Fresh Out of School and Into the World of Financial Planning

Savings
By hiveup,

You did it! You closed the chapter of examinations, landed the coveted job you have been working so hard to get, paraded down the graduation aisle and tossed your mortarboard into the sky. Sweet cakes!

Yet, for many recent graduates, there is also the stress of looming student loans, credit card bills and a barely-there budget. With plenty of new expenses — a brand new office wardrobe, movie night out to keep your sanity, the daily commute, Netflix subscription —you have to work towards being smarter with your money to avoid tough financial strains in future.

The goal is to cultivate a sense of stability with your finance, which of course, requires a dash of discipline, a cup full of hard work with sprinkles of strategic planning. Essentially, this is the recipe for forming a good habit, which is the basis of what you need when it comes to financial planning.

Here are three general financial tips:
  1. Build an emergency fund for the rainy day
  2. Plan your goals
  3. Think growth

 

1. Building an emergency fund for the rainy day

An emergency fund comprises six months of your monthly expenses. Having an emergency fund prepares you for unforeseen situations such as a job loss. It helps to avoid building additional unnecessary debt as well as cope with your current expenses independently.

Sounds tough?

Not really once you get the ball rolling. Get into the habit of setting aside a portion of your monthly income to this fund (~20% would be a safe estimate), until you have achieved your goal. Ideally, you should be saving for retirement and this should just form the basis of your safety net.

What if I’m lazy?

Do it NOW. Sometimes, ‘later’ becomes ‘never’.

You’re no longer relying on that mom and dad scholarship or allowance. It’s time to take ownership. There are tools to help, one of which is to automate your savings into a separate account (Bank GIRO). Here’s a list of the various saving bank accounts that could aid in making your money work for you.

Consider using the DBS Multiplier Account, with one of the highest interest rates of 1.85% p.a, to hold your savings.

Alternatively, if you already bank with OCBC, check out the OCBC 360 savings accounts. If you spend S$500 a month on your OCBC One Card, or other selected cards – and you credit at least S$2,000 of your salary or pay three bills monthly via GIRO – you get 1.5% interest per annum on the first S$10,000 in your OCBC 360 account. You get 3.33% on the next S$20,000, and 0.05% on any amount above S$50,000.

If you don’t meet the requirements (i.e. spending S$500 a month and paying three bills via GIRO, or having more than S$10,000 in the account), then stick with the DBS Multiplier Account for now.

However, avoid keeping the bulk of your savings in cash as this method may not be the safest harbour you think it is. Too much cash will expose you to inflation-rate risk (i.e. the real value of your money will erode as the cost of living increases). Once you have built your emergency fund, it will be ideal to park the cash in investments instead.

2. Plan your goals

Be true and real with yourself. Set aside time to think deeply about what you want for your life. Set financial and career goals with actual timelines and try to work out how you intend to achieve each individual milestone. It doesn’t matter if they are short-term or long-term, the sooner you decide the earlier you can work towards them and be the strong independent self you want to be!
Life’s not perfect and chances are that you will not be able to stick strictly to your envisioned timeline. However, having these actual plans help to keep you focused and motivated to make the next move.

By hook or crook, I want to get married in 5 years but I’ve only just started working. How?!

Instead of parking your cash under the pillows, consider placing them in fixed deposits to earn greater interest than that of the bank savings account. You can safely earn 1% interest higher than the banks and this is already better than locking your cash in a safe box. After gaining adequate confidence and a larger risk appetite, you can venture into higher-risk products with higher returns and higher potential losses. Our advice is to invest what you are comfortable losing and don’t do what you don’t know.

3. Think growth!

There is a tight limit to how much a fresh graduate can budget or cut costs; but theoretically, there is no limit on how much more they can earn.

Being growth-oriented means thinking beyond budgeting. For example, if you need another S$200 this month, don’t just decide what costs to cut or sit there hoping that it will fall into your lap. Instead, try to find side-income (i.e Grab hitch, busk, anything!) and earn an extra S$200. Grow your money – don’t just budget for it.

You might not have any substantial wealth at this stage, but it’s never too early to be thinking about wealth management.

Ideally, your savings must be complemented by an investment portfolio that will grow your wealth beyond the inflation rate (Singapore’s inflation rate is approximately 3% a year). Returns of at least 5% per year would be a good benchmark and anything less might run you the risk of missing your retirement goals.

A fresh graduate could potentially aim to create a portfolio comprising long-term capital gains through equities. There should only be low (or even no) allocations in fixed income products or cash, as these low-risk products are often outpaced by inflation.


Despite all these tips, being a fresh graduate myself, I often still succumb to indulgent spending habits.

Upon receiving your first salary, it can be overwhelming to suddenly have access to four times your monthly allowance in cash. In other terms, it also means financial access to Prada, Michael Kors, Gucci and the long list continues. Anything that you’ve ever wanted on that wish list, you can finally afford it! As good as this sounds, unfortunately, this isn’t the healthiest mindset to have.

