The upcoming implementation of the goods and service tax (GST) has been widely discussed from many angles. But to what extent will it affect us financially? No one can really be sure yet.
According to the Malaysian Institute of Economic Research, the economic outlook for 2015 will likely be mixed due to the fall in crude oil prices.
As it is, the rising living costs and removal of fuel subsidies have caused much concern among urbanites. On top of that, there is much speculation about the stock market performance this year. Could another global financial crisis be around the corner?
With all these factors to consider, the big question we need to ask ourselves is: Are we financially prepared for 2015?
Firstly, let’s skip that entire information overload.
The key to emerging from 2015 financially sound is to focus on one’s personal financial situation. Refrain from paying too much attention to the areas outside your personal influence as it may derail you from what actually matters. Instead, focus your attention on areas within your personal influence and aim to make a difference there.
By following these nine guidelines, you should be able to get your personal finances on track and withstand any unpredictability that the year brings with it.
Nine money optimisation guidelines
1. Start saving effectively. There are two methods of saving. One is where you spend off your monthly expenses and save what is remaining. As you may have guessed, this is an ineffective way to save.
More so, with the implementation of GST and the ensuing higher inflation rate expected in 2015, monthly household and personal expenses are bound to increase substantially – possibly leaving little to no savings.
A more effective approach is to save first and then spend the balance. Set a goal and force yourself to put aside a portion of your income to reach that goal before using the remainder for your expenses.
2. Actively look for suitable investment opportunities. The best return on investment (ROI) is one that beats the inflation rate. However, as long as you put your money into something that is performing better than the current rate, you are already optimising your money.
Set a bar for your ROI. For example, if you are looking to invest money from a fixed deposit, logically, your goal should be to look for something at least with higher returns than the fixed deposit.
On a more cautionary note, the investment environment for 2015 is expected to continue being volatile and unpredictable. Therefore, avoid high-risk investment deals such as small-cap shares, speculative properties and high risk unit trust funds. Look for opportunities that have a medium to low risk factor to avoid serious losses to your capital.
3. Compare and analyse investment options. Make apple-to-apple comparisons with other similar investment funds. If another fund is doing better than your current one, don’t hesitate to jump ship. Optimising your money is about tapping into the best returns possible (while minimising your risks).
4. Cut your losses and move on. Unless you are very lucky with your decisions, you are bound to come across an investment that may lose money. When this happens, it is essential to cut your losses and move on to something that is better performing.
Many tend to wait it out, hoping that the market will rebound, only to end up suffering from bigger losses, and losing out on the opportunity to optimise their money further.
5. Keep a cash reserve of at least six months of your expenses and monthly commitments. For retirees, put aside a cash reserve of at least three years. Cash reserves are important to grant you a holding power over your investments. Say, for example, you happen to buy into a solid investment at the wrong time, just before it takes a steep plunge. Without a cash reserve, you would have no choice but to sell out at a big loss should you be in dire need of money. But if you have holding power, you would be able to hold your investment and sell it off at a high profit – at best – or at a smaller loss – at worst.
6. Diversify your investments. Don’t put all your eggs into one basket. This may sound like a no-brainer, but you’d be surprised. It is almost human nature to put all your trust and money into one proven market. However, doing so opens you up to a big risk. What happens if that one market takes a sudden hit? All your work of optimising your money thus far would go down the drain.
Diversify your money and risk factors across other investments such as bonds, stocks, real estate, cash and commodities. That way, if one risk factor translates to reality, not all your investments would suffer the blow.
This strategy is especially important when the investment environment is highly volatile and unpredictable. Six months ago, no one would have predicted that crude oil prices could drop below US$50 and cause chaos to the financial world.
7. Always invest prudently and calculate your risks. Does your investment guarantee the return of your capital? Does the government regulate it? If it is a foreign government, is it stable? Is there a trustee in place to hold your investment? Do you know what percentage of your investment the trustee holds? All these are matters you should investigate and probe into before entrusting your money into an investment.
8. Minimise your insurance premiums. With the numerous insurance plans and even more convincing agents out there, we could very well be putting more cash than we should into insurance. As a rule of thumb, the total insurance premiums you pay in a year should not exceed 15% of your gross annual income.
9. Contain your mortgage interest cost. Mortgage interest rates are hard to predict, and could affect your finances drastically if left unnoticed. Housing loan interest rates are expected to increase in 2015. You can counter the impact by opting for a fixed interest rate loan. While the interest rate would be slightly higher, it will remain secure throughout your repayment, which will be beneficial toward your long-term financial planning.
When interest rates do rise, you can choose to pay a higher monthly instalment to ensure that your loan can be paid off within the original period. This, however, should be a carefully-considered decision as it could affect your cash flow and your money optimisation. Alternatively, consider using your liquid investments that are earning lower investment returns than the prevailing interest rate to pay off your mortgage.
To conclude, I would like to reiterate that the above pointers act as a general guideline for the upcoming year. While it is advisable to follow the financial recommendations mentioned here, everyone has different lifestyles and financial goals that they want to achieve.
No cost is too small to overlook. A small mistake now could affect your finances significantly during your retirement years.
To ensure you reach your financial goals smoothly, it is advisable to develop a tailor-made and holistic financial plan to help you optimise your money and meet your financial goals.
With that, I wish you all the best for your money optimisation in 2015!
Yap Ming Hui (firstname.lastname@example.org) is a best-selling author, TV personality, columnist and coach on money optimisation. He heads Whitman Independent Advisors, a licensed independent financial advisory firm.