This article first appeared in Personal Wealth, The Edge Malaysia Weekly on July 6, 2020 - July 12, 2020

Thomas (not his real name), 61, recently found his employment contract prematurely terminated and replaced with one that came with a 50% pay cut and a three-day work week. This happened even after his employer had announced at the beginning of the Movement Control Order (MCO) period that he and the other employees in the same salary bracket would only take a pay cut of between 10% and 20%.

“This [revised] contract is only valid for three months, after which it will be reviewed before renewal. This is very stressful as I do not know where I stand with my employer. Will I still have a job after three months or will I be required to accept a further revised contract?” he says.

As the head of his family, Thomas’ commitments include household expenses, monthly loan commitments and bills. Although the government’s loan moratorium has helped with the financial commitments for six months, he worries about what will happen after that, considering that the loans were given based on his last drawn salary.

“The Covid-19 pandemic has caused uncertainty for me personally as well as for the economy. I am experiencing first-hand the effects of the pandemic as my employer has been badly impacted,” says Thomas.

“If the business does not improve, there would be little justification for keeping staff employed, especially someone in my position, whose contract will be reviewed every few months. As I did not maintain a savings pool, I have had to reorganise my expenses and commitments on my current monthly salary.”

While Matthew (not his real name), 30, did not take as substantial a pay cut as Thomas, he considers the 15% cut a sizeable reduction as he is the main breadwinner in his family. The monthly shortfall of RM600 has had a major impact on his expenses as he pays the electricity, water, Astro and grocery bills as well as his and his parents’ insurance policies.

“As I did not have to pay my car loan because of the moratorium, I used the money saved to cover my expenses. But I had very little left over for myself, only about RM300. Thankfully, I was working from home, so I did not spend much on travelling and eating out,” says Matthew.

While he did try to put aside some money for a rainy day, he was only able to save about RM200 a month. Job security is a major concern now as his employer has been letting go of staff since the company had to shut down operations during the MCO. It recently re-opened for business.

“The pay cut happened over two months and is now up for review as we have reopened. From this experience, I have learnt the importance of saving money no matter what, because you never know what will happen. We did not know that we would face a pandemic,” says Matthew.

“I have also been saving up to take a bridal make-up course so that it can be a source of side income for me in the future. The course and materials are not cheap, so it will take me some time to get there. But I am not giving up.”

The last 3½ months have been difficult for nearly everyone. Many have lost their jobs or, like Thomas and Matthew, have had to take pay cuts as businesses across all industries struggle to stay afloat.

The latest statistics reveal that Malaysia’s unemployment rate spiked to 5% in April, the highest since 1990. The Department of Statistics also said the number of unemployed persons had gone up 48.8% year on year to 778,800 in April.

Unsurprisingly, the pandemic has resulted in a rise in mental and psychological distress, not least because of financial anxiety, especially with the looming possibility of pay cuts and job losses across industries. In a report by US-based nonpartisan fact tank Pew Research Center, a quarter of adults in the US said the Covid-19 outbreak was a major threat to their personal health and finances while about 24% said it was a major threat to their finances, but not their health.

Mohd Sedek Jantan, head of investment and financial planning at UOB Kay Hian Wealth Advisors Sdn Bhd, says the income loss during the pandemic combined with financial illiteracy and mismanagement shows that a large number of individuals face the risk of considerable debt and associated psychological difficulties, which translates into financial anxiety.

According to him, out of every 20 people he knows, two have lost their jobs and four have had to take pay cuts. “One of my friends, who freelances as an event presenter, is experiencing a seismic impact after three organisers cancelled events in one month. With almost 70% of the preparation completed, it put a heavy financial burden on her personally,” says Mohd Sedek.

“For just one cancellation [at short notice], she lost about RM2,000 to RM2,500 for her deposit with a wardrobe and make-up artist. In addition, she needs to pay her personal assistant a monthly salary of RM2,500.”

He believes that the number of unemployed graduates has definitely increased this year as most companies have been trying to reduce their headcount due to the slowdown in business and cash flow.

“The graduating class of 2020 could face years of reduced pay, limited prospects and job mismatches. One of our approaches to helping young graduates increase their employability is by partnering Talent Corp, which runs a structured internship programme as well as virtual job fairs. During the pandemic, we have also absorbed some of them as casual staff,” says Mohd Sedek.

