Rewind to a decade or two ago, middle class families were living in nice double-storey homes in the suburbs, driving imported Japanese sedans or even SUVs. Plus on average they had three children. Fifty Ringgit could probably buy enough groceries to last half a month for the whole family.
Fast forward to 2015, the middle class are now battling financial woes and debts as the cost of living continues to rise. Circumstances have changed. You can’t get the same things that you bought with RM50 10 years ago by far. That is a fact.
The sentiment is depressing and negative. The general feeling of the middle class population is that they are not earning nearly enough to cope with the rising cost of living.
This struggle is likely faced by millions of Malaysians who fall into the loosely defined category of middle class. And the financial challenge may have nothing to do with their longing for pricey cars and top-shelf clothes anymore. With every penny seemingly out the door the moment it comes in due to just trying to get by, substantial long-term goals can seem pointless to even pursue.
Does that mean that the middle class can now say goodbye to financial freedom? Not according to Yap Ming Hui, a bestselling author, TV personality, columnist and coach on money optimisation, who heads Whitman Independent Advisors, a licensed independent financial advisory firm.
“The fact is, the middle class in Malaysia are destined for financial freedom,” said Yap, “even now.”
Middle class earners in their 40s, earning about RM20,000 combined household income a month and tertiary educated should be able to achieve financial success in life. If you are able to save, lead a reasonably comfortable lifestyle within your means, invest your savings and be very careful about avoiding financial mistakes, then you will most probably be able to enjoy a comfortable retirement, and able to achieve most of their financial goals.
Yet, not every middle class person can bridge that gap between coping with daily financial expenses, and financial freedom. Yap shares with iMoney Malaysia about the 5 most common hurdles that cause Malaysians to fail in their finances:
1. Your expenses grow faster than your income
Parkinson’s Law is considered one of the most important laws of money and wealth accumulation. Developed by English writer C. Northcote Parkinson many years ago, the Parkinson’s Law explains why most people retire poor.
“The Parkinson’s Law says that no matter how much our income is, somehow we will spend every Ringgit of it, and a little bit more. It is like lifestyle inflation but beyond that,” explains Yap.
Most fresh graduates get a starting salary of RM2,000 to RM3,000 a month. With that kind of salary, the income is naturally not enough to cover their expenses. However, even when their salaries increase to RM5,000, their expenses still surpass that.
“Perhaps, they will console themselves by saying that, ‘Maybe one day when I have RM10,000 income a month, I’ll have enough money to solve all my problems. I will have enough to save and I can do whatever extra hobby that I want.’ But guess what? It’s still not enough,” adds Yap.
“The truth is, there are people who earn RM100,000 income a month but it’s still not enough. And they still don’t have any savings.
“We recently had a roundtable discussion with our advisors, and one of the advisors brought up a problem he was facing with a particular client. According to him, the client and his wife earn a combined income of about a RM1 mil a year, and he has serviced him for one year. The advisor and the client agreed that they must save some money but at the end of day, they are unable to allocate some money for savings.
“This client is facing this problem because of his lifestyle and his expenses. When a middle class person said he/she does not have enough income to save, invest, or accumulate, it’s absolutely normal,” says Yap.
According to Yap, 99.9% Malaysians in the Klang Valley will agree with that sentiment. However, that is not the truth. If you allow that feeling to continue, it will become a reality. Even when you earn RM100,000 a month, it will still be the same.
“So, when are you going to get out of the rat race?”
As you increase your income you need to quickly take hold of your expenses to ensure you don’t fall into the trap that is Parkinson’s Law. Force yourself to review your expenses and start making changes. In fact, one of the most practical ways is to channel your income into a saving vehicle before you start spending. That will force you to spend within your mean.
2. Sweeping investment troubles under the carpet
One of the most basic investment advice is to do your research and monitor your investments at all times. However, it is not a common adage most Malaysians follow when it comes to investing their money.
There are many Malaysians who do invest, but they don’t know how to monitor or sustain their investments.
“Most people tend to sweep their problems away under the carpet when they lose money from investing. Often enough, these investors are left in a lurch as they are unable to seek any further advice from the agent or banker who sold them the investments. In the end, they don’t know what to do –to hold or to sell? Nine out of 10 Malaysians would not sell.
“They would just keep it, and hope that one day things will change. That doesn’t work. If you leave your money there, the loss could get worse. From 20% it can go to 30% or 40%,” Yap replies when asked about how inaction can hurt one’s investments.
Investing your savings is good, but only if you are equip with the knowledge and takes active interest in your portfolio. Not knowing what’s happening with your investment is just as bad as not investing, perhaps even worse.
“This is not uncommon. We have some clients who’ve come to us to review their investment portfolio. Their portfolios include a long list of things they invested in in the last 15 to 20 years. When we went through the list of shares, some of them have already delisted,” shares Yap with a chuckle.
