This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Jan 11 - 17, 2016.

Catherine Khoo is a licensed financial planner with CWA . She was recently recognised by the Financial Planning Association of Malaysian as one of the top 3 scorers at the Malaysian Financial Planner of the Year Award 2015.

DOES higher income give you a better financial well-being?

While Malaysia aims to be a high-income nation by 2020, the recent price hikes that have contributed to the rising cost of living are a cause for concern. In October last year, the prime minister announced Budget 2016, with the theme “Prospering the Rakyat”, aimed at narrowing the budget deficit as well as implementing measures that address a host of issues.

But let’s face it. The “goodies” or measures don’t do much for those already grappling with the rising cost of living. At the time of writing, the ringgit has weakened more than 30% to 4.3112 against the US dollar, while the introduction of the Goods and Services Tax (GST), increase in toll rates across the Klang Valley and cigarette excise duty, among others, have compounded consumers’ woes.

Middle-income earners, who make up 40% of the working population, are not eligible for cash aid and do not earn enough to weather the rising living costs, yet they continue to bear the brunt of the current economic situation. If the cost of living rises faster than incomes, our aim to achieve high-income status is meaningless.

In fact, Malaysia’s household debt-to-gross domestic product (GDP) ratio, which stood at 87.9% last year, was among the highest in the region. That’s why Joe and Kim started feeling uneasy with the recent series of price hikes.

Joe and Kim were optimistic that their cash flow would be positive when they received their performance bonus and pay rise early this year. So, instead of saving and investing according to plan, they used the money to renovate their house, bought a new smartphone and a new car.

Due to their lifestyle, they are worried that they will not be able to sustain their standard of living. Their combined household net income increased to RM11,700 a month, compared with RM7,500 two years ago. But the bulk of their expenses go towards their housing and car loans, which make up 50% of their total combined income.

The higher cost of living has outpaced Joe’s income rate, which has led to less and less savings. He ended up being a net borrower when the family grew larger and the renovation costs went beyond budget. His credit card debt has increased to RM20,000 for him to maintain his standard of living, especially to meet his commitments in caring for his parents, his children’s education and health insurance.

Joe, 35, is a manager at a multinational company while Kim works as an administrative executive in a property firm. They have three children aged five, three and a newborn. Joe is the eldest son in his family and his parents moved from Muar to live with him two years ago.

Joe knows that he has to do some form of investment to grow his wealth. So, he attended many investment talks and invested his money impulsively without understanding much about the investment. He believed in market timing and was thrilled about the short-term gains. Though he has been investing aggressively, his investible assets are not growing at the expected rate of return. As a result, the couple’s income gap grew when family commitments rose faster than the household income.

A detailed cash flow was created to let them have a better understanding of their current income and expenditure pattern, and to subsequently assist them in developing a budget to meet their financial goals (see table).

The more income Joe made, the more stuff he needed. And the stuff he accumulated did not improve his quality of life. The wheel of the rat race just keeps spinning with no finish line. The longer Joe is in this race, he forgets where he is headed and gets lost in unnecessary detours.

Joe and Kim remain in their comfort zone and are so settled down in the middle of nowhere. They do what other people are doing and when they couldn’t meet their cash flow needs, Joe borrowed money to bridge the shortfall. When we met up, I was really shocked by how easy the extra savings had disappeared. Instead, the extra savings of RM1,180 a month had become negative and turned into outstanding credit card debt of RM20,000!

General principles and formulas may help in designing your plan, but they do not do the work for you. It is an inside job; it is your mindset and financial literacy level, together with the help of a financial planner. Here are the few immediate actions that Joe must take to get back on track.

1. Sell the investments that are still making a profit to pay off the outstanding credit card debt. Temporarily stop the regular monthly investments and resume when cash flow is positive again, which will take about six months.

2. Reduce the number of credit cards from five to two, just to pay for some fixed expenses such as insurance premium payments, utilities and phone bills. If not for the purpose of statements, the rest of the purchases should be paid in cash or online.

3. Use an expenses-tracking software to keep track of monthly expenses for at least six months. They can stretch the ringgit further by adopting strategies that allow them to save while spending, such as buying in bulk and using loyalty cards or cash rebate cards when shopping.

4. Put aside at least 10% to 15% of their take-home pay to build up an emergency buffer and also to accumulate for the future. This money should be transferred out of the salary account into a non-ATM account so that they don’t have easy access to the money.

5. Set a monthly budget for discretionary expenses and write down a shopping list. Only buy things that add to your quality of life. It is often our culture of consumption that pulls us into the rat race in the first place. More often than not, the stuff you own starts to own you.

6. Avoid investment mistakes. There is a difference between investing and investing properly. Anyone can invest money in investment products. But without a sound financial plan, you may not know which investment strategy or product works best for you. Having a diversified investment portfolio can help protect your capital from adverse market conditions. As Joe needs to pay off his credit card debt as soon as possible, he can consider selling his investments in the US now as the US dollar is going strong against the ringgit.

7. Both Joe and Kim’s parents are getting older and they may need some medical treatments from time to time. It is high time that they set up a family fund among their siblings to pool resources for future emergency needs and the care of their parents.

For most of us, one of the hardest things to do is delaying our gratification. We want everything and we want it now, without thinking much of the future impact. That’s why we still struggle financially even when our income has increased tremendously. The extra money we have somehow disappears and we end up in the same financial position.

Coming out of your comfort zone is tough in the beginning, chaotic in the middle but definitely awesome in the end. The solution to getting out of the rat race is delayed gratification with a plan. You just need to have a plan to reach your financial goals. If you have a plan, it becomes easier to resist the urge for immediate satisfaction. And when you want to spend money, you spend it with peace of mind. You are more conscious of your behaviours and you are aware of how they fit into your financial plan. By doing this, you are in control of your money and have the financial flexibility to make the choices you value and make you happy.

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