Wednesday, July 7, 2021

COVID AND THE GOLDEN RULE


Covid-19 struck the world in late 2019 where the virus was first discovered in Wuhan, China.  The virus has since wreaked havoc around the globe, causing trillions of dollars in damages and millions of lives lost.

Amidst all this upheaval in our money world, the poor and middle-class are the worst affected.  Many have lost their jobs, used up their life savings and are on the verge of mental breakdown due to all the stress. Some have actually committed suicide due to the unbearable pain resulting from money woes.  In Malaysia, an average of 4 suicides a day were reported for the first three months of 2021.

https://www.freemalaysiatoday.com/category/nation/2021/06/29/a-shocking-statistic-four-suicide-cases-a-day-in-2021/

Now why are the poor and the middle-class so badly affected?  Could they have done something to prevent all their money problems from coming to a boil and resulting in unbearable stress?  The answer is yes, although it many have come too late for many of those suffering right now.

The answer is found in the golden rule of personal finance, that is, pay yourself first.

An accountant friend of mine recently made a rather harsh remark for those who are suffering, especially entrepreneurs who have to continue paying rent and workers' salaries when they are not allowed to operate their business due to frequent lockdowns across the country.  He said, "Why didn't they save up some money earlier after operating all these years?  Can't they just tide over for a few months?"  What he said, though harsh, kinda make sense.  There are some new startups and we can't blame them for getting into trouble because their business is not stable yet.  But there are some businesses which have been operating profitably for decades and they are closing shop due to lack of funds to tide over difficult times.  Now why is that so?  Why didn't they "save for the rainy day?"

Financial success and survival really boils down to financial intelligence which covers ten elements.  Saving money and financial discipline are two critical elements.  I will tell you about all the other elements of financial intelligence at the end of this story.  Let me now digress and tell you about a viral story that most of us have read earlier.  It is the story of the smoker and it is usually told half-jokingly.

A wife asked her smoker husband, "How much does a pack of cigarettes cost?"  "Ten bucks," the husband answered.  "Do you know that if you quit smoking thirty years ago you would have saved enough money to buy yourself a Ferrari?" said the wife.  The husband then asked her, "Do you smoke, dear?"  "Of course no!" the wife answered.  "Then, where is your Ferarri?"

Although the story is often told as a joke, there is a very serious lesson behind it.  It is about the critical topic of saving money.

Most people don't smoke.  But where is the money that they have saved?  Yes, they have saved (did not spend) a lot of money.  But they also did not save (put aside) that money.  You see, there are a hundred good ways of spending our money.  All of them can somehow be justified.  People reward themselves after a hard day or a hard month's work by buying themselves a nice dinner.  Or getting themselves a new set of clothes.  Or a smart phone or some fun gadget.  Or a round of golf with buddies.  Or changing their old car.  Or renovating their house which really needed a facelift.  Or going for that long-overdue vacation overseas.  We can't wait until we can't walk before we go for a holiday, you know.  Months and years pass by quickly.  We did not save any money, because we always have a very good reason to spend it.

In Malaysia, a government survey in 2017 showed that 94% of Malaysians cannot last six months without income.

https://www.imoney.my/articles/malaysians-have-no-savings

And, 75% of Malaysians have less than RM1,000 ($240) in their account.

https://www.everydayonsales.com/news/bank-negara-75-malaysian-are-actually-doesnt-have-saving-more-than-rm1000/

Based on these official figures it is now clear why both bosses and employees alike get into big trouble during this Covid pandemic.  They simply have no savings.  And the reason for this is just mentioned.

On the other hand, rich people are financially intelligent.  That is how they become rich in the first place.  They don't underestimate the power of saving money as one of the elements of financial intelligence.

Why is it that people are not able to save money?  The reason is simply because they have either not heard of the golden rule of personal finance, or, they don't practice it.

The golden rule of personal finance says, "Pay Yourself First."  Although this sounds simple most of the poor and middle-class folks actually don't understand what it means.  It means that "a part of what you earn is yours to keep" as expounded in the classic book, The Richest Man in Babylon.  If you have not read that book you really should get a copy. Google says it is one of the best books about wealth ever written.  It was written about a hundred years ago and the copyright has expired.  You can get it on the public domain like here, https://www.pdfdrive.com/the-richest-man-in-babylon-e17589151.html.

Most people cannot save money because they pay themselves LAST.  They settle their bills.  They pay their daily expenses like food, gas and groceries.  With the high cost of living especially in the cities they soon find themselves out of cash before the month is over. Whatever they earned is paid to everyone else but themselves.

They should reverse this habit.  Each time when they receive their salary or profits from business they should set aside at least ten percent of that money and lock it away safely.  They can then spend the rest of their income.  At first, like the hero character in the Richest Man book, we will find it extremely difficult.  After a few months it becomes easier.  Meanwhile, we should learn how to invest the money we saved in order to make more money instead of letting it lie idle in the bank for a long time, because inflation will erode the value of the money we save.

Using that money we saved to either start a small business or to do investment requires skill.  The more skillful we are in handling business or investment the faster we can double our money.  It may take a couple of failures but once we improve our skills we will be on our way to financial success.

I have no doubt that no matter how tough it is we will somehow weather this storm and survive.  If you have not practiced the Golden Rule with your money, let this be a time to learn a valuable lesson in financial intelligence.  Once the storm is over you can put it into practice and find financial success.  Or at least save you on that rainy day like right now.

Good luck!  And, before I forget, the ten elements of financial intelligence as highlighted by CENFIS, the Centre for Financial Intelligence Studies, are:-

1.  Motivation

2.  Debunking money myths

3.  Residual income

4.  Making money

5.  Saving money

6.  Spending money

7.  Financial discipline

8.  Investing

9.  Emotional control

10. Protecting and distributing wealth



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