Should you spend or save?

Financial literacy of Malaysians is low. Research shows that most Malaysians do not have enough for retirement and many millennials have high credit card debts. What is the root cause? The saving rate of Malaysian is too low. Malaysians are spending more than what it should be. Malaysians are also very optimistic about their future as they just believe that they will have enough in the future.

In order to decide whether you should spend or save, there should be a financial plan in place. Understanding your future earning capability is hence very important. Say for example, if one can only work until age 40 and will spend another 30 years not working, one needs to save more compared to the one who is working till age 60 and spend 10 years on retirement life.

Many Malaysians ignore the importance of financial planning until they are too old to work or stuck with heavy debts. At that time, it is too difficult to resolve the financial issue. When one is too old to work, can he still reverse the time to earn more or save more? When debts are piling, where can he gets money to pay off the debt?

While having financial plan in place will ensure one has the clarity how much he / she needs to save per month to have comfortable retirement life. He / she will then able to judge what item he / she can spend on. For example, if one realized that he needs to have RM 1 million to retire and he has 20 years’ time before he retires, he needs to save RM 4,167 per month or invest RM 1,700 per month at 8% annual return. If he cannot save and invest RM 1,700, he needs to find ways to increase his income or reduce his expenses. He then knows what he can spend per month. If one has no clarity of what amount he needs to save monthly, he is likely to spend more. It is not when the earning capacity is increased only one needs to do financial planning.

It is also not when there is saving only one needs to start planning. We don’t wait for problem to arrive only we are thinking about the solution, it is often too late and the problem might be too difficult to solve. We need to start planning to avoid the problem!

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