NSRCC: Planning your finances early

Published in National Service Resort and Country Club magazine.

When should you start a financial plan? How do you go about it?

The answer is, “As soon as you start work”. And your financial plan should be, “Allocate 50% of your earnings for your current expenses and 50% for the future”. The allocation for the future is to be used mainly for the purchase of a home and for retirement, but a small portion can be used for your children's education and emergencies.

Save 50% of earnings
Hey, wait a minute. Do I really have to keep 50% for the future? Maybe, my starting salary is quite low and is insufficient for me to get by.

Well, if you are working in Singapore, you are already saving 34.5% of your earnings in the Central Provident Fund or CPF. Your contribution is 20% of earnings and your employer is contributing 14.5% for you. So, to make the total of 50%, you only need to set aside 15.5% for your personal savings account. This still leaves 84.5% of your net pay to spend now.

And how do you invest the 15.5%? Don’t worry about that now. Keep it in your savings account at the bank. Although the interest rate is less than 0.5% a year, it does not matter. When you have accumulated a few thousand dollars, you can then start to look for ways to invest the savings.

Repay your study loan
If you have a study loan, taken for a university education, you should try to repay it as early as possible, using the balance of your earnings.

Contribute to family expenses
If you are staying with your parents, your personal expenses are likely to be quite low. But, you have to be fair to your parents and make a contribution towards the household expenses. May, you can give 30% of your earnings? Talk to your parents about it.

Avoid borrowings
During this time, you should avoid incurring debts, especially on credit cards where you have to pay interest of 2% per month on the roll-over. This works out to more than 24% a year on a compounded basis.

If you are not careful, you can early chalk up a large credit card debt just by spending money freely at expensive joints, buying jewellery or going on a holiday. The monthly interest payment can take away a large part of your earnings. Just imagine, how hard you have to work to earn your salary. So, do not give it to your bank.

Lend to yourself
Do you know that your savings can earn you interest of up to 24% a year? No kidding - you can lend the money to yourself.

Suppose someone falls seriously ill or meet with a serious accident and a large medical bills has to be paid. Where can you raise this money? Or you have lost your job and you need money to start a small business.

If you do not have any savings, you have to borrow from your bank or use your credit card. This can cost you interest at up to 24% a year.

If you have accumulated some savings in the past, you can draw down on your savings and save this large interest expense. You can lend the money to yourself.

If you lend to yourself, you also have to pay it back. You should make additional savings from your future earnings to replenish the savings that you have drawn down. This is a necessary discipline - sign a contract with yourself on the repayment.

Summary: start a financial plan now and set a goal to save 50% of your earnings (including CPF) for the future