At long last, you are finally ready to enter the real world. With a bachelor’s certificate in your hand and graduation cap atop your head, you’re filled with hope and optimism to see what life has in store for you. Retirement is probably the last thing on your mind right now, but in truth, this is perhaps the best time to start formulating and sticking to a financial plan so you get to live comfortably (or even luxuriously) during your golden years.
Huh, I just graduated only to ask me to plan my finances already? Yes, that’s right. And if you’re not convinced, here are 5 reasons why you should start financial planning immediately after graduation.
PART 1:
#1 Failing To Plan Is Planning To Fail
Most Singaporeans aged 19-29 expect to stop working between 55 to 65, and plan to live on $3,500 a month during retirement. Assuming one stops working at 55 and lives til 85, one would require $1.26 million of savings in order to retire. However, most Singaporeans start saving too little, too late. It is difficult to achieve success without having a plan to guide you along. Sticking to a good financial plan ensures that the income you earn every month is appropriately distributed amongst your needs, wants, investments and savings. Without proper financial planning, you may end up spending more than within your means. Worse still, you might find yourself without enough savings for major life events such as marriage, BTO or even retirement when the time comes for it.
#2 Save Less Over Time
The logic is simple – if you start saving earlier, the less money you will need to save each month to reach the same retirement goal.
Look at the figures down below, it’ll make things clearer.
#3 Compound Interest
One of the most crucial advantages fresh graduates have is the power of time. By starting your financial planning immediately after graduation, you will have plenty of years to save, and grow your wealth. Leveraging on time will allow you to fully take advantage of compound interest to make your money do the work for you. Here’s a simple comparison of $100 being invested at the age of 25 vs age 40:
Assuming an annual return of 6% without additional contributions to the initial $100 investment, the investor who started at age 25 will walk away with more than double the money of his counterpart who started at age 40. While the difference may not seem like much, imagine how much you’d be able to grow your money if you saved $5,000 a year or $10,000 a year instead? Well, here’s how it’d look like:
Joe started investing $500 monthly (or $6,000 a year) at the age of 20. Susie however, only started 10 years after Joe. Assuming an 8% annual rate of return, and even though Joe invested $60,000 more than Susie, Joe was able to earn almost half a million more than Susie by the time they both hit 50 years of age – simply by leveraging on time and compound interest! Now do you now see how important it is to start your financial planning ASAP?
#4 Emergency Safety Net
Insurance plays a big role in financial planning, serving to protect you and your family from financial loss in the event of unprecedented situations such as major health issues, disabilities and even death.
For example, it is said that 1 in 5 workers will be unable to work due to disability during their lifetime. In the event of such an unexpected accident, someone who is covered under a form of disability income insurance will receive a monthly payout by the insurance company to cover their expenses.
There are a ton of insurance policies to consider, so make sure you get educated and pick up the best ones for you and your family.
Image Credits: Seedly
#5 For The Sake Of Your Dependents
Financial planning is not just for you, it’s hugely important for your dependents as well – whether it is your future children or your ageing parents. You have to take into consideration various expenses such as your parents’ monthly allowance, your future children’s education fees, housing etc. Without a proper plan in mind, you will easily lose track of how much you need to save at the end of every paycheck, and this may result in you not having enough money to fulfil your basic responsibilities as a parent to your kids, a filial son/daughter to your parents or even as a spouse to your significant other. While major life events like having children and retirement may seem far away for a fresh graduate, having a financial plan now will significantly boost your chances of reaching the financial goals you set out to achieve.
PART 2:
The Early Retirement Grid
Have you ever wonder… when can you quit your job and finally retire comfortably? There is more to life than just work and we all hope that one day we can quit our day jobs and spend our time in blissful retirement. (Or is it just me?) Zach at Four Pillars Freedom created an interesting diagram which estimates your retirement age based on your spending and earnings:
Source: Four Pillars Freedom
How it works
Some assumptions:
Your retirement investments has a 5% annual return
You will withdraw 4% each year from your retirement fund when you retire
For example, Tom earns $50,000 a year and spends $40,000 a year. Thus, he invests $10,000 a year. So according to the grid, he will need to work 36.7 years more to reach financial independence. This means that by investing $10,000 a year, it'll take 36.7 years for you to accumulate enough money until you can withdraw 4% of your funds for retirement (to sustain your daily spending) and never run out of money. Take a moment now to calculate how much you are earning and spending. Then figure out using the Early Retirement Grid what is your estimated retirement age.
Are you cool with that? Or are you going to work till your very last breath?
The Secret To Early Retirement
You should realise by now that you need to widen the gap between your income and expenses if you want to retire early. But this grid allows to quantify and examine how far you actually are from retirement. If you earn $40,000 a year and only spend $20,000 a year, you can retire 17 years later. But if you earn $60,000 a year and spend $55,000 a year, it is going to take you 56 years to retire. Good luck with that. A key thing that Zach pointed out is what a difference a mere $5 to 10K can make:
Annual Income Annual Spending Years to Retirement
50,000 40,000 36
50,000 30,000 21
Just by reducing your spending from $40,000 to $30,000, you can retire 15 years earlier!
Invest More & Spend Less
Just by spending less and investing more, you are accelerating your journey to financial independence.
Step 1: Keep a close eye on your cash inflow and outflow for a month to identify expenses and possible weak financial loopholes.
Step 2: Identify how much you are going to spend at the beginning of each month and transfer the rest to your investment fund.
Let's face it, it is tough and challenging to stay to a budget.
Even I can't trust myself with my money.
My best bet is to transfer the money away right from the beginning so that I can't see it.
Out of sight, out of mind.
You can use this technique to protect your "marshmallows" from yourself.
After all...
When it comes to retirement, we are our greatest enemy.
Start Your Financial Planning Today
As you can see, planning your finances immediately after graduation can ensure you’re way ahead of others who only begin planning once they hit their 30s and 40s. If you’re unsure on how to go about doing it, you can seek guidance from an experienced finance professional to set you on the right track by providing you with a solid foundation to start from.
Financial Fortress
Financial Fortress, a program conducted exclusively by qualified Virtus Associates, is an educational program with the right formula to help others achieve financial independence through meticulous financial planning.
During this one-day seminar, participants will be exposed to 4 comprehensive modules aimed at helping them attain financial independence in a practical, realistic and systematic way. If you aspire to achieve financial independence sooner rather than later, or are simply interested in understanding the fundamentals of good financial planning, you can register here! We hope to see you soon!
Written in collaboration with our financial advisory partners at Virtus Associates.