Households Saving Rate

Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.
~ Will Rogers ~

Household Saving = Income - Expenses

Net household saving is defined as the subtraction of household consumption expenditure from household disposable income, plus the change in net equity of households in pension funds. Household saving is the main domestic source of funds to finance capital investment, a major impetus for long-term economic growth. This indicator is measured as a percentage of household disposable income.

You need to save. I need to save. We need to save. But the true of the matter is, no one save!

We have heard it so many times. It's a statement that even a 2 years old can recite. You need to save money. However statistics shows that we are really not saving. At least not saving enough.

As highlighted in the recently published State of Households II report by Khazanah Research Institute (KRI), indicates that more than 50% of the country’s urban households did not have any savings, and 20% would only be able to survive for less than three months if their incomes were cut off.

This is a shocking number, but not a surprise for us. We know we are in trouble, just that we do not know how dire we are. Will this findings shake us to realise that we need to do something intentional with our finance?

Similarly, Bank Negara’s Financial Inclusion and Capability Study finds that only 6% of Malaysians can survive for more than six months, and 18% up to three months, if they lost their main sources of income.

As it stands, 65% of household income in Malaysia is sourced from paid-employment.

The risk is most prevalent among the lower income group, which is defined as households earning less than RM3,000 per month.

Malaysia’s unemployment rate stood at 3.4% as at June 2016, up from 3.2% a year ago.

Official statistics show that the median household income in Malaysia has improved to RM4,585 per month in 2014 from RM3,626 per month in 2012.

For the low-income group, who makes up the bottom 40% of Malaysian households, the median monthly income has improved to RM2,629 from RM1,852.

The middle-income group, who makes up 40% of Malaysian households, on the other hand, saw an improvement to RM5,465 per month from RM4,372 per month previously, while the better off, who make up the top 20% of the country’s households, earn a median income of RM11,610 per month in 2014, compared with RM9,796 per month in 2012.

It notes that Malaysian households spend most of the income on housing, transport and food – prices of which are all on a rising trend. Food inflation, in particular, has risen faster than overall inflation. 

The lower-income group remains worse off. 

KRI points out that richest households need only to allocate 9.9% of their monthly expenditure, or RM992, on food, while the poorest households, who earn less than RM2,000, have to spend 30.4%, or RM403, of their monthly expenditure on food

According to KRI, low-income households that cannot afford to buy all those high-valued items with cash have resorted to loans and credit to fund their consumption, while the wealthiest tend to pay by cash. 

It notes that while the better-off choose credit based on interest rates, the least well-off, who tend to have low financial literacy and limited access to debt, choose based on what is on offer and the instalment payments they can afford, rather than the true Annual Percentage Rate (APR). The latter could ultimately result in the least well-off paying significantly higher prices for their consumption. 

“In our previous state of households report, we had proposed several measures to reform household debt such as requiring all providers of consumer credit to prominently advertise the true APR, realigning the regulation of consumer credit between the various government agencies currently in charge, and mandating the teaching of basic financial literacy in schools. To date, these proposals have yet to be implemented,” Charon says, adding that it is important for consumers to know the actual costs they are paying through credit purchases.

Meanwhile, Malaysian household savings stood at 1.5% of adjusted disposable income in 2014, which is the last year for which such data was publicly available. Between 2006 and 2014, household savings averaged at 1.6% of adjusted disposable income. 

By comparison, the US household savings rate, which is generally acknowledged as being very low, is much higher at 5%. 

“The ratio of 1.5% of household savings to adjusted disposable income in Malaysia is an average figure; some households may save far more than others, and are therefore more financially resilient,” KRI says.

Key Take Away:

• We definitely need to save more than 1.5% per month.
• We need to understand what is Annual Percentage Rate (APR) before taking up any loan
• We need to save to prepare our emergency fund 

Knowledge Resources:
https://www.gfmag.com/global-data/economic-data/916lqg-household-saving-rates
https://data.oecd.org/hha/household-savings.htm
http://www.thestar.com.my/business/business-news/2016/09/03/many-malaysian-households-at-risk-of-shocks/