Housing woes: death spiral or virtuous cycle?

THE World Economic Forum estimates that the global cost of corruption annually is at least US$2.6 trillion (RM10.9 trillion) or 5% of global gross domestic product (GDP).

According to the World Bank, businesses and individuals pay over US$1 trillion (RM4.2 trillion) in bribes each year.

Corruption adds up to 10% of the total cost of doing business globally and up to 25% of the cost of procurement contracts in developing countries.

I gathered these shocking facts at a conference. There are other alarming statistics that shed light on the damage brought about by corruption and its dreadful impact on the economy.

Corruption leads to further impoverishment of the poor and other issues in many countries. The average income in countries with a high level of corruption is about one-third of those countries with a low level of corruption. In addition, corrupt countries have a literacy rate that is 25% lower.

The Corruption Perception Index 2018 released by Transparency International shows that on the scale of 0 to 100, where 0 is highly corrupt and 100 is very clean, over two-thirds of 180 countries score below 50, with the average score of 43.

In the index, Denmark ranked first in the world followed by New Zealand second. Finland and Singapore were tied for third with a score of 85. Malaysia was ranked 61st in the world, scoring only 47.

We were ranked the third highest in the Asean region, after Singapore and Brunei. Our country is doing better now with the ongoing investigation of the 1Malaysia Development Bhd scandal and other prominent cases.

In TI’s report, Malaysia is one of the countries on the watch with promising political developments against corruption. However, more solid action is needed in combatting all elusive forms of corruption.

According to Transparency International Malaysia, corruption had cost our country about 4% of its GDP value each year since 2013. Added together, this amounts to a high figure of some RM212.3bil since 2013. For 2017 alone, that figure was a whopping RM46.9bil!

As a comparison, our development expenditure in 2017 was RM48bil. If the value of corruption above was accurate, our development fund was almost “wiped out” because of corruption.

Transparency International Malaysia president Datuk Akhbar Satar said: “This is our estimate. It is likely to be higher in reality (on the value of corruption).”

No country can eliminate corruption completely. However, we can learn from good practices shown in some developed countries, such as the Scandinavian countries which all scored high on the Corruption Perception Index.

Corruption leads to poverty as money collected is not used for the welfare of the nation. As a result, the people end up suffering and paying for the leakage in the system.

If a country is corrupt-free, it will reduce the need for non-governmental organisations (NGOs). NGOs advocate for the rights of marginalised groups. The government can take care of those group when it has a surplus in the budget.

A clean government and system will have a positive impact on many aspects including affordable housing, one of the prominent needs of the people.

Whenever there is corruption, there is a compromise in the delivery of goods and services. The same situation applies to affordable housing.

Someone mentioned to me in the past that “the government isn’t interested in affordable housing as there is literally ‘no money’ to be made in it”!

Things have made a dramatic change for the better since May last year. Our new government is working on a platform of clean government and improving transparency. It plans to build one million affordable homes within two terms of its administration. To make this a reality, the government needs to put in real money to make it happen.

Corruption causes a death spiral that leads to various problems. Without it, a virtuous cycle grows that ensures every part runs smoothly and the marginalised in society are looked after.

With a promise of a cleaner government, we hope we will soon see a virtuous cycle that makes the one million affordable homes an achievable target.

By Datuk Alan Tong, who has over 50 years of experience in property development. He is group chairman of Bukit Kiara Properties. For feedback, please email bkp@bukitkiara.com. The views expressed here are solely that of his own.

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IN my previous article I asked the question, Do you earn enough to sustain your lifestyle?

The feedback received was consistent. People told me that they worry about the situation, some even wrote in to share their concern.

A reader by the name of Yap wrote me an email about his observation after reading my article.

“I always doubt how a family with a median household income can survive in KL. Based on my calculation, there is no way a family with two children can survive in KL with RM6,275 without accumulating bad debt or spending 4.5 hours to travel on the road. Housing is one of the factors, but not the only one,” he wrote in his email.

Belanjawanku, an expenditure guide launched by the Employees Provident Fund (EPF) in early March states that a married couple with two children spend about RM6,620 per month on food, transport, housing, childcare, utilities, healthcare, etc.

However, the median household income for Malaysians in 2016 was RM5,228. While the median income of M40 group (Middle 40%) was RM6,275, which means five out of 10 households in this category received RM6,275 per month or less. This is far below the RM6,620 required for a family with two children to stay in the Klang Valley.

