Financial success can seem like a long way off when you’re 25 and just starting your career. Here are 7 signs you’re on the right track.
At 25, it’s common to feel like you’re failing financially. That’s because you’re not at the peak of your earning capacity (probably), and faced with a rising number of commitments. Life, you’re learning, keeps raising your costs as you earn more. But don’t panic, if you have some of the following, you’re on track.
You Have S$20,000 (or Close to it) in a Savings Fund
Assuming you set aside S$500 a month, from the time you start working at age 21, you should have at least S$20,000 sitting in a savings fund (note: not in your CPF, but in an actual bank account).
It’s important to have about six months of your income stashed away, not just for emergencies but to seize opportunities. For example, you may want to move to a more lucrative field of work later – having a savings account buys you the time needed to retrain, and find new employment.
This will differentiate you from those who can’t seize such opportunities, because they’re living from one paycheque to another.
You Have no Credit Card Debt
The number of Singaporeans with credit card debt is high, although there are signs of it slowing down. When you’re young, it’s both easy and necessary to avoid credit card “debt traps”.
At an interest rate of around 26 per cent per annum, getting into serious credit card debt in your 20’s can plague you for life. For example, if you get a lower credit rating for late payments now, you may find difficulty qualifying for a home loan when you’re 35.
At the same time, the 20’s are often the period where you’re most tempted to live beyond your means. You have plenty of aspirations, and the energy to party and travel. It’s important to keep this in check, lest it result in debt that takes the next two or three decades to clear.
You Know Your Financial Products
What’s the difference between an endowment plan, unit trust, and Investment-Linked Policy?
If you don’t know, then you’re either (1) not saving and investing with any of these, or (2) investing without a clue.
If your situation is (1), then we hope it’s because you’re financially savvy, and are trying to minimise fees through other forms of investments. Otherwise, you should know that simply stuffing your money into a bank’s current account is not the best way to plan for your future – the inflation rate of three per cent, compared with the average bank interest rate of 0.125 per cent, means your savings will be worth much less than you think.
If your situation is (2), then you should know you’re wasting thousands of dollars, and may be paying to risk your future.
If you already know the differences between these, then you’re way ahead of your peers.
You Make at Least One Attempt to Increase Your Income Every Month
When you can’t afford something, your first question should be “How can I get someone to pay me the money I need?” It shouldn’t be “What can I cut from my life to make up the difference?”
Remember there’s an upper limit to how much you can budget, but no theoretical limit on how much more you can earn. Saving and being thrifty are important; but it’s better to have a higher income, than to be forced to rely on tight budgets.
If you’re always trying to increase your income – at least once a month – then you have the right idea. It can come from trying to get a raise, from trying to run a side-business, or even from buying dividend paying stocks; just so long as you’re actively trying to earn more.
As a bonus tip, challenge yourself to raise your monthly income by 10 per cent, every year. This sets a small, but realistic goal.
You Won’t Buy a Car (Until You’ve Bought Your House)
Car loans eat into your Total Debt Servicing Ratio (TDSR). This can get in the way of your home loan application.
When you try to get a bank or HDB loan, the amount you can borrow is capped by the TDSR framework; you cannot take a loan if the monthly repayment, plus your other outstanding debts, would exceed 60 per cent of your monthly income.
A car loan is often the most expensive debt next to student loans, and will eat into your TDSR limit. On top of that, the large down payment on a car (minimum of 30 per cent cash down) is often around S$27,000 to S$32,000 for a typical family sedan. This is enough to cover the downpayment on some three-room or even four-room HDB flats!
You Know How Much You Need at Retirement
You’ll need to revise this amount periodically; but it’s good to have it planned out. You should know how much you want to have at retirement (income per month), and how much you must save to get there.
Without a clear, fixed goal, you can’t determine whether your investments are performing as required. You’re also prone to impulsive financial decisions, like taking big gambles on high risk investments (if your goal is vaguely defined as “make more money”, it often results in the opposite).
We don’t condone gambling, but always remember: even poker players come to the table with fixed goals and rules. In the same vein, you must be clear on when you’re going to exit an investment, and on the maximum you can safely invest (even when times are good).
Speak to a financial planner for more help on this.
You Know How Much You Need in a Family Crisis
This isn’t just about filial piety; it separates the financially savvy from the more short-sighted crowd. At 25, you need to seriously consider setting aside money not just for yourself.
If one of your parents ends up with cancer, or loses their job, how will the family be affected? If you don’t set aside money for this, you might find yourself taking out huge, high interest loans to help. You may also find yourself liquidating investments before they can mature, as stopgap solutions.
As your parents are getting older, it’s best to get into the mindset of thinking about their needs as well: in another 10 years, you may be the one to take care of them. And that means factoring their needs into your long term calculations.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.