Question: Greetings! I am a 21-year old fresh graduate who just landed my first job as a junior programmer in an international IT company. I’m lucky to receive a salary that is more than what I had expected. My parents told me to begin saving up for the future but I really don’t have any idea on where to start when it comes to financial matters. What advice can you give me? At my age, what do you think should be my primary concern in terms of my finances? Thank you. – Jed S. (via email).
Answer: Generally, this is the stage in your life where you may be carefree and at the same time clueless on where your life is heading. It is a time when someone your age experiments with navigating the various paths to your dream career, which I call the “testing stage.” At this stage, you will also discover the challenges of living from paycheck to paycheck and learning how to stretch your meager income until the next payday. Being young, however, is not an excuse for not putting your finances in order. In fact, this is the best time for you to develop the habit of saving and investing.
Allow me to share with you five financial moves to get a head start in your financial future:
1. Create a spending/budget plan. Effectively managing your cash flow, the money that goes in and out of your pocket is the first step toward achieving a healthy and balanced financial life. A “spending plan” is a great tool in helping you keep track of your expenses. Start by writing down all your monthly necessity expenses such as food, rent, utility bills, etc. These are the items that are essential to your sustenance – shopping binges not included! It is recommended that your necessity expense does not go beyond 60 percent of your monthly income to provide room for your other expenses. Whatever is left in your budget after deducting your necessity expense is the “free portion,” the amount that you can allocate either to savings, “wants,” or both.
Implementing a spending plan is like getting into a new exercise routine. The first few attempts will seem difficult to follow through, but once you get started, your system will naturally get used to it and eventually be a regular part of your routine.
2. Build your financial safety nets. Financial disasters such as a job loss, hospitalization or any event that requires a sizeable amount of money immediately can happen to anyone, regardless of age and social status. That’s the reason why you’d like to allocate a portion of your monthly income to an emergency fund. Being prepared for such eventuality provides you with an indispensable hedge in your financial life. It is recommended that you save to establish between three and six months’ worth of your expenses as your emergency fund. From the “free portion” of your cash flow, carve out an amount that you can save regularly until you reach your desired emergency fund size. The second financial safety net you’d like to establish is your health and life insurances.
Being young and single doesn’t mean that you do not need any kind of financial protection like life insurance. Life insurance is great financial tool to ensure that we do not cause any unnecessary financial burden to our family in case of untimely demise. If no one in your family is dependent on your income, get insurance that is equivalent to the expenses they would incur for funeral costs, etc. Getting a life insurance of P500,000 is a good number to start with.
3. Resist debt. You are born in the age of information and everything “instant.” Instant information, instant coffee, instant noodles and instant access to credit are plentiful. While it is true that purchases using credit card offers convenience and freebies, it also encourages spending something that you haven’t earned yet and might lead to a vicious cycle where you work, receive paycheck and pay credit card dues. It is a cycle that would financially and emotionally drain you and in which you’d wish you hadn’t engaged. They key is to stick with cash payments. If your current cash balance cannot afford it, it means you have to delay it momentarily. Do not be trapped in the “YOLO” mentality, although it is not true that You Only Live Once; in fact, statistics shows you’re likely to live an average of 68.5 years – that’s about 25,000 days. Now, that’s a lot of days living miserably if you fall into the trap of instant gratification.
4. Invest in education. Improving your competencies through continuous education is what will separate you from the majority of your peers. Successful people, whether in the corporate world or in business, have one thing in common – they do not stop learning. Invest in your most important asset – YOURSELF. Remember that knowledge is one commodity that is not subject to inflation. Continue to develop your skills and competencies for they will be your springboard to success in a fierce and competitive marketplace.
5. Grow your money wisely. One of the advantages that you have over me, your boss and your parents, is time. Your age makes you a better beneficiary of investment. You have more years in which to grow your money and make yourself rich. Did you know that if you save at least P100 a day and invest it monthly in an investment vehicle that yields 10 percent interest every year will accumulate for you roughly P1 million in 15 years? Not bad for a daily saving that costs as much as your latte from your favorite coffee shop. Learn about stock investing, mutual fund and UITF. These are great investment instruments to use as you begin your investment journey.
Best of luck!
Jesi Bondoc is a registered financial planner of RFP Philippines. He is the director of My Wealth MD and Partners, Inc., specializing in investment advisory. You can send your money questions at firstname.lastname@example.org and they’ll be answered in his next article. For more info about the Registered Financial Planner program, e-mail to email@example.com or text <name><e-mail> <RFP> at 0917-9689774.