In the age of other people’s social media feeds always look better than yours, saving money is becoming more difficult in order for us to be accepted by our friends and show off our social status. Most Malaysians are earning under RM 5,000 in monthly wages and the cost of living is rising steeply and the young Malaysians try to have Instagram worthy experiences. This explains why young Malaysians are raking up more debts, building wealth seems like mission impossible.
Instead of comparing your life to someone else’s Instagram feed, we need to be clever and mindful of personal finance. Financial literacy is one subject the schools have not to teach yet. Here are some golden principles to consider in your 20s to secure your future financially.
Create a Budget
First and foremost, you need to establish a budget. Always live within your budget at the start of your career. Create multiple buckets in your budget. Start immediately to create a bucket called “emergency fund”, this bucket require 6 months of your expenses. If you spend RM 1,000 per month, then you should aim to save RM 6,000 as soon as you start to work or even before that through internship, part time jobs or side hustles. Then you need to create buckets for loans, debts, transportation, food, mobile, leisure, clothing, travel (not so much in COVID-19 era) and other needs.
50% of your income should go into the necessities such as household expenses, transportation, food and loan repayment. 30% should be into your savings and investment bucket. 20% should be dedicated for shopping, fun, leisure, and experience.
Measure your expenses
Use money management apps such as Spendee, Monefy, Mobills, Wally, Expense Manager, and Money Lover to track expenses. This will reduce efforts to monitor where your money is going and monitor against your budget. Every sen save is a sen earned.
You would have a student loan to repay, or a new house mortgage, or a car loan. You can refer to this article which we have written to eliminate debt. As long as you have set up your emergency fund, you should prioritize reducing your debt. The faster you clear up your debt, the more disposable income will be available for you.
Credit cards are great and convenient but you need to pay all outstanding amounts on time. You can visit this website and do your calculation to discover how many months to pay off credit card debt. Do not allow any outstanding amount rollover to the next billing cycle, this is where credit companies make money by charging you with late interest charges. It is based on different tier and different banks have different charges. You need to understand your credit score as it is based on the number of loans and credit cards you have and how consistently have you been paying them. There is a Central Credit Reference Information System (CCRIS) which tracks your credit score. This credit score is used by banks to approve your future loans, so be very mindful to maintain a good rating.
You need to protect yourself first before you start your investment journey. First, find out from your parents whether they have purchased any insurance policies on your behalf. Then you need to speak to at least 3 financial advisers to access which one has your interest at heart and you need to learn what are they must-have for insurance policies. Always differentiate investment from protection. Insurance is meant to pass your risk to the insurance company. Leave your investment to other means and not through insurance. I will leave you to research between whole life policy and term insurance policy. You can read more about insurance here..
Savings and Investment
You can read here on why the savings rate is important to your personal finance. You will be overwhelmed with your career, you may not even start to think about retirement. It is important to start to think about retirement on the first day you start to work. I have a friend who told me that was her inspiration, she wanted to know that she is ready and carefree when that day arrives. Maybe you are like me who wish to attend F.I.R.E and do something that you like. In your 20s, you can start to save for your retirement because time is on your side and you can allow your savings to be invested to enjoy the magic of compounding.
Let us show you how you can achieve RM 1,000,000. You can be the next millionaire if you have financial literacy. Assume your starting pay is RM 3,000 per month and there is an increment of 5% per annum, you save 30% of your salary and invest this money. The next assumption is for the portfolio to grow at 10% CAGR. By year 21, you will be able to achieve RM 1 million. This means if you start working at 23 years old, you will be a millionaire by 44 years old. This further assumes that your salary plateau at RM 61,572 per annum.
The below image shows you a slight difference from the above scenario. Assume you increase your savings rate to 50% and you will be able to achieve your 1st million by 17 years instead of 21 years. If you look further, by 23 years, you will be able to hit your 2nd million. This is why the 1st million is always the hardest and subsequent ones will be easier. The momentum will become unstoppable.
I have a team member who is 24 years old, she asked me recently how to grow her wealth. I explained to her that she needs to invest. There is a wide range of options to invest, such as equities from the Kuala Lumpur Stock Exchange, trade gold, currencies, commodities, derivatives such as options. Within the school of equities investing, there is value investing and growth investing. I will suggest growth investing for her in order to grow the capital to a sizeable amount.
Your salary increment depends on your own self, you need to learn how to negotiate with your boss about how you can get a salary bump, especially if you have been working for the same employer for at least 3 years. Track your job performance, accomplishment and tabulate them in a file. Use them as an evidence to justify your worth and why you deserve a pay raise. You need to research through head hunters and online portal whether your pay scale is below the market range. Once you are equipped with all these information, then you will be ready to speak up for a pay increment. As you have seen in the earlier figures shown above, pay increment is critical to achieve your first million as well. The more pay increment you can get, the faster you can grow your investment portfolio as well.