When it comes to personal finance, a lot of advice I find centers around investing. The idea is to invest as much as possible, as early as possible. With time on your side, with the magic of compounding, your investments will balloon up handsomely. This is all good and well, if you have the resources to do so. If you’re most people, you’re unlikely to have any excess funds at the start of your journey to do any investing.
Let’s look at the numbers. Bank Negara considers RM2,700 as the monthly living wage for single adults living in KL. A living wage implies that individuals, or families are able to cater for their basic needs and be free from severe financial stress. Now take that, and the fact that the median monthly income for fresh grads with a degree is at RM2,207. That’s almost a RM500 shortfall from the prescribed living wage. With an average of around 5% in annual salary growth a year, it’s going to take about seven years before getting to the living wage level. That’s not even taking inflation into account!
Hopefully not everyone has to wait seven years to get there. People tend to change jobs every now and then, which really helps in giving an extra boost to your income.
But the point that I’m trying to make is that – unless you’re staying with your parents, and have a few basic necessities taken care of (nothing wrong with that, honest!) – you’re going to be squeezed a little at the start of your journey. So you shouldn’t think about investing from the get go.
Do not fret!
This doesn’t mean that you can’t begin learning how to better manage your money. I believe, for many of us who are starting out, you should follow, in order, these three steps, when approaching money management.
Step 1: Budget! Budget! Budget!
Look, life is tough when you’re earning a small amount in an expensive city. I’ve been there, it sucked. There’s not a lot you can do about it in the near term. But what you can do, is to create a budget (here’s why). Write down all your planned expenses for the month against your income. Be sure to identify your fixed and your variable expenses.
Then, most importantly track your expenses and review them against your budget. Keep doing this and find areas that you can improve on. Are you spending too much on wants instead of needs? Tracking your expenses help you figure this out. Whilst it’s okay to indulge yourself every now and then (because hey, we all deserve a good time), it’s important to make sure that you’re not overdoing it.
Step 2: Save! Save! Save!
But hang on, if you’re already scraping it through, how do you expect to save?!
Well, saving is really a habit, more than anything else. Whilst it’s nice to be able to save a fixed amount every month (if you can afford to, you should totally do it!), most times, it’s probably not something you can do. So here at MoneySmarts, we really, really encourage you to start with what you can. That loose change in your pocket? Dump it in a coin-box somewhere. Loose one ringgit notes in your wallet? Chuck that in the coin-box too! Save like a Smartie! After three months, take it to the bank, put it in an account that’s separate from the one you use for your day to day expenses. After a while, you’d be surprised by how much you’ve saved up.
The idea is to get yourself used to saving money as often as possible. After all, I believe that if you can’t get into this habit when you’re earning little, you’re not going to automatically good at it once you earn a lot.
So get, started, and start saving, your small change will make a big difference.! Remember, sikit-sikit, lama-lama jadi bukit. Focus on building your savings first. Start with a small goal, and build it up as you go.
Step 3: Invest! Invest! Invest!
I believe that investing should really be the last thing that you focus on. In investing you stand to lose some or all your money, so you shouldn’t really do it, unless you have some savings on the side. Never, and I mean this, NEVER, use money that you’ll need in case of an emergency. You could stand to take out less than what you put in, and it’s usually not money that you’ll be able to redeem immediately.
When it comes to investing, there are a few approaches, you could do it yourself, or you could get someone to do it for you. Pro-tip, if you’re looking to do it yourself, and don’t have a lot of time to pick stocks or whatever, consider buying into ETFs, we’ve got a few on Bursa, and some brokers even give you access to foreign markets, where there are a ton of ETFs to choose from. Hey, if even Warren Buffet recommends it, who are we to argue?
And that’s it really! Money management shouldn’t be hard, and you shouldn’t feel as though it’s completely unavailable to you. Though investing is a component of money management, it’s hardly the most important. What’s most important, is how you manage your day to day cashflow. This is something everyone can do, and it’s something that everyone can do today.
So don’t delay, start tracking your expenses, save what you can, then we’ll talk about investing.
Got any money management tips? How do you do it! Share with us down in the comment section below!