The rich may get richer while the poor may get poorer, but it doesn't have to be that way. It requires a change of mind-set.
I ONCE overheard someone
lament that “the rich get richer and the poor get poorer”, which made me
think if indeed that statement is true.
The rich do get richer
only because they have sound financial concepts required to stay rich.
They focus on their net worth, working on their appreciating rather than
depreciating assets.
They know how much is required to keep
their lifestyle. They don’t necessarily need to be debt-free because
they know what good leveraging can do to enhance their wealth. They
employ financial strategies which are contrarian to common ones - taking
on investment opportunities when others would stay away and having the
purpose driven portfolios.
They consciously inject capital into
their portfolios rather than on an ad hoc or timing basis. They know the
impact of inflation on their money and insurance coverage because they
review their financial life regularly. Their financial data is
maintained and accessible anytime they want.
The poor do get
poorer only because they continue to adopt a poverty mind-set. They
focus on their expenses too much either being overly frugal or overly
spendthrift.
Frugality means overprotective of your money which
prevents risk-taking while overspending means financial leakages and
unnecessary bad debts.
Their financial life has no planning and
they have never taken a conscious effort to straighten it out. Their
finances are all lumped into a “pot” which is meant to be used for
everything.
They do invest but usually due to either lack of
knowledge or fear of losing their capital, the amount is too small to be
financially significant. Their insurance coverage depletes as medical
costs rise, unsure what and for how much they are insured for.
It really doesn’t have to be this way. There is a way to change your
financial situation. The first step is to decide to be financially
responsible yourself. Acquire the right financial knowledge and make
that change. Find a financial buddy to help you get started.
- Financial Snacks by Joyce Chuah, CEO of Success Concepts Life Planners
So you need more money ...
The problem always starts when you owe more than what you can earn, financial experts say.
When it comes to money, Adrienne Wong (not her real name) believes she is a reasonable spender.
An assistant communications manager, Wong, 31, earns about RM8,000 a
month, but says her debts take up a sizeable chunk of her monthly
income.
The two biggest items in her list, her housing and car loans, amount to about RM3,000.
“My credit card bills usually come up to another RM1,000 plus, so
that’s more than half of my salary gone. With utility bills, that’s
another RM600. The rest goes into savings, pocket money for my parents
and a bit of shopping.
“With property and car prices as high as they are now, it’s no
wonder our loan amounts are so big. But what choice do we have?” Wong
asks.
Indeed, the rising rate of household debts is a pressing concern –
as of March, this year, the Malaysian household debt ratio against the
GDP reached an all-time high of 83%.
Last week, Bank Negara Malaysia (BNM) announced a three-prong approach to curb the rising trend of household debts:
> Maximum tenure of property financing is now fixed at 35 years;
> Maximum tenure of personal loans is fixed at 10 years;
> Prohibition on the offering of pre-approved personal financing products.
BNM Governor Tan Sri Dr Zeti Akhtar Aziz had said that Malaysia
currently has the highest household debt to GDP for a developing country
in the region. In comparison, Thailand’s household debt ratio stands at
30%, Indonesia at 15.8%, Hong Kong at 58%, Taiwan at 82%, Japan at 75%
and Singapore at 67%.
Countries that have higher household debt to GDP are the United
States at 91.7%, United Kingdom at 114%, Australia at 113%, New Zealand
at 91%, and South Korea at 91%.
RAM Holdings Bhd group chief economist Dr Yeah Kim Leng says BNM’s move is a “prudent one”.
“A financial crisis can always be traced back to excessive borrowing
or leveraging, and the problem is that we never know we are in a credit
bubble until that bubble bursts.
“The higher this figure is, the more vulnerable the household sector
will be to economic shocks, which can come in the form of an economic
downturn,” he says.
The concern, he says, is when people owe more than what they can earn, which is not sustainable.
According to BNM figures, the three biggest contributors to
Malaysian household debt are the housing, car and personal loans (refer
to chart).
Personal loans can be used for a variety of reasons.
Teacher Siti Norsharmi Fateh Mohamad, 28, says she took a RM35,000 personal loan three years ago to fund her wedding.
“We wanted our wedding to be special, with everything done up
nicely. It didn’t feel like much then, but now that we have more
commitments (a daughter and a housing loan), it’s definitely an
additional burden for us.
“On hindsight, we shouldn’t have taken the personal loan ... it wasn’t a necessity,” she says.
But personal loans are popular lately and there’s a reason for it.
“Banks aggressively push personal loans because it’s one of the most
profitable products for them. Interest rates for personal loans can be
anywhere from 3% to 12%,” says a former local bank manager who declined
to be named.
Spending trends have also changed, says Dr Yeah.
“Previously, people only spend what they can afford, but practices
have changed. Today, many people don’t mind spending money they don’t
have.
“Taking a personal loan is not necessarily a bad thing, but it
depends on why you’re doing it. Taking a personal loan for education,
for example, is fine, because you’re improving your skills ... or for
medical purposes to enhance one’s health. But to take a loan for
conspicuous consumption, or to make speculative ‘investments’... I think
that should be discouraged,” he says.
Credit Counselling and Debt Management Agency (AKPK) chief executive officer Koid Swee Lian agrees.
“It is quite common now for people to take personal loans prior to a
festivity because they want to buy new furniture, change their
curtains, do a bit of renovation.
“Consumers must be discerning and responsible in their borrowings,
just as credit providers must be responsible in their lending. Earn
before you spend, not spend then earn! Use the debit card and not the
credit card if you cannot pay in full each month,” she says.
Before taking a loan, Koid says consumers should ask themselves:
> Do you really need the personal loan?
> Is it for a productive purpose or can you forgo it?
> Can you afford to pay the loan instalments? If the interest
rate increases, can you still pay the increased loan instalments?
> If the loan is for a productive purpose, would you generate
enough income to repay the loan and leave some income for yourself?
If taking up a personal loan is absolutely necessary, Koid advises
potential borrowers to do their homework and compare the different bank
rates.
“Go to
bankinginfo.com.my where you can make a comparison
of all the rates. Don’t take a loan just because it’s offered. Also,
understand what you’re signing up for. Find out whether the bank is
charging you a flat rate, a reducing rate or a floating rate,” she says.
Koid gives an example of a loan with these terms – a RM10,000 loan to be paid over five years at 4% interest rate per annum.
“A flat rate of 4% for a five years may not sound like a lot, but
what it actually means is that you’re essentially paying 20% interest
for the five-year loan. The amount of interest you pay doesn’t change
regardless of how much you’ve repaid,” she says.
“Compare this to a reducing rate. If you’ve paid RM1,000, that means the interest should only be on the remaining RM9,000.”
Those who have trouble managing their cashflow can also seek help at AKPK or call its toll-free line at 1800-88-2575.
“People who have a debt problem often feel very embarrassed, but I
think they need to be realistic. You’re in that situation, you have to
solve it. Come to us, we will do our best to help you,” Koid says.
BY LISA GOH lisagoh@thestar.com.my