Another alarming fact is... Belanjawanku compiles only core living expenses without including long-term financial planning tools such as education funds or investments. The actual budget constraint can be more severe if we take them into account.

The living cost in major cities is inevitably higher than in small towns or suburb areas.

As such, when we discuss housing affordability in the cities such as Kuala Lumpur and the Klang Valley, we shouldn’t impose the same benchmark of RM300,000 as everything else is more expensive in the city. Affordable housing should benchmark against the cost of living of the area.

Based on the research for Belanjawanku, even if housing was provided for free, a household of four would still need RM5,750 to sustain their lifestyle.

The transportation cost alone is RM1,040 for a family, higher than the RM870 allocated for housing.

Therefore, if a family is looking to lower their cost of living, moving to suburb areas would allow them to have a more affordable budget.

According to a news report which quoted information from brickz.my, the housing prices in KL are five times higher than in Seremban, with median housing price of RM1mil (RM940 psf) in the KL city centre, versus RM200,000 (RM210 psf) in Seremban.

Suburbs which are nearer to KL such as Klang and Shah Alam also offer attractive housing prices with a median price of RM340,000.

For families who stay in the city centre and plan to reduce their cost of living, they can consider moving to suburbs to enjoy a better quality of life, and leverage on the improved public transportation which offer hassle-free travelling from suburbs to city centre.

Although high living cost is a concern for many Malaysians, KL is ironically found to be the cheapest city to live out of the 11 major cities in Asia, according to the 2018 Wealth Report Asia.

We are “cheaper” or ranked lower than our neighbouring cities, including Bangkok, Manila and Jakarta. KL, Manila, and Jakarta are also the most price competitive cities when it comes to the residential properties segment.

Why are we still facing the challenge of high living costs despite being the “cheapest” city in the region? The underlying factor is because of the low household income earned by most Malaysians, as the previous government failed to transit us to a higher income nation.

In his email, Yap mentioned that “I always imagine what Malaysia can be if there were no leakages. Hundreds of billions could be spent to stimulate various industries. Our GDP per capita could be close to if not similar to Singapore’s”.

That is the vision and sentiment shared by a majority of Malaysians. With the new government that promises to be more transparent and efficient, we hope that one day, we can afford to live comfortably in any city we wish to, with a higher household income.

from Datuk Alan Tong, who has over 50 years of experience in property development. He was the World President of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email bkp@bukitkiara.com

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Do you earn enough to sustain your lifestyle?

DO you know how much you need to sustain your lifestyle every month? Are you living within your budget or stretching to make ends meet?

We can now gain insights with the unveiling of Belanjawanku, an Expenditure Guide for Malaysian Individuals and Families, launched by the Employees Provident Fund (EPF) in early March.

The guide offers an idea of the living costs for respective household categories. It encompasses the expenditure on basic needs and involvement in society for a reasonable standard of living in the Klang Valley.

According to Belanjawanku, a married couple with two children spend about RM6,620 per month on food, transport, housing, childcare, utilities, healthcare, personal care, annual expenses, savings, social participation and discretionary expenses.

When I read this guide together with the income statistics published by the Statistics Department, it reveals that a vast majority of Malaysians can’t afford to live in the Klang Valley.

Based on the statistics, the median household income for Malaysian households in 2016 is RM5,228, far below the RM6,620 required for a family with two children to stay in the Klang Valley.

If we take a closer look, the median income of M40 group (Middle 40%) is RM6,275, which means five out of 10 households in this category received RM6,275 per month or less. This indicates that over 60% (40% from B40 households and half of the M40 households) of Malaysian households (if they have two children) can’t afford to stay in the Klang Valley.

What went wrong in the process? Why are many households having challenges to meet the required budget?

According to Belanjawanku, a married couple with two children spent the majority of their income on food (RM1,550), followed by childcare (RM1,150) and transport (RM1,040), then only on housing (RM870) and other items.

Based on the research, even if housing was provided for free, a household of four would still need RM5,750 to sustain their lifestyle. Therefore, the common perception that only housing is expensive is not right. It is not that housing is expensive, but that everything is expensive because of inflation over the years! The value of our currency has fallen due to global money printing measures over the past decade.

