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Financial Planning in Your 20s: Ultimate Guide

Financial Planning in Your 20s: Ultimate Guide

Last Updated on by Tree of Wealth

If you’re in your 20s and just starting out, financial planning may seem like a complex and boring task. But it helps you ensure that you are well-protected and have a game plan for achieving your financial goals.

This is because without a financial plan, you will fail to allocate your finances in a way that can grow your money. Remember those times when you succumbed to an impulse buy? A financial plan can keep yourself accountable and ward off such temptations.

Do it as soon as you get your first paycheck. The earlier you work on it, the sooner you learn more about financial instruments and your money will also be able to grow much faster due to compound interest.

Even if you are in your late 20s and have been working for some time now, you should also review your plan from time to time as your financial needs and goals would have changed along the way. And it’s never too late to start planning.

What is financial planning?

Financial planning is about managing your income and expenses to grow your wealth. The basic steps in a financial plan include saving, protecting, and investing.

You also want to think about your own financial goals. Consider questions such as: What do you want to achieve in the next 5, 10, to 20 years? Do you have children or parents to care for? Can you take more risks with your money? Does your career support your financial goals?

Then, list down specific goals and the actions you will take towards achieving them. Maybe you want to set up an education fund for your child 30 years later. Or, you want to retire earlier at 50. Take the calculator out or use an excel spreadsheet to calculate the sums you need to save or invest to get to those goals.

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Saving an emergency fund

The first step — saving — is easy to understand. Always ensure that your expenses are well under your take-home income and try not to let debts go out of control, be it credit cards debt, student loans, or car loans. Essentially, you must learn to live within your means.

The first task for every young adult is to at least put aside an emergency fund comprising at least 6 months of necessary expenses. It will provide a buffer in the event of unforeseen emergencies, such as retrenchment, hospitalisation, and so on.

Take note, however, that while it is important to master the art of saving, in today’s age, saving is no longer sufficient. The two other areas you should look at are protecting and growing your finances.

Protect your finances

The next stage in your financial plan is to get sufficient life and health insurance coverage. It will compensate you or your family for unforeseen circumstances that will cause you to lose your income, including death and becoming permanently disabled.

As a young person, you probably have a clean bill of health. Thus, insurance premiums are lower as a result of “risk pooling”. Since the risk of a young person contracting a major illness is lower, you pay less than someone who is older than you, as that person would have a higher risk of contracting an illness. So buying insurance policies young can potentially save you money in the long run.

If you currently do not have any plans, the first policies you should look into getting are life insurance, hospitalisation insurance and critical illness plans. When you have those settled, you may also look into getting investment-linked policies (if it suits your needs).

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Whole Life Insurance

Whole life insurance provides compensation for the loss of your life, or total permanent disability (TPD), all the way until the end of your life. Most whole life plans, excluding “term insurance”, have surrender value. This means that it technically can be used to grow savings as well.

Read more: Best Whole Life Plans Singapore 2020 — The Ultimate Guide

Term insurance 

Term insurance also provides compensation for the loss of your life or TPD, but only for a fixed period of time, such as 30 years. After the plan expires, there is no surrender value. As such, the premiums are also cheaper, despite offering equivalent sum assured amounts.

Learn more here: Best Term Insurance Plans in Singapore

Critical illness and early critical illness plans

Another aspect of insurance that is often overlooked is critical illness. The reality of it is that statistics show that 1 in every 4 to 5 in Singapore may develop cancer in their lifetime.

Other critical illnesses include diabetes, liver failure, heart attack of specified severity. At the onset of a critical illness, you will be paying a lot more money for treatments over a long period of time. Critical illness plans offer you multiple payouts and higher coverage for key critical illnesses, but only for advanced stages of the illness.

To have a more comprehensive coverage, you can consider early stage critical illness insurance plans, which offer full payouts for early and intermediate stage critical illnesses.

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Comparison of life insurance types

Types of Insurance Term life insurance Whole life insurance Endowment Whole life insurance (investment-linked)
Objective Protection for death and TPD Protection for death and TPD and grow savings Growing of wealth/ Retirement Protection for death and TPD and grow money via investment returns
Compensation Sum assured Sum assured and accumulated bonuses Lump sum/ Steady Stream of Income at a chosen age/ Lifelong accumulation Sum assured and value of units in fund
Surrender value Nothing Guaranteed and non-guaranteed bonuses Guaranteed and non-guaranteed bonuses Value of units in investment sub-fund
Coverage period Fixed term Until the end of life Fixed amount of years or Life long Until the end of life

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Endowment Plans

Endowment plans are policies designed to help you save and grow your wealth with at a good rate with a peace of mind. Strong returns, regulated and at a low risk.. Aside from accumulating your wealth, the difference between saving in a bank and biscuit tin (they accumulate your wealth too) an Endowment plan actually grows your wealth with actual returns higher than a bank account or fixed deposits.

