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.
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).
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.
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.
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.
Comparison of life insurance types
|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||Protection for death and TPD and grow money via investment returns|
|Compensation||Sum assured||Sum assured and accumulated bonuses||Sum assured and value of units in fund|
|Surrender value||Nothing||Guaranteed and non-guaranteed bonuses||Value of units in investment sub-fund|
|Coverage period||Fixed term||Until the end of life||Until the end of life|
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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 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.
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.
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.