Money smarts: How to Manage Your Money in Your 20s

In an age where life is always greener on other people’s social media feeds, the old adage of saving money goes against human behaviour and our basic social need for acceptance and status.

Additionally, the fact that almost 90% of Malaysians earn under RM5,000 in monthly wages amidst rising costs of living* explains why the level of debt is high amongst Malaysians**. In cases like these, the notion of building wealth becomes seemingly impossible.

Instead of comparing your life to someone else’s Instagram feed, we advocate being smart about minding your wealth. While earnings and risk tolerance differ from individual to individual, here are some handy principles to consider in your 20s for a financially secure future.

The 20s is the most important stage to build good money habits that can secure a sound financial future. While your earnings are at entry level, the good news is that your debt and expense levels are also relatively low. At this stage in your life, your priority should be putting your money to work and building your career. 

First and foremost, establish a budget. It’s always a good idea to live within your means at the start of your career. A rule of thumb would be to look at putting your money into various ‘buckets’.  Allocate at least 10% of your salary to build an Emergency Bucket of at least RM10,000. Following that, you could look at a further 15% for long term savings and investments (more about that later). Next, deduct what you need to repay loans or other debts. And from the remainder, create a budget for expenses such as transportation, food, mobile or internet bills, leisure activities, clothing and other needs.

If you have excess funds, you can then drop them into a fund for any big ticket items you wish to purchase, such as the down payment for a house, a car, further education, travel, etc. Prioritising your big ticket items is also important. For example, dropping your money into a house means that there is a good chance your investment will grow in the future, while a car depreciates the moment you own it. Also, consider that with ownership comes maintenance, insurance, taxes and other expenses that will crop up.

At the same time, find ways to minimise your spending, such as taking public transportation or cooking at home once a week. Think of ways you can make your hard earned money work harder for you.

Speak to your parents or a trusted adviser about managing your debt levels. Chances are you would have a student loan to repay, or may have begun a new home or car loan. Prioritise reducing your level of debt (as long as you have emergency cash reserves) as fast as you can. Have extra cash from an annual bonus? You could put it aside for that new gadget you’ve been eyeing, but also consider sinking it into your loan(s). The faster you get rid of debt, the more disposable income you will have.

Credit cards are great for establishing a credit history and for emergencies. However, it does increase your ability to spend on unnecessary items. Watch your credit levels like a hawk as the interest rates on credit card balances tend to snowball over time. Keeping your credit record clean also favours you for your future when you may need a good credit history, such as for a loan to start your dream business.

Use online tools such as www.calculator.com.my to help you structure loan repayments and savings or investment plans.

Insurance plans work best for those who have a full life ahead of them, simply because you have the luxury of time on your side.

As young people tend to enjoy good health, health insurance premiums also cost less and can save you from unexpected medical expenses. Look to see what your family has by way of health insurance, and also what your employer policies cover so that you don’t duplicate coverage, though there will be some overlap.

Keep yourself updated on your evolving insurance needs over the years as well.

While you’re busy thinking about building your career, it’s strange to have to think about retirement, but this is necessary. Perhaps your goal is to retire earlier than the norm to pursue a passion project. If so, there’s no time like your 20s to begin saving for your retirement, because time and the magic of compounding interest (an interest which earns interest) are on your side.

Begin by determining when you wish to retire and how much you potentially need for a comfortable life after retirement. There are online tools that can help you calculate this by prompting you to input your salary amount, the number of years to retirement and other details. As of 2017, the government has also offered an incentive of RM1,000 to help start off your Private Retirement Scheme (PRS), so do some homework to discover which scheme appeals to you and get it going.

An investment mindset could make all the difference in how wealthy you are.  Apart from setting aside funds for a comfortable retirement, you could create an investment bucket for growing your money. A good kickoff point is to look at a starting investment capital which could be anywhere from RM1,000 to RM10,000.

The next step is to look at different means of investment which can bring earnings in the form of interest. This could be simple and low risk such as putting the money into a fixed term deposit or purchasing unit trusts or bonds. There are more exciting options such as purchasing equities from the Kuala Lumpur Stock Exchange, trading in gold or currencies. Because time is on your side, you can invest in more volatile investments such as shares because you can afford to wait out slow economic cycles and recoup any losses.

There are different strategies for investment depending on how risk averse you are. Just remember to keep diversifying your investments as you go along. Look out for our future installment of Money Smarts for those in their 30s and 40s.