Saturday February 16, 2013

Financial realities of the middle class

Money & You by YAP MING HUI

Middle-class Malaysians today have become used to spending on far too m any things.

This group is facing a multitude of challenges including a near decade of stagnant employee wage.

THERE is an interesting parallel between the Malaysian economy and the financial reality of middle-class Malaysians. As we are acutely aware, the country is in danger of experiencing stagnating growth unless it changes its economic model and direction.

Many middle-class families could find themselves in financial dire straits unless they too wake up to the risks that are inherent with their own current financial behaviour.

The “middle-income trap” that is threatening to prevent Malaysia from achieving its goal of becoming a developed economy has become a popular topic due to the high level of media exposure it has received. The crux of the issue is that if the country cannot improve its economic performance and cut loose from the low-income model of development that it has relied on until now to fuel its economic growth, the Government's high-income economic policy will fail to become a reality.

For membership to the high-income economic club, Malaysia needs to make an aggressive push towards high value economic activities by further embracing the technology, innovation and creativity industries.

So where does this leave today's middle class? What is its dilemma and how can it avoid the risks that are associated with the middle-income trap?

In my opinion, the middle-class category encompasses middle-aged professionals or business owners with a monthly combined household income of between RM10,000 and RM50,000. This group is facing a multitude of challenges including the constant rising cost of living and property price inflation coupled with a near decade of stagnant employee wage.

This lethal combination is squeezing the middle class into a corner that is created by the shrinking value of the ringgit on one side and reduced opportunities for income generation on the other. As a result, more middle-class families are finding it difficult to maintain their standard of living and when caught in a financial crunch, they end up in hardship. In order to avoid the trap of financial adversity, it is necessary to understand what is happening to the middle class and why.

The middle class is driven by a set of ideals, and the notion of “keeping up with the Joneses” is still very much alive and kicking. Having aspirations is a natural part of human behaviour and wanting to live in a semi-detached home or bungalow, or sending your children to university overseas is a common middle-class goal. What is unreasonable about wanting to maintain your current high living standards when you retire? All these choices unfortunately have financial consequences; it's a middle-class reality.

First, it must be recognised that the economic boom of the 1990s has faded and the slowing rate of growth means that the potential for income growth has diminished for many people. Advances in technology are making many jobs obsolete and retrenchments have risen as businesses move some of their operations to countries with lower costs and higher efficiency.

Unfortunately, creating middle-class jobs is not at all easy, as US President Barack Obama has found during his first term in office. Three-fifths of the jobs created during the economic recovery in the United States were low-wage, according to a study from the US National Employment Law Project in October 2012. However, many are quick to highlight that most of the jobs lost during the recession paid middle-class wages.

Second, the middle class has a daunting list of multiple and competing financial goals to accomplish. These range from purchasing health and life coverage to providing for your children's higher education, and planning for your own retirement goals

Third, middle-class Malaysians today have become used to spending on far too many things compared with the previous generations. Overseas holidays, private education for the children, a range of gadgets and entertainment options are now standard fare for a large segment of the population. Even having a domestic worker has become a necessity for a majority of middle-class families. As a result, we are experiencing the highest level of debt this country's has ever known and any discretionary income individuals or families often have is diverted towards payment off the interest and principal on loans taken instead of being funneled to savings or other investment vehicles.

Then there is the spectre of inflation hounding us. To illustrate, at an inflation rate of 6% per annum, it takes only 12 years for our capital to fall to half its value. Inflation similarly erodes purchasing power, so at that same 6% inflation per annum, we will need to pay twice as much for the same goods in 12 years' time.

To complicate matters, there is a bewildering range of financial and investment products facing us today. For example, someone looking to invest in unit trusts has some 600 funds offered by about 40 companies to choose from. There are equity funds, money market funds, bond funds, balanced funds, and a choice of conventional or Islamic funds. With such a complicated menu to choose from, most people just stick to the products that they are familiar with instead of considering options that offer them the best chance of achieving financial freedom.

Adding to the confusion is the fact that there are multiple financial services providers pushing the investor to use their services. The list includes life insurance agents, real estate agents, unit trust agents, remisiers, fund or asset managers, professional will writers, alternative investment sales agents, trustee officers, tax consultants, private bankers and retail bankers. It takes a sound knowledge of the financial sector to make the best use of these widely ranging services.

In light of the financial realities of the middle class, financial literacy is an indispensable asset today. In order to chart a course towards a secure financial future, we need to know where we are currently and where we want to be. Once we are clear about our financial goals, it is much easier to work out a plan that will ensure that we have the resources to fulfil whatever life goals we set for ourselves.

The key to the financial freedom we all want to enjoy is to optimise our earnings, savings and investments. If not, we could become caught in the middle-class lifestyle trap and end up missing the greatest opportunity in our life to achieve financial freedom.

● Yap Ming Hui (yap@yapminghui.com) is a best-selling author, TV personality, columnist and independent financial advisor on money optimisation. He wishes all the readers a happy and prosperous Chinese New Year.

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Saturday February 16, 2013

Financial realities of the middle class

Money & You by YAP MING HUI