Money Matters

1. Not everyone saves for a rainy day. For those who do, we can distinguish them into two broad categories.
2. The first are those who save after they have allocated expenses away and only then try to set aside for a rainy day on whatever little that remains. That will be akin to the equation of Savings = Income – Expenses.
3. Unfortunately, this type of saving is flawed and sadly, most people fall into this category. Worse still are those with inconsistent income who can never save systematically.
4. The other kind employ the concept of Income – Savings = Expenses. This group live within their means. Frugality is practiced to keep within the planned expense. They save first and then decide what commitments to enter into later.
5. When people practice financial discipline, money is never a problem. However, many spend first and depending on how high that commitment is, only then decide whether they can save any money at all.
6. Back to savings. Just how much should one set aside?
7. Well, the amount depends on the following 3 accounts being Emergency Fund, Consumptive Fund and Retirement Fund.
8. Set aside between 3 – 6 months of expenses as Emergency Fund. This acts as a form of retrenchment back-up so as not be pressurised to take the first opening that comes when in-between jobs.
9. Another approach is to save enough to feel confident. If that amount is Rm10k, then that is the amount one should strive for. If RM15k makes you feel secure, then that should be the goal. Although the approach is not mathematical as Point 8 above, it still does the job.
10. Ideally, this amount should be kept separate from the regular salary/income account so as to ensure clear demarcation of funds. The Emergency Fund should be left liquid either as a Regular Savings Account or at most, a Fixed Deposit Account for tenure of no more than 12 months.
11. Next is to create the Consumptive Fund account. As the name suggests, this amount is set aside to be spent once the desired amount is achieved. Big ticket items such as a new car, house, exotic vacation, etc are just some of the things that many of us desire.
12. However, most do not set aside funds in a systematic manner and end up taking out whatever savings they have to finance these purchases. As a result, should an emergency occur, things become very sticky.
13. The savings timeline in this account can be spread between 12-36 months, depending on the quantum. Once the targeted amount is achieved, withdraw the funds and spend it on the item.
14. Due to the longer savings timeline, it is encouraged to place these funds in semi-liquid form such as Fixed Deposit or in low risk Unit Trusts such as Money Market or Bond Fund.
15. Retirement Funds should be placed in illiquid instruments that pay out better returns due to the longer savings timeline. For the majority who are employed, one such option is the EPF.
16. However, due to relatively low contribution rates, the final amount might not be sufficient for a retiree to live on comfortably. Hence why voluntary savings schemes such as Private Retirement and Annuities are additional tools towards a decent Retirement Fund.
17. In a nutshell, the 3 separate funds play different savings objectives. While an Emergency Fund focussed on liquidity, the Retirement Fund concentrated on generating returns. A compromise in the form of timeline trade-off is needed to achieve these objectives.
18. The Consumptive Fund however, is a mid-point since it focuses on various items with differing timelines. It balances returns with matching tenures.
19. In conclusion, make a decision to save an amount on a consistent basis. A starting point between 5%-10% of gross income can be the first step towards gradually setting aside a very significant 25%. It is said that practice makes perfect. That saying applies here too.
20. While it is easy to say, the same cannot be repeated when it comes to execution of a plan. This requires determination and discipline. Only when there’s extra revenue, is there room to manoeuvre for Investments.