At some point in life, many of us dreamt of getting rich and not having to work for the rest of our life. Whilst there’s many ways that we can become millionaire out of the blue – strike a lottery, insurance payout from beloved ones (touchwood!), “skim-cepat-kaya”, gambling, etc.; but obviously none of these are practical and some are even fraud/illegal. Plus, even if we strike the jackpot, without proper personal finance principles, it’s all matter of time before we fall back to square one.
If you are here to look for shortcut to amass wealth, stock tips, or “lobang” to get rich, then you can already stop reading from here on as this website is not for you. Rather, it will be purely focusing on personal finance 101 and taking actions on things we can truly control.
So let’s get started!
Stage 0: Identify Your Goals
Whilst understanding personal finance is important, mere understanding with zero actions taken are still useless.
“Take any number and multiply it by zero.
The result? Still zero.”
Having a clear goal in mind helps to prevent you from dropping out early – as it will help to you to drive motivation.
Humans are pretty simple – if it is something you truly want to achieve for whatever reason, you’ll naturally have a stronger drive to MAKE IT HAPPEN. Likewise, without a goal and you’ll be wandering around mindlessly following others’ footprint, and one day you might just stop caring about all these crap and go back to square one.
- Find a quiet place where you can think alone, preferably places without disturbance or distraction from others. Put on some music to help you focus if you have to.
- Think about what you truly want – not now, but 10 years from today. Then 20 years from today. Don’t be afraid to dream big. Write down all ideas (braindumping) and do not discount any of those.
- Assess how far away you are today vs. your dream state. Are the gap something tangible (monies, objects, etc.) or intangible (experiences, feelings, etc.)
- Visualise these dreams in cost – use any estimation method. Example:
- “I want to be able to be a full-time gamer/streamer whilst not having to worry about my day-to-day expenses and occasional splurge, yearly travel, and shopping”
Chances are, you might find it hard to even do an estimation, unless you already know how much you need to spend based on current lifestyle by keeping track of your expenses.
Regardless if you managed to come up with an estimate (or not) – it doesn’t matter yet at this stage, but keep those goals in mind as you will need it somewhere down the road 😀
Stage 1: Know Your Expenses
Pilots have radar. Captains have compass. We have Google Maps or Waze.
Why are these even relevant? Well you see, would you rather be sitting on a plane with radar, or one where the pilot is trying to navigate around through gut-feel, hoping to bring you to your destination before running out of fuel?
The same applies in personal finance, where you are in the driver’s seat navigating the way forward into the future. There are many different approaches to this – some go crazy down to the cents level tracking for all expenses across all different bank accounts or credit cards; while some take a higher-level approach ensuring that majority of the expenses are captured, in a granular or aggregated approach which are more lenient.
Honestly there’s no right or wrong to both approach, as both will work so long as you don’t get burnt out from going too hardcore; or going too lenient to the point that you can no longer trust your budget. I have been at both of the extreme ends of the spectrum and trust me, you won’t like it there.
When I finally renewed my motivation, I made it clear to myself that I will maintain the balance, closer to the “lenient” side, whilst ensuring that all granular items are still captured and only aggregate certain low-value-high-effort items (example: toll/parking/petrol are all lumped under “Transportation”) so that I don’t get burnt out and stop mid-way again.
Personally, I am a huge fan of zero-based budgeting as it will always ensure that no pennies are left unturned. What does it even mean? Well it’s summarised in one sentence really:
EVERY SINGLE RINGGIT MUST HAVE A JOB!!!
Doesn’t matter if the “job” (purpose) is to pay the bills, put food on table, building emergency reserves, investing, entertainment, gifts, or any other categories. Every single cents that comes to you must be accounted for. Nothing more, nothing less. Yep, including your bonuses.
Want to buy a fancy dress? Well make sure there’s budget left in “Clothing” category.
Want to pamper yourself for a good meal out? Well make sure there’s budget left in “Meals”.
Not enough budget? Then you have to make a choice to trade-off something and reduce budget in other categories.
