Written By MK Chan – Financial Alliance Pte Ltd’s Director of Finance & Corporate Development and Chartered Accountant.
“What goes up must come down”. When Sir Isaac Newton said this, the rising costs of living was clearly not on his mind.
Malaysians can be forgiven for whirling in a daze after an avalanche of price hikes. Following the cut in fuel subsidy and the elimination of sugar subsidy, daily necessities like transportation, electricity, food and beverages are costing more than ever before.
Faced with a chronic budget deficit situation, which could cripple the country if left unaddressed, the government cannot but reduce their funds outflow (via subsidy reduction, etc) and increase their inflow (via GST, etc). These actions ultimately cascade down to the individuals living in the country.
Even if our finances can absorb the current increases, it may be advisable to take stock of our inflows and outflows and brace ourselves for unforeseen events. Whether we are currently coping well, barely coping or not coping at all, our future remains at stake.
What should we do?
The rising costs of living is deaf to complaints. We would have to deal with rising costs with real action – action that directly affect our finances and ability to live well in the face of inflation.
Unless we have the financial cushion to absorb the higher prices, some re-adjustment, if not a full overhaul, is necessary. We are not talking about a one-off re-adjustment, which is in itself already quite painful for most, but a re-adjustment of habits.
Yes, habits. Higher prices are here to stay, and prices are most likely to climb further. Whether they do so gradually is another matter. In other words, battling inflation is a never-ending endeavour. Habits are entrenched behaviour. Habits and overcoming inflation operate on the same time horizon – the long term. Perfect.
Now let’s take a look at some habits that require tweaking.
Do you habitually spend more than you earn?
Wealth is a net position. It is the excess of inflows over outflows. Inflows accumulate. Outflows deplete.
We accumulate wealth when we spend less than we earn, so managing our spending is crucial. Here are some ways we can approach this:
- Re-look what are considered to be necessities and luxuries. Some reclassification may be in order on a regular basis.
- Spend on necessities and rein in discretionary purchases.
- Control urges to make impulse purchases.
- Go for value-for-money options, not the cheapest options. This could have a bearing on future expenditure, such as repair and maintenance.
Are you on the branded product bandwagon, or busy keeping up with the Joneses?
Envy and desire are powerful human emotions. Brand-driven organisations play these cards to the hilt. Using celebrities and other social influencers to tempt consumers is an age-old tactic that preys on these basic human weaknesses.
These same weaknesses are activated when we see someone with something we are conditioned to covet. When we buy something to match what we see others want or have, we are literally “paying for it” – all puns intended. The satisfaction from flaunting may be real, but the damage to our finances is also real. Unfortunately, the effect of the former may not last as long as the latter.
What are physiological requirements, and what are good to have? Ultimately, we have to manage our desires and control our envy. This could be a daily struggle for some of us, but we would all be better off for it in the climate of rising costs.
Are you habitually in debt?
Different schools of thought exist on debt. Some see it as the root of evils. Some see it as necessary. We have to decide for ourselves how we stand on each item of debt we take on.
- How much debt are we in? How long do we need to clear the debt?
- How much interest are we paying regularly? How can we reduce it?
- Are we rolling over credit card balances unnecessarily? Are we incurring unnecessary debt?
- Are we incurring unnecessary interest and late payment penalties?
With the proliferation of tempting loans and credit card advertisements, perhaps one can say the debt monster beckons from every corner. Managing our debt level and interest payments would add up to the total effort to cope with inflation.
Is saving a habitual priority?
Do we spend first and save what we have left? Or do we save first and spend what we have left?
The order of priority has a deceptively imperceptible impact on our daily lives, but the effect will snowball in the long run. Some time in the future, we would either kick ourselves or congratulate ourselves for the things we do now and the habits we have now.
If we choose to spend first, we may get a rude shock when we realise there isn’t anything left in the kitty. The effect is clearly worse if this happens when income is lean or non-existent.
If we choose to save first and control our spending, we will have, in times of low income or no income, a reserve to fall back on. We may question the purpose as we grudgingly put aside money on a regular basis, but like a fire extinguisher, it could save our lives when we least expect it.
Balancing our current spending with future spending is a tough balancing act to execute, especially if our spending level is as high as our income level, if not higher.
If we rely on the excuse that we are too busy coping with the present to think about the future, we could be pulling wool over our own eyes. The future is closer than we think. The future starts the next moment, and anything can happen. A sudden fall, a sudden diagnosis, a sudden call for help from a loved one – all these require a robust financial cushion if we still hope to remain standing.
Are you habitually exposing yourself to risks you can transfer away?
Ask anyone seeking medical attention in a hospital’s accident and emergency department if they expected to end up there. Chances are, most, if not all, will reply in the negative.
Some big ticket emergencies are simply too big to save up for. They are normally beyond the financial capability of an ordinary person to cope. Besides medical attention for major illnesses and accidents, property damage and loss, professional and personal liability are some key risks we may unwittingly take on if they are not insured for.
Use insurance intelligently to maintain emergency funds. Transfer the risk of coughing up a big sum of money to the insurance companies so that we have more funds to cope with inflation.
Is seeking financial advice a habitual priority?
Unit trusts, regular savings plans, insurance, Private Retirement Scheme – these answers to financial health could overwhelm the best of us. It would be a shame if we were turned away by their complexity.
The financial product landscape is indeed treacherous. It is mired in landmines for the unsuspecting. Moreover, the terrain changes with our life phases and with time. Our best bet is to work with a financial adviser to sort them out on a regular basis – make it a habit, in fact. Apart from being able to incorporate inflation into our financial plans, a financial adviser knows where to tread and how to guide us out of the murky waters.
For example, retirement must be financed. Unless we look forward to retirement on a shoestring or less, we would be better off preparing for it early with real financial planning through the use of an appropriate blend of insurance, savings, PRS and investments. Relying on EPF is risky, as withdrawals for education, medical attention and housing loans will take its toll on the EPF balance.
With inflation, higher chances of medical attention, reduced or eliminated income, old age poverty is a real consequence of procrastination.
Let’s Get It Going
Higher prices are here, and they will creep upwards steadily. We can watch them erode our finances and ability to spend, or we can deal with them on an ongoing basis, starting now.
The government is balancing their finances to avoid a worse eventuality from coming to pass. It’s time we balanced ours for the same reason.
If we have difficulty dealing with the present, the future could be worse for us. The cost of living will be higher. By the time we retire, we may have nothing to look forward to.
Don’t take comfort or offence in others not putting their acts together. What matters is that you put your act together – now. It will not be easy, but ultimately, you will reap the rewards of your positive efforts. Look at your achievements and level of comfort today. Are they not the fruit of your past toil, tears and sweat?
By the same token, your future depends on what you do, not what you can do.
Guest Contributor: FA Advisory
Source: First Published in financial 1st Vol.1 2014