideline to lead you towards the right direction. Once you have an idea on how a balanced budget looks like, you can create your own budget to achieve your financial goals.

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Why Do Gen Ys Struggle With Their Money?

I get this question all the time, so I finally decided to write this one.

It’s partly about timeless fundamentals of personal finance, but I also included some thoughts about the future, and lessons from the past.Everybody’s got problems, but those that plague young people are unique in a few ways. Let’s go through them one by one:

1. Personal finance education 

Most “adult” people I know still have a surface-level understanding about money. Unfortunately, this applies to people of your age too. If you’d like to test your knowledge, try this basic financial literacy test.

It’s just five very short questions, and you get to see if you’re financially smarter than two-thirds of the world (who failed).

Why isn’t personal finance a mandatory subject in schools and universities? I don’t know, but that’s surely one of the biggest failings of our education system. Instead, young people are left to learn finance from websites, guest speakers and gulp, their friends and families.

It’s not that self-learning is a bad thing. It’s that sometimes even your well-meaning friends and parents could be teaching you poor money habits. And let’s not get into “friends” who “teach” but are actually trying to make money off you.

So your biggest problem really is: No one taught you personal finance. And even if someone did, was he/she teaching you the right things?

2. The changing world of jobs

When you were younger, your parents likely told you a version of the same advice they told me: “Study hard, get good grades — and you’ll have a secure job.”

But of course, the world has changed since our parents’ times. Today, the world of secure jobs isn’t so secure anymore. There’s no such thing as lifetime employment. And with huge advances in Robots and Artificial Intelligence every day, the world of jobs is going to continue to change rapidly.

It really scares me, but here’s the prediction some experts are making: we’re going to have much less traditional jobs in the near future.

So you’re now living in an uncertain job market with an even more uncertain future. It’s getting harder to have secure income.

“I might be smiling here, but I think robots are going to take away your job.”

“I might be smiling here, but I think robots are going to take away your job.”

3. Cost of living and inflation

In the 1980s, you could probably buy a double-storey house in Kuala Lumpur for about RM60,000. And your starting salary might have been around RM 1,000.

Today, try buying a RM500,000 (US$112,000) apartment on your starting salary of RM2,100.

The oft-quoted guideline from the World Bank is this: To be considered affordable, the price of your home should be less than three times your annual household income.

In other words, if your annual household income is RM54,600 (RM2,100 monthly salary x 13 months x 2 people), an “affordable” home for you costs RM163,800 and below.

That RM500,000 apartment is nine times your annual household income. The World Bank would call it “severely unaffordable.”

You and I call it something less savoury.

Here’s some more scary data. Because it’s not just the Malaysian economy that’s screwed up. Let’s take a look at the economic miracle known as the USA. Well, our young friends there aren’t doing so well either. The Atlantic  reports that over the last few years, real (inflated-adjusted) income has fallen for most Americans aged between 18 and 34. And here’s some data from the Bureau of Labor Statistics:

“Average income for Americans aged 18-35 has gone from US$36,000 (in 1992) to US$33,000 (today).”

James Altucher

You’re rightfully angry at the rising cost of living. Things have gotten more expensive over the years, and salaries (especially for young graduates) have just not kept up.

4. Student debt

Most of you have some form of student loans to pay off too. But here’s the good news: Malaysia — for better or for worse — is an extremely forgiving country.

I’m not suggesting you don’t repay your PTPTN education loan and beg for forgiveness from the immigration officers at KLIA before your annual vacation. What I am saying is if you have the will to pay your debts, the environment here makes it easier to pay.

We have all kinds of discount schemes; plus when was the last time you heard of someone getting hauled to jail because they missed an education loan payment?

Of course, student debt is still a problem. And I understand how hard it is to plan for your future when you have a big sum of money hanging over your head. I’ve been there too and it did not feel good at all.

But with that in mind, let’s take a look at the other side. It can’t be all doom and gloom; so what are some advantages that young people have instead?

1. Access and technology

When I was a fresh graduate, I had to call the TM Streamyx guys to come to my home every few months — because my copper wire DSL modem would periodically get fried by lightning. Not only was my wired Internet connection slow, it was unreliable.

Today, the cheapest data plan on your mobile phone is five times faster than my lightning-rod DSL connection of 2007. And as you’re probably aware, the amount of knowledge available for free on the Internet continues to grow exponentially.