Not willing to trade-off? Then increase your income so you can SPEND more (though it would be better if you save/invest those extra income instead of spending it)
When you first start with zero-based budgeting, it is completely normal that you accidentally left out some big-ticket-items which are either recurring on less frequent basis (e.g. vehicle maintenance, home assessment tax / cukai pintu, road tax, etc.) or unexpected events (e.g. vehicle repair, blown electrical fuse, burst pipes, etc.).
That’s where zero-based budgeting truly shines. Rather than having a “generic pool” of spare money where you draw as and when required (and it’s all drawn out before you know it), you estimate how much would these cost on a yearly basis, then dividing it by 12 months. Doesn’t matter if your car needs repair this month, always allocate the fixed amount of budget into this category so that when the time comes and you need it, it’s already funded for you.
My decade-old Proton Persona requires approx. ~RM200 half yearly for oil change; and perhaps there’ll be random broken parts which requires RM200 every quarter or so.
Convert these into yearly total:
(RM200 x 2) + (RM200 x 4) = RM1200
Then, convert it into monthly budget:
RM1,200 / 12 = RM100 per month
From that point onward, no matter the circumstances, I will always allocate at least RM100 onto my “Vehicle Maintenance” category for a peace of mind. Rinse and repeat for other similar categories – Personal Care, Birthday Gifts, Angpaos, Gadgets, Salon, etc.
Don’t worry about it when you first started and underestimated some of the items; or if some expenses just decided to hit you out of the blue sooner than expected. Just go with the flow and fund it from other category (trade-off) as an interim and quickly move on. The key is, all your income are budgeted for. NO MORE, NO LESS.
- Think about how you’d like to do your budget & tracking. Do you prefer to work with Excel/Sheets? Or via PC only? Or must be mobile-friendly and desktop-compatible?
- Whichever way you choose it doesn’t matter – what’s important is to make it your daily habit. Yes, you heard me. DAILY.
- When doing your budget, always take a pay-cut and pay yourself first. You can start from 5%, then 10%, then 20%, then maybe it’ll reach 50% someday. These pay-cut is very important as it helps you to spend what is left after saving, rather than save what is left after spending. A huge mindset shift needed before you can even move onto the next stages.
- If you’re looking for a easy-to-use Zero-Based Budgeting app, check out You Need a Budget
Stage 2: Beat Down Big Bad Debts
Literally what the graffiti said. With debts, compound interest is working AGAINST you. And this is especially bad if we’re talking about debts like outstanding credit card bill, which the interest rates can go as high as 18% p.a.
These interests (working against you) will just tear you apart, bit by bit. Not convinced? Try using this AKPK Credit Card Calculator:
Assuming outstanding balance of RM10000, making only minimum 5% payment (or RM50, whichever is higher), it will take you up to 7 years 4 months just to completely pay off the debt, with a total interest of RM4055 (making the total payment RM14055) which is ridiculous.
So if you have any debts which charges you crazy effective interest rate, then make it your first priority to pay down all these debts before even thinking about saving / investing. Your banks may sometimes choose to list things on simple interest rate as it will look more attractive (than effective interest rate), so be wary of those traps as well.
Having said that, there are some “healthy debts” which you can deprioritise first (i.e. mortgage loans) so that you can focus on protecting your capital or building your wealth, as these debts usually have lower interest rate than what you can potentially gain from building a safe buffer (emergency funds) or building your wealth (investment returns). It is not worth to dump all your extra monies into the mortgage and put zero into savings/investments – unless your investments are providing returns below your mortgage interest rates.
- Find out your net-worth by listing down list of assets and liabilities you have
- Identify the list of “debts” you currently have, and segregate them into “unhealthy debts” (pay back ASAP) and “healthy debts” (pay back as per schedule/slightly ahead of schedule after other priorities are done)
- Never treat your credit card as a “credit facility”. Bank provides you with high credit limit to hopefully tempt you into spending it and in return, charges you enormous amount of interests if you fail to pay back on time.