Always know where your investments are and how they’re doing and take an active role in their management. Money’s already tight, penny pinching isn’t going to help if your investments are going downhill.
3. Not proactive in property investments
Properties are very popular investments among Malaysians. Most believe that buying properties guarantees returns, and even if returns are not immediate, investors are still able to hold a tangible property.
“That is a myth,” Yap breaks the hard truth.
With rising prices of properties, especially in the Klang Valley, a lot of buyers are opting for properties outside of Kuala Lumpur and Selangor. Some may go as far as Genting, Port Dickson or Ipoh.
However, they fail to realise that property investment is not as easy as signing on the dotted lines on agreements. It requires time and money to ensure the property makes money.
Some of these investors lead a busy lifestyle, and they may not have time to take care of the property. When they get the key to the property, they want to lease it out. But when they can’t, they try to sell it. And when that fails too, that’s when the problem arises.
“After a year or two, they may lose their motivation, and they leave their property to languish and deteriorate. The condition will deteriorate quickly, and the property becomes unlivable. So they have to spend even more to rent it or sell it again,” warns Yap.
“I have a client, in his 60s, who invested a house in Tanjung Malim. He didn’t do anything with that house. Fifteen years later, he found that everything removable in the house was stolen, including the grille and the switchboard. Only the walls were left.”
Unfortunately, this is the bitter truth that most property investors face nowadays. It is easy to buy a property (if you have the cash), but if you’re not proactive in your investments, you will lose money that you already cannot afford to lose in the first place.
4. Not investing at all
It’s comfortable to work a “safe” job and get a stable salary. The middle class thinks being comfortable means being happy, but the wealthy realise that extraordinary things happen when they put themselves in uncomfortable situations.
Which is why the working class usually are more risk adverse when it comes to investing. “We are talking about the vice presidents, senior managers, and others who are earning high salary. They are generally quite risk averse,” says Yap.
This group of people are earning a comfortable salary, and they can save, but they don’t invest.
“They are busy and don’t have time to research on possible investments nor monitor their investments. Their savings, if they have any, will end up in the bank, earning minimal interest, which we know with the current inflation, is not enough,” Yap adds.
Not investing your money means you are letting the value of your savings diminish over time. This is not apparent in the first few years, but it will have a huge impact on reaching your target of financial freedom.
“When you are 22 to 30 years old, your income is just enough to support your basic expenses. However, when you hit your 30s, that’s when you hit the big income earning year, especially when you are 35 years old.
This is the time that they must actually save. But most people forget. Because that’s when they think they can afford to get their dream car, the big house, send their children to international school, or go to Europe for holiday. When all these happen, they forget to save or invest,” Yap warns.
5. Buying insurance policies that you don’t need
Although Malaysians have not reached target insurance penetration rate, there are many in the middle class who spend a lot of their money on insurance policies. Getting the right protection is important, but spending excessively on insurance plans that you do not need is just major wealth leakage.
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“A lot of my clients are paying for protections they don’t need. Based on our observations, Malaysians have a soft spot for insurance agents, especially if they are friends or relatives. So, they end up accumulating a pile of insurance policies,” exclaims Yap.
Overprotecting oneself is a waste of money that could have been used for investment to grow his/her savings.
“Some people buy insurance for savings, such as for retirement, children’s tertiary education, which is not the exactly the right financial decision because insurance is not the type of investment that generates good returns. This is a lazy approach.”
These are major reasons why middle class do not get to accumulate enough to achieve financial independence. It is not an impossibility for the middle class. We need to understand that having a high income is good, but it is not the only factor that impacts our financial freedom.
“The first step to overcome these hurdles is to recognise that they can achieve independence in their finances. They must not be negative and think they have no hope or choice. Or think that their income is too low, or their boss is not giving them enough increment,” says Yap.
“The second step, they need to start learning about managing their finances. The most important lesson is to know the common financial mistakes that they can avoid – such as investment mistakes. And the third step is to apply the knowledge you’ve learnt in your life. Knowing and doing are two different things, which is why establishing a saving habit is really important.”
Risks may stop you from growing your cash, but there are ways to manage those risks. Money optimisation is a crucial approach to put the right risk management measures in place especially when one starts to invest.
“Money optimisation is a proprietary methodology that we have developed over the years. We’ve been working with a lot of middle-class clients, and we realised that dilemma that all of them face when it comes to growing their money.”
“By applying the money optimisation concept in your investment, you will be able to learn about how to manage risks that may impact your investment success. Even though your money may not grow as fast as you speculated it to be, your money and your net worth will grow slowly and steadily.
It is undeniable that to reap the fruits of your labour, sacrifice and hard work are required. Review your finances today, and kick-start your journey to financial success, despite all these hurdles.
Yap Ming Hui (yapmh@whitman.com.my) is a bestselling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000.
