After years of relying on your parents for an allowance to sustain your lifestyle, earning your first pay check might provide you an exhilarating feeling of finally being an adult. You can now spend your hard-earned money on what you want without being accountable to your parents.
Unfortunately, being a working adult usually also means having to be more responsible and conscientious over what you are spending your monthly salary on. Just because you have this new-found freedom to buy more things doesn't mean you should be spending more freely.
Before you start splurging on expensive clothes, gourmet coffee and pricey avocado toasts, here are five things you should consider planning for with your salary.
#1 Build up your own emergency savings
Since young, you have been told that it's important to save up for a rainy day. Being an adult means having to put that into practice.
You need emergency savings that you can tap on whenever life decides to throw you a curveball. It could be a small but inconvenient matter such as needing to replace your washing machine. It could also be something serious such as requiring urgent medical treatment at short notice.
If you have savings to tide through such crises, it saves you from needless stress, having to borrow money or going into debt to pay for these unexpected costs.
A good amount to aim towards would be setting aside six to nine months of your average monthly expenses. This also ensures that you have enough savings for you and your family to continue living your current lifestyle even if you lose your job and have to start looking for another one.
#2 Clear or reduce your debt
While you are growing your savings, you should concurrently look at the debt that you have accumulated and have to repay.
At this point, student loan is a common debt that you may have taken on during your studies. Payment for such loans usually start once you have graduated and may take several years to clear.
Not all debts are created equal with some being heftier than others. For example, credit card debt tends to incur higher interest rates of more than 24 per cent per annum which are unsustainable if allowed to snowball. Pay off these debts first as they have the potential to cause you financial ruin.
Calculate the monthly repayments you have to make for all your debt and set aside this money every month to ensure you do not default on payments and suffer additional interest charges. If you have excess savings, you can explore making partial or full repayment of your high-interest-bearing loans.
#3 Understand your insurance needs
Having the right insurance in your youth is one of the most important components of successful financial planning. You need to start thinking about your own insurance needs as soon as you start receiving a salary.
At this stage in your life, the biggest asset you have as a young adult is your ability to work and enhance your career in the years ahead. This is also the biggest risk factor you face, as unexpected health issues or an unfortunate accident can rob you of your ability to work and provide for your family. That's the harsh reality of life.
To hedge against this risk, you should consider purchasing appropriate health and life insurance policies for coverage to meet your needs. Common insurance products to consider at this point include a private integrated shield plan, critical illness coverage, disability income coverage and life insurance.
#4 Start investing
It's key to start as early as possible. This is due to the power of compound interest, where investors can earn interest not only on their initial investment, but also on the interest that they have earned in earlier years.
By investing early, you also allow your investments more time to ride the ups and downs of financial markets, which can be volatile. This is particularly important if you are investing in riskier asset classes such as equities, where it's more common to see swings in the markets from time to time due to unexpected macroeconomic factors.
To further reduce your risk, always remember to take a diversified approach when investing. This means dividing your investment dollars into different asset classes that are not correlated, where price movements in one investment do not affect another, or even negatively correlated, where price movements in one investment generally moves in the opposite direction of another, as far as possible.
This helps if one asset does not do well as there are other assets within your portfolio that might be able to help cover the loss.
#5 Your big-ticket items
You will quickly find that adulthood is filled with big-ticket cost items that you need to save towards. Some of these will cost in excess of tens of thousands dollars and require you to start saving for diligently now.
If you foresee yourself needing $30,000 for your home renovation in two years' time, it means you need to save $15,000 per year, or about $1,250 each month. This math also only works out if you start saving today.
You might find yourself having multiple big-ticket items you need to save towards but having insufficient savings each month. You have to start prioritising your needs and thinking about what's more important to you. For example, should you splurge $30,000 on your wedding or should that amount be channelled towards paying for your home renovation.
It is also important to differentiate between needs and wants. A year-end holiday that costs $10,000 is a want that is less important compared to the down payment for a home and a roof over your head.
Only after you have budgeted for essential costs, should you think about luxury products or anything frivolous that you would like to spend your salary on each month.
Be life confident
After more than a decade of educating yourself, starting out life in the working world can be daunting. To ease into your new responsibilities and prepare yourself for what the future may hold, you should be diligent from the moment you start earning your first salary.
This includes building up your savings, reducing high-interest debt, understanding insurance and investing as well as putting money away for big-ticket expenditures such as weddings and home renovations that everyone will go through in their lives.
By understanding what you should be doing to strengthen your financial health, you can live life more confidently and enjoy greater peace of mind – giving you the ability to take on life's every moment.
AIA offers solutions that are made simple to keep up with your ever-changing wealth accumulation and protection needs. Get your financial planning on track. Take the first step towards financial freedom. Speak to us at 1800 248 8000.