It’s August, and many new graduates may have started on their first job after graduation. While it is an exciting time for the young adults, it can also be a rather stressful period as they begin to familiarize themselves with the many responsibilities they now have to shoulder as a working individual.
To help our readers tide over this period of uncertainty, we have compiled three financial advice from the renowned financial blogger AK for those who are just starting on their journey towards financial independence.
1. Buy sufficient insurance, but don’t overdo it
“Be sure to buy insurance!” must be a standard advice that the older generation gives to us, especially since they are at the age where medical bills might increase significantly. However, insurance can be rather hard to understand with all the technical words and jargons that do not seem to make much sense to an average joe.
To help you out on that, below, we have listed some of the most relevant insurance policies highlighted by AK that most fresh graduates should be getting.
a. Term life policy
Term life policy is a life insurance that provides a fixed payout should the client pass on within a period e.g. up till 60 years old. Many might opt for whole life policy (which guarantees payout when the customer passes on, no matter when) because they don’t want their money to go to waste should they pass on only after the term life policy expires.
However, one will have to consider the additional premium we will have to fork out for a whole life policy as compared to a term life policy.
More importantly, since these policies are about leaving behind a fixed sum of money after we have passed on, the fundamental question that we should be asking is “who is my dependent?”.
For some people, our parents will be our only dependents, considering if we do not get married or have children. In such cases, having a term life policy that covers us till we are 65 years old should be sufficient, assuming that our parents will already be 100 years old by then if they gave birth at 35 years old.
Whereas having a whole life policy might not make much sense, as even if we do live till 99 years old, there will not be any dependents who will benefit from the payout of the insurance policy.
b. Health insurance
The kind of health insurance to get depends on your personal preference. What kind of ward do you want to stay in, do you want to go to a private hospital? These are the kind of questions to ask yourselves instead of going for the policy with the lowest premium.
Buying a cheaper insurance is likely to mean less coverage and more payment on our part. Regardless of the differences in the many health care insurance policies around, one thing is clear; it is important to get covered for health care to avoid worrying about skyrocketing medical bills when we are in the hospital.
c. Critical illness policy
When we are diagnosed with a critical illness, we might not be able to work and will lose our source of income. Therefore, we can purchase critical illness insurance that will pay us a lump sum of money upon being diagnosed with such illnesses to help us deal with the expenses that we incur while fighting to get better.
In AK’s opinion, he thinks that the much higher premium for early critical illness policies are not necessary as it is assumed that we should “still be well enough to work and not have to give up our regular income”. Thus, we will not need the lump sum payout from the insurance.
2. Have an emergency fund
Besides adequately insuring yourself, fresh graduates should also learn the importance of having an emergency fund that will be needed on rainy days. Having an emergency fund is non-negotiable since no one can predict what might happen, but the amount to set aside for the fund can be tricky.
In AK’s post, he suggested that we look at three points before deciding how much we need to set aside for the unexpected. The three factors are namely: lifestyle, age, and dependents.
How much you need per month naturally varies according to the type of lifestyle you want to lead. Having meals in hawker centres versus restaurants, must we travel each year or can we do it every other year among many other considerations.
For age, it is assumed that older workers will find it harder to find a job in case of retrenchment, and therefore may need more money in their emergency fund to tide over a longer period of unemployment. Younger workers are likely to find a job within a shorter time, especially so if they are willing to accept lower salaries.
We also need to consider our loan repayments that we have to pay each month (for example, mortgages, insurance premiums, student loan). If our parents are dependent on us, we need to factor in how much allowance we need to give them each month. All these add up to form our monthly expenditure which is unique to each.
A simple rule of thumb to follow can be to set aside six months worth of expenses for the young adults.
3. Growing your money through CPF & investing
In the recent InvestX Congress, AK talked about how we can make full use of our CPF to help us in growing our retirement funds. Yes, you heard that right, we should be planning for our retirement even as early as now when we first start to work.
One of the most important thing that he highlighted in his post was to transfer the funds he had in his ordinary account into his special account to benefit from the higher interest rate (4.0% as compared to 2.5%) in the latter.
In his post, he said that because he did this at the very start of his career, it made “a big difference because compound interest needs time to work its magic and a bigger base earlier makes it more magical”.
Therefore, if you are not going to BTO or buy a flat just yet, you may consider doing this to make better use of the higher interest rate given in the CPF to enjoy a higher payout in your days of retirement as the power of compound interest helps you to build your retirement funds.
Also, as obvious as it is, much of AK’s wealth is built based on investing for passive income and that has helped him to achieve his current state of financial independence. Therefore, fresh graduates should certainly set aside a part of their earnings which they do not need and invest this for the long-term.
If you do not know where to start, take a look at this post written for the beginners as we learn from AK on how to start investing to create more streams of income for ourselves, and to reach financial independence earlier.