Saving money is often viewed as a stressful exercise. But if we don’t save and manage money wisely, we might end up with money cancers. We all know what cancer is and how deteriorating it is to the body. In my twelve years of experience, I have seen many people having money cancers without even noticing it.
I will share the top three money cancers and some case studies where you could be experiencing the same situation.
You could be having the symptoms, but you have not made the diagnosis. Perhaps after listening to what I have to share, you may see the similarities in these case studies. I will also share the solution on how to remove the money cancer.
Are we living within our means?
You are probably familiar with the concept of living within your means. For most people, our parents have always told us that we should spend within our means and save money.
When I first started working back in the year 2000, I asked myself these questions:
The ICE Jar system
The rule of thumb which I use is called the ICE Jar, based on the one-third rule.
For example, if you are earning a salary of RM 3,000 a month, you need to save RM 1,000 for investments, you can use up to RM 1,000 for your commitments, and you can spend up to RM 1,000 on your expenses.
In other words, a monthly salary of RM 3,000 goes into three jars:
Investment Jar: RM 1,000
Commitment Jar: RM 1,000
Expenses Jar: RM 1,000
I found out about this system after working for seven years and started practicing it right. This system allows me to find out if I am spending more than I should.
Money cancer #1: Overspending
Let me share about the first type money cancer. I want to share a story about a client of mine. He heard that I could help people turn their finances around and get them out of debt.
We diagnosed his finances and found out that he was overspending by RM 150,000, which he transferred into a personal loan and credit card.
At that time, he was earning RM 8,000 a month and paying RM 6,000 to loans. He was spending RM 10,000 a month, which resulted in a deficit of RM 2,000. It was difficult for him to save.
We found the money cancer in his personal loan and credit card, which many Malaysians are facing. According to the ICE Jar, he can only commit to a maximum of RM 2,000 to RM 3,000, but he was paying RM 6,000 a month on commitments alone.
After we identified the money cancer, we found ways to reduce the RM 6,000 loan to RM 1,800.
How did we do it?
We found another loan offering a lower rate of 4 % – 6 % interest to take over the interest rate of a credit card, which is 24 %. Effectively this will reduce the interest by 18 % to 20 %. Of course, you can also do debt consolidation.
Another way to do this is to reduce the installment. If you understand the concept of a fixed loan and reducing loan or the difference between a car loan calculation and a housing loan calculation, this is another way we can reduce the installment without incurring extra interest.
Money cancer #2: Debt from business failure
The second type of money cancer, which I see very often comes from business failure. My mantra is, if I were to ever go into business, I would not want to borrow money because the failure rate of starting your own business is relatively high.
Let us say we have ten businesses that started this year. Out of these ten businesses, 80% of them will fail in five years. In the subsequent five years, 80% of the remaining 20% will fail as well. From a financial planning perspective, it is just too risky to borrow money to fund your business.
In 2008, a client of mine got into an F&B business with a partner. They forked out RM 150,000 each to fund the business using their credit cards. They had an excellent product, but they did not focus on the number one thing which all entrepreneurs need to learn, which is how to sell.
Within six months, they had to close their business. At that time, having to lose RM 150,000 in six months was considered a lot of money.
I always encourage having the qualities and spirit of entrepreneurship. However, if we do not know how to do business and get into it, it will be a risky endeavour. For more case studies, you can find out how we help James overcome his deficit of RM 18,000 & save RM 10,000/mth
How did we fix it?
I advised him to raise the money among his friends and family, who has a fixed deposit account. At that time, the interest for a fixed deposit account is 4%. He raised RM 150,000 from three relatives and agreed to pay them back with 5% interest.
From a deficit of RM 3,000 a month, he managed to save on interest and recovered quickly. After settling the RM 150,000 credit card debt, he has a saving habit of RM 3,000 – RM 4,000 a month. He also saves RM 500 a month for his daughter’s education and bought two properties at RM 1.7 million each.
Money cancer #3: Over-investing
In 2012, there was a property bull run. Many Malaysians, including myself, got caught in the over-investment of property. This third type of money cancer is the result of over-investing.
I knew people who can save RM 2,000 a month, but they ended up paying RM 10,000 in property installment.
So if they could only save RM 2,000 a month, they are over-investing by RM 8,000. Having a credit card or personal loan debt is very easy to solve, but over-investing in property is harder to fix.
In 2015, it was hard to force-sell a property because of the market overvalue at that time.
Learn it for yourself
You can also download the ICE JAR workbook and do it for yourself. With this workbook, you’ll be able to find where the money cancer is.