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Financial Planning For Fresh Graduates

>> Sunday, October 4, 2009

Although graduating from your grueling tertiary education, you may still be in the dark when it comes to personal financial planning. You do not understand what lies ahead and have numerous "wants" purchases upon receiving your first income.

However, the short term goals should be your "needs" first.

  • Paying off the study loan, if any.
  • Build up an emergency fund of at least 6 months. This is because no job is secure, this fund is meant to tide you over if you loses their job and need time to look for another job.
  • Have BASIC insurance. This is because medical bills are very high. At a younger age, the long term effects are more devastating if disability or illness strikes, so do not let affordability affect seeking the proper treatment.
  • Determine the time frame and amount for the coming big expenses like wedding/honeymoon and housing/renovation.
The next step is to take action on those needs.
  • Work out the amount of money you will need to set aside every month for all the above essential expenses taking the time frame required into consideration, i.e. repayment of study loan, saving for the emergency fund, purchase of insurance and saving for marriage.
  • The remainder will be your budget for other daily necessities like food, clothing, transport, etc.
  • Adjusting your expectations of the above 2 points may be required to arrive at a more realistic expenses/savings budget if you find that all the above far exceeds your income.
    • A longer time frame to purchase housing. (Consider living with parents or renting instead)
    • Cut down on frequent expensive restaurant dining. (A home cooked meal can be cheaper and more healthy)
    • Leave the branded luxuries purchases till later. (Leave keeping up with the Jones for the Jones)
    • Taking the taxi less often, etc
  • Get the appropriate insurance.
    • Hospitalization and surgical (H&S) plans. Purchase a private Shield plan to enhance your medishield coverage even if your employer covers medical expenses. You never know when you will be unemployed or not insurable.
    • Term plans. Purchase critical illness and disability income insurance to enhance your Dependent Protection Scheme (DPS) coverage.
 Pitfalls that you SHOULD NOT do (Though most would or have already did it ALL):
  • Spend everything that you earn or save on a "have to" feeling. You know saving is important, so after spending you leave a remainder as savings.
  • Over committing to purchase a car. Paying zero down payment and locking up most of the income on car loan monthly installments for the next 10 years. Without considering the other required expenses of petrol, insurance, road tax, parking, ERP, maintenance and an emergency fund in case of minor accidental repairs.
  • Buying all the branded luxury clothes, bags, shoes, gadgets, etc that you have promised themselves to buy when you started earning an income.
  • Going on tour all over the world, visiting all the exciting places you wanted to go after seeing it on TV/Internet or how much everyone enjoyed their trips.
  • Ignoring insurance altogether. Or purchasing unsuitable insurance to support a friend or relative.
    • Do not go for Investment Linked plans.
      • You may be attracted because of the projected returns but they are non guaranteed.
      • Only a small amount is allocated to purchase units in the initial years.
      • You will lose your protection if you surrender your plans in future for the money back.
      • Insurance premiums increases with age.
      • Additional charges of monthly and yearly administration fees.
    • Treating endowment plans as protection.
      • They offer only minimal protection for the high premiums.
      • You will not be getting the required level of protection unless you over commit yourself.
      • They normally do not cover the more important areas of critical illness and disability income.
      • The coverage ceases when the policy matures and you lose your protection.
      • It should be used more for portfolio planning for retirement if you have the excess funds now.
  • Investing all your funds in unit trusts, stocks, forex, options, futures and anything that is hot. Investment is a long term commitment. You should only invest with funds you can afford to lose and you will not need for the next 5 years. Consider if it ties with your planning for your big purchases.
Take control of your own finances if you wish to be financially independent. Things are easier said than done, you hold the power to decide what to do with your money. So remember, what you need, you must have. Choose an adviser wisely and do not fall prey to those who take advantage of their ignorance in financial planning.


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