How Economic Trends Affect You: A Simple Guide to Navigating Financial Changes
We help you break through the jargon to understand economic trends and how you can mitigate their impact – and maybe even benefit from them.
"Be water, my friend. Empty your mind. Be formless, shapeless, like water.” – Bruce Lee
Bruce Lee wasn’t a financial guru, but he was right about being adaptable and flexible, like water. In the same way, we must be able to adapt to any economic trend because they are inevitable. But maybe don’t empty your mind.
Economic trends like inflation and unemployment rates may seem like abstract concepts that folks debate about at the mamak, but how do they affect your daily life? It can’t all just be talk. These trends have a significant impact on your personal finances, influencing everything from the interest rates on your loans to the glass of teh tarik you’re drinking while having that debate at the mamak.
While opinions may differ over how the government manages these trends, we all agree that understanding them can help us make better financial decisions. So, to help you out, here are the Big Economic Trends you must know like the back of your hand.
Inflation (things become more expensive)
Inflation is the gradual increase in prices over time. Increased costs, rising wages, government policies, cheap loans, and the devaluation of the ringgit all play a role in inflation. From an economist’s perspective, inflation occurs when there is too much money in the economy, due to cheap loans and more people spending more money.
But inflation isn’t all evil. A small, controlled amount of inflation is often part of the government’s economic policy to help drive economic growth.
In Malaysia, inflation rates rose to around 3.3% in 2022 due to global supply chain disruptions. This led to higher prices for everyday items like food and fuel, putting a strain on household budgets.
How it affects you:
- Inflation happens in small increments, and the accumulative effect erodes your purchasing power. You’ll need more money to buy the same goods and services. Today, you’re paying twice as much for that teh tarik compared to ten years ago.
- As prices rise across the board, you may find it harder to keep up with daily expenses.
Strategies to manage your personal finances:
- Regularly review your budget and reduce unnecessary expenses. This may require small adjustments to your lifestyle.
- Adjust your portfolio strategy to focus on companies that can pass their rising input costs to their customers, such as the consumer staples sector. Consider investing in real estate or inflation-linked bonds to protect your wealth.
- Take advantage of your hidden talents and hobbies to come up with a simple side gig to earn a little extra income.
Interest rates
Interest rates determine the cost of borrowing money and the return on your savings at the bank. When interest rates rise, loans like mortgages and car loans become more expensive. However, higher interest rates mean better returns on your savings.
In response to the 2008 global financial crisis, Bank Negara Malaysia (BNM) lowered its Overnight Policy Rate (OPR) to stimulate the economy. Cheaper loans made borrowing more accessible to consumers and businesses alike.
How it affects you:
- Higher interest rates mean higher repayments on your loans.
- Higher interest rates benefit savers but can slow down the growth of the stock market as borrowing to expand becomes more expensive.
Strategies to manage your personal finances:
- When interest rates drop, consider refinancing your loans to make the most of cheaper money.
- Choose between fixed and variable-rate loans carefully. Fixed rates offer stability, while variable rates may seem cheaper at first but can fluctuate over time.
- Take advantage of the higher rates to boost your savings. Prop up your savings accounts or put your money into fixed deposits that offer good returns.
Unemployment rates (job and income security)
Unemployment rates indicate how many people are actively looking for jobs but can’t find one. High unemployment can lead to job insecurity and downward pressure on wages.
During the COVID-19 pandemic, Malaysia saw a significant rise in unemployment as businesses cut jobs, leading to financial strain for many households.
How it affects you:
- High unemployment may increase the risk of job loss or reduced hours.
- With more job seekers in the market, wages may stagnate or even decrease.
Strategies to manage your personal finances:
- Make sure you have emergency funds of at least three months of living expenses, plus a little extra for unforeseen circumstances like car repairs or medical expenses.
- Update your skills, or learn new ones, to ensure you stay competitive in the job market.
- Don’t spend what you don’t have. Using a credit card can be handy to collect points and get discounts, but it takes a lot of discipline to repay the full amount each month. Losing your regular income can affect your ability to repay your debts.
Recessions (tough times for everyone)
A recession is a period of economic decline where businesses close, and unemployment rises. During a recession, you might see your investments lose value, and job security might be at risk. While central banks have managed to fend off the risk of recession, we should always be prepared.
