If I were to meet my 21-year old self now, I would only have one financial advice to give: SAVE WISELY.
First jobs often pay low but it is also the best time to start saving. For one, you do not have a lot of obligations or bills to pay yet. As your income grows, your lifestyle also upgrades hence, your cost of living increases. You will realize that you had more opportunities to save when you were just beginning to climb the ladder of your career.
The 50-20-30 Rule is a simple and easy-to-follow budgeting guideline that works across all income brackets. The rule says: use 50% of your income for essential expenses such as food, housing, transportation, and utilities; 20% for savings; and 30% for personal effects that include R&R expenses and charitable donations.
Allow me to focus on the 20% as this is what this article is about. Saving wisely means putting your money where it has the best potential to grow. After setting aside about three to six months' worth of your take-home pay in the bank where it is accessible for emergencies, it is already time to place your money in medium to long-term investments.
There is a variety of choices for these kinds of investments that 20-somethings may consider:
1. Variable Life Insurance - Also known as the Variable Unit-Linked (VUL) insurance, this is the investment that gives the best value for your money. It is a quick way to building your net worth, as well as to protecting your future family. The good thing about this kind of insurance is that it has an investment component: A portion of your premium contributions is allocated to a pooled fund managed by experts that will allow you to reap the benefits of your investment while you are still living---which is exactly how it should be! On top of it, insurance riders such as critical illness benefits will help protect your income in case of unwanted illnesses. This kind of investment is also affordable with some insurance companies offering minimum premium payments of only PHP10,000 annually that may also be paid in annual, semi-annual and quarterly installments.
2. Stocks - My advice to those who are planning to invest in stocks is to first, learn as much as you can about the stock market. There are free seminars being offered regularly and there are lots of credible information online that will teach you the basics of fundamental and technical analyses. Aside from this, you have to be constantly abreast with the movements in the global and national economy, as well as in the companies that you want to invest in. The stock market offers the highest potential income in the money market, which means that it also comes with the highest risk. So, in the meantime, you may consider...
3. Mutual Funds and Unit Investment Trust Funds (UITFs) - These pooled funds differ mainly as the former is offered and managed by individual companies while UITFs are by banks. Depending on your risk appetite and investment goal, you may opt for fixed-income securities (lowest risk and potential income), balanced funds which are a mix of fixed-income securities and stocks (moderate risk and potential income), and equities or stocks (highest risk and potential income). The disadvantage here is that you have to bear the costs of a third party fund manager. However, if you are wary of risks, then this is a good investment for you.
In conclusion, my advice as you follow the 50-20-30 Rule is to diversify albeit, not right away. Take baby steps with one investment leading you to the next. Depending on how good are you in terms of saving and investing, you might be able to afford an early retirement and take on more entrepreneurial ventures that are aligned with your passion.
Joyce Talag aka The Smart Gypsy is a licensed financial planner. To learn more about investment opportunities, email email@example.com.