5 Financial Mistakes to Avoid in Your 20s and How Investing Can Help
Your 20s are a transformative decade, with milestones like graduating from university and securing your first job. While these achievements are thrilling, they come with newfound responsibilities – especially financial ones. Ensuring financial literacy – understanding how money works, including how to earn, manage, invest, and save it – during this phase is crucial to setting a foundation for a prosperous future.
It equips young adults with the knowledge to make informed financial decisions, from discerning between essential and non-essential expenses to comprehending the nuances of loans and interest rates. Moreover, a solid foundation in financial literacy can prevent common pitfalls, such as accumulating debt or living beyond one's means.
By prioritising financial planning in your 20s, you not only safeguard your current financial well-being but also lay a solid groundwork for future financial stability and growth. We discuss common financial mistakes made in one's 20s. In addition, we'll explore how, when done right, investing serves as a cornerstone for future financial stability and growth.
1. Neglecting to Budget
The euphoria of receiving that first paycheck can often be intoxicating, making every dream seem within reach. Whether it's the latest smartphone, a designer bag, frequent dine-outs, or those high-end headphones you've always wanted, the allure of new purchases can be overwhelming. And while there's nothing wrong with rewarding oneself, without the anchor of a budget, it's alarmingly easy to drift into the seas of overspending.
Strategy: Prioritise Financial Well-being
Budgeting is more than just a monthly tally of income and expenses; it's a conscious strategy that promotes financial discipline. It serves as a roadmap, guiding individuals to distinguish between wants and needs, prioritise essential expenditures, and most importantly, make room for future financial aspirations.
When you allocate funds for various categories in a budget, you are essentially setting boundaries that help prevent impulsive spending. Here’s a couple of tips to get you on track:
- Pay yourself first: Before addressing other expenses, allocate a specific portion of your paycheck directly to savings and investments.
- Spot your spending patterns: Regularly review your budget to identify trends. Do you find yourself overspending in a particular area consistently? It might be time to reassess and adjust.
- Digital assistance: Consider using budgeting apps or software. These tools can automate much of the process, provide visual insights, and even offer recommendations for savings.
- Stay consistent: Whether you're using a digital tool, spreadsheet, or old-fashioned pen and paper, the key is to be consistent. Update your budget regularly, preferably at least once a month, to keep it accurate and relevant.
2. Not preparing an emergency fund
Life can often throw a wrench in the best-laid plans. From the abrupt breakdown of a crucial appliance to an unexpected health scare or even sudden layoffs in a volatile job market, unforeseen financial challenges are just around the corner. In these situations, an emergency fund isn't just a buffer; it's a lifeline that prevents financial distress from snowballing into more significant woes.
Strategy: Build your emergency fund
The essence of an emergency fund lies in its accessibility. Unlike long-term investments or fixed deposits, this fund is readily available, ensuring you can address pressing financial needs without resorting to borrowing or accumulating high-interest debts. Furthermore, having such a fund in place can provide immense psychological relief, knowing that you have a cushion to fall back on.
So, how much should an emergency fund be? While specific needs vary based on individual lifestyles and obligations, a widely accepted guideline is to maintain a reserve amounting to three to six months of essential living expenses. This provides ample coverage for most eventualities, allowing you time to recuperate, reassess, and rebuild without the immediate pressure of financial strain. Here’s how you can start:
- Start modestly: Don't be overwhelmed by the total amount. Begin by saving a small, feasible portion of your monthly income.
- Consistency is key: Even small regular contributions can add up over time. Think of it as gradually filling a bucket – every drop counts.
- Automate your savings: Set up a regular transfer to your emergency fund to maintain discipline and ensure consistent growth.
3. Not building a good credit score
In today's financial ecosystem, a credit score is no mere digit, but a reflection of one's fiscal diligence and trustworthiness. It provides access to numerous opportunities, particularly when you aim to secure a loan when buying your BTO or apply for specific job roles, especially in the financial sector. Yet, many underestimate its value until faced with the repercussions of a less-than-stellar score.
When you find yourself with a subpar credit score, you're inadvertently placing invisible barriers to numerous financial avenues. Loans may become more elusive, with applications met with rejections or, if approved, given smaller loans.
Strategy: Build and protect your score
Building and maintaining a commendable score isn't just for a select few; it's rooted in basic, consistent habits such as:
- Timely payments: Whether it's utility bills, credit card dues, or loan instalments, punctuality in payments is paramount.
- Mindful borrowing: Overutilising your credit limit or taking on multiple loans can negatively impact your score.
- Regular monitoring: Periodically check your credit report for any discrepancies or unauthorised activities, and address them promptly.
- Diversify credit: A mix of credit types (like instalment loans and revolving credit) can potentially benefit your score, but only if managed responsibly.
