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Takaful Tips

Financial Planning: Helping You Face Economic Uncertainties

Start planning financially by establishing an emergency fund to help you face economic uncertainties.
Men with shopping trolleys standing in queue

An economic downturn is a real possibility when considering the prolonged global effects of COVID-19 – the question is, are you financially ready to face these uncertainties?

What is an economic downturn?

An economic downturn, or recession, occurs when there is a continuous decline in economic activity. This can be caused by various events including a significant and continued drop in spending, a financial crisis, negative economic growth, or natural disasters including diseases like COVID-19. A downturn is often reflected in the declining numbers of a nation’s GDP, employment rates and production output.

It has been over 20 years since Malaysia experienced its last economic downturn. Felt during the Asian financial crisis in the mid to late 1990s, our country’s GDP shrank from US$100.8 billion in 1996 to US$72.2 billion in 1998. Those of us who were around when the incident took place will likely remember our foreign currency exchange rates with the USA and the United Kingdom doubling seemingly overnight. 

Malaysia only returned to our 1996 GDP in 2003. While we have been fairly stable ever since, the COVID-19 pandemic may lead us and the world into an inevitable global economic downturn.

How will an economic downturn affect you?

An economic downturn will have an effect on most people, but the worst hit will be those who lose their jobs (or do not have one to begin with) and those with significant debt. If you are a new employee, you are also at higher risk if your employers begin cutting jobs.

We can’t control recessions from happening or predict if we will have job security. However, it is possible to prepare yourself for an economic downturn, and the sooner you begin, the better

Start planning financially by establishing an emergency fund

Establishing an emergency fund is the most secure way to survive an economic downturn. Emergency funds provide an important safety net and gives you enough time to get back on your feet during difficult times.

Financial experts recommend having at least six months’ worth of your monthly income in your emergency fund, ensuring it covers your basic necessities and any financial commitments, including loans, mortgages, child support, and so on. If you are self-employed, financial experts recommend accumulating one year’s worth of emergency funds. This ensures you don’t depend on your credit card or take out additional loans, as both can lead to higher repayments later on. 

How do I establish an emergency fund?

Much like Rome, emergency funds are not built in a day, or even months. Depending on your income and expenses, it can take several years to build a six-month safety net. However, this prospect shouldn’t scare you, because starting today is better than not starting at all.

  • Start small. If all you can afford to put aside is RM10 a week, you will end the year with RM520 in your emergency savings. Increase the amount slowly as your salary allows. If you receive bonuses or cash gifts, consider putting a percentage aside immediately before you decide to spend it.

  • Have a separate emergency savings account, one you do not touch unless absolutely necessary. Keep the debit card out of sight to refrain you from spending that money on anything else than a true emergency.

  • If your income is stable and regular, set up automatic deposits so you don’t have to worry about remembering to transfer your money to your emergency savings account.

  • Think of ways outside the box to help you save more money. Consider putting aside all the RM1s, RM5s, RM10s, or RM20s you come across for one year. You’ll be surprised how much you can save that way!

  • Consider subscribing in investment-linked insurance or Takaful plans that do the double duty of providing you with protection while helping you save as well as providing investment opportunities. PruBSN Aspirasi or PruBSN WarisanPlus, for example, gives you investment opportunities to increase your certificate’s cash value.

  • Remember to continue saving as little or as much money you have no matter the situation you are in. Your effort will be worth it!

Downsize your lifestyle to suit the new normal

Reducing unnecessary spending is a crucial way to keep yourself afloat during an economic downturn. You don’t have to give up all your creature comforts, but there are many ways to downsize your lifestyle without too much compromise.

  • Cook and eat at home more often and use local ingredients instead of imported ones.

  • Challenge yourself to stop shopping for a year, perhaps rewarding yourself with something small that you are now able to afford at the end of the year.

  • Take public transportation or change your vehicle to a more economical one.

  • Avoid going on luxurious foreign holidays. If you need a vacation, staycations are a popular alternative, or travel as locally as possible. You can also opt for smaller, cute Instagramable boutique hotels instead of 5-star resorts.

  • If you are renting, moving to a smaller, more affordable place can have a significant impact on your monthly expenditure. Plus, there’s the potential to earn additional income from the sale of furniture or items that won’t fit into your new home.

  • Adjust or establish a budget to help you manage your monthly finances better.

Consider different income and investment possibilities

Getting a second job is not an uncommon practice for those who find their current income insufficient. During an economic downturn, many businesses opt to hire more affordable part-time employees, and this is something you can take advantage of.

  • If your time allows it, get a second, part-time job, do freelance work, or find other employment to add to your current income.

  • Find ways to monetize your talents. If you are a good painter, sell your art. Do you make fantastic cakes? Consider taking orders and selling them to family, friends and neighbours. All you need is an online platform to start selling.

  • Have a spare room? Try renting it out.

  • If you dabble in the stock market, keep a diverse portfolio. Some businesses will crash during an economic downturn, while others will thrive. COVID-19 is excellent proof of this – while many businesses are forced to shut, supermarkets, pharmaceuticals and yes, toilet paper, have become even more successful. The postal service, too, has experienced such a significant increase in demand that many have hired part-time postal workers to help deliver the mail.

  • If you have excess funds, invest in things that will appreciate over time, like land, property, or gold.

  • Investment-linked insurance or Takaful plans are also a great way to generate additional income. PruBSN WarisanPlusPruBSN Setia or PruBSN Impian plans give you returns on your contributions while keeping you and your loved ones protected.

Don’t forget to pay your debts

It may be tempting to put off paying your debts during a downturn, however, not doing so will land you in even more financial trouble as interest rates accumulate and you are slapped with hefty fines. The less debt you have, the more expendable income you have to put towards your savings, so continue to pay them, even if it is just the bare minimum.Will COVID-19 will lead to economic downturn? It’s hard to say for sure, but there is no reason why you should not start preparing yourself now. Even a small emergency fund is better than having nothing saved up at all. If the global economy bounces back and you find yourself still financially secure, you would have prepared yourself for another rainy day somewhere in the near or distant future. At the very least, you’ll find yourself with a comfortable retirement fund at the end of the day.


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