What to do with your first paycheck when graduating in a recession
Your anecdote to #adulting
2022 is a tough time to enter the workforce; we’ve barely handled the Covid-19 situation, and already the Russian-Ukraine war is in full swing. The Singapore government is already warning of a potential recession in 2024. Preparation begins from your first paycheck, so consider doing the following:
1. Set aside at least 20 per cent in an emergency fund
An emergency fund should consist of around six months of your expenses. Not everyone will be able to set aside such an amount in one go – but you can start to build it, by regularly setting aside a portion of your pay.
As a rule of thumb, it’s good to try and save about 20 per cent.
An emergency fund prevents the need to use personal loans, credit cards, or other forms of debt when running into an emergency. It also ensures that vital necessities – such as loan repayments, insurance premiums, and medical costs – are still covered if your income gets disrupted.
2. Plan next month’s budget around this month’s paycheck
Budget for next month based on the amount you have today, even if you may need to deprive yourself of a few luxuries. This means your pay in March, for example, should be budgeted for expenses in April.
Never plan your next month’s budget on your upcoming paycheck (e.g., don’t budget for April based on how much you assume you’ll get in April). This results in living paycheck to paycheck, and it’s financially imprudent.
If you get paid late, for example, or your employer unexpectedly folds, you could be left without cash.
3. Use a 50-30-20 breakdown
In general, your expenses should take up no more than half your paycheck. This should include bill repayments, food, transport, and insurance premiums.
The next 30 per cent can go toward discretionary spending, for things like movies, games, or whatever you enjoy.
The last 20 per cent, as mentioned in point 1, should go toward savings. If you’ve already saved up six months of your income, then consider investing the money with a qualified financial planner; they can help you grow this money toward longer-term goals, such as a future home.
4. Practice conscious spending
30 per cent of your paycheck can go toward buying fun things. However, you may find that planning this portion (conscious spending) can leave you happier than just being spontaneous.
When you spend on whatever you feel like at any time, you tend to end up impulse buying; and you’ll find the money gets spent on things you don’t actually want. For example, you might find most or all of the money has gone into unnecessary cab rides, or pricey meals when what you really wanted to buy was a new laptop.
This can leave you feeling unsatisfied, and compel you to overspend. So try to plan your major purchases, even if they’re just for fun.
This is especially true in 2022 with the world starting to reopen after COVID-19. With travelling and partying back on the table, it’s important to remain prudent and embark on a proper financial plan, instead of overspending!
5. If you don’t have any insurance yet, now is the time to start
Now that you’re in the workforce, you’re about to take on the pressures of adulting. A key part of that means having comprehensive insurance.
If you’re hospitalised, can you afford the bills? If – touch wood – you’re diagnosed with a critical illness like cancer, do you have the financial means to cope?
You’ll quickly realise your paycheque alone is seldom sufficient. To manage all of these costs, you’ll need to transfer the risk: that means getting an insurer to bear them for you, via the right insurance policies.
It’s an ideal time to consult your first financial advisor; they can help pick the plans you need, while also advising you on how to budget.
6. If you have any outstanding debts, start paying them down
Debt repayments must take priority over fun expenses, and even over investment (there’s no point investing if your debt’s interest swallows up all the returns).
Start paying down your loans, beginning with the highest interest rate loan. If you have no emergency fund, note that you should still save 20 per cent while doing this. Otherwise, an emergency could see you end up using credit again, and undoing your repayments – this can result in an inescapable “debt trap”.
To avoid tough situations like this, it’s best to avoid using lots of personal loans or credit cards; even if your paycheck now qualifies you to get them.
7. Make sure savings from the paycheck go to the best savings and investment tools
Cash that is not put to work gradually loses its value to inflation. To keep up with inflation, you’ll need to put them into a savings or investment tool.
These can range from bonds, endowment plans, high yield saving accounts offered by banks, investment-linked policies or even unit trusts.
Each of these tools has a different level of risk – so it's best that you learn about the pros and cons of each before you commit hard-earned money. Thankfully, these days there’re plenty of online comparison tools available that can help you as well!
If any of this sounds confusing, don’t worry – a financial advisor will be able to advise on how to best allocate your money to meet your financial goals.
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