- Instead, treat your credit cards as a payment-tool merely for convenience, or even better, a tool to generate cashback only on expenses which are intended to be spent even without cashback. Never overspend just to “capitalise” on extra cashback.
- Always pay your credit card bill in full amount before the payment due date stated in your bills.
- Don’t think you can handle (the temptation) of a credit card? Don’t even apply for it (or cancel it). There’s plenty of alternatives for Debit Card which nowadays are as secure and convenient as a Credit Card, without the risk of you overspending beyond your means.
- BigPay is one of the good alternatives as a debit card that I would recommend with zero annual fees, great overseas exchange rate, and free expenses tracking (p/s: use my referral code below during signup for extra RM10 for both of us!)
Stage 3: Protect Your Capital
Once your unhealthy debts are settled for, it’s time to build a buffer so that you won’t end up falling back on big bad debts. The reason to build the cushion after (rather than before) is so that you won’t be penalised during this process if you have already settled the big bad (expensive) debts, otherwise you will lose faster than you can save thanks to the enormous interest rates charged on your debts.
The general rule of thumb is to build at least 3 to 6 months worth of monthly essential expenses which you can live of and survive when the time comes, such as during pandemic times of the COVID-19 where record number of job losses are happening worldwide.
You might be pondering where you should keep these funds? Two things for sure:
- Not in your typical savings account with near zero interest
- Instead, keep it in multiple chunks of Fixed Deposit scattered throughout various holding periods.
- Example: If you have RM50,000 as your emergency fund, split it into at least 5 pieces of Fixed Deposit worth RM10,000 each with different tenures (some Monthly, some Half-Yearly, some Yearly, some 2 years, etc.)
- The combination is infinite – the key thing is to split it into sizeable chunks that can provide you liquidity when you need it.
- As I’m a very lazy person, I keep my liquid funds in my Maybank Flexi Home mortgage account with no withdrawal penalty / minimum blocks for interest calculation.
- Why? Generally speaking, regardless of interest rates, home loan interest will be approx. 0.2% ~ 0.5% above what banks will offer you on Fixed Deposit rate. By keeping funds in my mortgage account, I “save” on the interest to be paid to the bank rather than “earn” on the interest bank pays to me in typical case of fixed deposit
- Not in your so called “insurance saving plans”
- Maybe it’s just me but this is one thing that I really cannot tahan (cannot take it).
- Insurance are meant to hedge against risks that we (or family) cannot afford to stomach, should the risk occurs
- Hence it’s definitely a must to get insurance for your car – in case of accidents. For your mortgage – in case of death/loss of income (bills will still bite your family even after your death) AS A FORM TO HEDGE AGAINST THOSE RISKS
- But “Insurance Savings Plan” is nothing like that – it’s merely an investment tool to “grow your portfolio”. Unit Trust itself are already as expensive as it can get, but insurance is just another level.
- Imagine you paid RM6,000 over first 6 years (1k per year) for your “savings plan”. Perhaps you are expecting at least ~90% of the sum (RM5,400) are “invested and saved” for you. NO!!! ONLY ~65% (RM4,000) are invested and the rest goes to your agents’ commission and fees. That basically makes it ~5.5% fees per annum for the first 6 years, and I don’t even want to go to the annual fee charges which will take up at least 1% ~ 2% yearly.
- I will talk about more on this topic in my next chapter but for now – just remember that insurance is simply a measure to hedge against risks you cannot stomach and should never be treated as a form of investment.
Once you have built up your emergency funds which are liquid and accessible at the time of needs, ensure that you are adequately covered with medical insurance – unless you can save faster than the medical fees’ inflation rate, chances are most of us (myself included) will have to rely on medical insurance to hedge against a risk we cannot afford to have. Same thing goes for Mortgage Insurance which usually we are requested to buy MRTA, MLTA, or equivalent sum of Life Insurance to hedge against the total mortgage. Personally, I went with Level Term Life Insurance so that in case if I change property, the insurance will still “follow” me (as it’s not pegged against the property itself) and the cost are similar with a MLTA insurance.
