Pandemic highlights need for personal financial planning

Knowing how best to spend, save and invest money may not have seemed a crucial issue during more prosperous times, but Covid-19 is now throwing the financial fortunes of Malaysians into disarray.

The pandemic is forcing people to acknowledge that financial literacy is an essential survival skill, without which hardships come, especially when crisis strikes, whether global or personal.

Financial literacy simply means knowing enough to make rational and responsible decisions in personal money matters, and a key part is having sufficient financial awareness to build an emergency fund.

People should be aware enough not to spend so recklessly that insolvency is the inevitable outcome, but also not to hoard their savings instead of investing them, only to lose everything in a dubious deal or outright scam.

The 2020 RinggitPlus Malaysian Financial Literacy Survey, released this week, reveals that Malaysians’ financial habits have barely changed since this time last year.

Just under half of respondents said they still spend exactly what they earn or more, while just over half revealed that they would not be able to survive more than three months on their savings in the event of job loss.

Over 60% of those under 35 are unaware of available debt restructuring and rescheduling schemes despite the pandemic giving rise to temporary measures such as loan moratoriums and debt repayment assistance.

The survey also shows that while 70% of Malaysians say their EPF will not be sufficient for their retirement, 45% of them have still not begun retirement financial planning. Indeed, the evidence is that many people manage to scrape through their entire life with little or no thought for their personal financial management.

But perhaps that is not entirely their fault.

As the survey puts it, “Despite every single adult being impacted by money matters regardless of profession, we aren’t sufficiently taught it at school in a meaningful or mandatory way. Financial literacy is given less focus than the usual languages, maths and sciences, but should at least be given similar billing to the likes of history, geography and art.”

“Responsible financial behaviour is critical for us all, because should the worst-case scenario happen, you don’t want to find yourself destitute,” Izlin Ismail tells MalaysiaNow.

The Universiti Malaya professor of banking and finance emphasises the need to build a financial buffer to enable people to do better than merely survive a prolonged crisis, but she knows that doing so is easier said than done for some.

“Responsible financial behaviour is critical for us all, because should the worst-case scenario happen, you don’t want to find yourself destitute.”

“Many people living on low wages, who probably don’t have any savings to begin with, can’t build these financial buffers because they simply don’t have the money to do it.”

She warns that it is difficult for adults to dig themselves out of debt once they fall into it. “We need to be taught from a very young age the importance of financial planning and having a budget,” she insists.

Izlin has trained teachers to run financial literacy programmes for school children, each course tailored to a specific age group. In many cases, children of low-income parents who took such courses became so clued-up that they started advising their parents on how to adopt better financial habits.

Izlin says it is not necessarily true that rural, lower income groups require greater financial literacy than urban, middle income groups.

“I have done research on consumer financial vulnerability, looking at debt. Debt in itself is not the biggest problem, but over-indebtedness – where you cannot afford to pay your debts – was not so prevalent in rural lower income groups, because they don’t have any formal debt. What they do have is informal debt, where they have borrowed from family and friends,” she says.

“The problem is not how much debt you have, but whether you will be able to pay it back if it increases. The long-term implications of excessive indebtedness can lead to social upheaval when the economy is disrupted, like it is now.

“In the pandemic you can see people scrambling to get their hands into their savings pots,” she says. “Once that pot dries up, then what? How long can we expect the government to keep topping it up for us?”

As the RinggitPlus survey says, “When our economy recovers, it is to be hoped that Malaysians will take their finances more seriously so that we can all be more prepared in case the next rainy season ever comes.”