If you’re a first-jobber eagerly awaiting your first year-end bonus, congrats! Your hard work for the year has resulted in a little extra spending money.
Your first instinct may be to hit the shops and give yourself a nice reward (hello, designer bag!) because you feel you’ve earned it. Hang on. Before you max out your credit card, consider using part of it to start a saving and investment plan. As we step into 2023, also take the opportunity to change your spending, budgeting and saving habits, in a sustainable way that will help you gain greater financial independence. Wendy Soong, a Principal Executive Financial Consultant with NTUC Income who has 24 years of experience, shares 7 tips to be financially ready in the new year.
1. Budgeting and making saving a priority
Say you earn $40,000 per year and get an annual increment of 3%. Based on 40 working years, you will earn a total of about $3mil. But how much of that are you likely to save?
We often tell ourselves that we will start saving when we earn more. Nah, we’ll probably not. Wendy has clients whose monthly salary ranges from $2,000 to a whopping $100,000, and all face the challenge of financial discipline. “The more we earn, the more we spend,” she observes. Some fresh graduates were making $2,000 a month when she first meet them, with their salary jumping up to $5000 a few years into their job. “But they feel poorer than when they first started work.”
We blame it on 24/7 online shopping tempting us with their frequent app notification of sales (11/11 sales, be damned!). Wendy recommends that you do a monthly cash flow budget. Be it an ol’ school notebook, online spreadsheet or budgeting app, note down all your monthly financial obligations and subtract this amount from your income. “Seeing your spending habits written down can be a wake-up call on where you could cut costs. Be honest with yourself about what you can afford and what you can live without. Small purchases, like a takeaway lunch or a morning coffee, might seem harmless but they can add up to a surprisingly large amount.”
2. Review your lifestyle habits and redefine your idea of wealth
Wendy believes that being frugal is the cornerstone of wealth building, noting that people whom she knows are financially carefree, usually live well below their income. “They still pamper themselves with the occasional splurges and frequent holidays but they do their sums. Buy only what you need and allow yourself to occasionally splurge.”
Take for example:
A earns $50,000 a year, spends $20,000 and has $200,000 in saving.
B earns $300,000 a year, spends $250,000 and has $1.5m in saving.
According to Wendy’s definition of wealth, A is wealthier than B because if both of them lose their income, A can survive for 10 years based on his saving of $200,000 whereas B can only survive for 6 years on his savings. Thus, it is the duration your savings can last based on the lifestyle you are used to if you stop work now, that matters more than what your current paycheque is. This is the same definition that Dr Thomas Stanley used in his bestseller, The Millionaire Next Door.
“Do not be a victim of lifestyle creep as Gen Z may spend more on a better lifestyle just because of a pay raise,” warns Wendy. This might result in a situation of you earning more but not saving more.
So, before you spend 10% on your next pay check on the latest smart phone, car, branded watch or luxury bag, consider it more as a WANT than a NEED. Re-evaluate how this decision will affect your life and finances in the long run.
3. Pay your bills on time and minimise credit card debt
Wendy says she believes that Gen Z understand the importance to save. However, it is always tempting to spend the ‘excess’ money in the bank account. Try this: pay your bills and make any essential purchases the day you get paid. That way, you don’t have a lot of cash in your bank account to tempt you into non-essential spending.
“Clearing your bills, especially credit card bills, immediately would instantly free your mind from ‘worrisome debts’ too. Paying off your debt will help reduce expenses and increase savings, so that you can start investing for passive income.
4. Save before you spend
Saving any amount of money, however small, is worthwhile because it helps you get into the habit of saving. Wendy suggests setting up an automated transfer from your main bank account into another savings account, on the same day every month. So, you will have one bank account for saving say, 20%-50% of your income; and one account for spending only what’s left over. To further control your spending, set a weekly allowance in cash and leave your credit cards at home.
Heed the wise words of billionaire investor, Warren Buffett: “Do not SAVE what is left after spending but SPEND what is left after savings.”
5. Allow yourself occasional treats
Saving is important but if it forces you to abandon your social life, hobbies or love for new things, you’ll most likely feel deprived. “This can result in reckless, unplanned and impulsive spending,” says Wendy. Set aside a happy fund of 5 to 10% of your income to spend on occasional treats.
6. Make your money grow for financial independence
You have already set aside separate bank accounts for savings and spending. But you may easily spend everything you’ve saved later, such as on a long vacation or a car. Time to differentiate your savings. From your savings bank account, transfer some money into a structural regular savings program for long-term savings. “Investing when you are young is advantageous especially since time is on your side. How you choose to make your money grow really depends on your kind of lifestyle that you want to live,” says Wendy.
Using the ‘Rule of 72’, or the power of compounding interest, will give you a guide on the number of years needed to double up your money.
No. of your years to double your money (N) = 72 / Interest rate (i)
So for $100K to increase to $200K, using i = 0.5%, it takes N = 144 years.
If interest rate, i = 3%, for $100K to increase to $200K, it takes N = 24 years.
Set up short- to mid-term savings goals as well as long-term investment goals for financial independence. The power of compounding interest works best for long-term investments. Short- to mid-term savings can be reached by increasing the savings amount and this means that you need the discipline to make wise lifestyle decisions while growing your money.
Spend wisely and invest in low-risk investment vehicles like T-bills or Singapore Savings Bonds for short Term goals. As for long-term investments, more risks can be taken. Use dollar cost averaging as your investment strategy. To do that, debts must be paid off, emergency fund should be set and you should have plans to achieve your shorter-term goals.
7. Above all, protect your family and your income and consider a disciplined savings programme
Always have an emergency fund of at least 3 to 6 months of your estimated monthly expenses, in case you lose your job. This helps to tide you over as you search for employment.
Hospital or medical insurance is important, especially when an unexpected hospitalisation may cost thousands of dollars. You can transfer this risk to an insurance company for a few hundred dollars a year. Critical illness, disability and death threats could also pose a financial strain on your family so a financial safety net needs to be in place.
Most people have heard of getting Personal Accident, health insurance, Term or Whole Life policies. However, to help you save and invest in a safe and sustainable manner, you can consider Endowment savings plans.
Such “disciplined savings” programmes instil discipline. Wendy describes Endowment plans as an alarm clock. You decide the ‘time’ you want it to ring, from as short as few years to 10 years or even to a certain age, say, age 60. Once the alarm clock rings, the plan matures, and you receive a lump sum amount.
Start by putting say, $2000 of your 2022 bonus into an Endowment plan, to be paid every year right after you receive your annual bonus. This should be separate from your usual long-term monthly savings plans. Consider this your bonus ‘bonus’!
Some endowment plans allow you to withdraw coupons or dividends. As interest rates work best if you leave the money there to grow, resist the urge to cash in the withdrawal coupons and take the option to re-deposit it back with insurer to enjoy the compounded interest.
We totally get how hard it is to balance the financial strains of adulting with the temptation of spending your hard-owned money. It can also feel overwhelming, especially for first-jobbers. Don’t panic; little by little and you’ll get there. Like Wendy says, “Financial Planning is like a jigsaw puzzle. Fit the pieces together and it will help you to attain your holistic financial journey.”
Her final tip? “Don’t fall victim to scams!”