Three key elements in savings

Source: The Star Online (Yvonne Tan)

So, you’ve worked for some years now. How do you know if you are doing “well” when it comes to saving your money for a rainy day? Is there a magic number which tells you how you are faring?

“As a rough guide, one should set aside 20% to 30% of one’s net income every month for savings,” says licensed financial adviser Jeremy Tan of Standard Financial Planner.

“Saving is important because when you save you are preserving wealth for future consumption,” he tells StarBizWeek.

Generally, there are three key elements to one’s savings.

“If you have these in place, or are on your way, you are faring ‘well’,” Tan says.

“First, one should have what is called an emergency fund, this should equal at least six months of your current net income.

“This fund is set aside in the event you lose your source of income unexpectedly, so this should keep you going until you find another job,” he said.

Next is your life-risk fund, which is basically funds to be used when a person loses the ability to earn an income, i.e. becomes paralysed or ill.

This is normally accumulated via an insurance policy. Here, one should ensure that the funds are equivalent to at least five years’ annual income, according to Tan.

“So, for example, if you earn RM5,000 a month, which translates to RM60,000 a year, then you should buy a RM300,00 policy,” he says.

Third, you should set aside some money for generally safer investments such as property and blue-chip stocks.

“This should garner you some decent returns but you have to be careful of your choices,” he says.

“Following these principles is a good start to securing your stash,” Tan adds.

Comparing the amount you have tucked away with that of individuals of your same age simply to gauge how “successful” your savings strategies are is not a good benchmark, says another industry player.

“People like to do that but there is no point in comparing yourselves, say, if you are a 30-year-old to another 30-year-old, because every one has different goals and different lifestyle, not to mention different income levels” says Keith Hiew, wealth adviser at Freebase Wealth Advisors Sdn Bhd.

“There is no golden rule that says that at age 30, you should have this amount and so forth. You save within your means but you have to save,” he says.

“You know you are saving ‘enough’ when that savings are able, in your comprehensive and integrated financial plan over your lifetime, to cover your education, retirement and other goals,” says MyFP Services Sdn Bhd financial planner and managing director Robert Foo

“The wisdom in financial planning is save what you have first and then spend the rest,” he says.

For R. Kumar, a single, 30-year-old engineer who earns about RM40,000 a year in net income, savings are top priority, simply because “I cannot afford not to save.”

“I scrimp to save and invest a little every month but I make sure I do because I know my Employees Provident Fund (EPF) money is not going to be enough for my old-age,” he says.

A recent survey by the EPF showed that around 90% of the 5.7 million active members had less than RM100,000 in their accounts and more than 70% would have exhausted their money within three years of withdrawing the lump sum upon retirement.

Generally, Malaysia enjoys one of the highest savings rates in the world at 34%.

In the United States, during the economic boom that took place between 2005 and 2008, a credit-fuelled consumer spending craze effectively brought the US savings rate to zero.

Ahmad (not his full name), a 40-year-old private school teacher says he supplements his income by giving tuition. “The extra income earned is saved and invested,” he says.

“Based on my income alone, I am not able to save much, that is why I do extra work.

“You’ll be surprised to know how much I have saved over the years,” he says gleefully.