What I’m getting at is this: you’re privileged to live in an era of cheap devices and free information. Access to knowledge is not a problem anymore. It’s so common that you and I don’t even appreciate how wonderful it is; that with a few clicks of your mouse — you can check how cheap Malaysian car prices were in 1985. You don’t even have to open your mouth to ask anyone anymore.

With technology, you can learn from the world’s greatest minds for (you guessed it) free.

If you know what this is, you’re old.

If you know what this is, you’re old.

2. The freelance economy

Growing up, I wasn’t street smart. I did pretty well in school, but I was never the entrepreneurial kind. Maybe the whole “established path” of school >> university >> corporate job was too well-drilled into my head.

So the only way I knew how to make money was to work for a company and have a boss. Silly me.

Of course, you’re smarter and braver than me. So you’ve likely done some kind of work in your free time during your college days. You probably already know how to leverage your skills and connections to make money.

Which is a great thing. Did you know that freelancers now represent 35% of the US workforce? I couldn’t find detailed statistics from Malaysia, but it’s a growing trend worldwide. And it especially suits people like you and me who like to work from home in our underwear.

Your ability to use access and technology makes freelancing an easy option for you. You know how the Internet and social media work. Plus with globalisation, you can earn some high-value USD if you sell internationally.

All of us are entrepreneurs. I wish I’d learned that earlier in life; but for you young Padawan — the world is yours to conquer.

3. Time

Time is your greatest advantage of all. And here’s an example from history’s most storied investor: Warren Buffett, who’s now worth about US$73.9 billion.

Did you know that 99% of Warren Buffett’s wealth was made after his 50th birthday? Read that again. Even the greatest investor we’ve known made the majority of his fortune after he was 50.

He started when he was 11, but it took him 45 years to become a billionaire.

Of course, that’s not what people want to hear. Everyone wants to become the next Mark Zuckerberg — billionaire at 23 years old.  But it’s not going to happen for most people.

Most people need time to achieve significant things in their careers. And most people need the magic of compound interest over long periods of time — to really let their money grow.

I’ll give you a typical example here: Let’s say you earn RM2,200 and contribute the bare minimum into your EPF retirement fund. Keep contributing as normal for 41 years (till you retire), and you’ll have a cool RM1 million by the end of it:

Assuming 6% returns

And that’s even before you factor in any promotions and salary raises.

You’re young; you have time. But do you have patience?

So, what should young people do with their money? 

1. Budget and automate

If I could sum up personal finance in one sentence, it’d be this: spend less than you earn, and invest the rest.

Sounds great, but of course then you start getting tempted by how great the latest iPhone looks, and that unbelievable holiday deal from AirAsia. Which is precisely why you need a budget. Because if you spend your money freely without planning — you’ll be bankrupt one day. And that day would come sooner than you think.

You can read further details on how to create a budget, but the most important thing about budgeting is that it helps build discipline. Without which you will never achieve financial success.

Here’s a final tip on budgeting: Because most of us are so horrible at controlling our impulse to buy things, automate your savings and investments. Set your bank to automatically deduct your salary and invest that money immediately every pay day — so you can’t easily touch it.

Because if you can easily get to that money, I suspect you’ll have a new iPhone soon.

2. Be ruthless about expenses

If you were a company, there are two ways to become more profitable: make more money, or reduce your costs.

Both are important, but which one do you have more immediate control over?

Assuming you’re not extremely poor, and your family isn’t totally dependent on you — most young graduates have room to reduce their expenses.

“But I need trendy clothes and hipster cafes to maintain my image,” you say. “And I need vacations overseas to be happy.”

I’m never going to be the guy who says you should give up your overpriced Starbucks lattes or stop traveling. To each his own. But if you’re really going to control your expenses in today’s economic environment, I guarantee you’d need to make some tough decisions.

You’re not going to get everything your heart desires. Life is about trade-offs. In time and in money. So spend on those things which are really important to you. Spend more on them and cut out everything else. Ruthlessly.

Hint: When you get to my age, you’ll probably realise a lot of things you thought were important aren’t. So choose wisely.

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This Unusual Budgeting Method May Help You Conquer Your Finances

So, it’s official: it’s the year of the personal budget and while budgeting means different things to different people, 2017 is going to be a period where we will have to tighten our belts a little.

