The most important thing that you need to know about your credit card is its late payment charges and interest rates. Do you know that typically, the interest rate charged for late payment is 24% per annum on the outstanding balance, on a DAILY basis? This means that interest will be compounded daily. If you owe the bank $100, your total debt will grow to $102 in a month and $127 in a year.
Therefore, it is important to pay your bills on time and not to spend beyond your means. Having to pay high interest rates for things you cannot afford in the first place does not make economic sense at all.
2. Know your debts & responsibilities.
As Spiderman says, with great power comes great responsibilities. Entering into adulthood means you have to start paying your dues. The common things that one has to start repaying (literally and figuratively) for are likely to be education loans and family contributions.
While there are no hard and fast rules to the amount that you have to repay each month, some factors to consider are the loan interest rates, and your family's situation. If you are taking on a loan from CPF or your parents, you may choose to make lesser repayments as the interest rate is lower as compared to a bank loan.
We recommend a 20 – 30% allocation of your take-home pay, if possible, for such responsibilities.
3. Know your budget.
Keeping the above point in mind, you can also make similar allocations for your various needs. How much do you need to spend on your daily expenses and bills? How much should you set aside for entertainment? How much should you save?
Again, there are no hard and fast rules to making such allocations. But it is important to set up these ‘boundaries’ so that you can enjoy the things that your money can bring, and yet have a sense of your financial limits. Surely, it will take discipline to keep within your budget and you may slip at times. But it is important to be in control of your money so that you can be prepared for the unforeseen circumstances in future.
4. Know your insurance.
Some of your peers may choose to begin their careers as ‘financial advisers’ and you might start to get phone calls from them. While they are, hopefully, more knowledgeable about the different insurance policies, it is even better to have an idea of what you need and can afford at this stage of your life. This is so that you can prevent yourself from being oversold and then not being able to afford the premiums later on.
We think it is important to have medical/hospital insurance. The best is to enhance your MediShield through the various insurance companies. Typically, there will be a few plans to choose from, depending on the coverage that you want. The basic or the next higher plan would probably suffice at this stage of your life. The premium is not expensive as all or part of the premium can be deducted from your Medisave.
Next you should probably think about having life insurance. You should shop around and read up more on this. A permanent life insurance requires a lifelong commitment and the premium could be a little expensive for you now. You can probably get a term life insurance in the interim or perhaps if your company offers a group plan, you could sign up for it.
These are some guidelines that we find useful, but it is far from comprehensive. Just like anything in life, we need to learn more to better make decisions that are suitable for us. Hopefully these points will set you thinking and we will be happy to receive feedback from you!
Alex Lew, Investment Analyst