4. Overlooking employee benefits
In the rush of starting a new job, with the swirl of names to remember and responsibilities to grasp, it's easy to regard employee benefits as unimportant. But these aren't just extra perks; they hold long-term value. By not fully taking advantage of these resources you are doing yourself a disservice.
Strategy: Make the most of your employee package
From health insurance to retirement contributions, it's essential to understand and leverage these benefits fully. Not only can they save you money in the short term, but they also impact your long-term financial health.
- Health insurance: Employer-provided health insurance can offer different types of coverage, complementing individual and national health schemes. While the extent of this coverage can vary between employers, it's beneficial to understand what's offered and how it aligns with your needs. By neglecting to use this benefit, you might find yourself paying out-of-pocket for medical expenses. Over time, these costs can add up, putting unnecessary strains on your finances.
- Upskilling opportunities: Companies that offer education reimbursements or sponsor courses provide employees with a twofold benefit: career progression and savings on further education.
- Resource utilisation: Employee handbooks and HR orientations aren't just perfunctory exercises; they are resource-rich sessions that clarify the myriad benefits at your disposal. Engaging with these resources ensures that you're fully informed and can extract maximum value from your employment benefits.
- Wellness benefits: More than just gym access, today's employers emphasise holistic health. This might include subsidised fitness programmes, mental health resources, or nutritious workplace snacks.
5. Accumulating high-interest debts
It is incredibly easy to fall into the trap of high-interest debts, especially through credit cards or predatory loans with its tantalising offers and immediate gratifications. While these financial tools promise quick access to funds, they often hide the true cost: exorbitant interest rates that can keep you indebted for years.
It's crucial to recognise that every purchase made on credit isn't just the listed price. If not paid immediately, interest accrues, making even small purchases significantly more expensive over time.
Strategy: Prioritising repayments
If you find yourself with accumulated credit card debt, it's imperative to tackle it head-on. Here’s how:
- Go beyond the minimum: Simply paying the minimum due can prolong your debt and increase the interest. Aim to contribute more, focusing on high-interest debts first.
- Choose your strategy: Whether it's the 'snowball method' of tackling smaller debts first or the 'avalanche method' of addressing high-interest debts, consistency is key. Commit to a strategy that aligns with your goals and work towards a debt-free future.
The power of early investing
Embarking on the investment path can be intimidating for beginners, but it's a journey well worth undertaking. There are several foundational concepts to grasp in investing, and the principle of compound interest is paramount among them.
Simply put, it is the interest earned on both the principal (the original amount invested) and the interest that has been added to it over time. Compound interest has the potential to magnify the growth of investments due to the interest being calculated on both the principal and accrued interest.
Incorporating a habit of regular investing is not only about potential growth but also about fostering a savings discipline. It's essential to be well-informed, consider your risk tolerance, and periodically review your investment strategy to align with your financial goals.
Explore AstraLink for your investment needs
Income’s AstraLink offers a flexible investment-linked plan tailored to adjust to your circumstances. This adaptability ensures that your investment strategy aligns with your financial goals and aspirations.
Starting with AstraLink doesn't require a hefty sum. With regular premiums starting from just $100 a month, you can begin paving your path to financial freedom. This modest monthly contribution, especially when started early, has the potential to benefit from compounding over time, potentially aiding you in achieving your financial objectives.
Key benefits of AstraLink
- Tailored protection: Choose your desired protection coverage based on the applicable sum assured multiple1. Benefit from a Minimum Protection Value (MPV) of 300% of the sum assured (before the anniversary immediately after the insured reaches the age of 70).
- Rewarding incentives: Seize an Investment Bonus that can reach up to 67.0% of your regular premiums paid during the 1st policy year.
- Maximise wealth accumulation: With retirement option, you may reduce the sum assured of the policy up to zero from age 55 onwards and after your chosen minimum investment period (MIP) to maximise wealth accumulation for your golden years.
- Adaptable coverage: Life is full of significant moments, and AstraLink recognises that. You have the option to increase the policy’s sum assured without reassessment of health when any specified life event2 occurs.
Begin your investment journey with Income
Interested in setting the wheels of compound growth in motion? We are ready to guide you through. Reach out to an Income advisor and take the first step towards a future where your financial dreams are within grasp.
1 Sum assured multiple means the factor we use to work out your sum assured for your basic policy, or for a specific rider that you attach to your basic policy, based on your regular premium when we issue the policy. The sum assured multiple cannot be changed unless the retirement option is exercised. The Minimum Protection Value (MPV) is applicable before the anniversary immediately after the insured reaches the age of 70.
2 Each time the insured experiences a life event, you may choose to take up the Guaranteed insurability option, subject to the policy’s terms and conditions. Please refer to the policy conditions for further details on the life events and the applicable terms and conditions.
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income Insurance advisor. This advertisement has not been reviewed by the Monetary Authority of Singapore.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org. sg).
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