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> What Fresh Graduates and Young Persons Should NOT Do
What Fresh Graduates and Young Persons Should NOT Do
on 1 Oct 2009 11:40 AM
Last week, I encountered a few cases of young clients who had made serious mistakes financially even though they had just started their career. For young people, they must understand what lies ahead of them. These are:
1. No jobs are secure. So they must never have the idea that their company will keep them forever. Almost everyone these days face retrenchment risk.
2. They will be facing two large big ticket items. If they have a BF/GF, they will be having an expensive honeymoon in a couple of years time (hey, this is one in a life time – better have a good honeymoon man!). Whether single or attached, they will eventually buy a property to stay. With the property price sky rocketing despite the economic recession and the Cash-Over-Valuation (COV) increasing like nobody business plus renovation cost, they will need HUGE amount of cash on hand.
In view of the above, the following is what the young person
1. Save up a war chest of at least 6 months to two years (depending on the stability of the job) of cash.
2. Get the basic insurance because you don’t have money to pay your medical bills for yourself if you are sick.
The following are things that a young people
should NOT do
(which unfortunately almost all my clients did it all):
1. Do NOT invest a single cent in stocks and unit trusts. Your priority is to build up cash. Unit trusts and stocks are meant for long-term. You should not have the mentality of cashing out these investments for short-term.
2. Similarly do NOT buy regular premium ILP which has high investments component.
3. Do NOT buy regular premium endowment or anticipated endowment (those that you get X% every Y years). These so called saving plans offer poor value for money but most importantly do NOT provide you with the liquidity for emergency cash purpose and your need to have large amount of cash for your honeymoon and property purchase.
Young people should also be wary of many financial salespersons who will cheat you. Because these salespersons know your weakness – which is ignorance in financial planning – they will try to sell what you want rather than what you need. Young people
tend to “want”
1. They want to grow their wealth quickly or
2. They want to grow their wealth in a disciplined fashion.
In view of this, financial salesperson will either sell you an ILP (so that you can grow your wealth “quickly”) or sell you an endowment (so that you can grow your wealth in a “disciplined fashion”).
However, they will not tell you what you really “need” for fear you will not buy any products from them.
The things young people NEED are:
1. To save up cash for short-term usage like emergency cash, honeymoon and property purchase.
2. Basic medical insurance (note: insurance and investment are NOT the same).
For the first need on saving up enough cash, it does not involve products because you just need to save into cash or fixed deposits. For basic medical insurance, the commission is only enough to buy a cup of Starbuck coffee. So no financial salesperson is interested. But the commission for ILP is HUGE while commission for endowment is enough to buy about 100 plates of chicken rice.
If you want to become financially independent, you and only you will decide how this is going to be done. Always remember that what you WANT is totally irrelevant. What you need is what you must have.
| 17 Comments
Tan Siew Yan
commented on 2013-04-30 1:25 PM
Hi Wilfred, I find your advice for young graduates conflicting with another article I read on this IMSavvy website - that of 5 Mistakes on Retirement Planning posted by Yong Hui. In that article, one of the main takeaways I receive was that it is important to start saving for retirement needs early. Just $500/mth over 10 yrs from age 25-35 can cause one to achieve a nest egg 30% more than one who saves the same amount over 30 years from 35- 65. Wow!
I am someone who firmly believes in wise financial planning and have purchased several insurance, endowment and investment-linked products myself as I recommend the same to others. Yes, the cost of getting married and purchasing a property is currently very high and is a pressing need among those preparing to get married. But if one only focuses short-term goals, what happens to the medium-term and long-term goals? Will there come a day, when one has achieved his short-term goals and while patting himself on the back,then it hits him that the medium-term goals has become his short-term goals, and the long-term goals becoming medium-term goals! Then, forever one will be chasing after what seems to be urgent and (short-term) and neglecting what is equally, if not more important long-term goals, e.g. retirement. Ultimately wedding is but for a day, but retirement is for 20 years at least! Shouldn't one then, with his available budget, set aside a portion (albeit in different proportions) for all short-term, medium-term and long-term goals in his life? I am not hyped up about retirement, this is just an example i'm using, especially since it's such a hot topic on the CPF website. I simply find that putting our entire financial focus on what seems to be a pressing need too narrow-minded.
