If you’ve ever been confused by the term ‘income classification’, you’re not alone. What does it actually mean? Are you being judged by how much you earn, and why is it necessary? Good news: PolicyStreet is here to answer all your burning questions, and we promise to keep it as simple as possible. Let’s get right into it!
Income Classification
The latest Malaysian Household Income and Basic Amenities Survey by the Department of Statistics Malaysia identified three income groups for Malaysians: the Top 20%, Middle 40% and Bottom 40%, commonly shortened to T20, M40 and B40. Together, they present a picture of the country’s income distribution. The table below shows the typical income ranges of households in each group.
The B40, M40, and T20 can be further divided into ten smaller clusters, as shown below. This specific grouping enables the targeting of government programmes aimed to reduce the difference in household income.
Household Income?
You may have noticed that “household income” has been mentioned a few times instead of simply “income”. It’s because most people combine and share their wages among family members for daily expenses (e.g. food and transportation). Drawing from a shared account is also common when caring for children, the elderly, and the disabled.
In Malaysia, where the family unit is still very strong, this pooling of income occurs for a long time. For the majority of our population, living together permanently as a family and thus contributing money to the household is simply a way of life. So, it’s no surprise that household income is a more accurate measure of material living standards compared to individual income.
How Household Income is Calculated?
Simply total up every wage and other source of profits in your household. Income usually falls into one of these four categories, so consider your finances carefully:
- Paid employment― everything you receive from your employer (including allowance, bonuses, food, accommodation + your monthly salary)
- Self employment― revenue from your own employees/business/side gigs
- Property and investment― profits from lease/rental of land and buildings, as well as personal savings/speculations
- Current transfers― money you’re not expected to repay (e.g. alimony, pensions and government aid)
(Bear in mind that a household doesn’t have to be a family: it can be just one person, a couple, or even housemates renting a place together!)
According to the Department of Statistics, the average Malaysian household numbers four people with either one or two breadwinners. Household size has been steadily decreasing since 1974 when the survey first began. This is great because smaller households = more money allocated for each member = higher quality of life for each person!
The combined earnings of people who bring home monthly incomes in a household gives us the “household income”, averaging RM7,901 in 2019. If that seems a little high, it’s because it includes “a group of high-income households” (the T20), which tilts the scale when calculating the national average.
The DOSM reports that overall, the growth of the household income of all three income groups (B40, M50 and T20) has outpaced the rate of inflation for the past 10 years. This means that despite the prices of goods and services increasing by 23.6% in a decade, households have been able to afford their expenditures, and even increase their purchasing power. At the same time, 30.4% of Malaysian households were found to be earning below RM4,000 per month, which is where government aid steps in to make up the difference.
Household Income by State
Wondering how your household matches up to households around the nation? Take a look at the visualisation below and focus on the median household income, shown in orange.
Median is a better indicator of the real household incomes of Malaysians because it is not affected by extreme figures (i.e. very high or low salaries). It just takes the number in the very middle of the salary range. Unsurprisingly, citizens in urban Kuala Lumpur earn the highest wages in the nation. On the flip side, households in many of the traditionally agrarian states have incomes lower than the national median income of RM5,873.
However, remember that people often spend more when their salaries increase. For example, they may buy imported produce instead of locally-grown vegetables, or go on more holidays. The general goal is to make sure that even when expenses go up with a bigger paycheck, the amount spent on these expenses is still less than the increase in income. (FYI, falling below the national median does not necessarily mean your household is poor, it only means that you’re part of the 50% the government has aimed to help.)
What Can You Do to Increase Your Household Income?
- The first, and most important step: getting insurance coverage for everyone in the household. This has been repeated so often it’s almost become a cliché, but having a safety net in the form of insurance saves lives―financially, in addition to physically, should something untoward happen. (You can’t increase anything if your medical bills are eating away at your life savings.)
- If you’re not sure where to start, here’s a quick guide to the types of insurance a person will typically need throughout their lifetime.
- If you’re looking for alternatives to your current coverage plan, might we insert a little bit of self-promotion and recommend PolicyStreet? Our platform helps you compare insurance offerings from all over Malaysia, so you can choose the best policy for your current and future needs. The best part? It’s done in seconds!
- If you and your finances are comfortable with it risk-wise, start investing, and make sure to diversify your portfolio. There are lots of options in the market, from unit trusts to bonds and commodities, so always do your research to avoid unnecessary risk.
- With Fixed Deposit rates plummeting to an all-time low due to COVID-19, why not allocate some of your hard-earned money to high-interest savings accounts? These tend to be tiered, so they’ll require you to perform a few actions (typically spend, save, and invest) to unlock an extra tier of interest. Fret not, though, because most have realistic minimum amounts for each action, which makes hitting the maximum interest rate less difficult. This option is good for those who are earning a higher-than-average salary, who wish to save a set amount from their monthly paycheck AND have it be fuss-free.
