Am I budgeting right? Life hacks for your 20s and 30s, from two financial experts
Perhaps you’ve depleted your savings because of COVID-19. Or you’re unsure if you’re spending too much on insurance. In the first of a two-part series on financial moves to make in your 20s and 30s, experts give advice on how to save and budget like a pro.
SINGAPORE: Jasmin Jayadas lost her job in the COVID-19 pandemic and wiped out her savings to pay for a graduate diploma course. Now working as a swabber, she wonders: Are there better ways she can plan her budget and save for a rainy day?
Amid all this, how can she save up for her wedding, which she hopes will be in 2023?
Then there’s father of two Png Chin Teck, 32 - who has a new house on the way and renovations to pay for. How much, he wonders, should he be spending, saving and allocating his budget differently – now that he’s no longer single?
The turmoil of the past 18 months has made Singaporeans more aware about the need for both short and long-term financial planning. In the first of a two-part series on financial moves to make in your 20s and 30s, we get financial experts to share about good savings and budgeting habits young people should have.
Christopher Tan, CEO of Providend, and Jolene Ong, an associate trainer at the Institute for Financial Literacy, give their take on Jasmin’s and Png’s situations.
HELP! I DON’T KNOW HOW TO START ORGANISING MY FINANCES.
The most important thing to note, said both experts, is to “pay” yourself first. This means setting aside a fixed amount for savings before factoring in the expenses.
“If you do it the other way around, you might not see a steady flow of savings,” said Ong.
This is a habit that Jasmin said she will need to get into: While she does try to set aside almost a third of her salary each month for savings, the amount changes depending on her expenses, such as her online shopping habit.
Another way you can improve financial discipline is to use a debit card instead of a credit card, said Tan. “The problem with credit cards is that by the time you realise you’ve overspent, it’s a bit too late, because the bill only comes a few weeks after you spend,” he said.
And if you don’t pay it off on time and in full, interest repayments can snowball very quickly with the effects of compounding.
There are also tools online that can help you track your budget, Ong said. For example, MoneySense, Singapore’s national financial education programme, has a handy calculator to help Singaporeans estimate their typical expenses and set up a budget.
DO I REALLY NEED TO TRACK ALL MY EXPENSES TO BE A GOOD BUDGETER?
Budgeting may be daunting to some – especially when there are stories of people who write down everything they spend on, including the bowl of noodles they had for lunch – but, said Tan, it can actually be very simple.
His advice: Set up three bank accounts – the first, for crediting your salary; the second, for expenses; and the third, for savings. “Every month, you just automatically transfer the amount you need for (fixed) expenses to one account, and the amount you want to save to the other,” he said.
So long as your discretionary spending is within what’s left in your salary account, it will ensure you don’t overspend.
What if you’re married, like Png? He and his wife maintain two accounts – a joint one into which his salary is credited, and his wife’s which serves as their savings account.
Tan said married couples who wish to budget together can have four accounts in total – one income account each, and two joint accounts, one each for savings and expenses.
“Don’t let your savings co-mingle with your expenses account, because once it does, it’s very difficult to draw the line when you’re spending,” said Ong.
“It can also be very gratifying and encouraging to see the levels in your savings account rising,” she added.’
If you have yearly recurring payments like insurance premiums or road tax, Tan suggests dividing such expenses by 12 and setting aside the money you need monthly. That way, when the payment is due, the money has already been allocated.
HOW MUCH SHOULD I SAVE EVERY MONTH? AND WHAT IF I HAVE A BIG PURCHASE COMING UP?
A good guide for this would be to save 15 per cent of your gross income, said Tan.
Ong said the Institute for Financial Literacy’s recommended ratio is 10 per cent of take-home income, but of course, the more the better.
But what if, like Jasmin, you have big-ticket items like a home or wedding coming up? She hopes to have at least S$50,000 for her wedding fund, equally split between herself and her partner, by 2023.
