High household debt could lead to Malaysians’ financial ruin, financial planners say

High levels of debt has plagued Malaysians in recent months and could push many to the brink of financial ruin as most of them do not have any savings. ― File pic
High levels of debt has plagued Malaysians in recent months and could push many to the brink of financial ruin as most of them do not have any savings. ― File pic

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KUALA LUMPUR, Dec 6 ― Car spare parts businessman Ravi, 37, is in debt to the tune of hundreds of thousands of ringgit and uses up to 70 per cent of his salary to service his debts.

Even worse, Ravi, who has a two-year-old son and lives in Subang, is taking even more loans just to cover his expenses as the ringgit plunge has increased the cost of doing business by 35 per cent, while sales has dropped by 90 per cent amid a very soft economy.

“It’s super difficult... toll costs double now and GST is a pain. Grocery prices are not too bad but day care and such, all got GST. To buy kids’ stuff, all the prices have gone up,” said Ravi (not his real name) in an interview with Malay Mail Online, referring to the Goods and Services Tax (GST).

High levels of debt has plagued Malaysians in recent months and could push many to the brink of financial ruin as most of them do not have any savings to cushion against accidents, inflation and layoffs.

Malay Mail Online interviewed 10 people from various socio-economic backgrounds and found that most of them did not save. Even worse, many were already saddled with various debts in the form of credit card bills, house mortgages and car loans.

“Yes, this is not just a Malaysian problem... any person who has no savings is on the journey to financial suicide,” VKA Wealth Planners Sdn Bhd financial planner Kevin Neoh told Malay Mail Online.

Neoh added that having some money set aside for emergencies was the most crucial component of good financial planning. This is to ensure that an individual will be able to handle all financial “emergencies” without resorting to credit cards or taking on more loans.

He added, however, that simply having a healthy level of debt, which is 40 per cent of one’s income according to Credit Counselling and Debt Management Agency (AKPK), does not automatically translate to a sustainable financial position.

“Take a person who earns a low income or cannot qualify for a loan, this person will have 0 per cent loan repayment to income ratio, but does it mean this person is in a much healthier position?,” he said.

He explained that the appropriate way to ensure that an individual’s finances is sustainable would be to put aside money for savings before using it for monthly expenses, and not the other way around.

Harveston Financial Advisory Sdn Bhd’s financial planner Annie Hor added that surviving with scant savings was a precarious position for anyone to be in, pushing some to even resort to borrowing from friends and family simply to purchase the next on-trend item.

“From the new iPhone, to that vacation you cannot actually afford yet, to buying that car which saddles you with hefty monthly installments… all these are pushing people to make that impulse purchase before actually calculating if they can afford it.

“If not planned properly, this generation’s problem will become a liability for the next generation,” she said in an interview with Malay Mail Online recently.

She added that she has seen many women purchase handbags beyond their means or going on extravagant vacations they can’t afford, only to then use the popular phrase “you only live once (YOLO)” to justify their behaviour.

“I know of someone who travels annually and racks up his credit card balance, and every year he owes more and more because is he only servicing the minimum amount.

“My friends in the car industry tell me that single young graduates or those who have worked for just a few years are buying RM200,000 cars by making the minimum down payment and using almost half of their salary to pay the monthly installment,” she said.

This comes amid Malaysia’s household debt amounting to 87.9 per cent of gross domestic product as of December, according to central bank figures.

This is, according to Bank of America Merrill Lynch economist Chua Hak Bin, the highest in Southeast Asia, an observation mirrored by Standard & Poor’s at the end of last year.

More seeking debt advice

The number of counselling cases AKPK has taken on in recent years has also shown a worrying upward trend, with the number of cases leaping by 20,000 from 2013 to 2014.

From 2008 to 2013, there was an average of about 35,000 counselling cases annually, but that figure rose to approximately 60,000 in 2014.

The government agency also noted in a fact sheet made available to Malay Mail Online that from January to September 2015, there have already been over 62,000 counselling cases, exceeding the previous years’ figure.

AKPK also saw a sharp increase in participants for its Debt Management Programme, which averaged at about 12,000 annually from 2008 to 2013 but later jumped to approximately 20,000 cases in 2014.