For many young people nowadays, the actual age at which they are getting married is getting later and later. I am 32 this year, and though I myself am married with 2 beautiful kids, I must say half of my JC class are not married yet. The average Singaporean young person, may in reality, only get married between age 30-35, looking at the way how Singapore society is evolving. That gives them at least 5-10 years to really get a headstart in saving for the various goals and milestones in their future, which is definitely more than just marriage, and can include things like seed money for entreprenuership (starting their own business), to stay at the cutting edge by getting a MBA 5 years down their career, get started with saving for children's education (it is so expensive to raise a child in Singapore nowadays!), retirement, etc. All the above can be achieved with various endowment, investment-linked or unit trust products depending on one's preference, risk appetite, etc.
Would you not plan for the above needs of your clients yourself?
commented on 2012-01-29 3:22 PM
i'm a financial planner and i hope you guys do not generalised things. Especially when every individual is different. Some are born rich, while others are poor. Some are born talented while others are not.And same goes for their risk appetite. Both ILP and endowments have it's pros and cons. If not, it wouldn't be in the market and have timeline that range up to 25yrs.It's not just about it's returns but also how the product works. And yes, financial planners do have a target quota to hit yearly, but that definitely do not sway us away from being professional at work. by the way, i do agree that term plans are good for those who are tight with their money or those who are investment savvy and know better ways to invest their money for better growth.
commented on 2012-01-23 1:24 AM
Hi I am not a young person and I have two young sons (20 and 21) and I am trying to help them to become more financial savvy.
Let me share some of my financial mistakes so everyone can learn from them.
I grew up in HDB, in a family of five raised by a single struggling mom. I never knew it was necessary to learn how to manage one's money so I didn't develop any savings habit or desire to know about it.
1) I let a good friend who was selling insurance persuade me when I gave birth to my first son, to buy an ILP product. This turned out disastrous especially during the recession when we needed to stop payments on it as well and the value just dropped - believe me EVERYONE will have a few financial downturns in their lifetime they need to prepare for - this is reality not wishful thinking and not something to ignore thinking it will happen to someone else not me. Investment Linked Products in insurance is a product whose true cost you don't see when you first buy it. If you don't ask the right questions especially about what you get if you NEED to exit the product, you will lose a lot of money you have already paid in premiums. Having since worked in a financial planning company, I now know the wisest thing to do is to keep all the different categories seperate i.e. Life Insurance, never mix with an investment portion - investments should always be kept seperate, Savings for Children's Education, Savings for Retirement, Savings for Holidays, Savings for Special Occasions, Savings for Emergencies in case you are out of work, etc.
Not all insurance salespeople are out to get you but you need to know that they have sales targets to meet, and most times even well meaning friends don't understand their products well enough to know it is not the best one for you. If you are too polite to ask the hard questions before you buy then prepare yourself for the sensation of LOSS. Most sales people depend on this sense of politeness to not mention important aspects of the product they are selling. Always always ask for black and white information and never be afraid to ask about exit strategies. It is your money they are taking so it entitles you to ask anything you like. Anytime they are reluctant to answer your questions clearly, it is better to be on your guard. As much as it is a cliche, if there is one thing I have learned about money and everything else is: "If it looks too good to be true, it IS too good to be true - watch out for the hidden cost".
2) My husband taught me the value of hard savings - putting aside one fifth of his salary into a seperate account every month for 10 years enabled us to buy our first private property. We have since bought three. I can just hear people saying wah 10 years just for downpayment...well if it is easy, everyone could do it. It is hugely satisfying to be able to do it...and the additional kudos amongst your friends when you can say you have is immense:) That's just one of the many emotional payoffs.
3) It is always tempting when you get your pay packets to justify spending it so it takes an exceptional person to be disciplined and put some away. Be that exceptional person - you will never regret it!
4) In this day and age of no more guaranteed lifetime jobs it is even more important to save first, so as unexciting as it sounds make it a priority. Savings gives you choices in the future. Not saving locks you into a corner with little or no options.
commented on 2011-07-15 12:59 PM
Young people do not require as much as 6 months of Emergency Cash, especially those graduates who are able to find a job in less than 1 month, but many lack the discipline to even start saving. Whenever there is cash at hand (ATM cards), they tend to spend it during Great Singapore Sales, shoppings, holidays, gadgets, etc. Traditional endowment plan force them to save in a systematic manner. Many endowment plans in the market also offer Yearly Cashback when acts as an emergency savings that accumulates higher interests rate compared to banks.
I believe you are generalising too much to put stocks, unit trusts, regular premium ILP and endowment plans irrelevant.
The number one priority for anybody (including non-working teens) is to cultivate a healthy savings habit. If they already do, then you can start planning your financial goals. It is pointless to plan Emergency Cash, Honeymoon, properties when you don't even have the discipline to save.
iPhone Apps Developer
commented on 2011-05-24 2:48 PM
Thanks for sharing, I was contemplating unit trust till I read your article.
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