EVERYONE has seen those compound interest charts that explain how, if you save $X a month, you could be rich enough to flush your toilet with bird’s nest by the time you’re 62. This is all easier said than done – when you’re at an entry level job getting $1,200 a month, you’ll more likely speak to a financial advisor just to get free fries at Burger King, let alone think about high level savings and investments. Well, look on the bright side – if you save and invest what little you have, you can still end up with serious money one day.
Let’s start with a boring, difficult truth: the less money you have, the more disciplined you have to be with planning. Look on the upside; when you’re already living off Mamee and McDonald’s curry packets, a little added difficulty won’t make much difference. The key to financial planning, whether you have a million dollars or a thousand, comes to five main things:
- Cash flow
- Protection / risk management
- Debt management
- Long term / retirement planning
- Estate planning
Here’s how to look at each one, when you’re on a super tight budget of $1,200 a month:
1. Managing cash flow
Under the threat of oversimplifying, this just means making sure you’re never in a situation where you have insufficient funds. For example, if you need to fork out $30 to see a doctor right now, it doesn’t matter that you have $200 coming to you next week. You need the money now.
This is important when making certain decisions, like whether to pay in full or in instalments.
Say you’ve saved up a month of your salary, $1,200, over five months. At some point, you need a laptop. You can choose between blowing all $1,200 right now, or paying $120 a month for one year (for a total of $1,440). Which is better?
If you oversimplify, you might say it’s better to pay everything at once. That will save you $240 in interest repayments. But what happens if you empty out your savings, and then get into an accident? What if the pipes in your kitchen burst and you need $800 for a plumber urgently, but you’ve blown all available cash on said laptop?
That’s a cashflow management issue, and the tighter your funds are the better you have to be at it.
Speak to a qualified financial advisor (we’ve interviewed one below) for more on that, but we’re sure you get the general idea – never reduce your bank account to a complete zero if you can avoid it, even if you’re sure you have money coming in next month, next week, etc.
2. Protection / risk management
At $1,200 a month, a medical emergency can cripple more than your body parts. The simplest way around this is insurance. The less money you have on hand, the less you can afford to ignore insurance. If you get an Integrated Shield Plan (IP), it complements the basic MediShield coverage that all Singaporeans get, and it’s paid out of your CPF.
It’s also important to build up savings, to avoid needing loans in the event of emergencies. As a rule of thumb, save 20 per cent of your monthly income, and try to accumulate $7,200 (six months of your income) as an emergency fund. Obviously this won’t happen overnight, but even if it takes a while, be patient and work at it.
Beyond this essential basic, protection and risk management also means not getting ripped off.
It’s an unfortunate fact that, the poorer you are, the more often you’ll be viewed as a target. Ponzi schemes, dubious Multi-Level Marketing scams, and “wealth seminars” will try to rip off what little you have. They’ll assume you’re more susceptible to the lure of money.
You can experiment with bizarre investments or schemes once you are earning a lot more, and can absorb the potential losses. For now, be protective of your money and stick to well regulated products.
3. Debt management
It’s hard to get a loan on $1,200 a month. But if you do, do not allow the monthly loan repayments to exceed $360 a month (about 30 per cent of your monthly income). Anything more than that is playing with fire. Remember that the more money you spend on loan repayments, the less you can save and invest to improve your financial situation.
You may be the target demographic for lenders of last resort.
An example of this are certain licensed moneylenders, who know that your options for bank loans or credit cards are limited. They will lend you money anyway, at interest rates that border on extortion. These types of lenders are the financial equivalent of a sexually transmitted disease: one moment of trust will lead to regrets that last a lifetime. Avoid them.
4. Long term / retirement planning
Investments may seem like a distant concept at this point, but they’re not impossible. Remember that people invest to get rich – if you want to get rich first and then invest, you’re waiting for a bus that might never come (e.g. bus 10 and 14 on weekends).
It’s not as expensive as you think. OCBC and POSB, for example, have blue chip investment programmes that start for as little as $100 a month, although please speak to a financial advisor or other relevant expert before buying.
