Monday, October 5, 2009

Malaysian Personal Finance Part 1 - EPF

If you earn a salary in Malaysia, 8% of your salary goes to EPF (2009-2010) - Employee Provident Fund - before you can ever see it. This saving scheme is enforced by law and happened automatically, so this makes it a perfect ASS - Automated Saving System.

Your employer will add another 12% to it making it a total of 20% contribution. If your monthly salary is RM 2,500, RM 200 of your money goes to EPF. Your company adds another RM 300 to it so you will have a total of RM 500 in your EPF account.

Effectively you only receive RM 2,300 cash before tax. But the value you are receiving every month is actually RM 2,800 and not your salary amount RM 2,500. A 20% enforced ASS is absolutely NOT a bad thing at all especially during your mid life.

The lowest dividend EPF can declare is 2.5%, generally higher than most bank saving accounts for such a small amount of money. Again makes it a great ASS.

Sounds too good to be true ?

Indeed government force saving scheme like this is one of the greatest thing happen to one's personal finance. Most of the poverty in this country, not by chance, turn out to be those who didn't contribute to EPF.

Are everyone off the hook then ? Well, not exactly. If you have been following this site long enough, one of the fundamentals of ASS is in R E L A T I V E. Most of the people are in debt today, so if you are not in debt and have some saving, you are better than others. That is what ASS is all about. It is the Minimum one HAVE TO DO for his own personal finance. And one of the biggest effects of ASS is its psychological stop on getting into bad debt.

ASS does not make you rich, ASS does not fight inflation, it just give you a good start.

So if everyone has ONE ASS account and you have ONE ASS account then you are just like everyone else. Still in rat race that is. The status quo in the beginning of 21st century, is to create another ASS account yourself without the help of government enforcement. If you are able to setup an ASS account yourself consistently through out the years, you have just strengthen your personal finance from a merely 10% to above 60% !! . . . . . simply because most people fail to do so now.

If you have this 2nd ASS, you have increased your chances of success by 6x ! Because this 2nd ASS account will psychologically tune you into a secure investment in future. So a real personal finance starts at RM 2,300 in above example, not RM 2,500 or RM 2,800. EPF has already been setup and we should just forget all about it, our jobs starts at RM 2,300 !!

What's wrong with EPF then ? Well basically other than above generalization of EPF, everything else doesn't seem too right.

You cannot access the money until you are old, ie. age 55. So practically they are NOT your money. If you die early, it would just be a high premium low sum assured life insurance, paying out to your beneficiary.

In a good ASS, you are supposed to setup the saving system up and forget about it. Let it accumulate by itself over the time. But in real life, everyone is trying their best to get money out from EPF. Why do people need to withdraw from EPF prior to age 55 ? Because they do not have their own ASS accounts !

While it is really arguable if one should or should not withdraw from EPF, but the psychological effect of relying on EPF money is seriously damaging your ability to earn the income you could have been. If you want a house, you setup an ASS for the down payment. When you want a bigger house, focus all energy to increase your income. When your personal finance is setup right, a small increase in your income streams can have double effect in your finance world.

Last but not least, although government setup such provident fund at the name of people, the real intention of such fund management is really questionable. The real target of EPF is to fight inflation. There are some well known inflation hedgers such as stock markets and properties but EPF has less than 25% exposure on these 2 areas while more than 60% are channel back into govertmental mega projects. Generally speaking securities, bonds and loans pay out higher than Fix Deposit rate but still lower than inflation.

So generally we have a great system to start with in Malaysia, ASS is enforced using EPF. However, transparency and ability for EPF to function as it should, may take slightly longer to realize, if it happens at all. People's ability to use EPF in their favor, is still a long haul educational evolution.

Part 1 : EPF


Kris said...

Nice acroynm :P

Hmm..not sure in general , how much percentage wise a person saves up in a month?

It would be interesting to know about that fact :P

Michael Tsen said...

generally ppl don't save, at least not automatically :)

as for how much should one save, has to do with life stage

the younger you are the more you save, the older you gets, the higher chance you know where else you should invest, instead of just saving them ....

Kris said...

Yes. You are correct. When young it is possible to save a lot but don't know how to invest the money due to lack of exposure and knowledge. :P

Thus, i always believe education in financial sense is super duper important. :)

Michael Tsen said...

you have my full agreement on that :)