Planning vital to keep financial stress at bay
> Almost four out of five Malaysians have no savings to fall back on in case of loss of income
KUALA LUMPUR: Malaysia may be one of the few countries in the world which is still seeing good growth when it comes to gross domestic product (GDP), but with household debt standing at 89.1% of GDP and almost four out of five Malaysians having no savings to fall back on in case of loss of income, every working adult could face financial stress at some point.
Credit Counselling and Debt Management Agency (AKPK) financial education manager Nirmala Supramaniam said even though Malaysia’s household debt is high, this does not mean that the people are in trouble.
“There are no statistics to say that we’re financially stressed because stress is a feeling. It could be that people have properties and assets, which are not defined in cash value. Commitments are high but people are still paying (their loans) so you can’t define it as trouble yet, but what can lead to trouble is if there’s a change in your income, it drops and you don’t have a contingency plan,” Nirmala told SunBiz in an interview recently.
In aggregate, most household debt was undertaken to finance house purchases, according to the Khazanah Research Institute report, The State of Households II. Nonetheless, the overall household balance sheet is still healthy, as households continue to accumulate more financial assets than debt.
Nirmala said financial stress can be felt when people are worried that they do not have enough money, they might miss their loan payments and not having enough savings for an emergency. The top reason for default or debt problems is poor financial planning.
“When taking a loan, people usually look at how much is being offered but we should look at how much we can afford. Affordability is important so you
HOW TO DEAL WITH FINANCIAL STRESS
Admit Acknowledge that when you cannot afford to pay your instalments and you don’t have savings, these are signs of financial problems.
Analyse Study how much you owe, your loan balance, monthly payments, loan tenure, cash flow, detailed budget. You have to track your expenses daily to see how much you’re spending. When you track, you can see where to reduce your spending and use that money to pay your loans.
Act on it If you have problems paying your loans, talk and negotiate with your financier. Deal with legal institutions as there are third parties who claim that they can restructure your loans for a fee.
Financial counselling The Credit Counselling and Debt Management Agency (AKPK) offers financial counselling. Since its inception up to July 31, 2016, 460,031 individuals have attended AKPK’s counselling services and, from that, 156,892 individuals have applied to enrol into its Debt Management Programme (DMP). As at July 31, 2016, 10,869 cases had successfully exited from DMP with RM443.8 million settled. can assess how big a loan you can take. There’s a lack of planning for the long term and many of us don’t do those calculations. We will just cross the bridge when we come to it. No planning, no budgeting, no cash flow management, all these come under poor financial planning,” she explained.
When people do not plan, they tend to overborrow, Nirmala said, adding that when giving out loans, banks will look at 60% of one’s income but the ideal debt-to-income ratio should be below 40%.
A major component of financial resilience is savings.
Nirmala said the lack of savings can cause financial stress as many people are living month-to-month, within one’s means for survival and having nothing extra.
Bank Negara Malaysia’s Financial Inclusion and Capability Study found that only 6% of Malaysians can survive more than six months, and 18% up to three months, after losing their main source of income.
“Most of the people who come to us (AKPK) borrow when an emergency happens. That’s when they look for fast cash, personal loans. Car breakdown, hospital emergencies ... these small emergencies make you start to borrow and eventually it grows big,” said Nirmala.
She said people go through the financial problem phase in life but how fast a person takes action is what makes the person different.
“You should immediately move on, seek help, seek advice and change your habits,” said Nirmala.
Financial Planning Association of Malaysia CEO Linnet Lee said financial stress affects a person’s personal life in terms of relationships with family, friends and colleagues, as well as work life in terms of productivity, absenteeism, health and financial integrity.
“Among Malaysians, financial stress is high, looking at household debt. Those who are in the 89% will have a certain amount of financial stress, especially those with money woes,” Lee told SunBiz, adding that the high household debt is an alarming situation due to the current economic climate.
“Although a lot of household debts have assets like cars or houses to back them up, looking at the economy now, a lot of people are finding it hard to pay bills. If you can’t pay, you may lose your house. That is worrying,” said Lee.
Consequences of severe financial stress include suicide due to high debts, broken relationships due to arguments over finances and young people going bankrupt early on in their career.