How to Manage Our Personal Finance
The discoveries made by the Financial Education Network revealed several chilling facts. One-third of Malaysians rated themselves as having low financial knowledge. 10% admitted that they are not disciplined in managing their financial affairs. Only a quarter could sustain their living expenses for at least three months if they lost their income. Less than 20% have life insurance or takaful protection. And more than half of Malaysians have difficulty raising RM1,000 in an emergency!
This may not come as a surprise considering financial literacy was not taught at school previously and most families shun any talk about money at home. However, as Muslims, we should strive to be at the level to be able to help others instead.
“Righteousness is not that you turn your faces toward the east or the west. But [true] righteousness is [in] one who believes in Allah, the Last Day, the angels, the Book, and the prophets and gives wealth, in spite of love for it, to relatives, orphans, the needy, the traveller, those who ask [for help], and for freeing slaves; [and who] establishes prayer and gives zakah…” [Quran 2:177]
As the saying goes, one cannot give what one does not have. However we can begin making sensible steps to financial responsibility and subsequently, improving our financial well-being.
The first step is to ensure that we have a financial blueprint – a financial plan of sorts. It may vary from one person to another, however an efficient way of organising this is using the SMART (specific, measurable, attainable, relevant, time-bound) guidelines. The goals should consist of a long-term (retirement), medium-term (e.g. marriage) and a short term (e.g. emergency fund) plan.
Once this has been completed, it would be wise to establish a financial statement and determine our current net worth: total assets minus total liabilities. Based on the data, we can determine the level of assets (e.g. savings, shares) or liabilities (e.g. credit card debt). For cash flow analysis, we need to use a budget (at least initially) to track our expenses so that we would not spend more than we earn.
The next would be paying ourselves first. Once we receive the salary, deduct a portion, say 10% to 20% of the amount, and transfer it to a separate account. A popular choice would be Amanah Saham Bumiputera or Tabung Haji. Some employers even offer the convenience of making the deduction automatically. That would be the best method. Else, opt for automatic debit through Internet banking facilities.
This is meant to foster a saving habit, so start now even if you think your income is too low. Thus, our expense is the remainder of our income subtracting the savings. The pool of cash that is set aside and could then be used as the emergency fund or for investment capital later.
Lastly, set up an emergency fund worth three to six months of income. This fund acts as a cushion in the face of unforeseen calamities. We will be more at peace and psychologically prepared if we have the fund (also it improves the quality of our sleep!).
This fund needs to be kept as liquid assets. As the main objective is to preserve the capital, the return on investment is not a primary consideration. Again, an Amanah Saham Bumiputera or Tabung Haji account could be the best for this purpose as it has low risk, high liquidity and offers reasonable returns.