7 lessons on how to save wisely

Saving money is simple, but can be challenging at different stages in your life. So beware of these money pitfalls and how to avoid them.

1. Stagnating income

Increasing your income can be done by advancing your career, investing in your own self-development, and creating additional income streams leveraging on your strengths.

A higher income allows you greater flexibility to save more after deducting basic living expenses. There are of course those who manage to save tremendous amounts even from a modest income.

And also those with five-figure monthly incomes who cannot seem to save anything.

2. Recurring expenses

It is easy to sign up for various products and services i.e. cable television, mobile phone plans, Spotify. And then there are major purchases on credit i.e. home loan, car loan, furniture instalment plan.

These recurring expenses are a continuous drain on your financial health. All the small tens and hundreds of ringgit add up very quickly. Recurring expenses have a significant effect limiting your budget and savings/investment funds.

Think twice before paying for anything that will be a recurring expense of six months or longer. Pay cash and in full. Else take the time and effort to save up for it. Know the financial impact of each ringgit spent.

3. Failing self control

We live in a world bombarded by advertising. Many things look appealing to the eye and appeal to impulse purchases. Instantaneous gratification seems like a norm with seemingly everyone with the latest smartphone, branded goods, and a new car.

However, is it really important? Is it a need or a want? Will it give significant value to your life in the medium to long term? As we get older (and hopefully wiser), many of us realise that material things bring little, and short term happiness.

Take at least a few days to think and consider your planned purchase. Consider if there are better value options which are just as good and at half the price. Learn to shop around and do not be shy to bargain.

4. Swimming naked

Warren Buffett once said, “Only when the tide goes out do you discover who’s been swimming naked”. While Buffett was largely referring to businesses and investing, this applies to our daily living too.

Businesses: Companies, especially financial institutions and insurance companies, are under-reserved. It is not apparent during good years until a financial crisis occurs.

For example, the sub-prime mortgage crisis came close to taking down global banking. In times of crisis, you will see which companies are well run (or not).

Investing: Your investments look fine during the good years and flaws are not apparent. But be prepared for when there is a significant market downturn.

For example, Buffett’s Berkshire Hathaway faced downturns of up to 50% four times so far. Are you prepared to face a major correction which will inevitably happen?

Daily living: You may not run a business or make significant investment decisions (yet). But all of us can take heed of this principle.

If you lose your job or face a sudden major expense e.g. a family member’s illness, do you have emergency/backup funds available? A good rule of thumb is six-12 months’ worth of expenses in an easily accessible no-risk account.

5. Ignoring insurance

Risk management is about being focused on covering your needs in events which would otherwise have a significant negative financial impact.

Getting adequate coverage begins with knowing what you need. The basic guidelines are:

  • Students and the unemployed: Your focus should be on medical insurance to ensure that you do not become a burden to your loved ones.
  • Employed: You should focus on income replacement to ensure you and your family are taken care of in the event of disability, critical illness, or death.
  • Retired: You may or may not need insurance. Insurance can be used to supplement your income if necessary e.g. death and your spouse losing most of your pension. Or for estate planning purposes, a fair, fast and tax efficient way to leave a gift for your spouse and children.

6. Ignorant investing

Money games seem like an excellent deal – “investing” a sum of money and making 20% monthly returns. But we don’t know how many people will lose huge amounts of money when a Ponzi scheme collapses. Time has proven that hot “secret insider” tips in stocks and forex may lead to losses.

Investing is a skill that can give you decent returns provided you have an edge.

  • Know your circle of competency. If you don’t know what your odds are, your risk-reward ratio, and what factors affect your investment returns, it’s outside your circle.
  • Know yourself. What investments suit your personality, commitment, and time availability. How much can you afford to invest, and possibly lose?
  • Know your world. The basic entry level is knowing what is happening both in Malaysia and globally in. Separate facts from fake news. Listen and learn, but form your own insights.

7. Not talking about money

Some people are just uncomfortable talking about money (especially if they feel they don’t have much of it). Many feel it’s personal and have some irrational fear that others will treat them differently or become a target of robbers.

The truth is the “personal” part of personal finances is about individuals. You need to connect with each other on a personal level. If you are married, you become one with your spouse which includes working on aligning financial goals.

The best way to learn is through the accumulated experiences of others instead of paying the expensive costs of making mistakes. Personal finances advisors can save you a great deal of time and money with advice and strategies that fit your current situation and financial goals.

Do ensure that you get an advisor that meets your needs by having a trial period first, especially to make sure that he/she is not there to just push you insurance/unit trusts/etc.

This article first appeared in https://mypf.my

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