Belanjawanku compiles only core living expenses without luxury items or excessive spending. It also doesn’t include long-term financial planning tools such as funds for education or investments. If the majority of Malaysian households have challenges in meeting the existing expenses listed in the guide, it poses a serious concern on their future financial prospects.

The underlying factor of this challenge is the low household income earned by Malaysians. The previous government failed to move us to a high income nation as they had promised, and more families are stretching to make ends meet now. It may lead to serious financial problems in the future.

If median household incomes don’t increase, the B40 (Bottom 40%) and half of the M40 will always struggle even if housing is free, assuming that they aspire to have two children and to live in the Klang Valley.

According to Transparency International Malaysia, corruption had cost our country about 4% of its gross domestic product (GDP) value each year since 2013. Added together, this amounts to a high figure of some RM212.3bil since 2013. For 2017 alone, that figure was a whopping RM46.9bil!

Imagine what we can do with these monies if there was no leakage in the system? The previous government should have channeled the money to stimulate economic growth and increase the income of the rakyat.

Going forward, I am optimistic that the new government, with its promise of a clean and transparent government, can finally fix the leakage and focus on generating a higher income level for all Malaysian households.

Financial independence is a key factor in the overall well being of the rakyat. We need to increase household incomes to a level where families can meet their basic needs and embark on long-term financial planning, to elevate their quality of life.

Then, and only then, will housing and other living expenses finally become affordable.

By Food for thought By Alan Tong

Datuk Alan Tong has over 50 years of experience in property development. He is the group chairman of Bukit Kiara Properties. For feedback, email bkp@bukitkiara.com


 
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Buying a new car is regarded as a waste of money

  WHEN I discussed whether to buy a car or a house first in my last article, I received a lot of feedback from friends and readers. Someone even sent me an interesting article entitled “Buying a New Car Is the Single Worst Financial Decision”.

The remark was made by Davis Bach, a self-made millionaire who is also one of the American best-selling financial authors, a motivational speaker and an entrepreneur.

That was a bold statement but not without basis. In the article published by CNBC Make It, David Bach said, “Nothing you will do in your lifetime, realistically, will waste more money than buying a new car.”

He pointed out that a car's value drops 20% to 30% by the end of the first year. In five years, it can lose 60% or more of its initial value. And, most people actually borrow money to buy a car.

“Why would you borrow money to buy an asset that immediately goes down in value by 30%?” says Bach.

His views concurred with the idea I have been sharing in this column over the years.

In my last article, I mentioned the value of my friend’s car dropped 70% from RM140,000 to RM40,000 over eight years. On the other hand, another friend who bought an affordable apartment during the same time, enjoyed a huge capital appreciation as the apartment increased from RM100,000 to more than RM200,000 during the same period.

Both borrowed money to buy their house and car respectively. However, there is a clear contrast between the two items by looking at their long-term values. A house is an appreciating asset, and a loan on such an asset I like to call a “Good Debt”; while a car losses money, and is therefore deemed as “Bad Debt”.

Not only does a car depreciate in value, but owning a car also comes with expenses such as petrol, maintenance, licence, toll, insurance and parking costs. A person who owns a normal sedan car and travels about 1,000 km per month, can easily spend about RM1,500 per month for car loan repayment and other relevant expenses.

With ride-sharing services (such as GrabCar in Malaysia, and Uber & Lyft in other countries) becoming so convenient, and with the LRT and MRT networks being more developed, we can now choose to be car-loan free. Imagine having your own “driver” and able to use your time productively to read a book or relax when being caught in traffic jam. We are now able to enjoy this with ride-sharing services on call.

For a more economical approach, you can even opt for a "hybrid" transportation mode by combining ride-sharing and public transport services.

Chua, a reader from Muar wrote me an email last month. He shared his experience of not having purchased a property when he was young and only bought one when he was in his mid-30s due to some misperceptions.

“Looking back, how wrong I was! But today, there are just as many graduates who think just like myself when I was in my 20s and 30s. Therefore, your constant reminder to Malaysians is valid and practical. Instead of a new car, get a used car. Buy a medical insurance policy, pay EPF and try to buy a small property. These should be the priority of any young Malaysian,” Chua wrote in his email.