The first step for any couple, said Ong, should be to discuss what they expect for the wedding, what their budget should be and if it is a realistic target. Once this has been settled, they should then set up a joint wedding expense account and agree to each put a fixed amount into the account every month.
As for buying a home, which is on the cards for both Png and Jasmin, couples should ensure that they can afford to pay the mortgage over the long term. MoneySense advises that the flat purchase price should not exceed five times their annual household income; and that their mortgage servicing ratio should be within 25 per cent of their gross monthly income.
A Build-To-Order HDB flat would typically cost them less than a resale flat. And the latter might also require them to spend more on renovations, Ong noted.
Renovation costs should be budgeted for; if they take up a loan for that, it will be “added debt”, she pointed out. Her advice to folks like Jasmin, who on top of that has a wedding to plan for: “If finances right now only permit them a basic renovation, they can always add on along the way.”
WHAT IS AN EMERGENCY FUND, AND HOW MUCH SHOULD I HAVE IN IT?
It’s a readily available sum of money set aside for, well, emergencies. This could include a sudden loss of income or an accident.
Building this should be the first step for everyone, said Tan. Then, you should make sure you have sufficient insurance, and only after that should you consider investing for the future and planning for retirement.
“Before you run a marathon, you want to make sure you are physically healthy,” he said. “In the same way, in a financial race, you want to be sure you are financially healthy before investing in the long term.”
As a general guideline, Tan said the emergency fund should be between three and six months of your monthly expenses. But this really depends on how secure your job is, and how long you expect it will take you to find another income source if you lose this one. Anything more than this amount, he said, should be invested.
“Having too much cash in savings may not be good, because we all know that bank interest rates are very low right now, and it’s just going to be eaten up by inflation,” he said.
Before you run a marathon, you want to make sure you are physically healthy. In the same way, in a financial race, you want to be sure you are financially healthy before investing in the long term.”
Ong, on the other hand, suggested that there should be at least six months’ worth of emergency cover. “In the current situation, three months can be a little bit optimistic,” she said. “The job search process may take a while longer because of this period of uncertainty.”
But if, like Jasmin, you have wiped out your savings on something important – like upskilling to increase your earning power – don’t fret, build it back up slowly with good financial discipline. “The money is there to draw out when we need it, and she’s drawn it out for a good purpose,” said Tan.
AM I SPENDING TOO MUCH ON INSURANCE PREMIUMS?
When buying insurance, Tan said it is important to remember what its primary purpose is: Protection, not savings or investment. So, get sufficient coverage for as low a cost as possible.
“Insurance is really a contingency plan, and we don’t spend the bulk of our money on a contingency plan,” he said. “When we renovate our house, we don’t spend the bulk of our budget buying fire extinguishers and then using the rest on lousy materials.”
He said that families with young children should make sure that they all have a suitable hospitalisation plan to cover their bills should any of them be hospitalised. There should also be sufficient death coverage, and a critical illness plan to replace income loss should they be unable to work.
Png, whose household income is about S$100,000, spends about S$7,000 on health insurance and whole life policies annually for himself, his wife and his two children. This excludes what he also spends on endowment and investment-linked policies. Tan said that for his age, this sum might be a bit high.
According to MoneySense, in general one should spend no more than 10 per cent of one’s income on insurance premiums, though this guideline can vary from person to person.
National schemes like MediShield Life already provide hospitalisation coverage for subsidised bills. But if, for example, you want a higher-class ward, then consider an Integrated Shield Plan – though you should note that premiums will be higher as you get older.
When it comes to health insurance, the experts note that it is important to balance your desired quality of healthcare with the long-term affordability of premiums. You want to avoid having your policy lapse or terminated because you can’t pay the premiums.
Beyond that, if the main goal is to protect against income loss in the event of death or total permanent disability, then a “good low-cost term plan” (which comes without an investment component, unlike a whole-life policy) will suffice.
Said Tan: “I think if they do that, they will be sufficiently covered and have more surplus to invest in other products in the future.”
