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What Every Young Person Needs To Know About Financial Planning

Here are some things you need to know about financial planning while you are still young

 

Despite being one of the most educated countries in the world, personal finance literacy isn’t exactly a strong area among Singaporeans. In an article we wrote a few years ago, we highlighted a few reasons why we think that is the case.

The three reasons we highlighted were 1) lack of formal education from schools, 2) our parents not being able to teach us about finance and 3) us not trusting the experts. You can read the article in the link below, as it would explain our reasons for identifying these areas.

Read Also: Why do so many Singaporeans struggle with financial matters?

When it comes to personal finance matters, one of the biggest missed opportunities for people today is not starting their financial planning early enough. Similar to our health, most of us don’t take financial planning seriously until it starts becoming a problem in our lives. As long as we are comfortable, we tend to neglect it.

Today’s article is meant for the young working adults in our midst. We want to help debunk some myths that people have when it comes to financial planning. We hope that this helps you attained a more financially secured life in the years to come.

(1) Your Income Comes Only From Your Day Job

Part-time

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We have been taught since young that we need to study hard so that we can get a good job when we grow up and earn enough money for our family and ourselves. And while there is nothing fundamentally wrong with that statement, it is not entirely the full picture either. In fact, it subtlety suggests that earning money comes entirely from working.

Those of us who are slightly more financially savvy would know that there are millions of people all over the world who earn money outside of their day job. Some of these people do not even need a full-time job, or can choose to turn up for work as and when they want to.

There are people who are able to live off the investments they have made in their earlier years. These are investment made while they were still young.

We are not saying that everyone should start thinking of quitting their job and do investing full-time only. However if you are still young, it is worth thinking of how you can earn an income that supplements what you earn in your full time job. For example, investing allows you to own and grow financial assets that could increase in value over time.

If you were to invest $1,000 a month over the next 10 years at a return of 5% per annum, you would be looking at a portfolio of about $150,000 at the end of the period.

Assuming you get a payout of 5% per annum based on your $150,000 portfolio, that gives you an extra $7,500 more each year in terms of passive income.

Another area that is frequently not considered as a possible option is the taking up of work outside of full-time employment. For those with a specific skillsets (i.e. writing, designing, programming), it is possible to earn an income by taking on some of these projects on a freelance basis.

Some employers stipulate that their employees are not able to do any part-time role as part of their employment contract. We think that is an old-fashion way of thinking. In the past, it is common to see employers and employees commit themselves to lifelong employment under just one company. In the modern work environment however, this is seldom ever the case. Employees should be exposed to other areas of work outside of the company which they are interested in, as long as there is no conflict of interest.

Everyone needs a life aside from his or her day job and this could be in the form doing volunteering work, pursuing a cause, following up on a passion and yes, even taking a part-time job.

(2) You Need To Earn More Before You Can Save And Invest

Spending too Much

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When you first start working, the initial euphoria from earning $3,000 a month will very quickly go away once you settle in to your newly upgraded working lifestyle.

While the $700 a month allowance you received from your parents used to be enough to buy food from the NUS canteen, you will soon realize that the $3,000 salary you now earn is barely sufficient given the amount of money you spent on after work drinks with your colleagues, or the once every 3 month break you need to take to get away from your horrible boss.

You start telling yourself that when you earn the $6,000 salary your boss is making, you would have earned enough to save and invest money.

You are probably wrong.

You see, the main reason why a lot of people who earn a good salary can’t save and invest as much as they would like to is because of their spending habits. Due to society pressure, their lifestyle always keeps up with the increment of their salary.

Earn a $1,000 more each month? Let’s take a nicer holiday to somewhere more expensive. Earn $2,000 more each month? It’s time to reward myself with more frequent restaurant meals and that spa and gym membership. Earn $3,000 more, time for the car!

Earning more in life isn’t something we can always control. Spending less money is something we can. So put your effort into something that you can do something about.

(3) Let’s Leave It To The “Experts”

Distrust - trust

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Most of us are not experts when it comes to personal finance matters. Even after spending some time reading up about investing and insurance matters, we know we are not going to know enough to suddenly become the next Warren Buffet.

We might hear a financial consultant assuring us that “we should leave our financial matters in the hands of an expert” instead of trying to do it ourselves. We see these all the time of advertisement in the MRT.

We believe this is a poor advice to be receiving. It suggests that people should simply pass their money to financial institutions to help them manage it, instead of worrying about it for themselves. We disagree. People should take charge of their own finances. Even if they were to use a fund manager to manage their investments, they should demand to know where their money is going into and the reason for the investments.

Read Also: Conflict Of Interest In The Financial Sector And Why It Should Matter To Us

Have you ever heard doctors tell their patients not to worry about their own health and to leave everything into the hands of them? Probably not. Most doctors will advise their patients based on their knowledge but would also expect their patients to do their part in taking charge of their own health.

In the same way, the job a financial consultant is to provide advice to you. Ultimately however, it is your money and your responsibility on how you want to manage it. Simply shutting both your eyes and expecting someone else to do it for you is irresponsible.

Read Also: Why Financial Planning Is Similar To Keeping Fit

We hope that the explanation above helps motivate you to start working towards a financially secured life even when you are still young.

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