Bach, the self-made millionaire said, “If you’re spending US$500 (RM2,000) a month for that car, well, that’s US$6,000 (RM24,000) a year, not including the car insurance or the gas (petrol). That could be two months or three months of your income. Run the numbers and then ask yourself: Do you really need a car that's nice or could you buy a car that’s less expensive – maybe a little older – but still looks good and runs?”

That’s the sentiment that I had when I wrote about buying a house first before a car.

Buying a car may not be the single worst financial decision for everyone. There are different financial priorities at different stages of life. However, it may be the case if you buy a brand new expensive nice car prior to owning any long-run appreciating asset or investment, like a house!

Food for thought by Alan Tong

Datuk Alan Tong has over 50 years of experience in property development. He was the World president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email bkp@bukitkiara.com

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Better to buy a car or a house first?

Given a choice, would you prefer to get a loan to buy an item that depreciates over a short period which is deemed as “bad debt” or commit on a “good debt”, which is to purchase a house or asset that will appreciate in the long term?

A car used to be a symbol of freedom and ease of mobility. I could understand the dilemma of having to choose between a house and a car a decade ago.

Even then, we should still have chosen a car within our means to manage our financial position.

Today, with public transportation and the availability of ride-sharing services such as Grab Car, we can now really have the option of buying a house first. This gives us both shelter and value appreciation.

This choice has just been made easier with Budget 2019 and the recent announcement by the Finance Ministry.

The government has rolled out several measures to assist homebuyers, including stamp duty exemptions.

Homebuyers will get a stamp duty waiver for memorandum of transfer (MoT) for the purchase of houses priced up to RM1mil, during the six-month Home Ownership Campaign (HOC) from January to June 2019. In addition, the stamp duty on loan documentation is fully waived up to RM2.5mil.

Besides that, the Real Estate and Housing Developers Association (Rehda) has also agreed to cut the prices of its completed and incoming units by at least 10%.

When I talk to potential homebuyers, they always ask about the right time to own property.

There is no perfect time to buy a house on foresight. If the price is within your means, and you plan to buy it for own stay or as a long-term investment, then anytime is a good time.

However, with the property market at the bottom half of the cycle now, this could be a good time to commit to a house with the attractive tax incentives rolled out by the government.

Homebuyers can grab the “duty-free” opportunity now to explore the property market. Those living in the Klang Valley will be able to find their dream home during the Homeownership Campaign Expo at the KLCC Convention Centre from March 1-3.

The campaign is jointly organised by Rehda and the Housing and Local Government Ministry. Besides having all developers under one roof, the ministry will also be featuring homes under RM300,000 by PR1MA, SPNB, PNB and others.

The Homeownership Campaign was first held in 1998 to lessen the burden of homebuyers and to encourage homeownership. It is re-introduced after two decades now with the same objective.

For homebuyers who don’t like the risk of buying a house under construction, there are plenty of completed units for sale in the campaign.

Buying a house can be emotional and uncertain for many homebuyers. However, in the long run, we can rest assured that we are buying an asset that will appreciate.

For homebuyers, always buy within your means as you can upgrade your house in the later stage of your life.

In this auspicious Chinese New Year, I hope you decide to prioritise a new house over a new car. Gong Xi Fa Cai!

By Alan Tong . . . Food for Thought

Datuk Alan Tong has over 50 years of experience in property development. He was the World President of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email bkp@bukitkiara.com


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One way to solve housing shortage problem is to build more houses.


"If we take a look at countries with commendable housing policies such as Singapore and Hong Kong, we notice that the government plays a very important role in building and ensuring a sufficient supply of housing for their people."

THE issue of affordable housing has been a hot potato for many countries, especially for a nation with a growing population and urbanisation like ours.

In my previous article, I mentioned that there was a growing shortage of affordable housing in our country according to Bank Negara governor Tan Sri Muhammad Ibrahim. The shortage is expected to reach one million units by 2020.

According to Bank of England governor Mark Carney, one of the most effective ways to address the issue is to build more houses. There are good examples in countries like United Kingdom, Australia and Singapore, which have 2.4, 2.6 and 3.35 persons per household respectively.

In comparison, the average persons per household in our country is 4.06 person, a ratio which Australia had already achieved in 1933! To improve the current ratio, we need to put more effort into building houses to bring prices down.

If we take a look at countries with commendable housing policies such as Singapore and Hong Kong, we notice that the government plays a very important role in building and ensuring a sufficient supply of housing for their people.

