Did you realise that cooking a pot of curry costs you more in this year than it did in 2013? Red chillies costs 100% more now (in Kuala Lumpur) than it did in 2013, all thanks to inflation.1
Malaysia’s inflation rate hit 3.3% in June 2014,2 up from an average of 2.1% in 2013, which has led to rising costs of living.3
In part, the ballooning inflation is the result of a series of subsidy cuts by the government to ease concerns over the nation’s high debt burden and fiscal deficit. Among the measures taken were a 10% increase in petrol pump prices and a rise in power tariffs of about 15%, steps which are causing a chain effect of price increases in other necessities such as vegetables and meat.4
Looking at the bigger picture, the subsidy rationalisation, price hikes and other initiatives are needed to help bring in higher revenue for the country, reduce gross development spending and contain the fiscal deficit at 3.5% of gross domestic product (GDP).5 However, caught in the middle are Malaysian consumers who face battles on both sides – burgeoning household debts and rising prices that slowly but surely erode their purchasing power.
Living on borrowed money
Based on data from 2003 to 2013, household debt in Malaysia has risen some 12.7% a year, climbing to 86.8% of GDP by the end of 2013 compared to 57% in 2002. It is worrying that Malaysia has one of the highest debt levels in Asia.6 Of all forms of debt, personal loans recorded the biggest increase at an annual rate of 21% for the period between 2010 and 2013, representing 16.8% of the total household debts.7 More than half of one’s salary goes to paying debts, which is a vulnerable financial position for a household.8
Inflation eating up purchasing power
With inflation, purchasing power deteriorates. Just consider the price of a plate of chicken rice 10 years ago against the price today and you would have witnessed inflation at work. In a nutshell, inflation means the same ringgit amount has the power to buy you less goods and services than before. Inflation is especially worrying for those who stockpile on cash.
The purchasing power of their capital shrinks with rising inflation and that may jeopardise their quality of life in the long term.
The current economic scenario seems to leave many Malaysians in a quandary. On one hand is a large amount of debt to service and on the other is money with deteriorating purchasing power. How does one manage this financial situation then? While it is not possible to avoid inflation altogether, there are ways to counter its ill effects and manage debt. It calls for a two-pronged strategy to fight inflation and rising cost of living.
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CONSOLIDATE TO
DEFEND
To fight inflation you need to defend your
capital, which means to get the most bang
for your buck.
Deal with high-interest debts
Dealing with high-interest debt should be high on your agenda. Imagine this scenario: you have a burst pipe and as a result, your water bill is sky high. To reduce your water bill, you would mend the pipe first, rather than skimp on your shower, right? Paying a large amount of interest every month is like water flowing out from a burst pipe. Fix that first and you would have spare cash to flow to other areas. If you have outstanding credit card debts or other loans with high-interest, it may be wise to allocate a portion of your salary and any unexpected income (eg. bonuses, inheritance) to pay off your debt. You may want to work out a debt repayment plan to effectively whittle down your high-interest loan amount within a stipulated time frame. You may also want to consider balance transfer schemes such as HSBC Balance Transfer to enjoy savings on the interest you need to pay on your outstanding balance.
Review outdated home loan structure
Home loan interest rates may not be as high as credit cards or personal loans but you may still be able to push it down as low as possible. You may want to review your current home loan interest rates against the prevailing market rate. If it is higher than the prevailing market rate, you can opt to restructure your home loan or refinance it with another bank offering a lower interest rate. With the lower interest rates, you will be able to save on monthly repayments and put some money back into your pocket.
Continue saving a portion of your salary
If debt is under control, you may want to look into your savings. It is never a bad idea to save, even during inflation. Savings are especially useful for unexpected expenditure. Say, after a heavy thunderstorm, you discover that your roof leaks and the repair costs RM1,500. If you have no savings, you may need to dig into the money allocated for your monthly needs which may force you to cut back on some necessities. With savings, you can easily solve this emergency without bursting your monthly budget. Savings are also useful when an investment opportunity presents itself. You can take advantage of it immediately with cash. Another good place to use cash is for the purchase of major items, such as electrical goods or a new laptop. At some stores, you may get a better deal when you pay cash, letting you save even more.
Watch out for lifestyle inflation
Understandably, when you are used to a certain standard of living, it is hard to scale back. You would rather spend on a RM10 caramel macchiato than a RM2 kopi-peng. That’s an example of “lifestyle inflation”. It happens naturally when your income rises and it isn’t necessarily a bad thing. However if your income falls short or your tastes for finer things outpace your income, the lifestyle that you have become accustomed to may become a burden. In such situations, you may want to be clear on what is a treat or reward and what you can comfortably incorporate into your lifestyle.
