Disclaimer: I am by no means an expert on the subject matter. Treat this post as a personal opinion of myself with a limited experience and knowledge at the time of posting. If you have any questions, concerns or objections about my point of view, please refer to an actual expert on the subject matter.
Introduction
Have you ever had a conversation about money? Probably the obvious answer is yes, but you would be surprised by the amount of people that never talk about it. For some people, personal finance is a private matter and shouldn’t be discussed. For me though, I think that money is an important subject as everyone would have to deal with it anyway, and being ignorant about the subject would only lead to problems down the line. So, in this post we will discuss about what we should or shouldn’t do about money (especially for students).
Savings and Investments For Students
I would like to clarify. For most students, investing is a bad idea. I know it sounds a bit odd, but here’s the thing. Contrary to somewhat popular society believes, when we are a student, we are currently in the poorest state of our lives and not fit to be involved with investments. Moreover, most of our money came from our parents allowance, student loans, scholarships and financial assistance. We don’t have a stable income, yet we have to live like an adult by spending our own money on foods, rent, school fees, bills and so much more. These make our investment potential so much lower than a working adult.
For example, a working adult with a RM3000 monthly salary could easily keep RM600 each month (20% of his/her income) as an investment, while for a student with a RM1000 monthly allowance could only barely survive for the month (my experience being a student in Klang Valley is so much expensive). We are much better to allocate 100% of our money on our daily expenses and education rather than investing.
Instead, I would suggest students to make a habit of saving their money. For me, I allocate RM50 each month for auto deduction into my emergency fund account. Contrary to investing, the goal here is keep a consistent savings for each month without fail and not to accumulate wealth. This will benefit us in the long run, when we actually have the proper income to invest. We can just build onto the previously developed habit while we were a student.
Emergency fund should make up at least RM1000 or enough to cover 3 months of our spending, whichever possible. As the name suggest, emergency fund should only be used when an emergency is present as desperate times call for desperate measures. The account which we store our fund should be highly liquid and accessible at the moment of need. One example of this is keeping a separate savings account just for the fund, not in the form of unit trusts, stocks or precious metal like gold or silver as these asset classes are volatile and quite hard to liquidate.
Spending and Budgeting
For budgeting, I personally use the famous 50/30/20 rule (not actually 50/30/20, as I accounted for my needs as a student but you get the idea). That is, 50% of my allowances goes to my personal needs. Another 30% goes to my wants and the other 20% (or RM50 in this case) goes to my savings. The main idea here is to split your money into 3 accounts: needs, wants and savings. The actual percentage of the split depends on you personally according to your needs and financial capacity. The reason for this split is pretty simple. We are trying to avoid overlapping and accidental use of allocated budget: you don’t want to use your savings to buy a cup of coffee at a cafe, for example.
To avoid overspending, I often track my spending on my phone (often, not always – as I get ‘lazy’ sometimes). This ensures that I know what I spent on and how much. This help me to create a proper expectations and planning for my budget in the upcoming months. In case I overspent, I will search for alternatives that is cheaper. If not possible, then I simply allocate more money for that category.
Student Income
Most of my income came from my scholarship allowances. Some of them come from my part-time jobs and financial assistance from the government. In the future, if this blog goes live, it also will be a source of income. For students though, I highly don’t recommend doing part-time jobs unless during a semester break or if you absolutely need to in order to survive in university. I did it for quite some time, and it really did messed up my CGPA. So yeah, try to avoid it.
Financial Protection: Insurance and Takaful
For students, I think personal insurance is helpful but not necessary. If you’re able to go for one, why not? The reason it wasn’t necessary though is that students mostly are not breadwinners (the main financial provider in the family): in case any accident happen, they wouldn’t affect the financial well-being of their family as much, so the stake is less. Moreover, most universities already well-equipped their students with a group insurance, so any medical treatment would cost less or wouldn’t be charged at all.
Final Remarks
Being a student especially in cities can be tough as the cost of living is quite high. But with enough resilience and mindfulness about money, it could ease our journey a bit and we can expect a better outcome after graduation when we joined the workforce. Don’t forget to enjoy during the study years: yes, the challenge is there but for most people they would attend university only once in their life. I would like to think of our 20s as the golden age: the potential is high as there is not much commitment yet and we are still young and energetic enough to learn new things and get a proper education. It’s the time to build ourselves up from scratch so that we could be what we want to be. If we had given up so early, we would pay dearly for the cost of regret later in our life.
