6 Ways to Manage Your Money

In current economic times, its always good to go through these age old money management tips.

1. Save a minimum of 10% of your monthly income

Saving a portion of your monthly income is the start of all debt management. Experts usually recommend 10% of your monthly income. The more the merrier but what if you cant save 10% every month. Then start with 2%. If you earn 3 thousand a month, 10% would be 300 and 2% would be 60 dollars. Can you save 60 dollars a month?

Don’t scoff and say that 60 dollars is too little and thus negligible. Every penny saved is not a foolish endeavour. 60 dollars a month is 720 dollars in a year and 7200 in 10 years.

The secret to doing this is to automate the process.

The Automatic Millionaire

David Bach in his best seller, The Automatic Millionaire (one of the best books on getting out of debt that I’ve ever read), advocates automating your bill payments so that you never miss a payment and incur penalty charges.

Similarly, automate the saving of the 60 dollars into another savings account. They key to making this money grow is to make it difficult for you to withdraw the money. Don’t get an ATM card for the savings account. The more difficult it is to take the money, the higher its chances to grow for you.

2. Have at least four to six months of your monthly expenses in your emergency fund

Every one should have an emergency fund. How much money in the fund is based on your monthly expense and how long it would take you to find your next job. If you’re in a very niche market (which means you’re in demand because you have unique skill sets), then 1 or 2 months of savings should be fine.

But for the rest of us, we need around 4 – 6 months of savings.

Life always has its up and down. It’s nice to know that in severe emergencies, you wont lose your house when trying to save yourself.

3. Retirement expenditure at 70%~80% of last drawn income

Don’t take retirement lightly. remember how much you eat during the weekends when you don’t have much to do. Well, retirement is the same. Okay, you might not eat much, but you will require around 70~80% of your last drawn salary.

Retirees like to to travel, after all the years working. All this requires money.

Never take money out of your Employees Provident Fund (EPF) or your 401k except for emergencies or buying property. This money is for your retirement.

4. Your life insurance cover should be at least 7 to 10 times your annual income

While financial experts agree with this rule, the exception is that it depends on whether you can pay the premiums. Your life insurance depends on how many people depend on you for their livelihood.

A life insurance is meant to cover your earning potential. An example would be:

Assume you’re a 35 year old who earns Rm120,000 per year and your child is only 5 years old. Let’s assume he’ll be independent when he’s 25, so you realistically need money that will last him for another 20 years. That should be 120,000 x 20 = Rm2.4 million. At 10 times your annual salary, your life insurance should be for Rm1.2 million.

5. Your home loan payments should not exceed 33% of your monthly income

Most banks in Malaysia conducts credit checks and will usually set the borrowers limit to 33% of your monthly income. The rule of thumb for housing loan repayments is that when you’re buying the house to live in, then go for the shortest loan term possible while staying within the 33% limit.

But if the house is for investment purposes, then stretch the loan repayment period for as long as possible. This will allow you to have very low repayments. Why is this a  good thing? This is good during the times when you dont have tenants staying in your house and you have to fork out the loan repayment from your own pocket!

6. The percentage of your portfolio to be invested in equity should be 100 minus your age.

Take risks when you’re young because when you make mistakes, time is on your side. But when you’re aging, you have to wise in your dealings and as you age, you should lower your exposure to equities.

Always take into account your objectives, risk tolerance and investment timeline.

Identify what types of investments you’re comfortable with and determine its objectives and duration. Consider rainy days.

Then consider your attitude towards risks. How much risk can you take? As the stock market fluctuates, can you sleep well? If you cant, diversify your portfolio between equities and bonds and units trusts (mutual funds).

To close this topic, always track your portfolio. Always know their value and monitor their performance. This allows you to sleep better at night.

Buy or Rent?

Now that house prices are rock bottom, is this a good time to buy a house or should we still rent?

Buy or Rent?

Buying a house is good because rents can be channelled into monthly loan installments and at the end of the day, you own the place. And your house now becomes an asset in your portfolio.

But on the other hand, renting gives you mobility, especially when you’re either single or when your job moves you around all the time. There’s no point, unless its for investment purposes, to buy a place and then not be able to see it.

So which is better, rent or buy?

It all depends on YOU!

Never buy in a location where house prices have already peaked, like Mt. Kiara, Damansara, Tmn Tun Dr. Ismail – house prices in these places have stabilized over the years. But house prices in places like Kota Damansara, Kota Kemuning have risen 21% over the last two years. So, look for new housing development – these will be a wiser investment than well established townships.

But also be aware that having a house comes with additional financial commitment like repairs, maintenance and quit rents.

Renters, on the other hand, have some disposable income every month as rentals are usually lower than house installments. This allows the extra money to be channeled into other investments. Many couples, especially those who are still single and childless, go about it this way in letting their money grow at a faster rate in high yield investment tools. They then use the gains from these investment as their house down payment, thus lowering the overall loan amount and duration.

Ask yourself – are you read to commit a monthly payment for the next 25 years? Even if your purchase is for investment purposes, be cautious when buying because there is a glut of property out there and the place you buy may or may not flourish – you don’t want to end up holding an apartment worth only half its value 3 years down the road at Bandar Lagenda Nilai when the proposed university project by Dataran Mantin failed to take off and left all its buyers in a lurch!

Look into your future, especially time. If you’re on the move, its better to rent. Legal fees and paperwork can cost quite a bit, usually a few thousands.

But if you’re staying put, look a for a new township close to where you work – the prices will be lower, comparatively, and with room to grow.