For example in Singapore, their Housing and Development Board (HDB) has built over one million flats and houses since 1960, to house 90% of Singaporeans in their properties. In Hong Kong, the government provides affordable housing for lower-income residents, with nearly half of the population residing in some form of public housing nowadays. The rents and prices of public housing are subsidised by the government and are significantly lower than for private housing.

To be on par with Australia (2.6 persons per household), our country needs a total of 8.6 million homes to house our urban population of 22.4 million people. In other words, we need an additional 3.3 million houses on top of our existing 5.3 million residential houses.

However, with our current total national housing production of about 80,000 units a year, it will take us more than 40 years to build 3.3 million houses! With household formation growing at a faster rate than housing production, we will still be faced with a housing shortage 40 years from now.

Therefore, even if the private sector dedicated all its current output to build affordable housing, it will still be a long journey ahead to produce sufficient houses for the nation. It is of course impossible for the private sector to do so as it will be running at a loss due to rising costs of land and construction.

In view of the above, the government has to shoulder the responsibility of building more houses for the rakyat due to the availability of resources owned by the government. Land, for example, is the most crucial element in housing development. As a lot of land resources are owned by government, they must offer these lands to relevant agencies or authorities to develop affordable housing.

I recall when I was one of the founding directors of the Selangor State Development Corp in 1970s, its main objectives was to build public housing for the rakyat.

However, today the corporation has also ventured into high end developments in order to subsidise its affordable housing initiatives. This will somehow distract them from focusing on the affordable housing sector.

Although government has rolled out various initiatives in encouraging affordable houses, it is also important for the authorities to constantly review the original objectives of the relevant housing agencies, such as the various State Economic Development Corporations, Syarikat Perumahan Negara Bhd, and 1 Malaysia People’s Housing Scheme, to ensure they have ample resources especially land and funding to continue their mission in building affordable housing.

A successful housing policy and easy access to affordable housing have a huge impact on the rakyat. It is hoped that our government escalates its effort in building affordable housing, which will enhance the happiness and well-being of the people, and the advancement of our nation.


 Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

By Alan Tong

Too good to be true? Think twice

HAVE you ever grabbed an offer without any hesitation, simply because the price is too cheap to resist?

Many of us have this experience especially during sales or promotional campaigns. We tend to spend more at the end or buy things which we are uncertain of their quality when the deal seems too good to say no.

It may be harmless if the amount involved is insignificant. However, when we apply the same approach to big ticket items, it can cause vast implications.

Recently, I heard a case which reinforces this belief.

A friend shared that a property project which was selling for RM300,000 a few years ago is now stuck. Although the whole project was sold out, the developer has problem delivering the units on time.

The developer is calling all purchasers to renegotiate the liquidated and ascertained damages (LAD), a compensation for late delivery.

One of the homeowners said he is owed RM50,000 of LAD, which means the project is 1½ years late. When we chatted, we found that he purchased the unit solely due to its cheap pricing without doing much research in the first place.

The incident is a real-life example of paying too low for an item which can leave us as losers, especially when it involves huge sum of investment, such as property.

To many, buying a house maybe a once-in-a-lifetime experience, a decision made can make or break the happiness of a family.

A good decision ensures a roof over the head and a great living environment, while an imprudent move may incur long-term financial woes if the house is left uncompleted.

Nowadays, it is common to see people do research when they plan to buy a phone, household item, or other smaller ticket items.

Looking at the amount involved and implication of buying a house, we should apply the same discretion if not more.

It is always important for house buyers to study the background of a developer and project, consult experienced homeowners regarding the good and bad of a project before committing.

I have seen many people buy a house merely based on price consideration.

In fact, there are more to be deliberated when we commit for a roof over our heads. The location, project type, reputation of a developer, the workmanship, the future maintenance of the property etc, are all important factors for a good decision as they would affect the future value of a project.

Beware when a discount or a rebate sounds too good to be true, it may be just too good to be true and never materialised. If the collection or revenue of a housing project is not sufficient to fund the building cost, the developer may not be able to complete the project or deliver the house as per promised terms. At the end of the day, the “price” paid by homeowners would be far more expensive.

In general, the same principle applies elsewhere. It is a known fact that when we pay a premium for a quality product from a reliable producer, we have a peace of mind that the product could last longer and end up saving us money. Some lucky ones will end up gaining much more.