Being finally financially independent, there will be the temptation to spend rather than to invest. We spoke to Yeap Ming Feng, head of content growth at personal finance portal Seedly, on debt management for fresh graduates:

“Having just graduated and been a poor student for some time, budgeting was the last thing I had in mind when faced with a sudden spike in monthly income. I felt that I had suffered long enough as a student, and it was now time to indulge in comfort food and luxury goods that I have always wanted.”

What did you do with regards to your personal finance?

“The only thing I did in terms of personal finance, was to buy an Investment-Linked Insurance Policy (ILP), and invest S$100 each month into the Straits Times Index Exchange Traded Fund (STI ETF). This was a really huge mistake.”

What would you have done differently?

“If I could do something differently, I would have been more stringent on my expenses and invested a lot more. The S$400 dollars spent on a Gucci wallet, if invested in carefully picked stocks for long-term returns, would have accumulated substantially.”

Talk about the stress of paying off loans.

Most Singaporeans have their first credit card and personal loan in their mid-20’s. The interest rates are around 26% p.a and between 6-9% p.a respectively. This is sufficient to land you in debt for decades, if you do not use credit facilities responsibly.

How can you avoid it?

“I am strongly against incurring personal loans but advocate the use of credit cards when used to your advantage. However, there is a fine line between spending to save and ultimately eventually losing control of your money. It is good to set a credit limit of an amount that is less than half your monthly salary.”

Use the credit card as a mode of payment, rather than as a credit facility. Advantages such as rebates (in the form of cashback) and reward points are great but always be sure to pay back the amount in full.


Yes I definitely want to invest but with my limited cash, there’s no way I can do it.

The biggest worry of most fresh graduates is the tight income. You will likely be earning entry-level pay as you slowly, but surely, acquire experience.

AsiaOne reports that the median monthly income of private University graduates is between S$1,900 to S$2,600. For public Universities, such as National University of Singapore (NUS), the Straits Times reports median monthly income at around S$3,600.

Nonetheless, do not fall for the mistake of thinking that your degree determines your income – you are more likely to get rich through your investments than through your monthly pay cheque.

Seedly’s Ming Feng commented:

It is a common misconception that investing is expensive. There is a S$100 way to invest, and a S$1 million way to do so. For as little as $100, one can actually get exposed to investing in really great products.

Examples of such products include Blue Chip investments and the Straits Times Index Fund, which you can purchase for as low as S$100 per month.

Let’s put the tips mentioned above to practice:
  1. Think growth! Always remember that the aim is to get rich by investing, not investing after you get rich. Even if all you can set aside is a few hundred dollars a month, it’s better to get started right away.
  2. Just like how you plan your goals, set goalposts to raise your income, in realistic increments, of course. For example, aim to raise your monthly income by just 10% every year. If you make S$2,500 a month this year, try to make S$2,750 per month next year; and then S$3,025 the year after, and so on. Note that it does not matter where this income is from. Try everything from negotiating a pay raise, to washing people’s cars. As you progress, your business acumen and financial savviness will improve.

This sort of planned effort is more constructive than joining get-rich-quick schemes, or having pipe dreams about making stock picks to get $1 million richer overnight.


So what’s wealth without health?

Disclaimer: I’m not selling insurance nor am I sponsored by any insurance company. Let’s be honest, we all repel from financial advisors as much as we can until a need calls for the meet up. Which often, is too late…

As a rule of thumb, should you finally decide to purchase your first plan, health insurance should be your priority. With age comes increasing premiums, hence it is cheaper to get it when you are younger.

When purchasing health insurance, consider getting an Integrated Shield Plan (IP) to complement your MediShield as it provides additional pay-outs, for treatment and hospitalisation, that your basic MediShield does not. Depending on your premiums, IPs provide coverage for B-class and even A-class wards while the basic MediShield only covers C-Class wards. This provides you comfort with very little additional costs.

On top of your IP, purchasing an additional rider mitigates the need for a 20% co-payment after medical treatment.

For example, if your hospitalisation and treatment cost are S$5,000, you would normally need to pay the first S$1,000, before your insurance covers the remaining S$4,000. This can be painful to a fresh graduate on an entry level income. With an insurance rider, it becomes possible to pay nothing at the counter.

Only after securing your hospitalisation plan should you consider other products such as:

  1. Personal accident plans. This provides pay-outs in the event of an accident, such as a fracture while playing sports.
  2. Whole life insurance. The focus is on the benefits to your family and other loved ones and it usually lasts till the age of 99. The premiums are higher but rest assured that you will be covered for your entire life.
  3. Term life insurance. It is the cheapest kind of life insurance possible. For some young Singaporeans, premiums can be as low as S$60 per month. One strategy for fresh graduates is to only buy term insurance until they are 60 years old. This frees up money to be invested elsewhere.

Long story short, there is no real “correct” approach to insurance, and it varies based on your own and your dependent’s needs.


Will it be easy? Nope. Worth it? Absolutely!

Your attitude determines your direction. Go forth and seize the day!

Check out our articles covering other life stages:
  1. Financial Literacy — Jumpstart Your Journey… Yesterday!
  2. How much do Singapore Weddings cost?
  3. The Real Cost of Raising a Child in Singapore
  4. Retirement Planning, CPF Won’t Cut It

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