Karen Tang, CFP®: Certified Financial Planner in Singapore

Why Young Adults Need To Start A Financial Plan Now

Why Young Adults Need To Start A Financial Plan Now

The end goal of financial planning is to be able to enjoy a worry-free, comfortable retirement. Wouldn’t you agree with me?

A recent FinFit survey by HSBC shows that young working adults in Singapore aged 24-39 are weakest in their retirement planning as compared to other aspects of financial planning. 

  • Less than 50% of the respondents have a comprehensive retirement plan. 
  • 4 in 10 are not aware of the amount they need in retirement expenses. 
  • And many do not manage or monitor the performance of their retirement portfolio.
  • Annual rebalancing seems to be a low priority of young working adults.  

These young working adults could be single, married without kids or married with young children. 

The Earlier, The Better

When it comes to personal finance matters, one of the biggest missed opportunities for people today is not starting their financial planning early enough. Young working adults need to understand the importance of having some kind of financial plan sooner than later, instead of waiting till they have a sizeable sum to invest or allocate to their financial goals. 

Reality: As you grow older, your family structure will change. Your financial obligations will change. Expense will usually increase and this has an impact on how much you can save in the future. 

Therefore, unless you intentionally put in place a financial plan now, you may have to make compromises along the way and end up with a less than optimal outcome. 

This article aims to debunk some myths that younger people have when it comes to financial planning. 

Myth #1: Retirement is decades away. I have plenty of time. It is too early to plan for it now. 

Reality: Why plan for your retirement well in advance? Because of the way compound interest works. The sooner you start saving, the less capital you will have to invest to achieve the retirement fund that you need. 

Remember, time is your friend. Start saving and investing regularly, however small the amount may be. The discipline of systematically investing on a regular basis can go a long way in building your retirement nest egg. 

Here’s an example:

  • You are age 28. You start investing in the market at $500 a month, averaging a positive return of 0.5% a month or 6% a year, compounded monthly over 30 years.
  • Your friend, who is the same age, does not begin investing until 10 years later and invests $1,000 a month for 20 years, also averaging 0.5% a month or 6% a year, compounded monthly.
  • You will end up with $502,257 in your pocket whereas your friend will only get  $462,040. That is a difference of $40,217! You get more just by starting early, and with a smaller, more manageable amount. 

Myth #2: I need to earn more before I can save and invest

When do you expect that promotion or be rewarded with a handsome bonus? What if this does not materialise for you?

After settling in to your first job, you would probably realise that the starting salary is nothing to shout about. You start telling yourself that when you make double the salary, you would have earned enough to save and invest your surplus cash flow.

Well, you are probably wrong.

The main reason why those who earn a good salary and yet cannot save and invest as needed is because of their spending habits.

Call it peer or society pressure, their lifestyle must always keep up with the increment of their salary. I’ve seen how earning more means more luxurious holidays, frequent high end restaurant meals, lavish shopping sprees, high performance cars etc. 

Reality: How much we earn in life is not something we have control of. On the other hand, we have absolute control over how much we spend. So, this is where we should focus our effort on. 

Myth #3:
I’m well qualified so I know how to save and live prudently within my means. I don’t need to plan or invest. 

Reality: Failing to plan is planning to fail. How you get from point A to point B does not happen by chance. It is a journey that is deliberately planned for and with the help of a qualified and Certified Financial Planner. 

You have established a good start but just simply budgeting and saving will not take you far. You need to invest in assets that will appreciate in value over time and in some cases, generate regular income (interest, dividend, rental income etc.) in the future.

These assets could be stocks, unit trusts, real estate or other assets as per your investment objectives, investment time horizon and risk appetite.

Investing is not gambling. Yes, it does involve some risk but this is calculated risk. When done right i.e. adequate diversification across asset classes, regular reviews and proper rebalancing of investment portfolio, you can expect positive results.

Assets do not spring up overnight, so start your investing journey now.

Try to save at least 20% of your take home pay every month. This can be channeled in to investments to meet your medium term and long term goals. Remember – the early bird catches the worm! With time on your side, you have more time to learn, experiment and build your investment portfolio.

Myth #4: I’m young and healthy. I won’t fall ill so easily. There’s no need for insurance now. 

Reality: Diseases can strike anyone and younger adults are not ‘invincible’. It is always better to be safe than sorry. I have witnessed a few cases where it was too late to get any insurance protection.  

Why is it important that you get insurance coverage sooner than later?

  1. Premiums are generally cheaper when you purchase insurance at a younger age.
  2. Get adequate coverage through the right type of plans while you are still in the pink of health. When there is a pre-existing health condition, insurers could either exclude coverage of this condition or impose extra premium for accepting it. In some cases, the application can be declined altogether, making one uninsurable. Being given a ‘decline’ status is like being black listed and this information has to be declared in all future insurance applications.  

Some of us believe in insurance and some of us not as much. However, it is an undeniable fact that an insurance plan (especially one that covers early, intermediate and severe stages of critical illnesses) is the
best performing ‘investment’ for us on the day we are told the worst news of our lives. Think about it – the leverage effect is significant and the odds of materialising this ‘investment’ is rather high. 

Myth #5: 
I don’t think I’ll retire or I have my own property and some savings so retirement planning, investing, etc. are already taken care.

It is great that you own a property and have some savings to start with. But without proper planning, your retirement may not materialise the way you had envisioned it to be. Retirement planning is more than just owing a property and having some savings.

Some questions to ask yourself:

  • Do I know the retirement nest egg (i.e. your golden number) I need to accumulate in order to support the lifestyle I want?
  • How do I achieve this goal? What shall I invest in? 
  • What are my sources of generating retirement income?
  • How does my cash flow look like during retirement? Will I have a shortfall? 
  • How do I protect my wealth right up to retirement and during retirement? 
  • Have I considered the various scenarios that could derail my plan?
  • What is the impact of inflation on my retirement income?
  • What are some of the retirement planning mistakes that I should avoid?

DIY retirement planning? Think again. Retirement planning is not a straight forward thing. There are many planning aspects to consider and it involves a good amount of number crunching too. 

The last thing you want is to jeopardise your retirement because you did not engage a qualified financial planner to analyse your data and implement a customised plan based on your needs.

Don’t leave your golden years to chance. Get professional help today!

In Summary:

I want to leave you with this. 

6 Key Benefits of Having a Financial Plan:

  1. The process of financial planning helps you set goals
  2. Financial planning is a great source of motivation and commitment
  3. Financial plans provide a guide for action and decision-making 
  4. Financial plans set performance standards 
  5. Financial planning has additional emotional and mental health benefits
  6. Financial planning is shown to improve financial outcomes

Time and tide wait for no man. The one thing you can do for yourself before the year ends is to establish your financial security plan today.

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