I had a long conversation about life with a friend of mine last week. The pandemic and the crash in the financial markets has made many of us re-evaluate our priorities and our ambitions. We talked about a number of things – was this the right time to go back into the market? What should he do if he loses his job? What would happen if he catches COVID-19 and dies? Yes, it was that kind of conversation. It struck me that this a conversation that many of us might be having and I wanted to put down my own personal thoughts about it. And perhaps, it might be useful – especially for those of us who can’t afford too many risks at this point.
The first thing at this point is to figure out two budgets that you and your dependents can live on – the first budget allows you to continue the life that you are accustomed to (or how much you actually spend on a monthly basis); the second, a budget that allows you to live a stripped down version of that life.
For example, the former may include dining out, movie dates and shopping sprees– let’s say this totals up to RM3,000 a month; while the latter will exclude these ‘nice to haves’ but will include essentials like your mortgage, groceries, petrol – let’s say that this is RM2,200 a month.
Once this exercise is done, you will know how much you really need every month (RM2,200 in this example) and how much more you can theoretically save. (RM800 = RM3,000 – RM2,200). The next question is what should you do with this RM800?
If you don’t already have life and medical insurance, you should certainly consider setting these up. With medical insurance, you want to have the bare minimum to deal with serious illnesses – at least for the breadwinners and ideally for all the dependents. If you have dependents, you should secure at least enough life insurance coverage to provide for 12 months worth of costs (RM2,200 x 12) and any outstanding loans that you may have. By doing this, you will have the comfort of knowing that your loved ones will not be saddled with the repayment of any loans and have financial security for 12 months. Of course, the stripped down budget should include the costs of maintaining these insurance premiums.
Then you want to set aside as much of the rest of the RM800 for a ‘rainy day’ fund in a simple fixed deposit or savings account. In my mind, that should be about 3 months’ worth of your stripped down budget. Once you have secured this ‘rainy day’ fund, then you set up a separate fund for another 3 months’ worth of ‘stripped down’ costs. The purpose of this second fund (let’s call this the ‘gold’ fund) is to mitigate the impact of uncontrollable events like high inflation or currency devaluation – imagine if food prices increase because of the inability to ship goods into Malaysia or if there was a run on the currency, then the ‘stripped down’ budget that you have will no longer be enough to provide you with the necessities you need. This is where gold or US dollar comes in – all of us earn in RM, our savings/long term investments through KWSP, ASB, Tabung Haji are invariably RM but many of the things we need – rice, wheat, flour, oil – are priced in US$. So we need an alternative savings product to help protect us against any sustained change in the prices of our staple goods.
In these uncertain times, many of us are looking at the immediate and now. If you’re in a position to have that covered, don’t forget the long-term safety net. Back to the conversation with my friend. We talked at length about these financial considerations. We also spend just as much time talking about the changes to our lives that we should really consider. But that… is for another post. Stay safe, everyone – don’t forget to wash your hands!