Planning Your Finances After Graduation – Where and How to Get Started
A recent NTUC Income Survey of 1,000 polytechnic students, undergraduates and young working adults between the ages of 18-29 yielded dismal findings. 87% feel financially unprepared for the challenges ahead. About half of the respondents think they need more savings before they start investing, while a quarter of the respondents did not know where or how to get started.
These findings are dismal at a time where information is readily available and financial planners are a-plenty. It is all the more so considering this young bright-eyed generation is in the best position to make compounding work for their savings and investments at the start of their adult lives. So, is the old saying “youth is wasted on the young” true?
If you belong to the 18-29 group and feel helpless about your finances, here are some tips to get you started on the right track:
1. Keep a tight leash on your credit card spending
A surefire way to derail your financial plans before you even start would be to chalk up credit card debt. This incurs exorbitant interest rates of 20-30% p.a., compounded daily on remaining balances.
How do such high interest rates stack up? Most credit card companies require a minimum sum of 3% of your sum owed, or $50, whichever is higher. Let’s say you have a $5,000 balance owed. Paying the minimum sum of $150 for the first month and then carrying on at $150 thereafter each month would require 56 months to fully pay off your debt. What’s worse is if you choose to only pay the minimum of 3% each month, it will take you more than double the length of time (165 months) to pay that off.
That’s really crazy if you think about it.
So make sure to nip credit card overspending in the bud. Keep track of your credit card and other expenses with apps and review them periodically.
2. Buy health and term insurances
One of the best decisions you can make from your 20s would be to protect financial downsides from unforeseen circumstances like a major illness or accidents. The costs/benefit of health and term insurance plans are in your favour at this age.
Health insurance plans come in the form of Shield plans. These are offered by most insurance agencies and are a complementary upgrade of your existing Medisave plans. You can choose whether to opt for the most premium plan which allows you to seek treatment and stay in private hospitals if you are hospitalised, or cheaper plans for Class A wards in restructured government hospitals or Class B1 wards. Annual premiums from 5 agencies can be deducted from your Medisave accounts and cost a low few hundred a year.
A rule of thumb would be to get term insurance coverage of 10x your annual salary. It would be prudent to cover yourself for this sum till the retirement age of 65 at least. You’d be surprised how affordable the monthly premiums are. And the good news is that come 2015, you will be able to buy term insurance plans directly online without having to pay commissions.
3. Start Small, but Start Investing
If you’ve not seen any of the 7 wonders of the world, fret not. If you start saving and investing in your 20s, you will see the 8th wonder of the world, according to Albert Einstein in your very bank accounts. Einstein made the observation that people who save for 10 years from age 21 to 30 will have a bigger retirement account than people who starts at 30 and saves for 40 years till they are 70 years old. Such is the magic and power of compound interest that it will do you good to pay serious attention to it if you wish to be financially secure in life.
An easy way to get started would be to set up a separate savings account to automatically transfer 20% of your salary to each month. Then, sign up for either the POSB or OCBC Blue Chip Investment Plan to invest into blue chip shares like DBS Bank, SPH, ComfortDelgro or the Straits Times Index monthly.
** Note: You do not need more money to get started, if you have $100 to spare each month, you can get started now! As you earn more in future, you can sign up to buy into more shares or increase the amount invested monthly in each counter. The idea is to START.
4. Set aside cash reserves for a rainy day
If you have set up a savings account to automatically pay yourself first each month, you will be steadily building up reserves for a rainy day. You may like to apportion part of your savings for starting to invest, and part of it in cash. After all, cash is king. It will help avoid the situation where you have to liquidate your investments at a market downturn when the sudden need for cash arises.
It will be prudent to set aside cash reserves that can sustain you for 3-6 months should you lose your job or should something unexpected happen. This is also your freedom fund to enable to quit your job if you start to hate it and tide you over while you find another job.
This article was first published over at MoneySmart blog on 23 September 2014. It is reproduced with permission.
About The Author (Sharon Ang)
I started taking personal finance seriously ever since I became a senior relationship manager at a local bank and later a priority banking relationship manager. I moved into this advisory role, and subsequently writing, as I wanted to make a difference in people's lives on a subject close to their hearts.
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