4 money habits that will protect millennials from an uncertain future

The New Paper
We all look forward to payday every month, but what happens after that? Are you left penniless by the time the next payday comes around? Although Singapore’s millennials aim to earn lots of money, some studies have shown that they are perhaps not managing their income very well. Earlier this year, Manulife's Investor Sentiment Index in Asia revealed that many millennials in Asia are likely to face a cash crunch in their retirement years. Instead of spending every hard-earned penny, here are four things you should be doing to prepare yourself for an uncertain future: 1) Protect your income Because you never know what comes next, you should take precautionary measures to protect your livelihood. “In today’s world, millennials typically have not just children to support, but also elderly parents. These depend on their income to sustain their lifestyle, hence protecting income is an important use of savings,” wealth management director of Elpis Financial, Daniel Tay, says. According to the financial adviser, who also provides advice on financial consultant website Consultwho, there are five things you should protect your income from. The first is the loss of a job. Saving for an emergency fund, which should be enough to meet at least six to nine months of your estimated monthly expenses, can help tide you over when you lose your income and need time to look for a new job. The second is hospitalisation. Hospital insurance is important because an unexpected hospitalisation can cost thousands of dollars. “Why not transfer such a risk to an insurance company for just a few hundred dollars a year?” Mr Tay asks. Critical illnesses, disability and death - threats that could cause a financial strain on your family - are the other scenarios you need to get protection from, he says. 2) Make saving a priority Apart from protecting your income, Mr Tay says saving allows you to spend on the things you enjoy, to pay off your debts and to invest for passive income. Your savings should enable you to spend on things that make you happy, but at the same time, Mr Tay says millennials should save to pay off debt first. Paying off debt will help you reduce expenses and increase savings, so that you can start investing for passive income. Although savings in our Central Provident Fund (CPF) accounts attract compound interest to help protect us in retirement, it is not enough to rely on CPF savings alone. Mr Tay recommends saving around 37% of one’s take-home pay on top of CPF contributions, but adds that it would be better if you can save even more. “Some millennials are very inspiring. A millennial couple I know saves 60% of their combined income, and they are not high-income earners,” Mr Tay tells us. To borrow the wise words of billionaire investor Warren Buffett: "Do not save what is left after spending, but spend what is left after saving.” 3) If you must spend, be cheap When it comes to spending money, it sometimes pays to be cheap. In theory, you should only buy what you need, and allow yourself the occasional splurge. It can be easier said than done though, especially in the age of social media influence. Mr Tay warns against becoming a victim of lifestyle creep, which happens when you spend more money on a better lifestyle because you get pay raise. “This results in the situation where although millennials are earning more, they are not saving more,” he explains. “By assenting to what the media and society tells us is good, cool, and right, millennials are ruining their finances,” he says. Many things, including air-conditioning and mobile phones, were once considered luxuries but have become necessities for younger people today. So before you spend 10% of your next paycheck on the newest “must-have” gadget, consider if it is more of a want than a need and re-evaluate how your decision will affect your life and finances in the long run. 4) Make your money grow for financial independence  Investing when you're young is beneficial in the long run, especially since time is on your side. But before investing, make sure you know what you are doing, the risks, and the proper precautions you must take. How you choose to make your money grow really depends on the kind of lifestyle that you want to live, Mr Tay says. For example, a person with a simple lifestyle can achieve financial independence in under 10 years and may not want to invest in higher risk instruments such as stocks. “This is because the power of compounding interest works best for long-term investments. Short to mid term savings goals can be reached more easily by increasing the savings amount rather than taking on more risk,” he explains. Growing your money in the short- to mid- term requires discipline to make wise lifestyle decisions. If that is your goal, Mr Tay suggests spending your money wisely and investing in low-risk investment instruments such as the Singapore Savings Bonds. But if you don't want to do without day-to-day luxuries, then you will have to aim for financial independence in a long-term time frame. “This allows you to take more risks with your investments. Consider using dollar cost averaging as an investment strategy together with Exchange Traded Funds (ETFs),” he suggests. But before you embark on such a strategy, you will need to have paid off all high-interest debts, set aside an emergency fund, and implemented plans to reach your shorter term financial goals.

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