For all fresh graduates or graduating students out there, we can feel your pain. While the cost of living has unfortunately risen drastically over the years, the affordability problem is compounded by stagnant growth of starting salary. Given the average range of salary offered by companies that falls between RM2,100 and RM2,500, we hardly believe that this amount can be used to buy anything other than your basic necessities. However, we do believe that instead of pointing fingers, there are some wise money management tactics you should follow amid the tough environment.
So, if you have just landed your first job, what should you do with your first pay?
1. Plan a budget and be ambitious about the savings goal you wish to reach at year end
Well, you would have probably heard about this. There is a universal formula that many financial advisors are advocating.
Expense = Income – Saving
On a brief note, this formula tells you that the amount you can spend each month depends on the amount you wish to save. Instead of finding out how much expense you intend to incur each month, your first priority should be determining the amount you wish to save every month.
We hail this formula for correctly pointing out the mindset you should be having when planning your budget. However, we see budget planning as an ongoing cycle where you constantly adjust the amount of expenses and savings to finally reach an equilibrium point between the two. That said, there is always certain principle that you should keep in mind. In layman’s term, you should be more willing to increase saving than increase expense.
2. Don’t upgrade your standard of living too soon
A monthly salary of RM2,100 – RM2,500 does not seem enough only if you are trying to stretch your budget too much. Many have been asked or have imagined about what they would like to buy for themselves after getting their first real job. While I doubt the feasibility of buying a property in the first few years of work, most of the time the common answers to this question would go like this: “xxx-branded car”, “xxx-branded smartphone”. Many of us selectively blind ourselves to the fact that buying these expensive items would cause a strain in our budgets.
So what do we mean by upgrading standard of living? It probably includes one or all of the below:
a. Going for Friday and weekend parties
Your friends may be asking you out constantly for extravagant parties or celebrations. Imagine that if you spend RM50 each weekend, approximately 10% of your income will be gone by the end of the month. So, it is your choice to resist it or suggest a less pricey option for next meetings. Mamak seems like a good but less healthy choice, though!
b. Paying for a more than RM100 mobile phone package that comes with a new phone
When it comes to mobile plan, there are so many different packages with seemingly different values. In fact, RM100 is not a good benchmark that differentiates cheap plans from expensive plans. What we are saying is, resist the temptation – your wise decision will pay dividend in future.
c. Shopping for unnecessary items week in and week out
In our definition, unnecessary items are goods that you already own and you would not probably get better after buying them. Clothes, shoes and bags can be some useful examples for unnecessary items. To own a pair of new Nike shoes can be very tempting but it does not give you much value unless it is part of your essential activities to make money.
d. Buying a brand new car
With RM2,100 – RM2,500, there is no reason to justify why you should buy a brand new car. While we acknowledge the fact that taking public transportation in our country can be a painful act, we opine that second hand car can offer more than its lower price tag. One of the key things we think about car is always that car is never a profitable investment (save for Uber driver!). Comparing the decisions to buy a second hand car at RM15,000 vs brand new car at RM50,000 and assuming that both of their values would drop by 50% in three years, the magnitudes of the value depreciation for both cars are significantly different. Using simple math calculation, the difference in the depreciation of the car values works out to be (RM25,000 – RM7,500) = RM17,500. Yes, you could have done a lot of things using RM17,500.
3. Investing does make a difference
What we would like to advise you is not only to be disciplined enough to save money, but also to be ambitious enough to put your money into funds or to invest in other financial products. By saying so, we could tweak the formula mentioned above by a little:
Expenses = Income – Investment
Among all financial products, fixed deposit is probably one of the safest investments, but an interest rate of 3% – 4% is probably not ambitious enough to ensure your financial freedom in future. Thus, for those with limited financial knowledge, you could spend more time after work in understanding the knowledge of investing through self-study and workshops. Meanwhile, you could allocate funds every month to unit trust with solid past record. Do take note that even though unit trust managers are helping you to manage a portfolio of securities, you should help yourself in selecting and buying several unit trusts of different asset classes to diversify the risks. For conservative beginner, investing 70% of your fund in fixed income class and the rest in equity class can be a good starting point.
For many fresh graduates, this may not be the best time to enter workforce. Life can get increasingly hard as more and more things have become more unaffordable. However, we believe that the discipline to follow a strict money management rules will definitely pay off. Remember that success does not come to those who wait for the perfect moment, but it comes to those who endure and overcome all the challenging moments.