“Anyone can have money problems, regardless of income or profession. The first thing to do is to accept that your life will be different for a while and then focus on the things you can control. Just because someone is earning a high salary does not mean that he is automatically financially solvent.”

Steps to take

In the early stages of the MCO, the government announced two stimulus packages for the people and small and medium enterprises (SMEs). Recently, it announced its Economic Recovery Plan (Penjana). The initiatives include a six-month loan moratorium, wage subsidies, zero-interest-rate loans for SMEs that qualify and one-off cash assistance for the B40 (low income) and M40 (middle income) groups.

Despite the government’s efforts and the majority of Malaysians spending less because they are working from home, job security remains an issue. Ian Wong, a licensed financial planner and partner at IPP Financial Planning Group, says ideally, one should have three months’ worth of expenses saved up for times like these.

“Three months’ worth of expenses is reasonable to start with. If you want to be extra safe, then save enough for six months. But the question is, how much are your expenses?” he says.

Whether or not a person already has an emergency fund, the first and most important rule is to know what you are spending on, says Wong. This view was echoed by Mohd Sedek and Felix Neoh, financial planning director at Finwealth Management Sdn Bhd.

“Step one is do not panic. It is definitely a matter of concern, but responding emotionally without a strategy in mind will not serve you well,” says Neoh.

“The next step is to look at your finances such as your available cash and liquid assets — and whether these can be disposed of at a profit or minimal loss — as well as the money in your Employees Provident Fund (EPF) accounts and the cash value of your insurance policies.

Jot down your expenses and regular financial commitments as well as any areas in which you can reduce spending.

“When you put all your available funds together and divide it by your [revised] monthly expenses, how many months will the money last? This will give you a better sense of your financial well-being.”

Wong says budgeting is inevitable in this scenario because when there is a possibility of being financially crippled, people need to learn to live on the limited resources they have. “How much do you need to cut down to make sure your money can last at least six months?”

“Look at all your assets such as your savings and fixed deposits. Look also at your liquid assets like stocks, even though cashing out of a stock may result in losses from your initial investment. For bumiputeras, they need to look at their savings in Amanah Saham Bumiputera or Tabung Haji.”

Neoh also suggests leveraging the available benefits provided by the government such as the Prihatin packages for the B40 and M40 (including the benefits under Penjana) and loan moratoriums.

Mohd Sedek advises people to contact their bank if they are experiencing difficulties in servicing their loans. As for credit cards, do not delay the payments, he says. “Credit cards charge a high interest rate on pending payments, which directly affects your credit score. If there is a liquidity crunch, you must make at least the minimum payments to avoid larger bills later.

“You can ask your bank to convert your outstanding credit card balance into a personal loan. For other financing products such as mortgages and hire purchase, the six-month loan moratorium may be worth it for your peace of mind, especially when you have no income.”

Once these steps have been taken, people should consider restructuring their lifestyle to match their current income as well as revising their short-term budgets. Neoh says it is important to focus on your needs first as well as minimise the purchase of unnecessary items until your financial health is normalised. Expenses incurred to generate income should be prioritised as well.

In this regard, Mohd Sedek advises people to revise their current budget to a bare-bones version that covers only the necessities such as rent, utilities and essential groceries. “When combating the effects of Covid-19, not everyone is on the same page. If you are a parent of young children or you are taking care of your parents, prioritise essential items such as medicines, milk and diapers,” he says.

Some may consider reducing their EPF contribution or making a monthly withdrawal under the provident fund’s i-Lestari facility. But that should be a last resort to put food on the table.

The i-Lestari facility, which is available from April 1 until March 31, 2021, allows EPF contributors to apply for a monthly withdrawal from their Account 2. The amount can range from RM50 to RM500, depending on how much one has in the account.

Wong says the maximum of RM500 a month may not be sufficient, though it will certainly help to put food on the table. “If you have other household expenses like petrol for your car to go to the office or grocery runs, RM500 will not cut it. You will need [other sources of income]. But at this point, a person should have all hands on deck to manage his expenditure.”

