Working Adults: This Is How Your Finances Should Look Like In Your 20s

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02 Sep 2017

The start of your working life

In your 20s, very often it is the stage whereby you transition from school to work life. You start to increase and build up earning power and your human capital (energy, connections). Your actual money capital may not be the highest as you are just starting out with little to no savings and potentially some form of student debt.

Pros:

High human capital (energy and health) and earning potential
Low commitments (eg family, home, car loans etc)

Cons:

Low money capital
More active social life and monetary distractions

This article looks to share what are the key metrics you should be looking at when it comes to how your finances in the 20s here in Singapore should look like.

TL;DR: Best time to get started on the right track

In your 20s, it is the best period to set your money habits on the right track and build up a good foundation. Here are the 6 aspects you should look at.

1) Income

Your earning potential should be pushed as high as possible, build skill sets to support this
Actively network and grow your social capital to build a positive reputation for yourself
In this phase, you should probably be looking at mainly income from salary, not passive (property or dividend income) yet. This is crucial because this is your ‘top-line’ and the following points are all dependent on this

2) Spending

Do not aim to spend more than 50% of your take home pay monthly.
Have a dedicated spending account and card. Here’s how to choose.
A debit card: If you are unable to properly control your spending. (directly deducts from your account)
A credit card: If you are the savvier young working adult, get 1 credit card and stick to it for all your expenses (for either miles or cash back) and remember to pay it off when due (NEVER get into credit card debt)
Lastly, try out a budgeting app like Seedly where we help you track all your expenses automatically

3) Savings

Build up a habit of setting aside minimally 20% of your take home pay to this savings account.
Aim to build up a rainy day fund of 3-6 months of your monthly expenses, to be your emergency funds in case you get retrenched or laid off your job. Highly possible in today’s economic climate
Lastly, learn the basics to CPF and understand what can be used for (especially for housing, medical bills etc.) as soon you will need to dip into this

4) Insurance

There is a big benefit to buying insurance in your 20s, a lower premium and a cleaner bill of health. (especially for life and health insurance coverage)
When started working, many of your financial planning peers would have probably reached out to you. Get the basic insurance plans that you need and do not overpay for pricey over-coverage insurance
We highly recommend young working adults to sort out your insurance plans by looking out for the relevant policies. Ultimately insurance is about the sufficient coverage for the right reasons at the lowest cost

5) Debt

This is crucial to pay off. If you are in your 20s, most likely you have either 2 types of debt
For student loans: seek to pay down as much of the loan as possible. Even if you take the CPF loan, there is a 2.5% interest which you will need to pay off which can compound over time. Do not try to drag out payments and focus on clearing this as priority to get a clean start to your next phase of life
For home loans: This is for the later 20s when you are thinking to settle down with a loved one. If you get an HDB BTO, it is unlikely you will have to start paying off your monthly loan repayments till around 3-4 years when the flat is built. You will only have to look out for the main down payment sum which you should be able to pay 10% using your CPF

6) Investment

This is a tricky one. unless you have cleared off debt and gotten sufficient insurance coverage, this should not come up too high on the list yet. If not you are better allocating funds to paying off that loan first
If you have no loan to pay off, first educate yourself on basic investing and know that it is a long term game
Start with a simple Regular Savings Plan (RSP) which is actually an investment monthly plan from one of the local banks to buy either the STI ETF or ABF bond fund
Soon you will start to move beyond this and improve and grow your investment portfolio

Conclusion: It’s never too early to get started

When we interviewed a group of Millennials recently between 20 to 35, we found that majority of them have a basic understanding of their finances. Largely, the idea is to work towards retirement.

Retirement: Where monthly passive cash flow is more than monthly expenses.

What was even more interesting was also that they understood the importance to start early. Starting in your 20s and thinking about growing your passive income can be a very useful mindset to approach a longer game. And it can be visualized more in this chart above. Please leave comments or drop us a chat at our community here, where we are a group of friendly Singaporeans looking to learn and share with each other! 🙂