What is the commonest dream amongst millennials? Being debt-free of course! Too good to be true? Not necessarily, as the answer might not be out of your reach after all.
Financial freedom is the key to this haven. To achieve this, you need to have a passive income that is greater than or equal to your spending. Passive income is earned through performing one-time jobs such as renting property, where additional income comes in the form of rent while you are able to focus on your main job. If you are a college student or a fresh graduate in Malaysia, fear not! There are a number of opportunities that you would be able to turn to, such as low-risk investments – savings accounts, fixed-term deposits, bond investments and freelancing, which can provide you with liquidity (ease of convertibility to cash) in periods of emergency. Freelance jobs may include graphic designing, transportation services (Grab), rental services in regards to transportation and dorm units, and on-campus jobs (research assistant for a professor).
So, how feasible is achieving financial freedom for a fresh graduate or college student? Based on the Budget 2018 announced by the Malaysian Prime Minister, Dato’ Sri Haji Najib Razak, an allocation of RM 280 billion has been inputted into the budget to loosen financial restraints on its citizens. For instance, income tax rates have been reduced by 2% for each of the income tax brackets. With regard to fresh graduates earning a starting salary from RM 1,800 to RM 2,600 a month, income tax rates have been minimised from 5% to 3% to increase their disposable income. Theoretically, this should compensate for the high cost of living by allowing them increase both their active and passive incomes.
Therefore, we need only to ask ourselves this question: why is it crucial to achieve financial freedom, and how do we achieve it?
The first step towards financial freedom would be to identify, compare and understand the correlation between your earned salary and the standard cost of living. This is an especially crucial lesson to fresh graduates with high substitutability and low income in Malaysia as they are left vulnerable to even the slightest economic changes. Below shows the average spending for a fresh graduate. The amount of spending ranges from RM 2,800 to RM 3,000 whilst their average gross income is lesser than RM 2,600. From this, it is apparent that many young Malaysians are struggling financially to make ends meet, which makes the very idea of saving and investing from their current earnings seem absurd. This does not include the education loan that many must repay, which is a huge financial burden by itself. Thus, creating and planning for financial freedom is absolutely essential for young adults seeking to obtain long-term financial sustainability and stability.
Still unconvinced about the importance of financial freedom? If you think about it, young adults are amongst the most vulnerable to setbacks and obstacles when they first venture into the business world. During this transition, it is common for many to face difficulties in obtaining a job, low wages, high living expenses etc. According to a study by the Asian Institute of Finance (AIF), Malaysia’s millennials and Gen Y are experiencing significant financial strains early on, due in large to emotional spending. The survey result shows that a majority of Gen Y relies on high-cost borrowings such as taking personal loans (38%) and credit card borrowings (47%), whilst the remaining expressed confidence in financial literacy and management.
In addition, this survey also highlighted an alarming result where it found that three-quarters of Gen Y has a minimum of one long-term debt such as auto loans, education loans, and mortgages. Furthermore, about 70% of credit card owners resort to paying a minimum monthly payment while 45% do not pay their debt on time at some point in their life.
Although Gen Y is largely considered to be the most educated generation with high enrollment rates to colleges and universities, it is shocking to see the lack of financial literacy amongst them, which ultimately leads to early debt accumulation at a very early age.
The root of these problems stem from the lack of insight and knowledge on financial management. As this is not a subject taught at school, any financial knowledge is often passed on by parents back home. With the typical Malaysian parenting method relies heavily on the education system in terms of imparting knowledge, this results in a lack of knowledge on financial management and wealth accumulation in early life, leading to the rise of debt-ridden, financially-illiterate millennials.
Of course, the liberty to your own financial freedom still depends largely on your own principles. The guide to financial autonomy is akin to a roadmap with detailed instructions to your destination. However, before setting out on this journey, you must be aware of your current financial standpoint.
First, you must identify your current spending allocation, pinpointing the allocation of the majority of both your passive or active income (e.g. spending on household equipment, rent, groceries etc.), and discover your residual income every month. This method is called “Cash Flow Tracking”, and it will give you an overview of your current and past cash flow. Hence, it would give you better control and confidence over future expenditures through micromanagement of your funds.
What would constitute as “planning”? How do I begin?
You should first begin with a time horizon to set up either a short or long-term plan to achieve your goals and objectives. Achievements often begin with a concrete and meticulous plan. With this, you will be able to prioritise and set forth the actions you need to take in order to achieve your goals! Furthermore, you would also be able to construct contingency plans as a backup to your financial goals in the event of any failure.
Assets and Liabilities
No, assets are not anything to do with asses. Put simply, assets are things that bring money into your pocket, i.e. it yields value, while liabilities are obligations that take money out from your pocket such as mortgages, and short-term loans. There are no specific designations of items that are assets or liabilities. For instance, a house is traditionally known as an asset as it may yield value for a landlord through rental payments from tenants. However, even if the landlord pays off the mortgage payments, there will still be incurrence of maintenance costs, where they would be seen as liabilities.
Anything can be an asset or liability. So how does this apply to financial freedom? First and foremost, you would want to begin building a portfolio to expand your assets while shrinking your liabilities. This could take form in actions like establishing a personal budget to keep track of expenses, or investing in an emergency fund for college students (which is a great step to take for college students and fresh graduates).
Self-discipline is one of the primary determinants of Financial Freedom. No matter how meticulous an individual is with their financial goals, if they lack self-discipline, they are sure to fail their task.
Self-discipline can be better explained through this context. If you set a personal budget, you MUST have the discipline to stick with it in order to make some real adjustments in your spending habits and achieve your long-term goals. Emotional spending is often the key reason many succumb to failure. To avoid this, you should wary of your actions and exercise self-discipline when making key financial decisions. Actions like this accumulate, and if you continue to exercise this self-discipline over time, we guarantee that you would begin to see some changes in your financial state.
Financial freedom is highly desirable for all individuals. In fact, most of us aim to pursue some form of higher education to secure a job with decent pay with the hopes of being able to achieve financial freedom someday. Nevertheless, there are many young adults who still fail to reach this dream, irrespective of their background and income bracket. In reality, there is very little reason to fail, as financial freedom is very much plausible given right education in financial management and planning.
Written and Edited by: Wong Vyleen, Yashvanth and Luanne Lai
- The Star Online. (2017). Millennials facing financial woes. [online] Available at: https://www.thestar.com.my/opinion/columnists/on-your-side/2017/07/14/millennials-facing-financial-woes-our-economists-have-learned-lessons-from-past-financial-meltdowns/ [Accessed 23 February 2018].
- FMT News. (2017). Budget 2018 highlights. [online] Available at: http://www.freemalaysiatoday.com/category/nation/2017/10/27/live-budget-2018-highlights/