In a news piece from the end of last year, according to the Malaysia Department of Insolvency, almost 60 percent of Malaysians who were declared bankrupt were between the ages of 25 and 44. It was found that the top four causes of bankruptcy are car loans, personal loans, housing loans and business loans.
According to the Malaysian Department of Insolvency, personal bankruptcy is declared by the High Court against someone who is unable to pay off debts of at least RM50,000. In order to prevent bankruptcy, you need good personal cash flow along with strategies to manage your personal finances.
KC Lau, a financial educator, shares about having good personal cash flow and other tips to manage your finances.
1Twenty80: What does ‘good personal cash flow’ mean?
KC Lau: It is a simple formula of I – S = E
I = Adequate income
S = Meaningful savings. I recommend to at least aim for 30 percent saving rate
E = Have enough remaining for expenses and obligations
1Twenty80: How can we achieve good personal cash flow?
KC Lau: Focus on the left-hand side of the equation, namely, I and S. Put your effort and time towards increasing your income by improving your productivity, and in turn, increase your value creation.
Then, it is important to have a system in place to save a big chunk of it that’s at least 30 percent and invest for long-term returns.
1Twenty80: How much savings is ‘enough’?
KC Lau: Definitely, 30 percent. You see, EPF (Employees Provident Fund) already saves 11 to 23 percent of your income but it is rare for people to retire on their EPF funding alone. Thus, you need to do more on your own with your net income. Learn how to invest it or deploy the capital that can acquire great assets that produce long-term sustainable income.
1Twenty80: Why are savings important?
KC Lau: Your savings are fundamental in wealth accumulation. Imagine if a business can’t make ends meet. It will eventually wind up closing. This is the same for an individual. If you don’t have savings, you’ll spend everything you earn, or even more. One day, you will wind up broke.
1Twenty80: How do we draw up a budget and most importantly, stick to it?
KC Lau: A budget is a plan. It is like going on a trip. Without a plan (like buying air ticket, which hotel to stay, where to visit), you will end up ineffectively using your resources (time and money). Go without a budget for an extended period of time and you will end up lost in an ocean.
1Twenty80: What is a good way to ensure that you won’t be tempted to touch your savings?
KC Lau: Actually, the cure is to educate yourself and have a new mindset.
I understand that people find it challenging not to spend the money they accumulate. You can rely on some system that put the money out of sight. EPF is a good example of this. You can do regular unit trust investments (that deduct your saving accounts on a fixed day each month), take an ASB (Amanah Saham Bumiputera) loan, or purchase a property. These programs force you to fork out money to put aside for savings and investment.
1Twenty80: What are common financial challenges of Malaysians?
KC Lau: I believe that it is the lack of financial literacy. We are not taught in school how to manage our personal finances. Therefore, if you don’t realise you need to learn this, you will never do it.
1Twenty80: What is the importance of financial back up?
KC Lau: It provides flexibility and stability to your finances. You will be ready to act on the right opportunity. During bad times, you will not be required to liquidate your investments at a loss which is likely to be ‘underwater’ or in laymen’s terms, unprofitable.
1Twenty80: Going back to good personal cash flow, how does a credit card factor in?
KC Lau: Credit cards provide the convenience, plus all the perks and short-term zero-interest financing. Personally, I use it extensively since it records all my expenses which makes it easier to observe and analyse.
1Twenty80: What are the benefits of having a good cash flow?
KC Lau: Having a good cash flow means you’ll be able to:
- Accumulate wealth
- Achieve your financial goals
- Achieve financial independence
- Be the hero of your family instead of a parasite
1Twenty80: What is your advice to our readers about having a good personal cash flow?
KC Lau: I’ll keep it short and just remind them of the two figures to achieve which are:
- 30% savings rate
- Over 10% investment returns per year
References: Malaysian Department of Insolvency; The Star Online.