Just make sure not to go too crazy with insurance. Example of craziness in my humble opinion: buying life insurance for kids or retired parents. Why? Typically they don’t generate incomes at those stages, and are our dependants. In the event of death, while it will cause catastrophic disaster and takes a toll on our mental and emotional well-being, we’d most likely still be fine financially as long as we have been prudent with our expenses and built up enough buffers.
- By now, you should have visibility on your monthly expenses trending. Estimate from there how much you will need and focus on building the first 3 months buffer; then the next 3 months.
- Evaluate options which you can use to keep these emergency-accessible funds. If you have flexi-mortgage account, read your terms and conditions and understand how the principal offsets are calculated. Some banks have hidden criteria such as minimum charging block amout in multiples of RM1000, monthly rest calculation, withdrawal fees, or in my case, it comes with monthly account maintenance fee but are truly fully-flexi with daily rest calculation.
- Assess type and amount of insurance coverage needed to hedge against risks, medical cost inflation, or outstanding mortgage. In principle, insurance charges should be well below 8% your gross salary for an individual, more if you have dependent.
Stage 4: Grow Your Wealth
- at least ~20% of gross income saved on a monthly basis
- at least 3 months worth of emergency savings for essential expenses during
- no longer has any unreasonable / expensive debts (if ever any), except for healthy debts such as mortgage. Remember, your mortgage should never exceed 30% of your gross income.
In previous chapter I briefly mentioned on how we should avoid investments via insurance whenever possible and one of the main reason is cost. Just to illustrate the point, below is a very simplistic comparison between “investing” via Insurance Savings Plan vs. Roboadvisors in Malaysia. I won’t even go to other approaches here to keep it short and simple:
Assuming that we start with RM0 capital, with conservative return rate of 6% per annum compounded on a conservative yearly basis; whilst consistently topping up at the beginning of next year for the amount of RM12000 per annum.
- At Year 10, we’re talking about RM150,935 vs. RM107,982 (39.78%), when every year we’re consistently “paying” agents commission at different tiered rate up till year 10.
- At Year 20, we’re talking about RM396,791 vs. RM303,913 (30.56%), when finally 100% of the premiums paid are allocated fully to the investments for the fund to play catch-up at Year 11 onwards.
- At Year 30, we’re talking about RM797,266 vs. RM593,939 (34.23%), where the catch up starts to lag behind.
- At Year 40, we’re talking about RM1,449,597 vs. RM1,023,248 (41.67%), and compounding effect starts to draw the distance further and further. I won’t even go beyond Year 40, as we’ll probably already be 65~85 years old by Year 40, depending on our age today.
Throughout the 40 years, the top-up amount and annual return remains unchanged, yet the fees add up and eat onto your portfolio size in the longer run. So to recap, you would want to allow compound interest to WORK FOR YOU, not against you.
Please, if you ever plan to save and invest for whatever reasons – unborn child’s education plan, retirement funds, whatever those are – take your money and put it somewhere else like StashAway with ~0.8% annual fees plus ~0.2% ~ 0.4% fund expense ratio (depending on ETF), making it approx ~1.2% fees per annum
Heck, even if you don’t trust me or feel skeptical about StashAway, which you shouldn’t, as they are licensed by Securities Commission of Malaysia; then go for self-service Unit Trust/Mutual Funds like FSMOne by IFAST Capital.
It’s still gonna be more expensive than StashAway since they charge 0%~2% upfront initial cost, with 1%~2% annual fees such as fund expense ratios, platform fees; but still cheaper than your typical agent-based Unit Trust with 6% upfront initial cost and same annual fees.
In the long run at Year 40, the differences of DIY Unit Trust against Insurances Saving Plan is measly ~9%, so I still will not recommend this as your primary vehicle. There’s still advantage if you’re only in it for the short term (Year 10), as it has ~30% upside vs. Insurances Saving Plan as the effectiveness only starts dwindling down from Year 10 onward given the the recurring annual fees and upfront sales charge.
