Starting out is always the hardest. The same applies to the start of your personal finance journey. But by reading this article, congratulations as you are taking your very first step venturing into the unknown and taking on this challenge.
With everyone having different financial goals and circumstances, there isn’t a one size fits all solution. Individuals also have different preferences in the amount of effort they put into their personal finance journey with some having elaborate spreadsheets to maximise every dime and nickel they can get. However, it doesn’t have to be that complicated. The best part of personal finance is it is a personal journey. Your journey can be as sophisticated or as simple as you want it to be and once you get things rolling, you will notice how far you have come.
Now that we got you all charged up, here are some of the beginner topics to get you started with.
Consolidating your finances
Have you ever taken a good look at your finances? If not, this is the best chance for you to do so. With different financial institutions promoting financial products with hefty sign up bonuses, you might inevitably already be an owner of multiple accounts across different financial institutions and this would be a good time to do some housekeeping.
If time permits, take an hour or two to consolidate the list of accounts you currently have. From savings accounts to credit cards to insurance policies, compiling a list of accounts you own along with the balances would be a great first step for you to have a clear overview of your financial situation. Taking this first step would also help you to make a more informed decision when planning for your personal finance journey.
After you are done compiling your financial situation, it is a good time to look at your financial goals. Have a BTO coming soon? Planning to get a new computer? Wanting to get started on saving for your child’s future university expenses? Be it short term or long term goals, this is a good time to take a look at what matters to you and these goals will set the stage for your motivation in continuing on this personal finance journey.
Budgeting
With a clear view of your finances and financial goals, you could look towards developing a budget for yourself. One of the best ways you can do so is to adopt a “pay yourself first” mentality. Whenever your paycheck arrives in your bank account, you can transfer out the amount you wish to save/invest into the savings or broker account that you won’t touch. This way, you are only spending the amount you have after your savings have been taken out.
The amount that you should save and invest would depend on your financial goals. The overview of your current financial situation and goals should aid you in developing the amount you are looking to save and invest. If you still do not have any financial goals, it is recommended to save at least 10% of your income. Ultimately, the savings and investment ratio should be one that you are comfortable with.
Emergency Fund
Before you start saving or investing, it is essential for you to start building an emergency fund. The recommended amount of emergency fund is 6-12 months of expenses but the amount should greatly depend on your financial situation. If you have dependents or are self-employed with unstable income, you might want to have a bigger emergency fund.
In the event of an emergency, you should be able to access ready cash that would be able to help you tide over the crisis so your emergency fund should be located in an account which is readily accessible and allow you to tap on.
To help you determine how much of an emergency fund you should build, here is a non-exhaustive list of situations which may necessitate tapping into the fund:
- Facing retrenchment in the workplace
- Medical emergency of you/family member (which may/may not require you to quit your job)
- Emergency Home Repairs
If you have high interest debts, it is advisable to prioritise paying them off before building an emergency fund to avoid high interest charges.
You could consider using a high yield savings account (HYSA) to store your emergency funds to benefit from the interest while having the ability to tap on the funds at short notice.
Tracking your expenses
Keeping tabs of where your money goes hand in hand with budgeting. While it might seem daunting at first, there are many mobile applications to aid you with this. If you are not a fan of picking up new technology, keeping a notebook to have a record of your expenditure works too. Recording your expenses will provide you many valuable insights into your spending as you are able to look at your biggest spending categories and know exactly where every cent went.
In the event you are looking to increase your monthly savings, having a record of your expenses would empower you with the information you need to adjust your spending habits in order to meet your new savings target. It is also easier to cut down on the “wants” such as fine dining or a facial package once you have taken a look at how much you are spending on them.
Insuring your future
The insurance industry has a bad reputation in Singapore with many commonly associating them with the roadshows at MRT stations and malls who turn filling survey forms into a talk about your finances. But as most would know, insurance is a key part of financial planning. Insurance allows us to be financially protected from adverse events and creates a safety net for both our family and the individual.
The Life Insurance Association Singapore (LIA) recommends the following coverage amount:
- Death & Total Permanent Disability: 9x annual income
- Critical Illness: 4x annual income
For affordable protection, individuals should consider Term Insurance Plans and should limit the amount spent on insurance protection to 15% of income after deducting CPF contributions. However, if the individual chooses to purchase bundled products (e.g Whole Life Insurance), the amount may exceed 15% of income as they contain both investment and protection elements.
It is also advisable for individuals to get familiar with the compulsory national schemes:
- MediShield Life for large healthcare bills
- CareShield Life/ElderShield for long-term care in case of severe disabilities
Growing your wealth
The olden days of saving your money in tin cans do not work. With inflation, you would require more money to buy the same basket of goods. You may be hard at work but there is no reason for your money to not work hard for you too. Starting your investment journey early also allows you to enjoy the effects of compounding and allows you to ride out any volatility that you may face during your investment journey.
As the saying goes, don’t put all your eggs in one basket. It is best to diversify your risk and the same goes for investments. One of the ways you can do this is through buying an exchange traded fund (ETF). An ETF is a basket of securities that trades on an exchange similar to a stock. By buying an ETF, it grants you exposure into the basket of securities it contains without the need to buy all the individual securities. Each ETF is structured to track different securities with different strategies so it would be worthwhile to take some time to find one or more that resonates with your investment strategy and beliefs.
One of the most common ways of investing you will find on the internet is the concept of dollar cost averaging (DCA). This method of investing involves making small, regular investments over time. By consistently buying in regardless of the cost, you are averaging out the cost of investment in the long run. DCA works if the investments you are buying rise in the long term as you are averaging out the entry price while the price of the security continues to rise.
All in all, the personal finance journey is a marathon. You may take a while to comprehend the different topics but the most important step is the very first step you take to decide to gain mastery over your finances. If everything above seems alien to you right now, it’s okay. It takes time and with anything finance related, it is best to take your time to research to formulate the most suitable plan for yourself. No one knows you best and taking up the ownership of managing your own finances would be a game changing decision you will not regret.