Why an understanding of financial management is important

For many of us who don’t have savings, we have to depend on EPF for our retirement. Things get scarier if we do not own the property we live in when we retire. By then, without a regular income and still needing to pay a monthly rental is going to be a nightmare. One major reason for this is the lack of financial management understanding.

In fact, most Malaysians are still stuck at the awareness level instead of understanding it better. Perhaps it should be mandatory for university students to take a module in Personal Finance Management. Our Finance Minister Lim Guan Eng said one of the main reasons why many Malaysians end up as bankrupts is because of low financial literacy.

A 2014 report by S&P Global Literacy Financial says the financial literacy rate in Malaysia is only 36% while most developed countries are at 59%. Guan Eng said 100,610 Malaysians have been declared bankrupt between 2013 to 2017.

Based on EPF estimates, a person needs RM240,000 by age 55 to retire comfortably. However, active contributors aged 54 only have an average of RM214,000 based on the EPF’s 2017 report. Guan Eng says two thirds of contributors aged 54 only have a maximum of RM50,000 in their EPF accounts as of 2015. Needless to say RM50,000 is insufficient and could run out within the first five years of retirement.

How does one end up becoming a bankrupt? It’s extremely scary if your money runs out within 5 years because Malaysians are now living much longer lives. As we are living longer, we had better prepare more for our retirement. Imagine if we rent a room for RM500 per month, that’s RM6,000 per year.

Your RM50,000 in EPF is merely enough to last 8 years even if we only use it to pay for rental. Perhaps living in a small town will stretch this farther but this really depends on whether that’s the quality of life we aspire to. However, if we have a fully paid for home by then, even if it’s just an apartment, that RM50,000 can then be used for other monthly living expenses. How much would your apartment be worth 30 years later? Actually, quite a lot because the value of money gets smaller over time.

This article first appeared in kopiandproperty.com

Charles Tan blogs at property investment site kopiandproperty. He dislikes property speculators and disagrees that renting is better than buying. He thinks it’s either property or poverty. He is presently the CEO of an auction house auctioning assets beyond just properties.