By Ong Zhi Yi
Ever find yourself depleting your savings at an astonishing rate? Felt that pang of panic when you check your PayLah! wallet after paying for meals?
Entering university has made me realise the importance of financial planning. Personally, I’ve been eating out almost every day, and for those of us staying on campus, grocery-shopping also takes up quite a bit of our living expenses on top of hefty tuition and hall fees.
Diversification, credit, premiums… My mind used to switch off automatically whenever I came across these financial jargon. But it’s about time to pick up some financial literacy skills! If you’re a beginner just like me, this guide can help you get acquainted with some basic financial literacy terms and provide you with some tips on how to stretch the dollar.
It might be tempting for most of us to spend once we have money. But resist the urge to splurge; the spend-now-save-later mindset may potentially leave you with nothing quickly. Perhaps try to set aside a portion of your income each month.
After knowing how much you have to save, it’s also important to set a budget for your monthly expenditure. This can help us ensure that we are living well within our means. Consider downloading expense tracking apps such as Seedly to keep close tabs on what you’re spending on, so you’ll know what to cut down on if the need arises.
As compared to saving, you’ll be able to enjoy higher returns via investments. But the catch is that it comes with risks. So before you get started, take some time to contemplate over your financial goals and risk appetite, whether you’re in this for the short term or long term, and how much capital you’re willing to lose.
Passive investment, also known as the buy-and-hold strategy, refers to purchasing then holding onto a diversified portfolio of assets for a long term (about 10 years). There’s minimal trading in the market, so it’s less complex, less risky and less expensive as compared to active investment. Keep in mind that diversification spreads your investments over a variety of assets, which typically includes stocks and bonds.
Exchange-traded fund (ETF) is a popular method for diversification for its low average cost. ETF refers to purchasing a collection of underlying assets, hence saving you from the trouble of analysing separate corporations to invest in.
This is extremely useful for beginners who don’t know what to bet their money on, and can avoid huge losses if one company takes a plunge for the year. One example is the STI ETF, an ETF that tracks the Straits Times Index. You would be investing in the 30 largest companies in Singapore in one go. Or, one can also consider Unit Trusts – which is similar to ETF, except that it’s actively managed instead.
Otherwise, you may opt for an investment-linked insurance policy. You’ll be able to enjoy insurance protection as well as investment returns. The premiums you pay are used to finance units in the sub-funds of your choice.
In turn, the units purchased are either sold to fund insurance coverage, or remains invested in the market. ILPs emphasises on flexibility; you’ll be able to change your sub-funds and insurance coverage based on your personal financial needs.
Investment might sound like a dream come true; all you have to do is throw money into the market and it will magically multiply on its own. But that is not the case. You will have to manage your capital wisely, run multiple risk assessments, and analyse the market every once in a while. This requires a lot of effort but if done properly, you can grow your wealth effectively.
There are three main insurance types – health, life, and general (which includes car, travel and property). It’s important for you to be very sure of what you want to protect; this will affect what type of insurance you purchase and how much premium to pay. Premium refers to the amount you pay for the insurance, and payment can be monthly, quarterly or annually.
Health insurance can help to cover medical expenses when one falls sick or sustains any injury. MediShield Life is a compulsory plan for all Singaporean citizens and Permanent Residents (PR) that helps to reimburse large hospital bills. If you’re looking for more coverage, opt for Integrated Shield Plan.
Life insurance means that you pay premiums to provide financial back-up for your beneficiaries after your death or become totally and permanently disabled. There are two types of life insurances – term and whole life products. Like its name suggests, term insurance is only valid for a certain amount of time, be it five or 20 years, according to the type of plan you purchase.
Therefore, it is typically cheaper than whole life products. But the catch is that you’ll only be protected for that limited period. Meanwhile, not only will you be able to receive life-long protection under whole life insurance policies, you can even build up cash value over time. This means that you can opt to surrender your policy when you don’t see the need for protection anymore.
In turn, the cash you receive can be used to supplement future financial needs. Do note that there might be a surrender charge depending on your insurance plan, but it does decrease over the years until it eventually disappears.
So what are you waiting for? Start early while you can! Now that most of us are in our early 20s, we have more time to build our coverage overtime. Moreover, insurance is typically cheaper for those who are young and healthy. But be sure not to over-purchase – only protect the things that are really important to you, or you would have to shoulder a huge financial burden for no good reason.
If COVID-19 has taught us anything, it is to be prepared for rainy days. For those of us who want to get equipped with some financial literacy skills, there’s no better time to start than now!
Disclaimer: This article is only meant for educational purposes. Do consult your financial advisor to get professional advice best suited for your personal needs.