Bonus Section: The Myth – Gold Price Always Go Up
I’m putting this here just to debunk a myth that most of my friends believe, and I’m pretty sure many people did too. They would laugh at me if I’m about to claim that betting 100% of your money on gold is a foolish move. The reason for this is simple: for any given asset class that could experience appreciation (increase in value or price), they could also depreciate (loss in value or price). There is no magic in this, even gold.
It’s not even rocket science, just think about it. There are thousands if not millions of investors out there with respective qualifications from economics, finance, banking etc. which is smart enough about money than most people. Yet most of them diversify their assets by investing in real estate, stocks, unit trusts and bonds, even cryptocurrency, not just mere precious metal like gold. If they are so smart, why would they avoid putting everything on gold, or even other asset class? The reason is because they know there isn’t a single type of investment that is foolproof: investments will always carry opportunities and risks, no matter how small it is, and in order to minimize these risks is to diversify their assets.
Even throughout the history of gold, we can see the prices going up and down. In this example, I am citing the data from Microtrends.net. In 1980, the gold price peaked at around $633.75 per ounce. After the year, gold price dropped below the peak value in over the span of the next 27 years, which leveled again around the year 2007. In other words, if somebody had bought gold in the year 1980, it would take them over the next 27 years to recover their capital from the losses.
Don’t get me wrong, I’m not against gold in any way. In fact, gold is a useful tool. As for many experts recommendation is to keep around 5%-10% of our portfolio in gold to hedge against inflation. Many of them also actively trade in gold to gain revenue from capital appreciation. The issue that I’m opposing here is the one that is investing in gold blindly, without any knowledge whatsoever. When somebody invests without the proper knowledge, it is no longer called ‘investing’. It’s called betting. Monkey do what monkey see, and when they saw everybody was jumping on gold, they bought it out of fear of missing out – FOMO, not out of due diligence.
Case Study: 2008 Financial Crisis
I have an example for this no-risk fallacy, although the situation isn’t involving gold, yet the same fallacy exist. It is the 2008 subprime mortgage crisis in the United States which bring the global economy to a meltdown overnight. During this time, everybody believes in the same thing: the price of houses will never go down. People take out loans from banks to buy houses, which in turns generate revenue from rent and capital appreciation. Everybody said there is no risks: you won’t go bankrupt from mortgage loans as the interest rate for mortgage is at all time low (the Federal Reserve set the fed funds rate at 1% in order to boost the American economy). The rating agency which benefitted from the real estate buying frenzy falsified the rating of the property bonds as triple-As (AAA) and not the actual deserved rating. Banks lent out money without any background check whatsoever: offering ‘ninja loans’ which stands for “No Income No Job Assets – NINJA” as it would only benefitted the banks to lent out these money to home buyers.
What happened next is a catastrophe. After the housing market corrected itself from speculation, the housing prices go down drastically as the supply of houses far exceed their demand. Millions went homeless and unemployed as they couldn’t afford to pay for their loans. Wall Street crashed overnight after the mortgage bubble ‘popped’, as most companies had invested into real estate bonds. The most shocking was what seemed impossible at the time. Lehman Brothers – the fourth largest bank in the United States went bankrupt as they couldn’t support their Mortgage Backed Securities (MBS) portfolio. As a result, the US economic meltdown sent a ripple effect throughout the global economy, slowing down the global market in Europe and Asia.
Bonus Remark
Readers are suggested to do more research on the subject on their own, but I want to assert the previous point. Do not let these ‘no risks investments‘ fool you. There is always risks involved. You just need to be knowledgeable to know one. One question I often get asked around is “What is the best investment?”. If there is one type of investment which is foolproof, I would say it is investing in knowledge, as knowledge sets apart the truth from falsehood, and sets apart the idiot and the informed investor. Because “What is the best investment” had no definitive answer, really. It just depends on you personally, your preferences and the risks you are willing to tolerate. If you had no answer on “What is the best investment”, that could only means the current knowledge you’re having isn’t enough and you shouldn’t be investing at all. In that moment, you need to realize and should focus on learning instead.