SHOULD I PUT MONEY INTO INVESTMENT-LINKED POLICIES (ILPS)?
Some people believe that ILPs provide best-of-both-worlds benefits – Png, for one, is in it for the investment, with the additional insurance as a nice bonus.
However, Tan pointed out that they can be an expensive way to invest, explaining that such policies are “basically an insurance policy that gives you some insurance protection, while the rest of your money is invested in high-cost unit trusts”.
“If you need insurance coverage, you are better off buying term insurance,” he said. “If you want to invest, you are better off investing in a low-cost exchange-traded fund (ETF).
“An ILP is a ‘stuck in the middle’ product that may not achieve either goal.”
But what if you’ve already bought an ILP and want to drop it? Tan said this depends on whether you’ve bought an ILP purely for investment purposes or for insurance protection as well.
“If it is for investing, one should evaluate if the plan is performing the way it should perform. If it is not, then just like any investments, it is probably time to change it,” he said.
Things become more complicated, however, if the plan is for protection. If your health conditions have changed, he said, it may not be so suitable to drop the plan and buy a new one, as you might not be able to get similar coverage.
Also, surrendering an ILP early may incur losses. Explore options with your financial advisor before deciding – some ILPs offer the flexibility to adjust the insurance component, cash out part of the policy, or reduce the premiums.
WHAT ABOUT AN ENDOWMENT PLAN?
Like a number of parents, Png has invested in two endowment plans for his children’s education. Tan noted that such plans may be safe, but they also have modest returns of about 2-3 per cent per annum.
If a person has “a 15-year time horizon, they should consider investing their money – this can give them a higher return, and they should have enough time to ride out the volatility”, Tan said.
An alternative to an endowment plan, both experts said, is to top up your CPF Special Account (SA), which guarantees 4 to 5 per cent returns per annum.
Tan noted, however, that as you would not be able to access your funds till age 55, you should not “overdo it” to the point where you have no money for emergencies.
Ong said one gauge to use is the top-up amount – currently S$7,000 – on which you will get maximum tax relief. From Jan 1, 2022, this will go up to S$8,000 in cash top-ups per calendar year to one’s Special, Retirement and MediSave accounts.
But if depositing it in one lump sum is difficult, she recommended breaking it up into monthly top-ups. This can be done via a GIRO arrangement.
Topping up your SA, Ong said, will allow you to benefit from the effect of compound interest. Using the Rule of 72 – a formula which calculates the length of time it takes to double an investment with compound interest – she pointed out that at about 4 per cent annual interest, you can expect to see the funds in your SA double in 18 years.
MY NEEDS MAY CHANGE IN THE FUTURE. HOW CAN I PLAN FOR THAT?
As life stages change, needs change too – and so do one’s financial priorities. Not being able to anticipate these changes is something Png worries about. “We’re about to move into a new house, plus I don’t know what the future needs of the family will be,” he said.
That’s where sound budgeting habits started early will stand young couples in good stead. When children get older, and needs and expenses increase, knowing exactly where their money goes “will really help to keep them on track”, said Ong.
She also suggested that young couples like them could put money into instruments that are low-risk and offer high liquidity, so that they can tap the funds as the need arises.
At the base line, there are fixed deposits, or Singapore Savings Bonds which are issued and guaranteed by the Singapore Government. If they are looking for higher returns, there are alternatives such as exchange traded funds (ETFs).
Ong said there are many ETF products of varying risk levels, so those who are new to ETFs can look at those that track indices. One example is the STI-ETF, which mirrors the performance of the Straits Times Index, which comprises the top 30 performing stocks listed on the Singapore Exchange.
“The risk is diversified across these 30 companies and the fees and charges are also lower, compared to a fund that’s actively managed by a fund manager,” she said.
However, as some risk is still involved, it is important to consider investments in line with one’s risk tolerance and time horizon, she added.
This is the first of a two-part series on financial moves to make in your 20s and 30s. Next up: Investing for retirement.
This story by CNA Insider was done in partnership with MoneySense.