High Income vs Low Income

So according to the Prime Minister of Malaysia, Malaysia will be a high income nation in 2020. Everybody likes to have high income and more money!!!

However, what's the definition of high income?

According to world bank (in 2009), a high income economy is defined as a country with a per capita gross national income higher than $ 12,196 or more.

So if your wages is higher than $ 12,196 per annum, technically you are considered by world bank as high income person.

But are you???????????

Example: John and Gary are good friend. John stays at urban area and Gary stays at rural area. John earns $ 15,000 per annum and Gary only earns $ 5,000 per annum. Both of them are single.

John bought a house worth $ 100,000 last year (tenure = 25 years) with 4% mortgage rate and margin of finance is at 80%. The annual mortgage installment is $6,400. Gary rent a rural house at a rental fees of $ 2,000 per annum.

John also bought a car (tenure = 9 years) worth $ 50,000 with 4% interest rate and margin of finance is at 80%. That means John annual installment of $ 6044.44 while Gary still using his old motorcycle.

Standard of living in urban area is much higher than standard of living in rural area. Assume that Annual living cost for John is $ 4,000 while annual living cost for Gary is $ 2,000.

So who is considered as high income and who is considered low income?

World bank will defined John as high income group and Gary is defined as low to middle income group.

However John spend 16,444.44 per annum (with wages of $ 15,000) while Gary spend $ 4,000 per annum (with wages of $ 5,000).

Most of us will say John belongs to high income group with his since he is staying at urban area, drive a nice car and earns a handsome wages. For Gary who stays at rural area, rent his house and riding an old motorcycle, everybody will considered him as low income person.

However, is that true?

By ignoring the fluctuation in the prices of house and car (which offset each other), although John earns 3 times higher than Gary, Gary is the one with better money management. John overspent his income while Gary still have $ 1,000 unused income left.

There are 2 main problems for John:

1) Like most people who live at urban area, He used most of his income (around 83%) on hire purchase. Most people use around 40-50% of their income on hire purchase which is not healthy.

2) He buy something he can't afford. John bought his house and car on hire purchase which mean initially he can't afford both assets. There is a simple rule: if you can't afford it, don't buy it. I mentioned about debt many times so I don't think I need to repeat myself.

So make sure we distinguish clearly the borderline between high income and low income. High income means nothing without purchasing power and money management. It's not how much you earn. It's how much goods / services your wages can purchase.