Lifestyle inflation may also happen from a purchase that creates a ripple effect causing higher spending. For instance, you may buy a more expensive car which you may have budgeted for but failed to account for the unanticipated expenses: higher ongoing maintenance costs, insurance premiums. These are “shadow costs” which may not be obvious at the time of purchase but will appear in due time. While we cannot account for all unexpected expenses, you may want to do your due diligence when making major decisions such as buying a bigger home, a more expensive car or enrolling your child for education abroad.9
STRATEGISE TO
ATTACK
Just defending your turf may not be enough
to overcome the rising cost of living. You
may need a strategy to attack it and where
possible, even profit during times of inflation.
Invest intelligently
Saving is well and good, but it is not enough, if you want the possibility of beating inflation. If you save your money in low-return financial products, the returns you gain may not be enough to match the inflation rate. What that simply means is that your savings will be worth less over time. To combat inflation, you may want to channel some of your savings to investments and find instruments suited for rising inflation. Here are 3 tips to consider when reviewing your financial portfolio:
- Rethink investments that provide fixed returns
You may want to reconsider some investments, such as bonds that provide a fixed yield rate that does not increase over time. For example, if you buy a 20-year bond that pays a 4% yield rate, but inflation skyrockets to 10%, you will be losing money. No matter how safe you think the bond is, your returns are diminishing in terms of purchasing power over the years.10
- Consider investments that can increase cash flows
Invest in businesses or financial vehicles that have pricing power. For example, a restaurant chain can increase prices should their costs increase due to inflation. Or if you rent out a property, you can increase rental in tandem with rising costs.10
- Diversify your investments to hedge inflation risks
An inflation hedge is “an investment that is considered to provide protection against the decreased value of a currency. An inflation hedge typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets which may decrease in value less rapidly than the value of the currency,” as explained in Investopedia.com. Some investments that are perceived as not directly affected by inflation are commodities such as gold.11
However, just like any investment, a thorough understanding of what you are investing in is needed before embarking on the investment. Speak to your HSBC Premier Relationship Manager or walk into any HSBC branch for more information on risks and potential returns of each investment.
Make the most of your savings
If you have spare cash or are saving money towards a goal, you may want to consider placing it in financial instruments that offer a rate that is higher than the inflation rate. One such option is a Fixed Deposit account such as HSBC’s Time Deposit which offers an interest of 5.88% p.a. if you invest at least RM100,000 in selected wealth products and place a minimum of RM100,000 in Time Deposit (up to maximum of RM300,000).12 Fixed Deposits let you grow your money. However, they do limit your flexibility as your money is locked in for a fixed tenure. Withdrawing your Fixed Deposit prematurely will incur penalties. If you prefer greater flexibility, you may consider other investment options such as Unit Trust Funds, Structured Investment for potential higher returns.
Consider investing in property and other real assets
In times of inflation, “real” assets such as property may offer a hedge to inflation risks. Real assets are tangible goods that you can see, touch, and use; as opposed to a ‘nominal’ asset, like stocks or bonds. The rising prices may also increase the resale value of your property over time.13
Consider annuities with increasing guaranteed income
Investors are increasingly using annuities as part of their future planning. In short, an annuity is an insurance product that pays out a steady income stream on a future date whether monthly, quarterly, or annually for a specified number of years. One factor to take note is that the purchasing power of those payments can still be eroded by inflation.14 To counter that problem, do consider annuities, such as HSBC’s UniversalTreasure, that provide increasing annual guaranteed income in the form of Guaranteed Cash Payment that may keep up with costs of living. (The percentage of Guaranteed Cash Payment (GCP) shall depend on the chosen premium payment term (Single Premium or Regular Premium) and type of GCP (immediate GCP or deferred GCP). The type of GCP shall be selected at the inception of the policy. The GCP and Guaranteed Maturity Benefit will only be payable provided that all premiums due and any interest charged on late premiums and any other indebtedness to Allianz Life are paid.)
Lastly… stay invested
Stay invested and stay focused on your financial goals. Periodically, review your portfolio and realign your asset allocation. It is important to take a long-term view on your investments to avoid knee-jerk reactions to market developments.
BE PREPARED FOR HIGHER INFLATION
Brace yourself. The inflation rate is expected to rise above 4% with the introduction of the Goods and Services Tax (GST) in April 2015.15 How far ranging will the effects of the GST and subsequently, the higher inflation rate be? We will soon know. But for now, it may be the time to take a critical look at your savings and investments to reposition them for the impending rise in living costs.
If you need assistance in reviewing your portfolio, please feel free to schedule an appointment with your Relationship Manager or walk in to any HSBC branch.
Sept 2014