Many Malaysians overspend when buying on impulse and many can’t afford to retire. Millennials are plagued with bad money management with a good amount living on high-interest credit cards. Retrenchments are predicted to increase…. It seems like the proverbial rabbit hole where the further you venture, the uglier it gets.

But, fret not, while there are many factors beyond your control, you could exercise a decent amount of prudent decision-making when it comes to your spending – and that’s where budgeting comes in handy.

There are many theories out there but here’s one that you may not have tried yet:

First expenses, then income

Imagine not earning enough to pay your bills or those unexpected expenses that come up every so often. It’s a common scenario that plagues many families. The usual solution is of course to cut your expenses.

However, there is an uncommon technique that may help you when cutting expenses no longer seem plausible. The first expenses, then income is not a typical budget method – and it can seem more difficult that trimming your spending, but if you are successful it will definitely make your life easier.

Here’s what you need to do: First, list down all expense you’d like to pay. Next, figure out what type of income should you aim for.

For example, let’s assume this is how much you want to spend monthly:

Total monthly expenses	RM5,780
Groceries	RM500
Broadband Internet	RM180
Petrol	RM300
Season carpark at work	RM200
Utilities	RM250
Car loan	RM600
Life insurance	RM400
“Fun” money (Starbucks coffee, snacks, restaurants, cinema, books, etc.)	RM600
Home loan	RM2,000
Savings for unit trusts, general savings, etc	RM600

Let’s say your take-home pay is about RM4,500 a month. Automatically you’ll start thinking about: “How can I earn an extra RM1,280 a month?” and start working your way upwards to reach that budgeting goal.

Do the hustle

Seeing that retrenchments as well as living costs are expected to rise this year, a part-time job is a reasonable decision. There are a few ways to go about it.

Thanks to ride-sharing and Airbnb, Malaysians are never short of options when it comes to generating extra income. As Airbnb would require higher capital to get started, we’ll stick to ride-sharing.

Surveys have pointed out that car ownership in Malaysia at the third highest in the world, so you would probably own a decent car that takes you from one point to another.

Image from YouTube

Turn that into a money-making machine by just working six trips and four hours a day, you can earn between RM2,248 and RM2,373 through GrabCar or UberX. In a year, you can potentially earn anywhere around RM26,976 to RM28,476.

If writing is your thing, you could also start a blog. On average, a blogger can bring in about RM4,000 to 5,000 a month. You also stand a chance to monetise your readers by turning them into customers if you have a product or service to sell. It could even be a launching pad to additional freelance writing gigs.

You can also offer your writing services on websites like Upwork or Freelance.com to earn additional cash.

What if you are jaded with your full-time job? Then look for one with a higher salary. Invest in your career and position yourself to get a job that pays more and offers perks such as a handsome performance bonus or raise.

You might also consider going back to school. According to online salary comparison site PayScale, employees with postgraduate qualifications earn nearly three times more than those with a bachelor’s degree.

Someone with a master’s in business administration with five to nine years of working experience can earn an average of 2.6 times more than someone with a bachelor’s in similar fields and with similar years of experience.

Apparently, employers perceive those with postgraduate qualifications as having better leadership qualities and decision-making abilities, hence the higher pay.

If you are turned off by the school fees, then note that you can withdraw from your EPF Account 2 to further your studies in local or overseas institutions.

Not forgetting, you could also generate passive income through renting out your apartment or even investing in equities. The latter is more towards the long-term but to get started, all you need is RM1,000.

But never budget for more debt

Though this unconventional budgeting method focuses on income more than expenses, it is important to ensure that expenses remain lean at all times. This method will only work if you are consciously spending within your means and being realistic in your income generating ability.

Image from US News

Prioritising your expenses should also come first. The goal is to always reduce debt. Overspending or mishandling credit are bad financial habits to pick up but that said, getting a handle on your finances and drafting a budget requires work.

Discipline is key and, sadly, there are no shortcuts. If any, you can make technology work for you, such as using the auto-debt standing instructions to transfer money into investments or your fixed deposit account. Or you can use an app to track spending and such.

But always pay down debt as quickly as possible, even on your credit cards. We’ve done the maths on paying the minimum and found the interest charges staggering.

So, what are you waiting for? Budget away!

