Financial tips for the family to handle expected tough times

The Star Online

IN July, families were wondering how they were going to make ends meet once the price of petrol bolted to RM2.70 a litre. The fuel hike caused prices across the board to surge and people had to redo their budgets to cope with higher costs.

The days of budget adjustments, sadly, are not over. In fact, things are taking a more serious tone. The subprime-induced US recession is now wreaking havoc throughout the world and families are now bracing for tougher times.

Job cuts, wage freeze and cost-cutting measures have accelerated as companies are being hit by what many consider to be the worst economic downturn since the depression of the 1930s. This also has an effect on families, especially when uncertainties might surround the job security of a family’s breadwinner.

“Some readers will definitely be retrenched in 2009. While it is likely the total number of unemployed in Malaysia will be relatively low compared to those now losing their jobs in the developed world, to the affected that will be no comfort whatsoever,’’ says Rajen Devadason, a licensed financial planner with MAAKL Mutual Bhd. He is also CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd.

“Therefore, it is crucial that while there is still viable employment, household breadwinners decide now to adopt a well-thought out budget that will help them preserve cash.’’

While there is limited room to cut expenses for most people, Devadeson says what is often more pragmatic is to simultaneously try to increase sources of income.

His four ideas are:

·Utilise EPF’s Account 2 options to reduce the principal sum outstanding on existing home loans. If possible, pay off the home mortgage as fast as possible.

·In homes with multiple cars, consider selling – quickly – any extra vehicles. If the older cars which are fully paid for are still in reasonably good shape and capable of running safely for at least another three years, then it makes sense to keep those and to sell the newer cars if doing so generates sufficient cash to pay off the existing hire purchase loans.

·Encourage teenage children to work around the neighbourhood by doing chores for cash. Urge them to contribute their added earnings into a family pool to build up cash reserves.

·In single breadwinner households, if the children are old enough to fend for themselves, having the traditional caregiver, usually the wife, also join – or rejoin – the workforce will be helpful in increasing cash inflows into the family coffers.

“Whatever unutilised additional cash flow generated should be channelled into a safe interest-bearing bank account or into a money market fund to build up an urgently needed family cash reserve buffer,’’ says Devadeson.

There is chance that the number of available jobs in 2009 may contract and if getting additional employment proves difficult, Devadeson suggests that people start a small family business.

“In really tough times, common options include running a food stall, washing cars, baking and selling cakes and cookies, cleaning houses, gardening and giving tuition,’’ he says.

He adds that many people will find such viable cash-generating options beneath them but such pride is something to be dispensed with during the tough times.

“Also, unnecessary expenses need to be slashed before doing so becomes unavoidable because of a job loss. That way extra cash can be channelled into savings even while normal income continues,’’ he says.

“As savings grow, the option to judiciously invest in ever cheaper cash-generating investment assets as the economy worsens will rise. Eventually, doing just that will plant the seeds for long-term future family prosperity in 2010 and beyond.’’

Abacus Advisory Sdn Bhd founder and CEO Carol Yip says the upcoming lean times will be an opportunity for families to take stock of what they have and to make substantive changes.

Yip says a family is like an organisation in which each member has an important role to play, and families should sit together and discuss any financial issues they face. “This can be used as a chance to educate your children and set financial goals for them,’’ she says.

Yip also says simple cost-saving rules such as switching off lights, cutting down on electricity and Internet usage could be set. “Families can use the money they have saved instead of their bonuses to pay for their next holiday,’’ she suggests.

She says parents have to lead by example, and practise what they are telling their children. “Action and behaviour is as important as words,’’ she says.

Another important advice is that both parents have to be on the same page. There is no point in one parent making the sacrifice while the other is out buying a second widescreen TV for the house. “Both parents must have common goals in savings and cost-cutting,’’ she says.

The fastest way to save as a family is to look at the activities the family does together. If a family goes out often to have expensive meals, a fast way would be to cut back on that.

The next tip to parents is to reassess the children’s extracurricular activities. “If parents are sending children for, say, piano lessons for the parents’ own fulfilment, perhaps they might want to reconsider if the child does not have any interest in pursing learning such an instrument,’’ she says.

A sensible thing might be for the non-working parent or an existing parent to take a second job should finances take a dip, but Yip says that might not be so easy. Firstly, a downturn means fewer job opportunities. And if one were to find employment, it could have an effect on family ties.

“It depends whether children are understanding or not. Some might feel more appreciative of the sacrifices being made by a parent to support the family,’’ she says.

Other issues will revolve around providing medical care for aging family members and a downturn might mean seeking cheaper but not necessarily lower quality heathcare.

“Family members also have to be aware of the current state of financial affairs in order to make a decision on what to do when an emergency arises,’’ she says.