Saturday July 21, 2012
Avoiding personal financial crisis
By CECILIA KOK
ANECDOTAL evidence seems to suggest that there are still many Malaysians, especially the young adults, who do not really practise sound financial management.
Consider the case of 28-year-old Albert Tan (not his real name). Having worked for only five years as a marketing executive, Tan has already amassed credit card debts amounting to RM50,000. He holds at least five credit cards from five different banks.
Tan does not see the importance of settling his credit card loans as soon as possible to avoid high interest payments. He prefers to repay only the minimum amount required each month for each of his credit cards. And thinking that personal loans can help ease his “financial burden”, Tan has taken up offers by his credit card banks for personal loans amounting to RM40,000.
One might be thinking where has he been spending all those money? Well, besides using some to pay part of his debts that are due, Tan likes to spend it on the latest electronic gadgets, entertainment and leisure.
Tan draws a monthly salary of RM5,000. Not too bad for a person his age, and he is lucky he doesn't have to pay rent as he is staying with his parents in the suburb of Kuala Lumpur. But he has been living beyond his means, amassing big debts through credit cards and different types of loans, including personal and car loans.
Sujatha, a 26-year-old writer, also has credit debt problems. She owes two banks around RM20,000 after having splashed the money on travelling overseas last year.
But what sets Sujatha apart from Tan is her resolution to settle her credit card debts within the next 12 months through a disciplined instalment programme, and she's not tempted by banks' offers of personal loans.
“I've learnt my lesson. It hurts to see a huge sum going to repayment of my loans, so next time, I'll be wiser,” Sujatha says.
Experts tell StarBizWeek that Tan and Sujatha's cases are common among many Malaysians. And for an unrepentant debtor like Tan, experts fear he is flirting with financial disaster.
Last month, the Insolvency Department recorded 116,379 bankruptcy cases in the country between 2005 and April 2012. Of that number, about 20% involved individuals below the age of 35, while 32% involved those between the ages of 35 and 44, and 18% involved those aged between 45 and 54.
Most of the bankruptcy cases were due to debts over vehicle loans (25%), personal loans (13%), housing loans (12%) and business loans (11%). Bankruptcy due to credit card debts was around 5%.
If Tan does not change his ways, experts say he will become part of statistics.
Consider what Prime Minister Datuk Seri Najib Tun Razak said over the week about managing the country's economy to prevent any form of financial crisis, and one could draw a parallel between the four main aspects that he highlighted and the basic principles of personal finance management.
Najib said the most basic thing to do to avoid a financial crisis in an economy was to ensure that expenditure did not exceed income (for an individual, it means not living beyond one's means).
Najib went on to say that an economy should have ample operating surplus to prevent any borrowings to finance management expenses (for an individual, think building one's wealth, and not simply take on unnecessary loans to finance personal and unproductive expenses).
The third rule that Najib highlighted was that a country's fiscal deficit should be on a progressive declining trajectory (for an individual, this means working towards reducing one's debts). And the last rule was to have a balance between revenue base, which ought to be large, and the capacity to provide incentives and stimulus to certain sectors or sub-sectors (for an individual, this sounds like proper planning and working towards one's ultimate financial objectives).
“Planning is important. Failing to plan is planning to fail,” AmBank wealth management head Joshua Lim asserts.
“You see, people always have unlimited wants, but the truth is, they only have limited resources, so they have to make choices, and proper financial planning is key,” Lim argues.
For a start, Lim advises individuals to assess their current financial situation, and then identify their objectives, and start to analyse ways and options to achieve those goals. He, however, stresses the importance of being practical and realistic about setting financial objectives based on one's projected financial standing.
Using a budget to manage one's inflow and outflow of money is important, according to financial planning experts, as it gives a clear idea of how one's money is spent.
“It is very important to track the usage of money, and to ensure that one does not use the wrong funds for the wrong purpose,” Lim says.
He points to using one's money in the Employees Provident Funds account that is meant for one's retirement being used to finance children's education as an example of using the wrong funds for the wrong purpose.
For MyFP Services Sdn Bhd managing director Robert Foo, the most basic principle for an individual is never to spend beyond one's earnings. In reality, though, Foo reckons it is very difficult for many Malaysians to observe this basic principle.
“Sometimes, people with low income have no choice. The tendency to overspend is because basic living expenses are rising faster than their income growth,” he explains.
“One should defer spending on discretionary items, for example, if one can't really afford it,” Foo says.
So, financial experts advise individuals to assess their needs objectively to evaluate whether it is necessary to take on debts to acquire goods and assets.
“Simply taking on debt will result in one not optimising one's resources,” Foo points out.
Lim concurs, saying that taking on too much debt could result in one finding it difficult to meet one's financial obligations later on.
As for building one's wealth, experts say seeking new sources of income and making the right investment choices is the way to go.
Foo preaches “dual income. He says, “It is important to find ways to earn extra income. We live in an uncertain world, so one needs to have something to fall back on if one income stream was to be suddenly cut off.”
Financial experts also advocate having a diversified investment portfolio to build one's wealth.