1.0 Foundations of Personal Finance & Investment Awareness
Introduction
Whether you're managing your student allowance, planning to save, or thinking about investing, financial literacy is essential. This guide is designed to introduce you to basic but powerful principles that will help you navigate your adult life with confidence.
1.1 High Returns = High Risk
When an investment offers high returns, it usually comes with equally high risk. These types of investments can bring big profits, but they can also lead to significant losses. Always assess any investment opportunities to determine if it meets your risk profile. Not all investments may be suitable for you.
And remember, any investment opportunity that comes with no risk / zero risk is a red flag. All investments have its risk.
1.2 How to Reduce Investment Risk
One of the best ways to reduce risk in investing is by diversifying and spreading your money across different types of investments. This way, if one investment performs poorly, the others may still grow and help mitigate your losses. Diversification helps protect your money from sudden losses.
1.3 Understanding Interest Rates
Interest is the cost of borrowing money or the reward for saving money. For example, if you borrow RM1,000 and repay RM1,100 after a year, the interest rate is 10%. Understanding how to calculate interest rate helps you make smart decisions.
1.4 Why Saving First Matters
When a bank pays you profit or interest annually, your savings can grow over time due to compounding interest. For example, if you deposit RM1,000 and earn interest each year, you can continue to earn interest on top of the previous interest earned, and therefore compounding your initial amount over time. This growth happens because you earn interest on both your original savings and the interest earned. The earlier you start saving, the more your money can grow.
You don’t need to be rich to begin investing. In fact, you can start with as little as RM5 through legitimate online platforms such as licensed digital investment apps. Starting small helps you build confidence and learn without taking big risks. Investing is about consistency, not big capital.
1.5 What to Do When Something Goes Wrong
If you’re having problems with your bank, investment provider, or e-wallet service, your first step should be to contact them directly. Most issues can be solved through customer service or official complaint channels.
1.6 What’s Considered a High Return?
For long-term investments like stocks, cryptocurrency, etc. a return of 20% or more per year is considered high. While this sounds attractive, these types of investments may be volatile and often experience ups and downs. That’s why it’s important to understand your risk tolerance before investing.
1.7 The Impact of Inflation
Inflation refers to the general rise in prices of goods and services over time. When inflation is high, your cost-of-living increases, meaning the same amount of money buys you less. If your income or savings don’t grow at the same rate, your financial power weakens. That’s why saving and investing wisely is important to keep up with rising cost of inflation.
1.8 What Is Net Asset Value (NAV)?
Your Net Asset Value (NAV) is a snapshot of your financial position. It’s calculated using the formula: Total Assets – Total Liabilities. Assets include things you own such as cash, savings, or a laptop; liabilities include debts like loans or credit card balances. The higher your NAV, the stronger your financial health.
1.9 Interest-Free Loans
If your friend borrows RM25 and returns exactly RM25 the next day without any additional payment, the interest rate is 0%. That means no profit or extra cost was involved in the borrowing.
1.10 Positive Cash Flow
Cash flow is the movement of money in and out of your account, income vs. expenses. If you have positive cash flow, it means you are earning more money than you are spending. This allows you to save, invest, or prepare for unexpected emergencies. Negative cash flow, on the other hand, can lead to debt and financial stress.
1.11 Final Thoughts
Financial literacy is about being informed and prepared. When you understand money; how it grows, how to manage it, and how to protect it, you gain control.
Saving isn’t just about putting aside leftover money. It means prioritising saving as soon as you receive income, even before you begin spending. This habit ensures that you always have something saved, no matter how small. Over time, these savings can build up and help you achieve your goals or handle financial emergencies.