For instance, when we purchase a car, we should consider its resale value as some cars hold up well, while others collapse after a short period. Other determining factors include the specifications of the car, the after sales service, and the availability of spare parts.

Quality products always come with a higher price tag due to the research, effort, materials and services involved.

In addition to buying a house or big ticket items, other incidents that can tantamount to losing huge sums are like money games, get-rich-quick scheme, or the purchase of stolen cars or houses with caveats.

When an offer or a rebate sounds dodgy, the “good deal” can be a scam.

Years of experience tells me that when what is too good to be true, we should think twice. I always remind myself with a quote from John Ruskin (1819-1900) who was an art critic, an artist, an architect and a philosopher. “It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

“The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

Food for thought by Alan Tong

Datuk Alan Tong has over 50 years of experience in property development. He was the world president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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Little by little, a little becomes a lot

NOW that Christmas, New Year and Chinese New Year are over, many of us have started to reconcile the amount spent for these celebrations.

Not surprisingly, many have underestimated the current cost of living and have therefore overspent.

Hence, it did not come as a surprise to me when I overheard one of my relatives saying that the price of an eight-course Chinese New Year package at the restaurant that she often frequents has increased by 15% from RM898++ to RM1,028++ within a year. Not only has the price increased, she also noticed the serving portions were smaller than the previous year.

The rising cost of living caused by the depreciating ringgit, hike in transportation costs, the goods and services tax implementation, etc, was the hottest topic of discussion during these festive gatherings. Among the various counter-measures, some young ones welcomed the option to reduce the Employees Provident Fund (EPF) contributions, citing that it would help relieve their burden.

The reduction in EPF contribution came about early this year when the Government announced that employees had the option to reduce their EPF contribution by 3% from March 2016 until December 2017 to spur economic growth and at the same time, put more money into the rakyat’s pockets. According to our Prime Minister who is also the Finance Minister, this move is expected to increase consumer spending by RM8bil a year.

It sounds good as we now have the option to have more disposable income. Yet, should we encourage spending or saving during this challenging time.

Before answering this question, let’s ask ourselves what we should do with the extra disposable income. Repay credit card instalments, go after items such as expensive household goods, electronic gadgets or gourmet food?

If we are not careful, we will end up spending based on our desire instead of necessity. Hence, having more money to spend is not necessarily good. It depends on how we plan our future finances, and whether we spend the money on “good debt” or “bad debt” as explained in my previous articles.

If we unnecessarily spend the additional income on luxury goods such as a new car which depreciates over time, we are practically paying for “bad debt”, as these items are liabilities instead of assets.

In contrast, if we convert the additional income into “good debt” such as investing in commodities/ shares or to fund our housing loan, we can enjoy the long-term benefits as the value of these assets will likely appreciate over time.

At a glance, 3% taken out from the EPF per month may not be seen as a lot. However, it will become a significant amount in the long term.

For an individual earning RM5,000 a month, 3% equals to RM150. As such, the total amount is RM3,300 for the duration of 22 months (March 2016 to December 2017). Assuming the average EPF interest rate at 6.5% per year (based on the dividend declared this year), the compounding rate for RM3,300 could potentially become RM23,190.64 after 30 years!

Therefore, unless there are really good reasons to use this additional disposable income, it is better to retain this seemingly small amount as retirement funds, giving its potential to grow significantly in the longer term. Besides, the savings in the EPF can also be withdrawn during rainy days to fund the payment for children’s education, purchase a new home and payment of medical expenses for treatment of critical illnesses.

At this testing time when many are faced with the burden of rising costs and economic slowdown, it is important to resist the temptation of instant gratification, be prudent in spending, and be able to differentiate between “good debt” and “bad debt” in making financial decisions.

For those who have yet to opt out from reducing the EPF contribution from 11% to 8%, it is important to use the additional money wisely so as to ensure that your retirement fund is not affected. Every ringgit saved or invested is essential in making a difference in our future financial position.

When I was a kid, my parents encouraged me and my siblings to save. Each of us would have our own piggy banks and they would continue to remind us about the beauty of saving. Until today, I still like this Malay proverb – ‘Sedikit, sedikit, lama-lama jadi bukit’ (little by little, a little becomes a lot).

Datuk Alan Tong has over 50 years of experience in property development. He is the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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