It’s never too early to start thinking about where you want to be in your 40s. We detail the 5 money moves you should be making in your 20s to have a financially stable life.
Words by Budget Babe
So, you’ve entered the working world and have all this disposable income in your hands. Congratulations! But, suddenly everyone is telling you to buy insurance, start saving for your retirement, etc. and you’re not sure what to do. Considering that for most of us, our starting pays aren’t astronomical, how can we make sure that we are using our money right?
Here's our mistakes. Don't do the same.
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
Here are 5 money moves you should make in your 20s to make sure you’re financially covered for the future. (You can thank us later.)
Money To-Do #1: Open a Separate Savings Account
As you start getting a regular salary, it is smart to open up a separate savings account. Most of us continue to stick with the one bank account our parents opened for us when we were young. But, let’s face it, in today’s world of e-commerce, the money in our main account depletes quickly once our bookmarks tab starts filling up with the addresses of online shopping sites.
It becomes harder to track how much money you’re saving each month when you stick to just one account. So, it’s best to open another. There are a few banks such as such as the OCBC 360 Account that either give you an upfront cash payment or other benefits if you credit your salary directly with them every month. Since you are literally being paid to open an account, why not? Set aside money in this account for savings, investments and other strictly non-spending purposes.
Money To-Do #2: Kick-start your Emergency Fund
You never know when you might suddenly need cold, hard cash – unemployment, or an unexpected hospitalisation bill, etc. To avoid being in debt when this happens, set up an emergency fund. It does not have to consist of a lot; a general guideline would be to save up to three to six months of your monthly living expenses.
Money To-Do #3: Pay Off Your Loans
Unless you were smart (and lucky) enough to have gotten a scholarship for your studies, it is likely that you owe either the bank (or your parents) S$22,000+ in tuition fees. While the minimum monthly loan repayment is only S$100 over a duration of 20 years, the accumulated compounded interest can add up to a lot if you drag the payments for too long. With the annual interest rate currently pegged at 4.75 percent, you’ll be paying S$1,045 worth of interest in the first year alone. Due to the compounded interest, the longer you take to repay your loan, the more the bank earns from you.
- FIRST YEAR
Amount Borrowed: $22,000
Annual Interest: $1,045 (at 4.75% currently)
Yearly Repayment Sum: $1,200 (at $100 a month)
Principal Loan Sum Left to Pay Off: $21,845
- SECOND YEAR
Principal Loan Sum: $21,845
Annual Interest: $1,038
Yearly Repayment Sum: $1,200
Principal Loan Sum Left to Pay Off: $21,683
Here’s a smart debt repayment tip that you only learn from finance professionals – if you can find an investment that gives you higher returns than the interest rate on your debt, then it makes more financial sense to pay the minimum sum on your debt and use your money to pour into the investment instead.
However, if you can’t find an investment product that gives you more than 5 percent compounded growth rate per annum, it would be smarter to first pay off your student loan. You can take a look at investments after you’ve settled your debt.
Editor’s Note: Interest rates are accurate as of January 2015, verified by a visit to the three banks. The interest rate is based on the average of the Prime Lending Rates of OCBC, DBS and UOB.
Money To-Do #4: Make Sure You’re Sufficiently Insured
With so many types of insurance products out there in the market, it is no wonder most young adults get confused about what to buy. Before you commit to any insurance plan, make sure to consult a qualified financial consultant (or a financially-savvy friend with no ulterior motives) to assess your situation.
In all honesty, you don’t actually need a lot. The most important insurance coverage you should get in your 20s are:
- Health and Hospitalisation
- Accident Plan
- Life insurance / Term insurance
- Critical Illness Coverage
Most insurance premiums increase as your age goes up, so it would be wise to buy while you are still young and healthy. Medical bills in Singapore are extremely expensive; without insurance, you might find yourself in a lot of trouble.
A recent survey found that unexpected medical bills was the fourth most common reason leading to 1 in 5 Singaporeans ending up in debt. Do not make the mistake of forgoing insurance just so you can save a couple of hundred dollars every month.
Money To-Do #5: Set a Budget…and Stick to It
Author and American politician Elizabeth Warren recommends a 50-30-20 budget rule. In a nutshell, 50 percent of your salary after taxes goes to essential expenses, 30 percent goes to lifestyle wants, and the remaining goes into your savings and investment.
But for those looking to save more in your 20s, I recommend a frugal 40-20-40 formula in Singapore since living costs are increasing every year. Allocate 40 percent for paying off items that you cannot run away from, such as bills, transport, insurance and your parents’ monthly allowance. It’s easier to get away with just 40 percent for your needs since you’re likely not paying any rent, and that’s a major expense in other countries. The tougher part is just using 20 percent of your take-home salary for food and entertainment (but this can be done as long as you watch your spending), thus leaving you with 40 percent for your savings.
- Example Budget on a S$3,000 Salary
After CPF Deductions: S$2,400
40% Bills & Liabilities: S$950
20% Spending: S$500
40% Savings: S$950
Stick with this budget for a whole year and you’ll have S$11,400 worth of savings at the end of the year. If you are prudent and disciplined about your money, this 40-20-40 rule is not exactly hard to achieve. How do I know? Well, I achieved it, managing to save S$20,000 in one year on a salary of S$2,500 a month.
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