The Basics of Personal Finance
Recently, I've started thinking more and more about the future. About buying a house, sending kids to college and retirement. I'm not going to lie. All these things have one thing in common which scares the heck out of me - money.
What's your relationship with money? Mine is complicated. Money and I are frienemies. On one hand, money pays the bills and puts food on the table and on the other hand, it gives me sleepless nights.
So many questions run through my mind: Do we buy a house? If yes, when and for how much? Will buying a house put us into serious debt? Will we have enough for retirement to lead a comfortable life with dignity in our old age?
These questions come to mind more frequently and with greater intensity now that I'm unemployed. Is this how it will always be? With money filling me with fear and anxiety? This shouldn't be how we live our lives. Money should serve us and give us peace of mind, not take it away. So how do we change our relationship with money?
I realised that all my money fears stemmed from this one thought: I need more money. Of course, this can be a good motivator, especially for those who are looking for a sustainable side-hustle, but for me, it was crippling. I started to see dollar signs everywhere and I would think, "More money would solve my woes." But how much money is enough money? Would more really be a solution to all my worries? As I researched more about personal finances, I began to realise that the answer is, probably not. What matters most is not how much money we have, but what we choose to do with that money.
So I decided to start with what we have. Firstly, I wrote down our monthly household income and expenses. Based on this, I was able to gauge how much we can save monthly. Then, G and I set a standing instruction to move this amount of savings automatically on a particular day every month (preferably on or a day after payday) to another bank account. This has really helped me to save in the past.
Setting a certain amount of money aside somewhere else can help to reduce the temptation we might have to spend that money. After a few months, I put the money into an e-Fixed Deposit (FD), further reducing the temptation to spend because if I withdraw money from the FD prematurely, I may end up losing interest. With FDs, I opt for automatic renewal and to add interest to principal. This way our money slowly grows through the magic of compounding.
Many finance gurus advice on building an emergency fund on the path to financial freedom. An emergency fund is ideally the amount of money required to cover your expenses for 6 to 12 months. From personal experience, having this set aside gave me peace of mind when I left my job. It wouldn't keep me going forever, but it would keep me afloat for a while as I found my bearings lost in sea.
Below is a downloadable PDF to get you started on your income-expense breakdown, if you haven't already.
Some things to consider:
Items like Phone Plan or Internet are more clear cut as they involve a fixed amount per month. Electricity and water charges may vary so it's best to look at past bills and gauge how much these utilities incur on average.
Under expenses, I've also added Car Service and Birthdays. These items can involve relatively pricey transactions and breaking them down into smaller payments each month can be helpful. For example, car services for a year may cost RM 1200 and we can put aside RM 100 a month to cover this expense.
So once we build our emergency fund, it's probably a good idea to consider how we can grow our additional savings here on out. FDs can earn us some return on our savings, but the interest rates can be relatively low and may fail to beat inflation. As such, the real value of our savings may actually fall over time.
I'm pretty risk-averse, but as I see the FD rates dropping, I start to worry. I realise that I may have to consider other ways to save and grow our money.
The first thing I decided to look into is unit trust. So, what is unit trust? Imagine that you really want to buy and use a range of gaming consoles, but you don't really have the money to do so. You and your buddies decide to each pitch in and finally, you have enough money to buy a number of different gaming consoles that all of you share and benefit from.
Under this umbrella of unit trust, there is also what is known as private retirement scheme (PRS). There are 8 PRS providers in Malaysia which each offer a number of PRS products. The key difference between regular unit trust funds and PRS is that PRS is geared for long-term investment, to help grow our savings for retirement. PRS usually requires a relatively small initial investment and you can top-up as much as you want, whenever you want. But keep in mind that your contributions are divided into two sub-accounts: sub-account A (70%) which can be withdrawn upon retirement age of 55, and sub-account B (30%) which can be withdrawn pre-retirement once a year, subject to a tax penalty of 8% (there are exemptions to this penalty; for more information, check out PRS FAQs).
But of course, it's important to remember that unit trust is not capital guaranteed which means like other investments, it's possible to incur losses. So it's a good idea to look up different funds, review their past performance, factsheets and gauge whether the fund fits your risk appetite. For example, growth funds that invest more in equity are considered more high risk compared to conservative funds that invest more in fixed-income assets such as bonds.
One resource that may be useful here is the Fundsupermart website. My dad introduced me to this site and it provides useful information on a range of unit trust funds (including PRS). A lot of information such as risk rating, unit price, fund performance, charges and fund factsheet are all provided in one page. Purchasing unit trust can also be done through this platform.
Here are some useful online resources for your reference:
Private Retirement Scheme (PRS):
Investing can be daunting, but in this digital age, we can get a lot of information about various investment options online. This can be both good and bad. Good because it can allow us to be well-informed investors, but bad because the sheer volume of information available online can be overwhelming. So try to start with one thing and read up about it, for example, unit trust. Explore different funds and check out their performance. Read recommendations or 'Best Performing Funds' lists drawn up by reputable sources. Start off with a small investment. With time, once we feel more comfortable, we can explore other investment options.
There's a saying in Malay: sedikit sedikit lama lama jadi bukit. It means: a little every day goes a long way. This is one of the first Malay proverbs we learn in school and for good reason. Retirement is a scary thing for most of us, but if you're already thinking about it now, it can make all the difference. Saving a little every month can really add up 25 to 30 years down the line. Here's one thing I know for sure: our future selves will thank us for it.