The Hidden Cost of Everything: Why Your Money Needs to Work Harder

Have you ever felt like you’re diligently saving or investing, yet your wealth seems stagnant? You’re not alone. Many people underestimate the hidden costs that erode the true value of their money. This article delves into the concept of cost of funds and why it’s crucial for achieving financial success.

Understanding Cost of Funds

Simply saving or investing isn’t enough. You need to consider the cost of funds, which encompasses two key components:

  • Opportunity Cost: This refers to the potential return you miss out on when you use your money for something else. Let’s say you withdraw RM50,000 from an EFP account offering a 5.5% dividend (as of 2023). By taking out that money, you lose the opportunity to gain that potential 5.5% growth each year.
  • Inflation Cost: Inflation is the gradual rise in prices over time. As inflation increases, the purchasing power of your money decreases. For example, imagine a loaf of bread costs RM5 today. With 2% inflation, the same loaf might cost RM5.10 next year.

The Malaysian Context: Counting the True Cost

In Malaysia (as of Q1 2024), the inflation rate sits around 1.8%. Combining this with the opportunity cost, the cost of funds for Malaysians can be significant. Let’s revisit the car purchase scenario:

  • Withdrawal from EFP: You withdraw RM50,000 with a potential 5.5% annual return.
  • Combined Cost of Funds: The combined cost of funds (opportunity cost + inflation) is approximately 7.3% annually.
  • The True Cost of the Car: After 9 years, the total cost of funds would be RM94,268.70. with car depreciation to RM15,000, the actual cost of the car becomes RM79,268.70.

This example highlights how neglecting the cost of funds can lead to a distorted understanding of how much you’re truly spending.

Making Informed Decisions

Understanding the cost of funds empowers you to make smarter financial decisions. Here’s how:

  • Compare Costs: When considering a purchase, compare the cost of the item with the potential return on investment if you used that money elsewhere.
  • Prioritize High-Yield Savings: If you need access to your money, consider high-yield savings accounts that offer a return that at least keeps pace with inflation.
  • Invest for Growth: Invest a portion of your funds in assets with the potential for long-term growth that outpaces the cost of funds.

Beyond Malaysia: A Universal Concept

While the specific numbers may differ, the cost of funds is a universal concept applicable to everyone. By factoring it into your financial planning, you can ensure your money works harder for you, paving the way for long-term financial well-being.

Taking Action:

Ready to get started? Here are some additional resources:

  • Explore online resources on the cost of funds and its impact on financial planning.
  • Consult a financial advisor who can help you calculate your cost of funds and create a personalized financial strategy.
  • Start tracking your expenses to gain a clearer understanding of where your money goes.

By taking control of your financial literacy and understanding the hidden costs that impact your money, you can unlock greater financial freedom and achieve your long-term financial goals!

Author

Jason Koeh

Author of The Slave of Money and developer of The Template of Financial Freedom TM; with Capital Markets Services Representative

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