Most savings plans are Capital Guaranteed upon maturity and your savings are protected in the event of death. Critical Illness and Cancer are included. Safeguard your savings in the event of unexpected loss so you can be sure your wealth will be covered for while growing them.

Read More: 5 Best Regular Insurance Endowment Plans In Singapore

Disability Income

Disability Income plan protects your income in the event of unable to work due to early stage critical illness or partially disabled but not totally disabled, and you still need to provide for dependants and monthly bills & expenses. Then Disability Income Protection is a coverage you should strongly consider.

Different from Total and Permanent Disability (TPD), Disability Income plan pays out monthly as a form of income replacement when you are unable to perform in your own occupation.

Read More: Best Disability Income Plans Singapore – The Ultimate Guide

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Hospitalisation plan

Hospitalisation insurance, also known as “medical insurance” or “health insurance”, basically covers hospitalisation fees. Even if you have never purchased a hospitalisation plan, don’t worry. all Singaporeans and PRs are covered with MediShield Life administered by Central Provident Fund (CPF). It is a compulsory hospitalisation plan that provides basic coverage. Premiums are deducted from your MediSave account, and lower-income households can enjoy premium subsidies.

The claim limits pegged to B2 to C wards in public hospitals, which are pretty basic. For instance, it is $700 per day for normal wards and chemotherapy for cancer is at $3,000 per month. There is also a limit for the policy year, which is $100,000. Pre- and post- hospitalisation charges are not included.

To boost your coverage, you might want to get an Integrated Shield Plan (IP) from a private insurer to complement your MediShield Life. An IP can cover Type A and Type B wards in public and private hospitals.

Investment-linked plans

Investment-linked policies have a life insurance component and an investment component. Your premiums pay for units in one or more sub-funds. Then the units purchased are used to pay for the insurance, while the remaining are invested.

Due to the uncertain nature of markets, ILPs do not have any guaranteed cash value. The value of the units you buy with your premiums also depend on the sub-fund’s performance, and you bear full investment risk.

An ILP can offer you flexibility as to which sub-funds to invest in, and you can also reduce or increase coverage along the way. But, if your main purpose is life insurance and you are not too familiar with investing in funds, it is probably better to buy a whole life or term life insurance plan instead.

To find out more on the competitive Investment-Linked Plans, we have done the homework here: Best Investment-Linked Policy Singapore

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Grow your finances: How to invest

Growing your wealth is important for beating inflation and preparing for your financial goals, be it having enough for a wedding, baby, buying a house, or for retirement.

To this end, go beyond saving. Once you have secured six months of essential expenses and bought insurance policies that offer peace of mind, it is time to invest. There are many instruments to do that, including investing in unit trusts, stocks, shares, ETFs and endowment plans. Each of these instruments have different risk levels.

Stocks and shares are higher risk. They will require you to understand the companies that you are investing in and your investment value fluctuates with market conditions. Safer options include endowment plans, where there would typically be guaranteed returns (even if they are lower than the sum of premiums you paid).

With every investment, make sure you understand the mechanics and are committed to the risk involved. Then, you can choose the best investment brokerage account to start trading.

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Financial planning is not a one-time affair

Life can surprise you in different ways. Falling in love, having a child, or getting a promotion are things that can slow down or accelerate your financial plan. So, just like how companies do a quarterly review of their business, you also need to check on your financial plan from time to time.

As you earn more income and contribute more to the family, does your insurance coverage match? After marriage, have your financial goals changed? Now that you have a third child coming, how should you adjust your expenses? Financial planning is not boring if you align it closely to your lifestyle. After all, you do need money to achieve significant goals in life.

Regardless whether you are a newbie at financial planning or you already have one in place, get professional advice to help you find the best insurance or investment products.

Simply fill in the form below and our friendly licensed FA advisor will get in touch with you. We will be able to compare different policies based on your needs. No obligations, no hidden fees. All advice is free of charge.

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