Financial planning is important yet tricky. If you are one of those who read hundreds of articles on the internet hoping to improve your knowledge, it’s easy to be confused.
You may read an article about why it’s important to be saving money, followed by another one about why billionaire Mark Cuban thinks saving money is a bad idea. And then an insurance agent comes along to tell you that your financial plan is bad as you have insufficient insurance coverage.
Financial planning doesn’t have to be confusing, or difficult. It may sometimes be technical but that comes with wanting to understand the products that you buy.
Let’s first understand the basic motivations behind saving, insuring and investing.
Saving: When Should You Start Saving?
Saving is a habit best taught young. During our school going days, our parents give us pocket money each day, week or month with the advice that we should make an effort to save some, instead of spending it all.
The concept of saving is closely intertwined with budgeting. When we receive a $50 weekly allowance, we think about how much the money can buy us, outside of the usual meals we consume in the school’s canteen. If we buy two McDonald’s meals, it takes away some money we can spend on our favourite comic book. If we get lazy and decide to take the cab home, then we spend the large bulk of our discretionary “income” for the week.
As we grow older, the stakes become higher. No longer are we deciding between spending on a McDonald’s meal against a comic book.
Rather, we are balancing between the need to spend on things we really want today (e.g. holiday trips, restaurant meals, a car) and the things that we need to save up for the future (e.g. unexpected medical expenses, unemployment, family needs).
The habit of savings needs to be formed from a young age, if not, when you get your first full-time job. Aim to save at least nine months of your average monthly expenses and to keep that money aside for a raining day. This should be your first important financial objective.
Read Also: How Much Should My Emergency Fund Be
Insurance: When Should You Start Buying
For insurance, we are not going to comment about having insurance policies when you are a child because for the most part, that’s usually a decision that your parents will make for you. We have written about the importance of why you should buy the right insurance for your child and you can read up more about this important topic in this article.
When you reach adulthood however, it becomes your responsibility to ensure that you have sufficient insurance coverage. No longer can you rely on what your parents have done for you.
As adult children who are already working, do we really want our parents to be the one financially burdened and having to scrap their retirement plan in order to pay for our hospital bills, just because we neglect buying the right insurance policies?
Start off with health insurance protection first. The reason is simple; you can’t expect to help others if you cannot even support yourself. There are many different policies you should consider such as a private integrated shield plan, critical illness policies and disability income insurance. Talk to a trusted agent about what these things are. Set aside a budget and buy what you need.
When you have dependants who are reliant on your income, then you need to start buying life insurance coverage. This is to ensure that they receive payouts in the event that you are no longer around to support them. Buy what you need but avoid overbuying. Insurance is a form of protection, not a lucky draw.
Lastly, avoid mixing your insurance and investment needs together. We don’t believe in that. Both investing and insurance are important areas of personal finance and you shouldn’t let the performance of one affect the other. Pay for your insurance coverage without expecting any returns from it.
Investing: Starting As Early As Possible
There are two common mistakes that people make when it comes to investing. We will touch on both.
Firstly, many people start investing at a later age when it’s harder for them to attain their investment goals. If they started investing earlier, they would have been able to generate higher returns while taking lesser risk due to the power of compound interest.
Secondly, in order to compensate for having started late, many newbie investors tend to take more risk than they should. They may decide to put a large stash of their savings into the stock market almost immediately, rather than to enter the market slowly.
If you are new to investing, it’s always best to avoid market timing. Invest a small sum of money each month that you can comfortably sustain. Think of investing as a habit you want to cultivate over time. As you read up more about investing, you can slowly increase your investment and to channel them towards the assets you are familiar with.
What Should You Care About Most At Different Phases In Life
Here’s a quick recap.
Form a habit when you are young, or as soon as you start working. If you have yet to do so, learning how to save is the first thing you need to do. If you constantly spend more than you earn, no amount of investment returns will be enough.
When you are an adult, it’s time to get responsible over your healthcare matters. You also need to be responsible for the dependants that you have.
Start investing as early as you can but start off at a small amount. Once you become more comfortable and have better knowledge and experience, you can slowly increase your investment size.
We leave you with the following quote from a separate article that we wrote.
“One misconception that young people have is that they should set fixed financial goals before saving and investing towards them. That’s not totally true. It’s perfectly fine to start saving and investing even without having fixed goals yet.”
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