- If you’re a dual-income household, you could revise your current budgeting plan to cut back on unnecessary family expenses and allocate your shared money to the real essentials. This article outlines the 50/30/20 method, which is particularly useful for married couples looking to maximise their savings―with some discipline, you could save an extra 120K together, no sweat.
Why Even Classify by Income?
Now that you know what household income is and how to increase it, you may be wondering why national income classification is necessary. The simple answer: it’s an incredibly useful tool in policy-making. When governments are aware of exactly which sectors of the population require more or less aid, effective and swift action can be taken to lessen their burdens. Establishment of future welfare initiatives becomes easier. The information collected also influences the planning process of the National Budget to ensure nobody gets left behind.
Factors such as “income share” act as a yardstick to estimate the gap between the richest and poorest in Malaysia. Narrowing the gap has always been a long-term Government goal, but this can be especially difficult in tough times.
Income Inequality
Findings from the 2019 Household Income & Basic Amenities Survey Report indicate that the income chasm has generally widened. B40 households make up only 16% of the national income distribution (compared to 16.4% in 2016), while the T20 saw an increase from 46.2% to 46.8%. This means that the richest 20% of Malaysians own nearly half of the nation’s wealth in GDP, while the lowest earners don’t even make up a quarter.
“The rich get richer, while the poor get poorer” is a common scenario in countries all over the world, regardless of development levels. The Gini Index, which measures economic inequality, has risen globally. The OECD reports a past-century high for all of its member countries, indicating substantial unequal income distribution in economies as different as Japan and Norway. In ASEAN, Malaysia has the third-highest Gini coefficient (0.407), alongside Thailand and the Philippines. Urban and rural areas within the country itself also recorded different values, with the income gap higher in the former.
While reducing income inequality is an ongoing effort, the issue itself is also extremely complex. Factors such as education, globalisation, and fiscal policy influence what income looks like to people of different groups and nations. There’s no one-size-fits-all solution. Acknowledging this fact will help both governments and citizens in moving forward and working together in the future.
Government Aid for B40, M40 and T20 Groups
So what has the government done to close the Malaysian income gap? Here are a few programmes which have been implemented to help Malaysians through the pandemic. Check the terms and conditions to see if you’re eligible.
Bantuan Prihatin Nasional 2.0 (BPN 2.0)
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- Part of the “Kita Prihatin” economic stimulus package
- Cash benefits:
- RM1000 for B40 families
- RM500 for B40 single Malaysians
- RM600 for M40 families
- RM300 for M40 single Malaysians
Targeted Repayment Assistance (TRA)
- Aims to help borrowers who are struggling to repay their loans
- For B40 individuals who receive Bantuan Sara Hidup (BSH):
- Three-month deferment of monthly payments, OR
- 50% reduction in monthly payment amounts for six months.
- For M40 individuals who are registered with Bantuan Prihatin Nasional (BPN):
- Apply online, 50% reduction in monthly payment amounts for six months if approved
- Also known as the “Skim Peduli Kesihatan” (Care about Health Scheme) offered by the Ministry of Health
- Aims to meet the healthcare needs of the B40, specifically for non-communicable diseases (NCD)― potentially serious conditions which are not contagious such as cancer and diabetes
- Benefits include health screening, medical equipment assistance, incentives for completing cancer treatment, and coverage of transport costs to medical facilities
- Announced on March 17th― aims to rejuvenate and strengthen the economy by providing aid for SMEs, B40 families, employers, women, OKU, and youths
- Among the 20 initiatives, here are a few relevant to households and individuals:
- A one-off payment of RM500 for the B40 who have experienced job loss
- An additional RM500 for those with incomes below RM1,000
- Subsidy increase from RM180 to RM300 for families with school-aged children to purchase technological devices
- Free business registration with the Companies Commission of Malaysia (SSM) for OKU entrepreneurs
- Prihatin Special Grant 3.0 for micro-businesses and SMes
Perlindungan Tenang Voucher Programme
- B40 are entitled to an RM50 voucher for purchase of Perlindungan Tenang insurance products
- Incentive to encourage the non-insured lower income families in Malaysia to obtain basic coverage
- One-time RM8,000 cash payout if you are diagnosed with one of the 45 Critical Illnesses
- Contribution of RM50 per day for daily hospitalisation fees (up to 14 days).
Income Classification and You
We’ve covered income groups, households, income growth, and economic inequality both globally and locally in this article―whew! We’ve also highlighted various government programmes which are aimed to benefit the rakyat across all strata. Hopefully, you’ve come away with a better understanding of income classification in Malaysia, and are more aware of the resources available to you, regardless of whether you’re B40, M40 or T20.