It has been a pretty long one – so to recap, if you are lazy like me, or simply have no time to study the stock market; just invest in passive funds via ETF; and the easiest no-fuss approach in Malaysia today is via StashAway. Avoid insurance agents / unit trust agents for investments as fees will really add up in the long run. If you’re here for more advanced approach to have even finer control / international reach on the ETF selections, stay tuned as I’ll be posting more articles on local / international trade soon and will link it separately, since this article is tailored more for beginners to personal finance.
- Assess your investment philosophy, in relation to your identified goals earlier in Stage 0. Every individual is unique so should your goals. A 20 years old graduate have more time in his favour to take up higher risk portfolios, but perhaps not so for a 60 years old nearing her retirement as her focus would be on wealth preservation.
- Research various investment vehicles available to you, trust no one but yourself to read through every single line in the terms & conditions, pricing page, and understand the fees structure; as this will help you to make a sound decision. Turn a blind eye and staying ignorance would not help you – as I’ve only found out 5 years later.
- Passive Investing may not be for everyone, as some would prefer to Trade Actively – and that’s totally fine so long as you know what you are doing. Your investment style is yours and yours alone – just don’t be a sheep following the herds blindly.
- Read more books on personal finance and investments, as reading will definitely expand your knowledge and avoid common pitfalls. I myself read occasionally and you can check out my reads here
- Consider estate planning, especially if you have a family of your own as you probably wouldn’t want your family to struggle, or mismanaging monies after you leave the world.
Stage 5: Giving and Share
“Give, and you shall Receive”
Doesn’t matter whether if the quote is true – typically one shall not expect for something in return when they’re giving out. Giving and Sharing can be in many forms, doesn’t necessary need to be of monetary value.
- Some donate to cause that they truly believe in, and contribute through financial means.
- Some provide services on pro-bono basis to help others in need.
- Some share their knowledge and lessons learnt with others, hoping to help others to avoid the same pitfall.
The form doesn’t matter as long as it fills you. Some may argue that one can only give after achieving financial freedom, and that’s not true. We can always either start small, or start with something that doesn’t cost us money.
- Think of a cause that you truly believe in and are willing to fight for – Child Hunger, Women’s Equality, LGBTQ+ Rights, Underprivileged Family, Youth and Adult’s Financial Literacy, etc.
- Plan what you can contribute, in your capacity, and take action. This blog will be my baby step in helping to contribute to the awareness of Financial Literacy in Malaysia
Stage 6: Independence
If you’re at this stage, congratulations! You have already achieved the Financial Independence (FI) stage where you already have your passive income consistently covering your needs beyond your retirement as long as you stick with your planned lifestyle.
Nevertheless, always remember that it is important to enjoy life as we only live once. Don’t ever let the money game stop you from enjoying life – life is more than the numbers in our bank account 🙂
Stage 7: Freedom / Abundance
The only difference between Stage 6 and Stage 7 is where at this point, you have so much money that you’ll highly likely won’t be able to finish spending throughout your entire life. This is the time to stop sweating the small stuff and spend if you have to (but responsibly).
Enjoy life, help others and do charity, do what you’ve always dreamt to do. This is exactly why Stage 0 is so important as you wouldn’t want to spend all the efforts to arrive at this stage, but have no clue what to do with the rest of your life.
If there comes a day when I achieve this stage, you’ll probably be seeing me travelling around the world more often to experience different cultures, different weathers, and different experiences across the world. And on normal days? I will probably be reading books, gaming away, or perhaps by then, taking care of my young adults 😀
I know this article have really been a long one, and if you’ve read up to this point – I truly appreciate your time and I hope that these small steps would be of useful to you.
If you have any other suggestions, feel free to let me know in the comments below or email me at [email protected]. I will also be periodically revisit some part of the articles and expand further, perhaps in the form of bite-sized blog posts to dive deeper on certain topic – as I won’t be able to cover everything in depth in this section.
See you around on my next post!