By Kian Ng
An economic downturn is something we can’t avoid right now. Learn what you can do to ensure smooth sailing through tough times.
“2020 is a bad year for me!”
“I wish I could restart my 2020 to deal with my finances differently!”
“How would my finances look like in the second half of 2020?”
Many Malaysians are asking these questions. A significant number have already been impacted by income loss, pays cuts, and perhaps retrenchment this year due to the pandemic. Financial issues such as debt restructuring, tight cash flow, and lack of emergency funding, are cropping up often enough to begin looking like an expected norm as people are focusing more on the problems rather than seeking solutions for their current financial situation.
Since we can’t turn back time and restart the year, it is important to look at this matter of financial preparedness more objectively to seek for solutions out rather than lingering on things that are not able to be reverted.
The key point is – it is never too late to realize the situation and take the action to solve it even at the cusp of an economic downturn.
Don’t cry over spilt milk.
Here are some simple and proactive tips that you can take when addressing financial issues, especially during an economic downturn.
1. Review where you financially stand
The art of managing finances well starts with identifying where is your current financial standing. This is the most important step, yet most people are not able to get it done correctly due to busy work schedules and many more other excuses. Research shows many people failed to improve their finances was due to failure to identify where they are right now and where they wanted to be in short term or longer time frame.
The analogy I always put forward before I start my meeting with clients is to think of navigation apps such as Waze. In order for it to function correctly, you need to provide it with your original location and destination. From there, the app will provide you with navigation and even a time estimate for you to reach your destination. The same applies to your getting your personal finances in order.
To know where you currently stand financially, first start by finding out the truth about your current cashflow. Find out accurate numbers regarding your income, savings, and expenses. Nowadays there are many expense tracker apps that can help you with this. By identifying your cashflow, you have visibility over your spending on your wants vs needs, and whether you may be living beyond your means.
Next, list down all your known assets. Identify how much you have in liquid assets, investment assets, and fixed assets. It allows you to see some indicator of whether your assets are easily liquidated in the event of emergency, whether you are too much leaning towards fixed assets investing and leaving you truly little room for liquidity.
Thirdly, something many people neglect, is to list down all your known liabilities. This means any loan repayment commitments, including all credit card debts, personal loans, hire purchase loans, study loans, and mortgage loans. This helps you identify the financial commitments you have to bear regardless of your income. Often, there are people who have been unwisely building up liabilities by passing debt to and fro between credit cards and personal loans. In tough times, the commitment to repay may be out of your reach and be aware that interests can go up to 19.56% per year!
Knowing your cashflow, assets, and liabilities will help you identify your current financial standing. There are several possible scenarios you may find yourself in such as deficit cash flow scenario whereby your expenses are more than your income, or surplus cash flows scenarios but yet unable to save. Each and every possible scenario throws up indicators for you to use to identify solutions that you can implement to improve them.
The most rewarding outcome after the above exercise would be to allow you to see clearly if you and your family have sufficient emergency funding in the event your income discontinues. This can give you peace of mind knowing you can brace yourselves during an economic downturn.
2. Set short-term and long-term financial goals
Now that you know where you stand financially, you need to address the gaps by setting financial goals to meet that can improve your financial situation.
Short-term goals are such as paying off credit card debt with credit transfer facilities offered by banks. Consolidating all loan repayments would allow you to have savings to build up your emergency funding. This would increase financial resiliency in an economic downturn.
Mortgage loan for properties are the long-term liabilities to restructure as the OPR has been lowered by 0.75% since Mar 2020. It is an opportunity to shop for options for lower interest rate mortgages. The initial bankers will be a good person to discuss this with to facilitate for better loan options.
These short-term and long-term goal setting gives you an overall view of how execution can be done to ensure financial loan commitments can be paid at the lowest of interest. One will not need to pay extra in terms of financial cost, thus savings can be promoted.
3. Planned VS execution
Most people plan and they plan extraordinary well. However, plans remain as plans when there has been no execution to materialize the plans.
Once the planning is done, you need to ensure the execution is made on a step by step basis to reduce complications. Most people find that they just do not have the time, effort, and capability to follow through with their execution. Success may be more easily obtained simply by breaking your execution into smaller more achievable steps, and with realistic deadlines.
Step by step, sorting out your cash flow, maintaining good savings, and lowering your debt ratios will give you good head start of your finances. It is equally important to continue your execution even during tumultuous financial periods.
4. Constantly review the outcomes
As one’s financial resources are limited especially during an economy downturn, constant review of the financial goals set earlier becomes very important. Sometimes we may lack discipline or resources to execute plans on time. One simple tip to ensure you are on track towards meeting your goals is to keep a good record of your progress. It can even be as simple as a checklist. Knowing your progress can help you re-assess how you have made plans and how to move forward with customizing those plans further based on your progress rate.
As you encounter life changing situations such as getting married, having a newborn baby, or changing from employment to business owner, you may discover your goals are changing and money needs to be allocated differently. With regular reviewing, you have the opportunity to timely switch tracks in order to adapt your plans to your new goals.
When an economy downturn happens, re-assessing your plans to suit the economic climate is necessary. For example, perhaps you prefer moving your investments into more conservative portfolio and hold more cash. Thus, a regular review of your progress and your overall financial plan will provide good data to help you make the best decisions for your finances.
5. Having a neutral third party for second opinion
Oftentimes, we will hear people recommend we get a good XYZ agent if we wish to invest in XYZ investment option or a good ABC agent if we want ABC insurance coverage. These agents’ are likely making a career out of earning your money by introducing you only to their products. How will you know how their products compare with others in the market?
Having a neutral third party with professional financial qualifications makes perfect sense. Licensed financial advisors can give neutral findings on existing plans in hands while providing a review with options after comparing other plans available in the market. This could save you of making financial mistakes which sometimes could be very costly.