"Financial-preparedness" among many Malaysians, particularly the young working adults, has remained low and worrying. Many of us have failed to realise the importance of securing a good personal financial heath, which is beyond saving cash in our bank accounts.
In this article, you get to learn five crucial goals in mapping out your finances, which could act as an important buffer in rainy days.
1. Investing - While the importance and benefits of investments are widely known, not many would prefer to invest their funds, considering the potential risks that may be encountered. Appropriate investments will allow you to earn a strong real return, even after factoring in inflation, unlike your low-return savings in deposit accounts.
Firstly, you must decide on your level of risk-aversion. The simple underlying mantra in investment is "the higher your risk, the higher your return will be".
Those who prefer lowest risk can consider bonds or gold-related investment options which are regarded as safe havens, while those with a higher risk appetite can look into options such as equities, which are more volatile.
Mutual funds can be a good option for those who are still new to the world of investment or for those who lack in investment-related knowledge.
2. Accumulate six months of salary as liquid cash - Any financial guru will tell you this: the importance of financial buffer. It is crucial for one to possess a sizeable amount of liquid cash in his or her savings accounts, in the event of an emergency or immediate use. Unfortunately, merely 6% of working Malaysians have savings which would only last for six months, according to Bank Negara Malaysia's "Financial Capability and Inclusion Study 2015" report.
While accumulating six months of salary is easier said than done, this can be eventually achieved if one commits to save certain amount on a monthly basis.
Upon successfully achieving the six-month salary target, refrain from using the saved cash except during emergencies. Of course, savings meant for your desired vacation or the latest smartphone should be made separately.
3. Achieving a good credit score
Credit score refers to the creditworthiness of an individual, based on previous records of servicing credits or loans. Globally, banks use them to analyse a person's ability to repay borrowings and to decide whether the person qualifies for another loan.
Contrary to popular belief, zero history of credit repayment does not indicate a good credit background. In fact, it is bad for your overall credit score if you do not possess any prior loan repayment history.
For a good credit score, make sure that you complete the monthly installments on your existing loans within the stipulated time frame.
And for those who are starting from a clean slate, you can consider getting yourself a credit card, which can be used to pay your monthly bills. Credit cards, if used well, can improve your credit score along the way.
4. Start your retirement fund
With rising life expectancy among Malaysians, a stronger retirement savings remain crucial for everyone.
However, most Malaysians cannot afford to retire. According to EPF, as of 2015, 68% of its members aged 54 had savings of less than RM50,000. This is likely to last for less than five years only.
In contrast, EPF expects its members to have at least RM228,000 upon retirement, as indicated in EPF's annual report for 2016.
Look for other appropriate retirement savings options such as the Private Retirement Scheme in order to strengthen your retirement fund.
As you commit to allocate a certain proportion of your monthly salary for retirement, this practice will eventually provide you with a bigger sum in your golden years.
5. Getting yourself insured
Insurance plays a very important role in strengthening your personal finances, especially in unforeseen circumstances. Unfortunately, Malaysians are grossly under-insured.
Latest available statistics reveal that nearly half of the Malaysian population are not covered by any life insurance, therefore making them susceptible to financial complications in the event of any health crisis. Not only that, many Malaysians who own some form of health insurance coverage at present, are not adequately covered, considering the medical inflation which runs at about 15% in Malaysia.
When you buy a life insurance policy, the rule of thumb is to insure a sum equivalent to 10 times your annual salary.
Getting yourself and loved ones financially protected
While strategising your personal financial health is highly-crucial, it is easier said than done, especially for those with less knowledge in finance-related matters.
A Life Planner is essentially a licensed financial professional who aims to meet their clients' financial needs through customer fact-finding and a financial needs analysis process.
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