Halloween is the time when people dress up in scary costumes, and when horror movies are played repeatedly on TV and cinemas. It is no doubt a scary event, especially with the extra calories you’ll be consuming in the form of Halloween candy!
However, what are even scarier are the financial mistakes you might be making now – some of which can haunt you for years to come. Everyone has made some kind of money mistakes before in their lives. After all, we all learn better from mistakes — where the lessons learnt are ingrained into us forever.
Saving too much, saving too little, not saving at all, or not investing your savings, mismanagement of money resulting in instant noodles every month-end — and the worst of them all, incurring insurmountable debts!
However, even if we’ve already erred, we can still turn things around. Here are some of the most ghastly money mistakes you can make, or may already be making, and how to fix them:
1. Living pay cheque to pay cheque
As a fresh graduate stepping into the workforce for the first time, it can be exhilarating to receive your first pay cheque. According to a survey by a local job portal, fresh graduates in Malaysia earn an average starting salary of RM2,500.
If one is living in the urban area with no family support, that starting salary can be stretched pretty thin. With almost non-existent financial literacy (as it is not taught in school or college, depending on your course), most freshies may have a hard time managing their money, and forego savings.
How to avoid it:
Personal finance experts often give the advice: “Pay yourself first.” What this means is, you set aside a percentage of your income for yourself first, before paying for your other commitments (read: bills). If you decide to pay yourself 25% of your income every month, this money is not to be used for your daily expenses, but as your savings. The rest of the 75% is for your bills and your expenses.
This will help you avoid over extending your finances, if your expenses exceed the 75%, you are spending beyond your means. This will also help you manage lifestyle inflation better, because regardless of how inflated your lifestyle has become, you will still be saving the same 25% every month!
2. Accepting and using a credit card you couldn’t pay for
Getting a credit card can help you save some cash or get rewarded for the expenses that you are already spending on anyway. That is the right way to view a credit card.
However, once you start using your credit card as a way to purchase items that you cannot afford, you are heading for a major financial meltdown that will make The Exorcist seems like a romantic comedy.
It is fine to purchase big ticket items on the credit card but if you put everything big on it, you are going to rack up a lot of debt (very quickly!). To help control credit card debt, especially for those in the low to lower middle income, Bank Negara Malaysia (BNM) has set that the minimum income to get a credit card is RM24,000 (from RM18,000), and for those earning below RM36,000, the credit limit for each credit card cannot be more than two times of their monthly salary.
How to avoid it:
Though the regulation help reduce credit card debt in Malaysia, most people, even those earning more than RM36,000 fall into the infamous credit card debt pit. Remember, regardless of how attractive the cashback or reward seem to be, it will be meaningless if you miss your credit card payment, due to the steep credit card interest rate.
Missing a payment can lead to your balance snowballing to an amount that is no longer manageable. Try to pay your credit cards off every month. If you already have a credit card balance and is struggling to pay it off, consider balance transfer.
3. Ignoring snowballing bills
Humans are pre-conditioned to ignore nasty or unhappy things. Some prefer to bury their heads in the sand when it comes to debts. This is one of the most dangerous mistakes you can make with your finances.
It is surprisingly easy for one to go into bankruptcy in Malaysia. With just RM30,001 in debt, a bankruptcy suit can be filed against you. Some of the debts that can easily spiral out of control are unsecured loans, such as credit card and personal loan.
Based on the data published in the Financial Stability and Payment Systems Report 2013, outstanding credit card balances have increased slightly by 4.3% in 2013, with revolving card balances (credit card balances that are rolled over) also increased by 2.3% compared to the previous year.
How to avoid it:
Most people take up loans with the confidence to make the repayment, however, sometimes things don’t go according to plan.
Even when the debt seems insurmountable, it is not impossible to tackle. Devise a strategy to clear your debt and stick to it. Even with a RM10,000 debt, you can clear it off in no time, with discipline and determination.
4. Taking up too many loans
Most people consider a loan and its repayment on its own instead of looking at the big picture. Paying RM600 a month for a new car may seem like nothing, but with your existing commitments such as household bills, rent or home loan repayment, this can eat up a big chunk off your disposable income.
How to avoid it:
The safest way to ensure you do not overextend your finances is to gauge with the debt-service-ratio (DSR). The recommended DSR is usually 60% to 70%, which means the total debts you hold should not exceed 60% to 70% of your monthly disposable income. Even financial institutions use DSR when they are processing your loans to ensure that you have the ability to service your loans.