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Here’s How To Evaluate Your Unit Trust Fund’s Performance

Hold or sell? Buy or wait? These are important investment decisions for every investor.

However, one thing is certain – investors should not base their decisions on emotions, or worse, rumours, but on the fund’s performance over time. Therefore, the funds must be regularly evaluated.

Unit trust investments, like any other investment, do not guarantee returns. This means that your principal value can fluctuate according to changes in the market. As such, it is imperative that you examine the performance of your funds regularly.

Fund evaluation is a good barometer of a fund’s performance over the years and how well it is managed. It allows you to chart the progress of your funds, and should be done regularly.

Here are three ways you can evaluate the performance of your unit trust funds:

1. Calculate the total returns

A unit trust fund’s performance can firstly be measured by its total returns. A fund’s total returns represent the change in the value of an investment in the fund. Total returns can be identified in two ways – cumulative total returns and average annual total returns.

Cumulative total returns take into account the rise or fall in the fund’s unit price, while assuming that the income and capital gains distribution are reinvested into the fund. On the other hand, average annual total returns refer to compounded total returns, which are measured on an annual basis. Total returns, compounded over time, can really magnify.

When evaluating a fund’s performance, one of the best approaches is to compare the total returns of similar or correlated funds over the same period. For example, an equity fund would be best compared with another equity fund that invests in companies of a similar business nature. A bond fund would be compared to other funds with a similar maturity period or credit rating.

However, it is important to ensure that the fees and charges are deducted from the total returns for a more accurate figure. This figure only addresses the fund’s total returns against its peers in a specific period, without considering its unique individual risk.

So, where can you find this information? It is usually available in a fund’s annual prospectus or semi-annual report.

Sample page from a unit trust fund’s prospectus

2. Compare a fund’s performance against its benchmark index

Another way to evaluate a fund’s performance is to measure it against a benchmark index. Unit trust funds investing in Malaysian equities typically evaluate their progress by benchmarking it against the FBM KLCI Index.

A fund is considered to have outperformed its benchmark index if the fund’s returns are higher than its benchmark.

As benchmark indices are well-established and commonly used to represent current market conditions, comparisons with it are widely accepted as a fund evaluation method. Comparing your fund’s performance against its benchmark will also show you the value-add brought by your fund managers.

Lookout!

For this fund evaluation method, you need to compare the performance of your unit trust fund against related peer funds. Reason being, although your funds may perform well against the corresponding benchmarks, they also tend to outperform other related funds.

Sample page from a unit trust fund’s prospectus

3. Consider performance relative to risk taken

One way to measure this is by looking at the Sharpe ratio – also known as the reward-to-volatility (risk) ratio – which measures a fund’s historical risk-adjusted performance. The higher a fund’s Sharpe ratio, the better the returns generated per unit of risk taken. In other words, when you compare two funds of a similar nature, the fund with the higher Sharpe ratio would have generated more returns for the equal amount of risk exposure. A higher Sharpe ratio also indicates consistency in returns generated.

As it is complicated to calculate the Sharpe ratio of a fund using the mathematical formula, you may want to refer to your unit trust agent or unit trust fund performance rankings that are available online or in print.

Sample page from an online unit trust distribution website

Conclusion: Be an informed investor

Unit trust fund rankings or ratings, and other methods of evaluating a fund’s performance only enable you to compare the performance of your unit trust fund with other funds. Unfortunately, many investors often misinterpret these evaluations as recommendations, when they are not.

Before you invest in a fund, it is imperative that you equip yourself with the necessary information and knowledge to make informed decisions. Request for the fund’s prospectus from your unit trust agent (or obtain it online), and read it thoroughly to understand the fund’s goals, risk factors and performance records.

Always keep in mind that a fund’s past performance is not a reliable indication of its future performance; a more accurate indicator would be its long-term track record. Reason being, in the long term, financial markets and economies globally will go through various cycles. Investors should therefore consider how different unit trust funds perform over various time frames to gain a better understanding of how funds react under different market conditions.

Although fund evaluation methods provide insight into a fund’s performance and can assist investors with their investment decisions, it is not failsafe. You will still need to do your due diligence on the funds in which you are considering to invest. You also need to match your investment goals with the fund’s ability to perform within a stipulated time frame, and the level of risk you are willing to take on.

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