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You know that saving is important. Check. You practice a good savings habit. Check. You maintain good savings amount regularly. Check. You have a good purpose for your savings i.e. retirement, emergency, additional funds, medical expenses, family, etc. All checked. Great! You definitely seem to have your saving fundamentals in the right order.
But are you really saving it the right way?
From our recent survey on the saving habits and practices of Malaysians, here’s what our fellow respondents had to show from which we gathered are very common mistakes people make despite their noble attempt to save and grow their finances.
1. 2/3 use their savings account only which generates very low interest
A savings account is likely the first investment most of us ever make. Certainly it is the safest investment option with the convenience of accessibility; ideal for building of emergency funds or for daily use. On a long term scale, it would not be a prudent choice to have all your eggs in one basket, let alone relying solely on the interest rate a savings account provides to achieve your financial goals.
A quick look at our local bank savings account interest rate by Malaysian Deposits, iMoney.my and Ringgit Plus will show you that the most basic savings account pays an average interest of less than 1 percent a year. So for every RM1,000 ringgit saved you may probably generate more or less about RM10 a year, which is very little profit.
As a start, you should divide your savings account into sub-accounts with specific purpose. This is to prevent unintentional spending for what should be meant for emergency usage or for your future (retirement planning etc.).
2. Most think that fixed deposits alone can generate savings
The interest rate on fixed deposit (FD) is much higher than a regular savings account and it is guaranteed until the given maturity date. And so it is a preferred choice for most, an avenue for safekeeping of our funds. While, the advantages of FD are that the interest rate is guaranteed and accessibility to the funds (for withdrawal) is easy, but on the flipside, by solely relying on FD over a long period, your money’s buying power might be eroded over time when inflation can be higher than the interest rate paid.
3. Put all your money in high-risk investments only
As the saying goes, high-risk – high-return, low-risk – low-return while no risk – no return. When investments offer high-return for your money, this means it is risky. No doubt, many investments have the potential to double your savings, but this takes times. But the trouble is that, most investors, just like us, are attracted to making big money in a short period of time, and this is where the risk lies. So chances are you might end up with a handsome return or completely lose all your hard-earned savings overnight. Or investing in high risk assets without professional knowledge is no different from speculation, as speculation is like gambling your hard earned money away.
So the best way to grow your savings is to diversify, diversify, diversify!!!
Diversifying is without doubt a smarter way to save and invest. Diversification is the golden rule to investing and is vital as it helps to reduce the impact of any single investments going down. It also provides an opportunity to boost your return potential overtime. While this might be easy to say, when it comes to making any decision on your money, it can be hard to figure out the right thing to do, especially when it comes to balancing between the security of your funds over market opportunity. So, the take away is that by diversifying your savings it can help you to achieve both financial security and freedom.
There are different kinds of asset classes / investment products which you could consider. The main asset class are Equities (i.e. stocks), Fixed Income (i.e. bonds), Cash Equivalent, Property and Commodities (i.e. gold, collectibles). However, there are a few things to be considered such as: –
- How much do you want to invest?
Are you looking to invest a lump sum, or set aside a regular monthly amount? And how much money do you have available? Is this your emergency fund? You are advised not to use your emergency fund for investment.
- How long do you want to invest?
Certain investment products run for a fixed period of time, so if you have a specific date in mind as to when you need access to your funds, then some product types won’t be necessarily right for you. Certain investments, such as unit trust takes time to see results and shouldn’t be considered as a short term investment.
- What are you planning to use the money for?
We all have different reasons for savings, and the purpose of your investment can affect how much risk you’re prepared to take with your money. If your investment is to pay for your children’s education, then you may be investing over a long period of time. If your investment is for retirement, then perhaps you can choose a lower-risk investment option.
- What is your risk profile?
How do you feel about investment risk? Like the saying goes: the higher the risk, the higher the returns. Imagine you might incur losses on your investment, how much loss you could stomach?
- How much flexibility do you need?
It’s important to note that when you invest your money, it can get tied up and is no longer easily accessible. But, if you have a sudden need for cash, how quickly and easily can you liquidate your asset? And what’s the penalty for doing this?
It is always a good idea to consult an appropriate professional or financial adviser on the particular investment in relation to your own circumstances.
Alternatively, you could consider AXA Saver, an insurance savings plan with 3 key benefits to meet your saving needs; guaranteed annual income, growth opportunities via dividends and investment upside as well as insurance protection with a short payment term of just 4 years. If you have a moderate risk appetite, able to commit to a long-term investment and looking for protection at the same time, then this might be suitable to you. Or, if you are unsure of your risk appetite and would like to talk to our AXA agents, click here.
Well as the saying goes, remember “Never to put all your eggs in one basket!”
Happy saving and investing!