Neoh says this could be the time when people discover a side hustle or passion. Those who have taken a pay cut can consider working overtime or taking on a non-conflicting part-time job to optimise their free time, he adds.

“Running an online business is one way of doing so. You can set this up on your own or assist those experiencing a surge in business. Gig economy work is also something to look at. This includes ride sharing, doing deliveries or picking up jobs on freelance platforms such as Fiverr,” says Neoh.

At this point, be sure to update your résumé so that it reflects any new or existing skills and experiences that match the job you are seeking. While losing a job can be devastating, Mohd Sedek advises people to lower their job expectations to increase their chances of reemployment.

“For example, if you have lost a job that paid you RM6,000 per month, you may have to lower your salary expectation to RM4,000 per month. Or you may choose to get involved in the gig economy and take on work such as food delivery or ride hailing,” he says.

“This temporary approach will reduce your financial constraints. In some circumstances, employers will rehire staff after the crisis has passed.”

Common financial mistakes

If in dire need, people may consider looking at the cash value of their insurance policies or taking out personal loans. But only do these as a last resort.

Wong points out that there is an unhealthy cultural norm among Malaysians to take out personal loans for things like wedding planning, travel and honeymoons. “Doing so can damage your finances. It is ridiculous that some parties are advertising such loans and encouraging people to put themselves in debt for things like these, which will make them worse off financially,” he says.

“But if you have an emergency, then you have no choice. It is either you take a personal loan or have no food on the table and no roof over your head because of your inability to pay rent. But try not to take more than what you need.”

Wong says if you have an investment-linked insurance policy and access to the money without incurring a penalty, it can be considered during an emergency. For policies that generate a cash value and can be taken out when someone turns 60, for example, these are structured in such a way that the person overpays when he is younger in order to ease his financial burden when he is older using the surplus generated. Hence, withdrawing this surplus means that the insurance policy may no longer be sustainable.

“You need to be aware that this is what you are doing with your policy and you have to put [the money] back at some point or face not having insurance coverage in future, which is very dangerous,” he points out.

Mohd Sedek says even if you have to take a pay cut, you should not reduce your insurance coverage and that a portion of your income should be set aside for emergency funds. “You may reduce your emergency funds depending on your current income. These emergency funds can be placed in a savings account or a fixed deposit to earn interest.

“Individuals should be alerted to the fact that skipping insurance premiums for more than three months can cause difficulties when making future claims. Instead of skipping the insurance premiums altogether, individuals can exercise their right to a premium holiday from the available insurance cash value.

“Alternatively, some insurance providers allow eligible policyholders a grace period of 90 days to pay the premiums. During this deferment period, the insurance company continues to provide protection. However, this is not automatic; policyholders must approach their insurance agent or financial adviser to apply for this deferment.”

How should people be investing?

Neoh suggests keeping some cash in reserve first before investing any extra funds, and a little more if the impact of the current economic conditions on income stability is a concern. If you are experiencing a shortfall in cash flow due to a pay cut, then you should consider reducing your regular savings and investment plans temporarily.

“However, if your cash level remains healthy, you can use the current market volatility and share price weakness to top up your investments or increase your monthly savings and investments,” he says.

In the current situation, individuals should focus on their short-term investment strategy, says Mohd Sedek. This is to ensure the liquidity of the funds when there is a need to access the money. For example, investing in unit trusts is still favourable as it is less volatile than investing in the stock market.

“A preservation strategy should become the priority instead of a wealth accumulation strategy. Have a high allocation to defensive sectors such as consumer staples, healthcare and utilities. However, existing investors who do not require cash from their investments should maintain their investments in equities, preferably dividend stocks,” says Mohd Sedek.

Meanwhile, Wong says if you realise you have cash to spare after budgeting and will not need it for the next three to five years, you should look at the equity markets, specifically the Malaysian or US markets, as they are recovering but not quite to their previous highs.

“A lot of good stocks are currently trading at a discount. You can view this as a sale,” he says.

“Having said that, I generally advise clients to be smart when it comes to investing in the stock market. For example, Malaysia’s rubber glove industry has seen a huge spike in value due to an increase in global demand because of Covid-19. A savvy investor would ask himself, ‘How long will this inflated demand last? Will the demand be as high when the pandemic is over?’”

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