Note that long term financial planning is never a one-off process. It will be subject to constant rebalancing. For example, when you start to earn more, your financial advisor will probably need to revise your asset allocation to be more aggressive. Many years from now, when you’re nearing retirement, you may again need to drastically rebalance as your switch from aggressive to defensive assets.
In short, don’t refuse regular appointments with your financial advisor.
5. Estate planning
This is working out what you’re going to leave to your children, how your assets will be divided, and how you’re going to annoy that relative you’ve always hated. (I suggest willing them your broken washing machine. It’s as spiteful as it is hilarious.)
Again, this may seem like a distant concept when you are on $1,200 a month. But it always helps to think and plan ahead, and many of the assets you will acquire in point 4 can also go toward your children later. If you have a financial advisor, they will usually handle this aspect of financial planning for you.
Sample financial planning for someone earning $1,200 a month
We spoke to Mr. Carlos Lee, a Senior Financial Consultant from NTUC Income. Here’s a hypothetical plan for someone earning $1,200 a month:
“I would recommend for a person to set aside 20 per cent of her salary on financial planning. For a 25-year-old female earning $1,200 a month, her annual income, excluding bonus, adds up to $14,400. As such, her financial planning budget should be kept within $240 monthly.
“For the purpose of holistic financial planning, I will assume that she does not have any insurance plans to begin with.
“Her top insurance priority should be health insurance, as a major medical condition could severely derail her financial plan. The Enhanced IncomeShield Basic plan with Plus Rider to cover deductibles and co-insurance is recommended. Premiums for the Enhanced IncomeShield Basic plan amounts to $257 yearly, which can be paid with Medisave (someone with an income of $1,200 contributes about $100 each month into Medisave). The Plus Rider costs $105 yearly and will have be to paid in cash.
“Life insurance is another key priority. Life insurance is prudent planning that considers the outcome of those left behind should tragedy strike. For someone without any protection to cover for loss of income, I would recommend Income’s VivoCare 100, a whole life plan that provides comprehensive coverage against more than 100 medical conditions including early, intermediate and advanced stage dread diseases.
“At age 65, the plan provides an option to withdraw the cash value to meet one’s retirement needs. For the profile mentioned earlier, the monthly premiums are $118.70 for a payment period of 25 years.
“I would also recommend for her to take up the Dependent Protection Scheme, which provides term coverage till age 60 against death, terminal illness or total permanent disability. The annual premiums of $36 can be paid with one’s CPF OA.
“After addressing these first needs comes the building of assets. I recommend taking up RevoSave, a regular savings plan, for 25 years with a cash value of $44,994 at age 50 which might be used as an early retirement fund. The plan offers the option for yearly cash benefits of $750 after the 25th month. The monthly premium for her would be $104.40.
“Based on this proposal, her monthly premium with cash outlay is $231.85.
“Down the road, after she has built up her assets and has more disposable income, she may need more insurance coverage to protect her and help her conserve her wealth towards a bigger retirement fund. She should review her financial planning every two to three years.”
What about when you earn more?
Let’s say you earn a little more over time, and your income climbs by $500.
The first thing to do is to contact your financial advisor, rather than deciding to hide it and spend it all. You could do that, but the payoff that comes from investing and the added $500 could serve you much better in the long term. If you don’t have a financial advisor, here’s a good list of priorities for the extra cash:
(1) Accelerate the building of your emergency fund. Since you know you make $1,700 a month, you can build an emergency fund of $10,200. Pump the extra discretionary income into the emergency fund first, before considering other things.
(2) Repay debts if you have them. After savings, the next issue to address are your debts. Pay them down to shrink your obligations, but watch out for loans that have prepayment penalties (you may have to pay extra to pay off an instalment loan sooner, for example).
(3) Buy some Singapore Savings Bonds (SSBs). These bonds won’t make you rich, but they are superior to the banks’ fixed deposits. You can cash out any month without losing the accrued interest.
This article first appeared in The Middle Ground on 01 Jun 2016.