This is the start of a series of posts that will explore a number of firsts in the life of a fresh graduate.
After slogging through years of formal education and a whole month of hard work, you finally earned yourself a first paycheck! Now what?
Well, most people would spend it on a nice meal with your family and friends. Some would reward themselves with a nice present – a new extravagant purchase, perhaps? While there are no rights or wrongs on how you should spend your money, it’s wise to also start planning to build your stash of funds with your newfound recurring income.
A stash of funds?
Building a stash is an important part of financial planning and eventually financial independence. Planning how you are going to allocate and spend your salary is wise as it prevents you from overspending, allocate some to savings, build an emergency fund, or invest for the future.
For Singaporeans, you might first notice that a part of your salary goes into your Central Provident Fund (CPF), a compulsory social security savings scheme mandated by the Singapore Government to build up a money base for your personal retirement, housing and healthcare needs. I will discuss the mechanics and optimization of the CPF in a separate post, but this is where you first receive a cut of your gross pay into a forced savings scheme. What’s left behind is your net salary.
Save, Spend or Invest?
There are many theories on how to allocate your funds into savings and spending and while there is no right way to do it – it all depends on your personal financial situation – I will share the common ways and how I do it.
POSB recommends allocating 50% into expenses, 30% into savings and 20% into investments. This allocation mix allows you to dedicate a significant portion of your salary into paying off your debts and expenses, such as daily necessities, bills and student loans. Saving 30% of your income in your bank account to build up an emergency fund and investing the remaining 20% (e.g. in passive funds or unit trusts) means half your salary is spent on wealth accumulation. Seedly also offers a similar allocation pattern, but with minor tweaks in the investment and savings mix.
Sure, those allocations are perfectly fine, but here’s my allocation and I’ll explain why it’s better in a bit.
10% savings + 60% investments + 30% spending
Is it possible? Absolutely. Let me break it down for you:
Assuming you are a fresh graduate drawing a median gross salary of $$3500. Your net salary after CPF is $2800 (20% x $3500).
30% Expenses Breakdown:
Meals – $5 x 3 meals per day x 31 days = $465
Transport – $2 x 2 trips per day x 31 days = $124
Movies/Outings/Dates – $30 x 4 weekends = $120
Total Expenditure: $709.
Of course, this excludes any loan repayment amounts, allowance to parents or family contributions. But I am illustrating that it is possible to spend below $840, or 30% of your initial net salary without living like a poor soul. If there are other extravagances or monetary commitments in life that you must afford or pay, then sacrifices in terms of future income must be made.
10% Savings Breakdown:
Saving only 10% of your salary? Are you crazy? Is it enough for a rainy day?
Yes, these are legitimate questions. But here’s why – cash should only be used for emergency purposes, i.e. when you need it for a lump sum payment, emergency hospitalization needs (ideally, this should be covered by insurance), or when you’re out of job. A commonly recommended safety net is between 3-6 months of your expenditure or salary. I recommend you start building a 2 months safety net, and invest the rest because inflation will reduce your spending power, ie. decrease the value of cash.
Inflation is real, and rising. In fact, inflation rate rises when the economy is growing and expanding – like what we are seeing now after years of quantitative easing (or easy money). Inflation eats into the value of your cash because the same amount of cash would buy less in the future.
60% Investment Breakdown:
Alright, here’s the juicy part. 60% in investing – is it alright for a clueless young graduate to pump such a significant portion of my salary into a risky endeavour?
Investing is risky if you either don’t know what you’re doing, or if you are speculating. Investing begins with the right mindset, and then a disciplined approach to be financially educated, and being committed to invest for your long-term financial future.
As for what to invest in, the platforms to do it, and how to do it, these are questions that will be addressed in future posts.
What’s important at this stage, is to start being financially aware of your options available, and educating yourself on financial education (which unfortunately, isn’t taught in schools). There are numerous platforms available, and Google is your best friend.
For me personally, my investing portfolio makes up a significant chunk of my fund allocation. By starting early, I am able to use the power of compounding and long investment time horizon to my advantage.
I am excited to share more about my investment strategy, allocation mix, strategic rebalancing and other thoughts in future posts. Novice investors should not start investing right away, rather, they should be aware of their options and start thinking about how they can build a sustainable investment portfolio that can help them grow their wealth. In the meantime, building an emergency savings fund or repaying outstanding debts can be their immediate objective.