Many middle class families in Malaysia are feeling the pinch, especially with the recent subsidy cuts and the soon-to-be implemented Goods and Services Tax (GST). Though the latest Budget 2015 is purportedly “pro-rakyat”, it may not benefit all income groups, especially the middle-income group, who doesn’t earn enough to weather the rising cost of living, yet earn too much to qualify for financial aids provided by the Government.
Middle-income earners, also known as the “sandwich class,” have enjoyed a comfortable lifestyle in the 1990s, when the cost of living was comparatively lower and the Ringgit could get us more than today.Though inflation is a perennial issue that everyone has to face, there should be a balance to avoid tipping over certain segments of the population into a financial nightmare.
The middle class dilemma is not unique to Malaysia. The Allstate/National Journal-Heartland Monitor poll published in the New York Times, found that Americans perceived the term “middle class” with less opportunity to get ahead, less job security, and less disposable income than the middle class of previous generations.
Saving on one side…
One pertinent effort that the Malaysian Government has announced during Budget 2015 that will help alleviate the financial burden faced by the middle-income group is a reduction in personal income tax rates to increase tax savings.
However, as the rationale behind income tax rates is, “the more you earn, the more taxes you pay,” it is the high-income group that will ultimately benefit from the tax reduction, more so than the middle class.
Below is a comparison between the current personal income tax rates and rates that will be implemented in 2015:
There are different tiers to the term middle class. According to the Institute for Democracy and Economic Affairs chief executive officer Wan Saiful Wan Jan, middle class starts from the lower middle class, who makes a household income of RM3,000 a month, to the upper middle class, who earns a household income of RM9,800 a month. Collectively, the middle class group makes up 54.5% of the population in Malaysia.
With the latest income tax rate deduction, which is applicable for Year of Assessment 2015, the lower middle class earning below RM4,000 will be exempted from tax. Here is a comparison between what a middle class individual who earns RM5,000 will be saving in tax compared to a higher income class individual earning RM12,000.
To simplify the example, let’s assume that the individual can only claim for personal relief and EPF.
…Paying on the other
Though everyone in the middle class is benefiting from the income tax reduction, it is akin to putting money into one pocket and taking it out from the other. We are saving on one income tax, but our expenses will undoubtedly increase with the imminent implementation of GST.
According to the Prime Minister Datuk Seri Najib Razak, 354 items are likely to see a price hike after GST. However, price increase is not just influenced by GST, but also various other factors. For example, property prices. Even though residential properties are exempted from GST, the construction materials are not.
According to the Real Estate and Housing Developers’ Association Malaysia (Rehda), prices for residential properties are expected to rise by about 2.6% once GST comes into play. Another report published by The Star, three tax consultants unanimously agree that residential properties are expected to increase by 3%. Although developers cannot charge buyers GST, the 3% would have been included into the selling price.
Therefore, even with the higher disposable income after the tax saving, tax payers will most likely see the savings going directly into their living expenses due to GST, Overnight Policy Rate (OPR) hike driving loan repayment higher, and various other factors.
What other benefits await?
Budget 2015 may not be kind to the middle class, as even the RM2,000 tax relief for those earning RM8,000 and below has expired. With the two most significant benefits from Budget 2015 for the middle income earners being tax reduction and the new Youth Housing Scheme (YHS).
Middle income earners between the ages of 25 and 40, with household income of RM10,000 and below, are eligible for the new housing scheme, where they get 100% financing for their first home, plus RM200 financial assistance for the first two years. The 50% discount on stamp duty for first residential property has also been extended to December 31, 2016, and the maximum property price raised to RM500,000.
The maximum property price is also more realistic now in view of the rising property prices. Malaysians were hard-pressed previously looking for a property in the Klang Valley price below RM400,000.
The beauty of YHS is not only in the RM200 a month for the first two years, or the savings it can post. With the additional interest incurred for 100% financing, the RM4,800 financial assistance seem to dim slightly.
The biggest benefit of the scheme is in the higher feasibility to own a house now without having to save up about RM50,000 for the down payment. Most middle-income earners are unable to afford a home because they find it difficult to save up the down payment, on top of the other costs involved in buying a home (i.e. Stamp duty, legal fees, etc.). With 100% financing, they would only need to save up about RM10,000 to RM20,000 to pay for all these additional fees.
The downside to this scheme is the restriction for the first 20,000 qualified applicants. With 68.5% of the population earning below RM10,000, 20,000 units can only cater to about 0.1% of that.
Survival tips
As Malaysians are still recovering from subsidy rationalisation in the form of abolishment of sugar subsidy and the annual fuel hike, expecting the middle class workers to make a significant impact in the task of trimming the country’s fiscal deficit can be suffocating on them.
Middle class has always been the backbone of the country, and they are important for us to realise our vision of becoming high-income by 2020. Therefore, it is imperative for individuals of this group to not just learn to survive, but also to thrive in the economy.
1. Cut back and downsize
Cutting back on your expenses is not an easy feat. Everyone succumbs to lifestyle inflation without realising it, and when it comes time to cut back, it takes a far longer time to adapt than expected.
First step to ensure a sustainable plan in reducing your expenses is to create a realistic spending plan and learn to live within it. This will help you identify which area to cut back on, and set yourself measurable targets, such as saving RM3,000 in three months.
2. Save up emergency fund
Once you have started seeing excess in your monthly income, transfer the money to a separate account to build an emergency fund. You can consider a high interest savings account or a fixed deposit account.
This will help you regain ground quickly by not making the mistakes most of the middle class made, which is living larger than their incomes could afford. This means not buying too many shoes, or a fancy new car, or other items that simply aren’t affordable.
3. Establish other income sources
Middle class workers will have no choice but to consider other avenues to boost their income, and cut back on their expenses drastically. The quickest way to gain ground is to figure out how to increase your income, whether at your company or another.
The number one investment you can make is to increase your competencies and skills that will boost your income. Even after optimising your income at your current job, consider other ways to create passive income to supplement your regular income.
For example, work freelance if you are good at skills like writing, blogging, photography or even designing. Consider working part-time, like food catering, party planning, and other services you can provide when you are not working.
Perhaps, if you find yourself earning more from these side businesses, you can consider entrepreneurship. You can consider the various perks for entrepreneurs in Budget 2015.
4. Invest your money
The biggest risk of investment is investing blindly and not investing at all. Lack of knowledge is the biggest risk to investing. By not investing, your money is also at risk — at risk of losing value due to the rising inflation, and at risk of losing opportunities to get returns.
You can easily create passive income through the right investment. You don’t need to have a huge lump sum of money to invest, you can just start with RM1,000, or you can even consider drip-feeding your investment in small sums regularly. Whatever you choose to invest in, make sure you know what you are doing, and your investments are financial crisis-proof.
The economic conditions and circumstances are not likely to be better in the decades that lie ahead. However, the benefits that we can reap when the nation becomes a developed country and a robust economy will be worth the short-term pain.
For the time being, Malaysians must be resilient and learn to adjust to paying real prices, without subsidies. There’s no time for despair. While you can’t control the economy, focus on what you can control – the choices you make every day that determine your financial future.
