wmafendi.com

What are they and how to avoid them?

AT 32, single and earning a relatively decent and progressively growing income, Albert Lee (not his real name), should easily be able to afford an apartment in Kuala Lumpur. Or so it seemed.

Three months ago, his family members began to pressure him to buy a medium-cost apartment in the city centre.

Lee, an executive with an advertising agency for the last six years, found himself unable to afford the basic down payment for the unit, not to mention those miscellaneous fees that come along with buying a home. That’s baffling to people around him; it’s hard for them to comprehend how Lee, whose monthly take-home pay of close to RM4,000, somehow couldn’t fork out the cash to secure a city pad.

But Lee knows better. Truth is, he’s been straddled with stubbornly high credit-card debts for several years now. His savings account is in a comatose state due to his excessive spending habit on top of having to meet his monthly obligations.

“It’s an experience of regret and disappointment, as I realised that I’ve not been managing my finances well; this is certainly a wake-up call for me to re-assess my financial position,” Lee shares with StarBizWeek.

Lee’s excessive spending, high indebtedness and poor savings, according to financial experts, are some of the most common financial shortfalls faced by young adults. If not rectified, experts warn, these mistakes could lead to further regret and much inconvenience in the later years of one’s life.

“Money is a huge deal in everyone’s life. It has to be managed well, otherwise one would run the risk of having financial difficulties in the future,” says KH Tan, a financial planner with a local insurance agency.

And the most basic thing to do, he points out, is to learn from the mistakes of others and stay clear of them. So, StarBizWeek this week compiles five of the more common fortune disasters pointed out by financial advisers in the hopes of helping readers gain a solid financial footing.

Not budgeting

As Lee reflects on the financial challenge that he faces today, he realises that the root of his problem begins with his failure to plan ahead and set financial goals.

According to experts, budgeting is the first step of financial success, as the method helps one to manage his or her finances properly.

“Budgeting enables one to be in control of his or her own financial affairs. One cannot afford to be ignorant of his or her own financial position – the inflow and the outflow of one’s money; otherwise one’s expenditure can get out of control, and that could probably lead to other problems later on,” explains financial adviser Mohd Yusof.

Impulsive spending

Wealth is commonly destroyed because of uncontrolled spending, as sales executive Melissa Lim, 27, could testify.

Her frequent retail therapies, which involve grabbing stuff that she does not really need, as well as the occasional splurge on fine-dining have resulted in her running into debt problems, not only with credit cards, but also with her friends.

“Every little thing you spend on adds up, and that could gradually eat up your finances. Unrestrained spending, which can turn into a habit, can lead to wastage, and before you realise it, you see a mountain of debt facing you because your present income just can’t sustain your lifestyle,” Lim shares.

The 27-year-old sales executive has since repented of her frivolous ways. She is one of the individuals currently seeking the help from the Credit Counselling and Debt Management Agency (AKPK), an outfit set up by Bank Negara to advise individuals on their financial management.

Debt bondage

While the invention of credit cards has provided much convenience to modern society, the useful tool has also become a bane as it turned out to be one of the main causes of bankruptcy in society today.

For instance, in Malaysia, the number of credit card holders being declared bankrupt in 2006 stood at 1,656. The good news is that the number had actually declined to 405 credit card holders out of the total of 3.2 million nationwide being declared bankrupt last year.

According to Bank Negara in July, 50% of credit card holders who had been declared bankrupt were below 30. AKPK corporate affairs and communication head Devinder Singh said many young adults risk being declared bankrupt because of credit card overspending and failing to observe basic rules in sound financial management.

He advised individuals who had problems settling their debts to seek help as soon as possible before the compounded interest rates could take a toll on them.

Depending too much on credit card tempts one to spend more than what one earns, and if there is no check on the usage of this facility, individuals can end up in a financial mess, experts say.

“It’s fine to have certain type of debts such as home mortgages to acquire assets, but accumulating too much of credit-card debts is not only costly, but can also be debilitating,” says Tan.

No savings

The one essential step to achieving financial independence, according to locally renowned millionaire coach Azizi Ali, is learning how to save.

In his many seminars and books, he’s never failed to advocate the traditional way of accumulating wealth.

He argued that consistently setting aside a portion of one’s income as savings is one of the habits of a millionaire.

Financial planners couldn’t agree more. “You can’t squander all that you earn; you’ve got to keep some for rainy days, big-item purchases later, as well as for your retirement,” Mohd Yusof says.

“If you’ve never saved before, you will find yourself in wanting one day,” he adds.

No sound investments

It’s hard to grow one’s wealth through conventional savings. Low interest rates generally do not compensate well due to inflation.

Therefore, it is necessary to put one’s money into various instruments – such as stocks, bonds and unit trusts – so that the value of one’s wealth would not get eroded by inflation. Which to invest in, says financial planners, will have to be based on one’s age and risk appetite.

“While seeking to grow wealth, always bear in mind – there’s no such thing as free lunch; so don’t be fooled by any get rich quick programmes, lest you end up losing more,” Tan cautions.

While many individuals may be well-versed with the mistakes pointed out above, financial advisers say many of them still fall into the same trap. So, it really requires a great deal of conviction, will power and self-discipline to avoid these pitfalls, and by starting soon, one can well be on his or her way to sound financial management.

Source: cecilia_kok@thestar.com.my, The Star Online