Financial planning - tips for young people

First posted in December 2009. Re-posted in July 2010

The most important advice in financial planning is to save 15% to 25% of your earnings, in addition to CPF. This personal savings can be used for emergencies and for your retirement. If you draw down on your savings, you pay 0% interest. If you have to borrow from a bank for your urgent cash needs, you have to pay up to 24% interest.

Keep your savings in liquid form. It is all right to keep in a bank to earn 1% interest. When you have accumulated sufficient savings, you can invest in the an exchange traded fund, e.g. STI ETF, to enjoy diversification and professional management, or in a low cost unit trust (look for one with annual charge of less than 1%).

When you have started a family, you can buy term insurance for 5 to 10 years of your income. Do not pay more than 1% of your income in this insurance premium. If you are not able to get term insurance at a low cost or it is too troublesome to get it, you can buy personal accident insurance for this amount. At a young age, the biggest risk is due to accident which can be covered under this policy. You can change to a term insurance when it is readily available.

Do not worry about the other types of insurance. An insurance agent may tell you that they are necessary, but for most young people, you can live without them. It is more important that you have savings that can be withdrawn easily to meet unexpected cash needs. Even if you have invested in an ETF, you can withdraw it by paying only a small charge (i.e without paying the high penalty in a life insurance policy).

Join FISCA and attend the educational classes on financial planning. You can also read my financial planning book, which will be given to all FISCA members. This will be available in January.

Tan Kin Lian