Monday, January 11, 2010

Smart Financial Moves to Make in Your Twenties

By iFast Financial

The 20s is the 'Starting Out' stage, when fresh graduates join the rat race and when many experience the liberation of earning their own keep.

This is when money is tight and many are living in debt after buying their first car, work wear and paying for a new lifestyle in the corporate world. It is not uncommon for many in this life stage to get carried away with their newly found financial independence till they forget to save and invest.

Wilson Koe, Associate Director at Eternal Financial Advisory, shares that the very first thing a person in the Starting Out stage must do is to have at least six months worth of emergency savings. "Being able to save is fundamental to financial planning. Sadly, many tend to spend more than they can save, which proves to be one of the major difficulties facing young working adults today," Koe laments. The best method to save is by setting aside an amount as savings, before spending your income on expenses.

Saving for emergency purposes is an example of a goal-oriented savings plan. This type of savings plan instils discipline. Other short-term goals could be buying a new car, getting married or putting the down payment for a home. A long-term goal that applies to everyone is retirement. Throughout all stages of life, it is advisable that we constantly look back on the goals set in the 20s to determine whether we are financially on track.

The general rule is to save at least 10% of your pay for your goals and increase the percentage every time you get a raise. The more you save, the better off you will be later in life. "Consider implementing a regular savings plan - by allocating a portion of your income to a designated savings account or by investing into funds, every month," says Koe. A regular savings plan is one way to ensure that you will save.

Budgeting is a practice that goes hand-in-hand with savings. Budgeting gives an idea of how much money you are making and where it goes. Even if you are financially stable, budgeting is important as it helps you unlock your financial positions. For example, you can see how much money is left, after paying for your bills, and maximise it.

The path to financial success starts with sticking to a budget that balances your income, spending and savings. Only after you have mastered this practice, should you consider using credit cards. Koe points out that sticking to a budget cultivates a responsible attitude with credit cards, which is vital to avoid falling victim to debt. Those that charge purchases to their cards, without considering their budgets and their ability to pay, can easily find themselves with a humongous debt that incurs an extremely high interest.

This is also the time to start thinking about managing your risk in your financial plan. At this stage of life, it is prudent to have insurances to fall back on, instead of spending all your hard-earned savings during emergencies. "There are several must haves and nice-to-haves in a financial plan. To begin, one must look at their present situation. Is it of vital importance to protect your income by having a disability protection plan? The plan will pay an income should the person be unable to work due to a disability or illness," says Koe.

Other must haves are hospitalisation plan, critical illness coverage and death coverage (to care for your parents should premature death occur). Meanwhile, nice-to-haves are endowment plans which are long-term regular savings plan with built-in life cover. This is used to achieve goals in the distant future as you will receive the sum assured plus any bonuses that have been added over the years as a lump sum, provided that you have paid all your premiums.

In summary, at this life stage you should:

• Save at least six months of your monthly salary in an emergency fund
• Put aside at least 10% of your income towards goals that you want to achieve
• Start budgeting and sticking to your plan.
• Use credit cards responsibly (pay off your balance before the due date)
• Acquire a hospitalisation plan, critical illness coverage and death coverage

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