Malaysia faced such a downturn during the 1997 Asian Financial Crisis, which led to widespread job losses and reduced economic activity.
How it affects you:
- Job cuts or reduced work hours can severely impact your income.
- Economic downturns can reduce the value of your investments.
Strategies to manage your personal finances:
- Make sure your lifestyle is always a little below your means so you don’t have to live paycheck-to-paycheck – but you can still enjoy yourself. A handy trick here is to use the Envelope Method. Every month, allocate an “envelope” for each monthly expense, plus one more for fun money (nights out, movies, etc) and another very important one for savings. Any excess amount for each “envelope” is carried forward. If you have a little extra fun money after a few months, treat yourself, invest it, or put it into your emergency funds.
- Starting now, assess all your debts and pay down whatever you can, starting from the smallest amount. Clearing small amounts first will give you the motivation to keep going.
Government policies (rules that affect your wallet)
Government policies, such as changes in taxes or social benefits, can significantly impact your disposable income. New regulations or changes in existing ones can affect financial markets, business costs, and individual financial decisions. For instance, in 2018, Malaysia repealed the Goods and Services Tax (GST), reducing the tax burden on consumers. Recently, the government announced a gradual removal of subsidies on diesel and petrol.
How it affects you:
- Changes in tax laws can increase or decrease your take-home pay.
- New rules can affect your financial decisions, such as where to invest.
Strategies to manage your personal finances:
- Keep up to date with policy changes that could impact your finances.
- Adapt your savings or investment strategies based on new policies. Meet regularly with your Relationship Manager to discuss any changes in your goals and risk profile.
And finally…the most powerful strategy for all trends
The general underlying strategy across all these possible Big Economic Trends is to have a comfortable financial buffer. One way to do this is to diversify your passive source of income. A passive income is one which you don’t have to work for. For example, an investment-linked insurance plan will help you accumulate savings, while providing protection for you and your loved ones. Investing in a diverse portfolio of funds is also a great way to make your money work for you. With the help of your Relationship Manager, you can plan your investment strategy and pivot when any of these economic trends emerge to make the most of them.
Economic trends might seem distant and unreal, but their effects are felt in every aspect of your financial life. By understanding these trends and adapting your strategies accordingly, you can protect your finances and make informed decisions that help you thrive, no matter what the economy throws your way.
Disclaimer:
Member of PIDM.
Buying a life insurance policy is a long-term financial commitment. You must choose the type of policy that best suits your personal circumstances. You should read and understand the insurance policy and discuss it with the bank staff or contact the insurance policy directly for more information. Investment-linked Plan is an insurance product that is tied to the performance of the underlying assets and is not a pure investment product such as unit trusts. You must evaluate your options carefully and satisfy yourself that the investment-linked fund(s) chosen can meet your risk appetite, and that you can afford the premium/contribution throughout the policy duration. Return on an investment fund is not guaranteed.
For further details on the benefits, exclusions, and terms and conditions of the product, please refer to the Product Brochure, Sales Illustration, Product Disclosure Sheet (PDS), and policy contract. Underwritten by Tokio Marine Life Insurance Malaysia Berhad (199801001430 (457556-X), RHB Bank is merely acting as a distributor.
RHB Bank Berhad 196501000373 (6171-M)
Member of PIDM.
Buying a life insurance policy is a long-term financial commitment. You must choose the type of policy that best suits your personal circumstances. You should read and understand the insurance policy and discuss it with the bank staff or contact the insurance policy directly for more information. Investment-linked Plan is an insurance product that is tied to the performance of the underlying assets and is not a pure investment product such as unit trusts. You must evaluate your options carefully and satisfy yourself that the investment-linked fund(s) chosen can meet your risk appetite, and that you can afford the premium/contribution throughout the policy duration. Return on an investment fund is not guaranteed.
For further details on the benefits, exclusions, and terms and conditions of the product, please refer to the Product Brochure, Sales Illustration, Product Disclosure Sheet (PDS), and policy contract. Underwritten by Tokio Marine Life Insurance Malaysia Berhad (199801001430 (457556-X), RHB Bank is merely acting as a distributor.
RHB Bank Berhad 196501000373 (6171-M)
