August 8, 2016
Ever wondered what your actual purchasing power is these days? Fresh graduates in Malaysia are not only finding it hard to negotiate for higher starting salaries, but are now caught having to stretch out their money given the higher cost of living.
To give you a clearer estimation of your purchasing power, Comparehero.my has compiled several economic indicators and salary indexes and has come up with the Nasi Lemak Index. (Think Big Mac index, but based on something more relevant to Malaysians.)
The formula is pretty simple:
Net disposable income = [Gross disposable income – (gross disposable income X inflation rates)] X 100
Gross disposable income = Starting salary – [starting salary (Debts service ratio + gross savings to income ratio)]
Nasi Lemak Index = Net disposable income/starting salary X 100
Based on the table above, it is sufficient to say that our Nasi Lemak Index seems to be stagnant and may even drop in the following years. This translates into not only lower purchasing power but also less savings and investment proportion by young executives in the near future.
Let’s sort out each indicator in the Nasi Lemak Index and see why the future of fresh graduates is gloomier than ever:
According to online recruitment platform JobStreet in its latest survey, 60% of fresh graduates expected a salary of RM3,500 (US$818) for their first job, while 30% want to be paid as high as RM6,500 (US$1,520). However, the average salary offered to fresh graduates in Malaysia is between RM2,100 to RM2,500 (US$491 to US$585).
It is depressing that the starting salary range has not grown for the past three to four years, however, should this be blamed on the employers for their reluctance to offer higher salary packages?
Many argue that fresh graduates today are not being realistic in demanding for salary over RM3,500 and above as they do not have the adequate skills and experience to fulfill the job. In addition to that, poor English proficiency and lackadaisical attitudes are still major issues faced by many fresh graduates resulting in lower employability.
Excluding tax relief and other incentives including BR1M, this does not alter the fact that their disposable income would be of below RM 2,000, an amount that is hard to survive in the urban centres of Malaysia.
According to Aon Hewitt’s salary survey last year, salary increments for employees in Malaysia are forecast at 5.8% in 2016, an increase from 5.6% in 2015. Aon Hewitt is a reward and talent practice lead in Malaysia.
Despite the stable trend in salary raises, many younger workers are still not satisfied with the pace of their increments and are reluctant to stay long term in a company, according to a senior human resources executive in a logistic company.
“This has resulted in more job hoppers in the market today as new employers can offer higher salary revisions which range from 15% to 20%. The percentage is more attractive than staying in the existing company if the salary increment is lower than the range offered by other companies,” she said.
In the report by Aon Hewitt, it also noted that the three most popular measures to retain employees were pay above market, improved work-life balance, and timely and meaningful feedback from managers.
However, under the current circumstances, fresh graduates and new entry level executives should think twice before leaving as many companies are undertaking cost-control measures. The job market is not as active as it used to be and it is harder for these groups to leverage opportunities to negotiate for better salary package if they do not possess the skills or experience required.
This is the total debts to income ratio on an average basis for every Malaysian. Soaring as high as 146% in the latest figures, this means that every Malaysian has to pay almost up to 1.5 times of their monthly salary.
Given the minimum debt service ratio at 30%, it looks certainly impossible for fresh graduates and other Malaysians to be able to settle their loans for at least another ten years. Credit cards, hire-purchase, student and personal loans are debts that fresh graduates need to be careful with.
If the ratio continues to rise, the spending power of Malaysians will only continue to worsen where most their income will only be used to pay off debts. Thus, it is important for young executives to adjust their budgets and to not rely on credit cards and loans to pursue a lavish lifestyle.
As for those with existing debts, debt consolidation with a personal loan offered at lower interest rates is one of the alternatives to be considered.
According to the Private Pension Administrator, Malaysia’s current replacement income ratio stands at 30%, relatively lower compared with 57% average for Organisation of Economic Corporation and Development (OECD) countries.
Apart from the minimum 30% savings ratio for retirement, cash reserves to be saved for emergency, travel and other purposes should not be neglected as well. Nonetheless, given the latest figure at 28% on average basis, we are still left behind the ‘safety’ threshold for savings.
While inflation rates released by the government may seem lower than the annual salary increment percentage, this may not necessarily mean that the value of our disposable income is not reducing.
For instance, it was reported by Nikkei Asian Review that prices of food and non-alcoholic beverage index, which carries the largest weight at 30.2%, rose 4.2% in June from a year earlier. The index of food and alcoholic beverages gained 21.9% in a year, which means our daily consumption is still getting more expensive than the inflation rates projected.
Assuming a young executive is servicing the minimum 30% of his or her debts and has a savings ratio at 28%, he or she will only have approximately RM966 left for spending, extra savings or investment for the month.
This may or may not project the actual financial status of everyone given the diverse background of Malaysians. Yet it is hard to deny that many millennials are stuck facing this scenario. So, it is even more important than ever for us to recognize the need to plan a budget and achieve financial freedom.