Graduating soon? Take steps towards financial security.

Received an email from a reader who is about to graduate and join the workforce:

Hi AK,

I am C and this is actually my first time writing to a blogger.

I've recently found your blog and you've been such an inspiration to me and my "future financial life".
 
Would like to sincerely thank you for setting up this blog to benefit us youngsters in Singapore. :)

I am about to graduate soon in a couple of months and I'm just wondering if you can provide some advice to me...
 
Upon graduation and receiving my first pay check, would you recommend me to first set up my emergency fund or invest in FDs or buy insurance or voluntarily top up my CPF or invest in a SRS account or a combination of some? 

There just seem to be many things I should do but I'm not sure which one I should focus on to get my priority right.

Thank you for your kind advice, AK.

Warmest regards
C

My reply:

Hi C,

I am not allowed to give advice but I am happy to share with you what I would do if I were in your shoes. :)

1. Buy a term life policy. 

Very important if we have parents or other dependents to care for. 

How much should the coverage be? 

It is up to you but I feel that $500K is probably more than adequate for most.

2. Buy a good H&S policy. 

Personally, I have NTUC Incomeshield with Assist Rider. 

We don't want to be sunk by hospital bills. 

How much you would spend here depends on whether you are comfortable with Class C, B or A wards or if you want to stay in private hospitals.

3. Buy a Critical Illness policy. 

We need this money to help pay for long term treatments if we should be diagnosed with one of these illnesses and not die. 

I am covered for $300K but, for a start, I think $100K should be comfortable.

4. Set up an emergency fund. 

Slowly build this up so that it is enough to cover at least 12 months of regular expenses (including insurance expenses). 

My preference is for 24 months. 

In case we lose our jobs or are unable to work for some reason, this is the fund we would draw upon.






Once we have done all these, we can start thinking about investing for a second stream of income.

Of course, if we can pay less taxes, we should. In planning for retirement, you want to consider topping up your CPF-SA to a maximum of $7K a year. Of course, you could also start an SRS account.

The tools are out there to help us achieve financial security. You will do quite well if you make good use of them. :)

Best wishes,
AK

If anyone has any ideas to share, please leave comments here and I am sure C will read them. Thank you.

Related posts:
1. Why a meaningful emergency fund is important?
2. How much for hospital and surgical insurance?
3. Tea with Solace: Getting ready for investment.
4. Build a bigger retirement fund with CPF-SA.
5. SRS: A brief analysis.

Paid off $15K debt and pondering other money matters.

Hi AK!

Few days ago I happen to come across your blog while searching for some information regarding finance management. So i'm considered a new reader of yours. 

After reading them I find that you are someone that is quite knowledgeable in this area and I though maybe you could give me some advise on my situation based on the current knowledge and experience that you have.

So here's my current situation:

My take home income after deducting cpf is currently 3k per month. I have been working for exactly 3 years (since I started this first full time job on 1st aug 2013). I manage to clear off a 15k debt within these 3 years (5k per year). 

And in my second year I started to buy insurance. This is the problem number 1. I really spent too much on it I guess it's because I didn't have enough knowledge regarding finance options at the point of time that I bought them.

Insurance that I bought:

1) Ntuc income: it's an endownment plan which I bought it for savings purpose. Payment term is 5 years (about $2.5K per year); contract term 20 years. The guaranteed amount that I will get back after 20 years is $15k.

2) Ntuc income: another for savings. This is the one that I later regret buying but I had already paid the annual amount and terminating it would mean losing money. As I spent too much on it. Contract term is 20 years as well; payment term is 10 years (about $5.8K per year)... I have already paid about $8.3K.....

3) Prushield monthly is about $350 per annual for my current age.

4) Prulife (about $3.3K per year) for 15 years. I have paid for 1.5 years already. 

I am now very confused as I am not sure if it's a good idea to hold it out for so many years or should I consider suffering some short term losses and just give up on the one or two policy? 

If I were to give up on prulife and revosave I would lose about $13-14k in total which is an 'ouch' for me considering I just started working. HAHA but trying to be optimistic I just turned 27 years old June this year so I guess the good thing that I have here is time.

After all these I currently have $10k in my bank account as emergency fund. I have been using 360 account from ocbc and have been fulfilling the 3 criteria. I didn't start the SRS account but I read some of your post and I will be getting it soon but I don't think I will be able to transfer a lot of money into it to totally avoid income tax. Afterall my income tax is about $300 plus per year. Probably help to cut a little. As SRS will be locked up for a very long time till we are age 62 and I am only 27  that is really a long time to lock away our money. But I am not sure how much should I put into SRS as having cash on hand is also important.

The way I see myself now is that I made decisions in the past that didn't allow my money to work harder for me. However, regarding investment I really have zero knowledge and I am also someone that wants certainty more than taking high risk. Especially on something that I am not sure I will not go into it. 