According to news portal Star Online, AKPK revealed on November 15 that over 25,000 of Malaysians under the age of 35 have been declared bankrupt in the last five years, prompting  Domestic Trade, Cooperatives and Consumerism Minister Datuk Hamzah Zainuddin to urge youths to alter their lifestyles according to the current economic climate.

For 24-year-old Tan, using half her salary to service her credit card and car payments has made it a struggle to survive, but that has only been exacerbated by the soft economy and the rising cost of living.

“After the toll hikes, I am paying 40 per cent more for tolls. I cannot afford to pay my credit card debt in full ever since the toll hikes, so I will have to cut down on other expenditure like food, beauty products and I haven’t even made any clothing purchase since then, just to pay back the credit card debt,” she said in an email interview with Malay Mail Online on November 17.

And living in Kuala Terengganu has not made it any easier for a 30-year-old doctor, who requested anonymity, as he has been struggling to cope with the rising cost of living to the point of spending his entire paycheck on monthly expenses and debt repayments.

“I have no personal savings. I can't save any money though, while maintaining a 'just decent' lifestyle. We also had to consider and re-consider buying a few home appliances that we think could make our life easier,” he said in an interview with Malay Mail Online recently, adding that he and his wife have had to even work on Saturdays just to get by.

He also said that he’s had to cut out luxuries entirely from his lifestyle and is merely spending on the necessities, despite both him and his wife being doctors and living outside the Klang Valley, with his only form of savings being his Employees Provident Fund (EPF).

“How do I feel about my household finances? Horrible, for the fact that in a household consisting of a child and two professionals, we are just barely able to afford a roof over our heads, food and decent care for our child.

“We cannot afford anything extra, and I cannot imagine if we have to lower our standards due to the rising cost of living,” he said.

News portal Star Online also reported recently that 67 per cent of active EPF contributors have not met the basic savings requirement which was, according to Deputy Finance Minister Datuk Chua Tee Yong, due to poor financial literacy in Malaysia.

The Malaysian Insider also reported in March that almost 80 per cent of workers turning 55 will not have enough funds in their EPF to live above the national poverty line which is RM830 a month.

Citing EPF chief executive officer Datuk Shahril Ridza Ridzuan, it reported that over the next 20 years, the total EPF savings of many Malaysians will only enable them to live on RM800 a month due to low contributions.

High cost of living could lead to ‘vicious debt cycle’

Business channel CNBC also reported in April that Malaysia’s household debt to income ratio is at an alarming 146 per cent, which match figures in the US and UK but given the lower income levels here, raises questions about its sustainability.

Asian Development Bank lead economist Jayant Menon pointed out that the public will soon start to feel the impact of the depreciating ringgit which could create a “vicious debt cycle.”

“As the effects of the large ringgit depreciation begin to feed through to prices of tradeable goods and services, the cost of living will rise even higher, placing a further burden on households and likely to feed a vicious debt circle,” he said in an email interview with Malay Mail Online.

However, the lower income group should proceed cautiously as they would be more susceptible to “financial vagaries,” RAM Rating’s Co-head of Financial Institution Ratings Wong Yin Ching said..

Wong also noted that the household-debt-to-GDP (gross domestic product) ratio is likely to stay elevated due to Malaysia’s young demographic.

“This cohort is an asset-accumulating class which will continue to underpin the strong underlying demand for home and vehicle purchase,” Wong said.

Financial planner Annie Hor noted, however, that more Malaysians needed to take charge of their finances and not easily fall prey to sweet deals many credit cards and banks offer.

“More awareness needs to be given to consumers. Malaysians need to take charge of their finances and seek the advice of financial advisers on how to best manage their monies,” she said.

What more, a change in mindset is equally as important as financial prudence as cutting back on non-essential luxury goods is just as important as realising there is no need for purchasing them in the first place, financial adviser Kevin Neoh said.

“If the mentality is not adjusted to take this face-on, many will continue to live the same old lifestyle and not be aware that we are compromising our long term well being for today's quality lifestyles,” he said. 

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