A reason young working adults fixate on how much they should have saved by the time they turn 35 is because they want to know how they compare to their peers.
Your savings should not be viewed as a competition over your earning power or success against your peers. Rather, it should be the stepping stones towards leading a prudent lifestyle, investing for the long-term future and achieving financial freedom.
Leading a prudent financial lifestyle
How much each of you have in savings will largely be a function of the salary you earn and the lifestyle you lead. This is also why there should not be a fixed number for how much you should have in savings.
Firstly, leading a prudent financial lifestyle means always living within your means. If you spend less than you earn, you will always have the ability to save.
Next, as you progress in your career from a fresh graduate, you will begin to rise up the corporate ladder and earn a bigger salary. This is when you need to understand the difference between necessary increases in living expenses versus lifestyle inflation.
An increase in necessary expenses happens when you get married and move into your own place. This will mean taking care of your monthly housing loans, household bills, grocery shopping. This will continue to rise as you add new, and very cute, members to your family. You don't have much of a choice when it comes to these expenses.
On the other hand, lifestyle inflation happens when you start spending more after each salary increment. This means going to restaurants more often, taking more frequent holidays to exotic locations, getting a car and even upgrading to a condominium.
It's ok to want nicer things – as long as you're not sacrificing your retirement nest egg.
Investing for the long-term future
The first step to securing your long-term future is to secure your short-term future. This happens by creating an emergency fund to cover for any unexpected costs that arise, including paying for broken essential household appliances, losing a job or having a medical emergency. It is recommended that you have between six months and 12 months of your monthly expenses set aside as your emergency savings.
After setting this aside, you need to start saving for the long-term. This means making your money work for you by investing it. While your savings will typically pay you a meagre interest return, your investments are meant to significantly compound over time. There are a number of investments that you can pick from, including stocks, bonds, savings products and even commodities.
You can also consider growing your savings with other savings products, such as AIA Smart Wealth Builder Series, which provides policyholders with a 100% capital guarantee after the 15th policy year, insurance protection against death, total and permanent disability and terminal illness, as well as offer you the flexibility to accumulate savings up to age 125.
Moreover, you continue to retain the flexibility to pay for the policy within 5, 10, 15 or 20 years, and still be able to withdraw your savings to pay for key goals, such as your child's education or your own retirement, if your require.
When investing in stocks and bonds, you need to consider the risk-return trade-off as they are investments that carry risks, and with it, the chance of losing your returns and/or principal amount.
How much you invest will be a function of how much you are able to save each month. Again, rather than attaching a specific figure that you need to have invested by the time you turn 35, you should just strive to maximise this amount. This is primarily because each of you will earn a different amount, climb the corporate ladder at a different pace and have to increase your monthly expenses at varying times in your lives.
Achieving financial freedom
The eventual goal of striving to save and maximising the amount you can invest is to achieve financial freedom. This is when the returns you receive from your investments are able to pay off your monthly expenses. Thus, you have achieved the ability to retire if you wish to do so.
At this juncture, you should not simply retire because you can afford it. There are several reasons why:
- You may encounter a family medical emergency that wipes out your savings/ investments
- Working for a longer period of time means you can either set aside a greater amount to spend each month when you eventually retire, or it can afford you a way to gradually take on less work and earn less
- You may not be fulfilled leading a retired lifestyle. You still need to do things that you are passionate about
The equation to achieving financial freedom is quite simple – you simply have to minimise your monthly expenses and keep lifestyle inflation low, while maximising the amount you can invest and your investment returns.
