The Fundamentals of Financial Readiness

Achieve lifelong financial security by starting early

Save first. Spend later.

The single biggest mistake people make in terms of financial planning? Almost everyone accounts for their expenses or spending and then saves whatever amount remains. This is the exact opposite way of how we are supposed to be going about it!

Think about it. When you start your first job, you have very minimal expenses and obligations. So, if you were to decide that you were going to save 50% of your income and then spend the rest, you will most definitely be able to.

There are a number of benefits to taking this approach:

• This attitude sets the financial ‘tone’ for the rest of your life. Believe me, once you start the saving habit, you will find it very hard to not be financially prudent.
• It works regardless of how much you earn! This system doesn’t dictate absolute dollars, but a suitable percentage of your salary. So, it is a savings plan customised just for you.
• It ensures you build a lifestyle that suits your means. For example, many young people buy a car very soon after they start working. That can take a huge chunk of money out of your monthly income. But if you were to flip it and look at the amount ‘left’ after saving, you will realise you can’t afford a car just yet. The same applies to luxury holidays or expensive watches (another common item these days for young adults). You can still spend on these things, but only when it is absolutely necessary and more importantly, when you can afford it. You, therefore, will never ever spend more than what you can afford.

When you start saving is more important than how much you save

We often make the mistake of assuming that we will save when we earn more. So, we keep putting off saving or investing till later. But the truth is, a person putting aside $500 a month over 20 years will end up with much more than a person who saves $1,000 a month over 10 years. Though they both technically accumulate $120,000, the person who saves or invests longer ends up with a higher amount. This is due to the effect of compound interest. Compound interest means the interest you earn on your savings/investments earns interest too. When spread out over an extended period of time, the gains can be enormous.

Think Short term, Mid-term and Long term

You can’t plan for everything in life, but you can certainly be prepared. Many of us focus too much on the short to mid-term but ignore the mid to long term needs.

We start off worrying about a car, then a house and then kids. Though we try to save, our changing needs constantly chip away at our ability to put aside money for long term needs like retirement and overseas education for the kids. Whatever we save is used by the next ‘big’ life event. So, in addition to saving for your wedding or a house, start planning for your retirement from the word go.

Create different buckets of savings

Another common mistake is saving without clearly defining what the savings are for. It is ideal to have different buckets for different needs. This way, you are planning for all your needs, not just the ones in the immediate future. For example, you could have a bucket each for big ticket items like renovations, holidays or a new car (short term), kids’ education (mid-term) and retirement (long term). At the start, the percentage of savings could be divided as follows:

• 40% of savings for big ticket items
• 25% of savings for insurance / investment
• 20% of savings for kids’ education
• 15% of savings for retirement

As you hit your 30’s and things like house and car are taken care of, you can shift more of your savings to your mid and long term buckets. How you divide your savings is up to you; the important thing is to constantly evaluate how much goes into each bucket. This method ensures you are able to face any expenditure when you are younger and yet ready for retirement when the time comes.

Plans will change

As we know all too well, life is unpredictable. In your 20’s, you may be keen on climbing the corporate ladder. In your 40’s, however, you may want to do something more meaningful that means taking a pay cut. Perhaps you want to take a year-long sabbatical to pursue a passion. Or your kids want to go to an expensive overseas university. Planning early helps you be ready for all eventualities.

There are no shortcuts

Unless there is an unexpected windfall like a lottery win, us mere mortals have to make the most of what we earn. It is best to start when we are young, as hard as it may seem. By being prudent in the short term, we buy ourselves the luxury of choice later on in life. It requires a lot of discipline but is well worth the rewards.

By Isaac Anil

Isaac thinks life is what happens in between football matches. He is a born again dog lover who thinks cats are overrated. Having tried his hand at multiple vocations, he holds the same opinion about hard work. Till he can figure a way to beat the system, he relies on whiskey to get by.