5. Putting off retirement planning
Retirement seems years away, even decades for some. Why would you worry about that now? However, according to Organisation for Economic Co-operation and Development (OECD), in order to maintain the same standard of living post-employment, one should start saving at least 33% of his/her monthly income as early as 25 years old, to have at least 2/3 of your monthly income in retirement.
If you think your Employees Provident Fund (EPF) contribution is sufficient, you are sadly mistaken. You are only providing about 23% to EPF every month (11% from you, and 12% from your employer), still 10% short.
How to avoid that:
Consider various investment option to save the additional 10% as soon as possible to make up for the shortfall. Investment vehicles such as the Private Retirement Scheme or unit trust funds can be a good way to ensure you have sufficient retirement income in your golden years.
6. Tapping on your retirement fund before retirement
With the flexibility to withdraw money from the Account 2 of your EPF, many people have been misusing their retirement funds. You can withdraw the money from the second account for various reasons, from paying your home loan, to paying for medical expenses.
All seem like good reasons to withdraw, but can also have dire consequences on your retirement.
How to avoid that:
Don’t treat your retirement fund as contingency. Some retirees are left penniless after they withdrew from the EPF account to pay for their children’s tertiary education, or even to buy a home for their children.
If you want to do all that, plan in advance by saving up for your children’s education with various investment or saving options. Remember, your EPF money is for your retirement, and should not be used for anything else.
7. Avoiding investment
Investing seems scary and sounds complicated, so it’s no wonder so many of us avoid it altogether. Some people have a pre-conceived notion that it is only for the wealthy, with thousands of Ringgit to invest.
That’s not true. You can now buy and sell stock very cheaply, so the old rule to not invest if you can’t afford to is moot. The lack of knowledge in investment has left many thinking they have low risk tolerance, which results in many just putting away their sizeable savings in savings or fixed deposit account. This movement even has a name: Sit-Out Syndrome.
By not investing you are taking a bigger risk. The risk of your money eroding over time due to the rising inflation and cost of living.
How to avoid that:
If you do not know much about investment, read up. Do your research. Find a financial planner who will be able to advise you to strategically invest to achieve your financial goals. Now’s the time to get educated.
8. Investing too much
Moderation is the key — not just for your diet, but for your finances as well. If you invest money that you should be using for your basic living needs, you could be in real trouble.
Always separate your money for expenses, contingency fund and your investment. You don’t want to over commit yourself to too many stocks and funds.
How to avoid that:
Have a plan for your finances with the financial goals in mind. How many percentage should go into your savings, daily expenses and investment? Once you have set that in your budget, stick to it! Your investment should not eat into the other funds in your budget.
9. Not preparing for the unexpected
Unexpected expenses can jump out at you at any time, which is why it is important to keep a substantial contingency plan, and also have adequate insurance coverage.
With the rising medical inflation, sickness that involves hospitalisation can easily set you back at least hundreds of Ringgit. To make matter worse, you could lose your job or your ability to work due to sickness.
Therefore, having adequate medical insurance is important to get the treatment you need, and not to burden your loved ones with financial woes in this difficult time.
How to avoid that:
To protect yourself, set aside enough money to cover three to six months of essential expenses in an easily accessible savings or fixed deposit account. Do not let your insurance lapse, even in your bid to reduce your monthly commitments.
Consider the right insurance coverage, and the amount to be insured. This needs to be reviewed periodically, especially after some life-changing events, such as getting married, having a child, getting a divorce, etc.
10. Not asking for help
Due to the fear of looking like a failure, or even the habit of procrastinating, and ignoring your less-than-rosy financial situation, most people put off dealing with financial trouble until it is too late.
Sometimes picking up the phone to negotiate with your bank can help you clear that credit card debt much sooner — saving you tons of money and headache.
How to avoid that:
Watch out for warning signs when trouble is brewing in your finances and get help before it is too late. Getting a loan from unlicensed lenders is not a solution and will lead to worse financial nightmare. First thing you need to do at the first sign of trouble is to talk to your bank.
Even when things seem too much to handle, you can still get help by signing up for debt management programme with the Credit Counselling and Debt Management Agency.
Things are always scariest in the dark, so don’t be afraid to shed some light on your finances. Educate yourself on financial literacy to manage your money better and wiser. It helps to share the burden and talk about your problems with your loved ones.
By avoiding these money mistakes, you can ensure that the ghost of your past decisions doesn’t spoil your financial future. Happy Halloween!