So the second problem I have is do you have any advise for a newbie like me regarding investment. For example what are the skills that I need to have before deciding to go into investment and what are the risk etc. The thing about investment is that I have read about people losing alot of money imagine 100K or more and I am not sure if I will be able to take that blow in the future especially if I were to start a family. 

Currently I don't intend to go into investment as I think I do not have the required knowledge and $$ and I don't like to go into something I am unfamilar of.  

My priority now is to save up. I wanted to take this time while saving up to gain more knowledge. But I felt really lost as investment look like a very big world to me so many things and I don't know where to start.

I guess I have the discipline to save up since I am able to pay off 15k and still have 10k in my bank after paying all the insurance, bills and daily expenses etc. With my 3K take home pay. I can still feel my heart ache when I type the word "insurance".

The last part would be on cpf:

I am 27 this year so I believe transferring OA account money into SA would be advantage to my situation. However i have some concerns. Because me and my partner is planning to get a bto flat hopefully by next year. We are planning to get a 3 room flat in a non-mature area so as to get more grant. Assuming the flat is 200k. 10% would be 20k which i think the grant should be able to cover. 

So now my question is should I keep the money in my OA and pay for the rest of the bto flat and get as little loan as possible to save on the loan interest or should I just aim to pay for the minimum 10% and try to get the maximum loan. We are planning to sell this flat away instead of for permanent stay. 

My current plan now is to transfer about 15k to my SA but my concern here is after that every month how much should I transfer from OA to SA in order to hit the minimum sum by the time I am 55 years old. Is there a way that can help us calculate because I really have no idea what is the minimum sum that I must have in my SA by the time I am 55 years old. And how to calculate how much i should put in every month in order to hit that amount. 

Cheers,

XY =D

Hi,

Welcome to ASSI! :)

1. You seem like a prudent person when it comes to debt. Stay that way.

2. You only need to buy Term Life for as long as you have dependents. It pays in case you die. You buy some Critical Illness coverage for in case you don't die and have to stop working due to these illnesses. You need H&S coverage and if you think class C or B2 wards are good enough for you, you only need Medishield Life. You don't need to spend a lot of money to get the insurance coverage you need. Whether you want to make changes to your insurance portfolio or not is your call, of course.

3. Having an emergency fund is prudent. Roughly, it should be enough to cover 6 months of expenses for those in their 20s. For those in their 30s, 12 months and for those in their 40s or older, 24 months. Nothing sacred about this. Just a comfortable guide for myself.

4. SRS is useful if we want to sock away more money for retirement. The income tax relief is a nice feature. We can also consider doing MS Top Up to our CPF-SA to enjoy 4% interest per annum. Will get income tax relief for the first $7K contributed per year too.

5. Read up and learn about investing. Then, decide if this is something we want to do and are comfortable doing. To be quite honest, many people are not cut out to be investors because they cannot stomach volatility. If you do decide to invest, never invest with money you might be saving for other purposes.

6. Doing OA to SA transfer in the first few years of my working life was an important move that helped to get my CPF savings to where it is today. Whether you should do it and at what pace if you do it would depend on what you plan to do with your OA money. Just remember what is the primary purpose of the CPF and also the opportunity costs involved in using your CPF money. I won't say more.

Gambatte!

Best wishes,
AK

Any other ideas for the 27 year old reader? 

All genuine comments are welcome. :)

Related posts:
1. 7 things a reader did after visiting ASSI.
2. Why buy term life insurance and how?
3. 7 pertinent question to help us build wealth.
4. Use CPF savings or cash to pay for our home?
5. SRS: A brief analysis.

Getting covered for critical illnesses.

The following is an email from a regular reader, Tree:


Hi AK,

Let me talk to myself a bit too. :)

To start with, I think it is important for readers to understand what CI coverage is for... it is actually term insurance coverage for the 30 illness, which are likely to lead to either death or TPD of some form.

A lot of people have signed up for CI coverage only to find out years later that they are not covered when they contract one of the 30 critical illnesses (mainly due to the clause, for example cancer, only end-stage [stage 4] is eligible for claim). That is where early CI coverage came in. Even then, the requirement for early CI is still quite stringent.

Understand that the coverage is very very narrowly defined within the illnesses (read: very very seriously ill).

It is thus very very important all readers, for this insurance, to go over the details of the coverage so that you do not become disillusioned, furious, shocked, dismayed, disappointed, upset etc. with the actual coverage.

So CI coverage, like term insurance, is for your family. It is to help your family cope with the bills caused by the illness if it occurs, but only the very seriously ill version.

Since you have a family and you are bread winner (I assume), you ought to get the CI coverage for your family if your family cannot cope with the bills if you *choy choy choy*.

If your family can cope with ease, it is optional.

Same reasoning with early CI.

Please note that with the coming implementation of Medishield life, there will be better coverage overall for hospitalisation and as such, the need for CI coverage decreases.

Related post: SAF Group Insurance and CI coverage.