Financial Planning (1) - How much to save?

The first step in financial planning is to decide on the proportion of the current income that should be saved for the future. The answer is "as much as possible".

Some people are frugal. They spend only to meet the essential expenses and save the remainder of their earnings for the future. They are willing to forgo their current spending and enjoyment - no vacations, search for cheap offers and bargains, take public transport, find inexpensive eating places.

There are many opportunities to leave frugally and still enjoy the pleasures of life. The parks and public spaces are free. Activities and courses in community and sport centers are affordable. Walking is free and good for the body.

As a rule of thumb, you should save 10% to 15% of your earnings and keep it for future needs. After meeting your essential expenses and savings, you can still have a balance for the discretionary spending, such as vacations, branded goods, tuition, entertainment or the pleasures that do cost money.

It is very important to avoid getting into debt, including borrowing on credit cards, that charges a high interest burden. It is already difficult to earn money and set aside savings, yet some people have to pay interest that takes away 10% or more of their earnings!

Do not invest in a property that requires more than 40% of your earnings to service the monthly repayment. Do not buy a car that needs more than 20% of your earnings to meet the monthly repayment. You have other options that should be explored. If you take these loans, you must make sure that your job is secure, as the monthly repayments can be a heavy burden when you are out of a job.

If your spouse is also working, which is now quite common, the above rules should be applied on the combined income.

To recap: as a rule of thumb, save 10% to 15% of your earnings. When you are clear about your financial goals for the future, you can adjust the amount that you need to save.

Tan Kin Lian