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Best Tips on Financial Planning for Fresh Graduates

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Congratulations on your recent graduation! You are now entering into another exciting stage in life, and are ready to start building wealth. This is just like building your dream house.

You have to start building a strong foundation, so that your wealth is solid and stable. Here are three steps you can take to start your journey:

1. Change Your Money Management Mindset

Wealth accumulation is all about having the right mindset in terms of money management. Let’s start by accessing your way of handling money.

Equation 1

  • Income – Saving = Expenses  

Equation 2

  • Income – Expenses = Saving

Which equation do you apply in your life? Your answer will reveal where your PRIORITY lies in managing money. In equation 1, you prioritise SAVING before spending. In equation 2, you prioritise SPENDING before saving. Eventually, you might end up saving nothing.

For you to accumulate wealth, you have to pay yourself first every time you receive an income. It’s recommended to start saving (and investing) at least 10% of your income, and then gradually increase this percentage to 30% and beyond as your income continues to grow.

The secret to wealth accumulation is all about spending below your means, saving and investing your money, and to continue repeating this with every pay raise you get!

However, why are people prone to spend first instead of saving money? We are living in a digital era where our decisions and behaviour are easily manipulated via social media marketing, without us even realising it.

I bet you can relate to the following scenarios:

  • When the latest technology gadget is launched, you are magnetised to purchase it to keep up with the trend
  • After viewing your friend’s Instagram story, you might make an impulsive decision to book a flight ticket for vacation
  • You are spending, dressing, behaving in certain ways to impress others

The above scenarios are examples of social validation. We’re social animals and will do whatever it takes to belong to a social group. Therefore, you are likely to spend your hard-earned money just to keep up with trends and stay updated among your peers.

Realising your worth is more than your social appearance can help in breaking social validation patterns. Sit down and think about who you really are and what defines you. Once you’ve cleared this up, you’ll start to make better decisions for your financial and mental health.

2. Build An Emergency Fund

Emergency funds are a financial safety net for unexpected events like losing your job. Not having a financial cushion might lead you into bad debts such as personal loans and credit card defaults. The biggest enemy of wealth accumulation is bad debt, because it is impossible for you to accumulate wealth while serving high interest bad debt.

According to the RinggitPlus Malaysian Financial Literacy Survey (RMFLS 2020), 53% of Malaysians would not be able to survive for more than three months with their current savings. What will happen to them after exhausting their savings?

The Covid-19 pandemic has put the importance of emergency funds firmly in the spotlight, so it’s important that you build up your own in order to survive unexpected events. But how big of an emergency fund do you need?

If you are single with no dependents, aim to prepare an emergency fund with at least six months of monthly expenses. For example, if your monthly expenses (loans, food and beverages, transportation, accommodation, insurance, etc) is RM3,000, you should have at least RM18,000 on hand at all times.

If you have dependents like your parents, spouse, or kids, prepare an emergency fund that can cover at least 12 months of expenses. Let’s say your loans and living costs total RM5,000 each month – this means you should have RM60,000 available in case of emergencies.

3. Risk Management

Life does not come with guarantees. The Covid-19 pandemic has shown us that anyone is vulnerable. Accidents can happen. Health issues may arise due to lifestyle choices, stress, and family history. When something unexpected happens, the last thing you want to worry about is money.

In order to protect and grow your wealth, you need to mitigate your risks. Generally, there are a few types of insurance that’s advisable to have, depending on your situation. 

Types of Insurance Purpose
Medical Insurance Pays for your medical bills
Critical Illness Insurance Lump sum money payable to you upon diagnosis of critical illness.
Acts as income replacement
Life Insurance Lump sum money payable to your beneficiaries upon death. 
This is especially for those with dependent (parents, spouse, kids)
Disability Insurance Lump sum money payable to you upon disability.
Acts as income replacement

By following the three steps above, you’re well on your way to building the right foundation in wealth accumulation. Once your foundation is solid, the next step is to understand and set your wealth accumulation goals like house purchase or retirement, as well choosing the right strategies and solutions to achieve your goals. However, Rome was not built in a day; be patient and take your wealth accumulation journey one step at a time!

About the Author

Kuah Soo Yee is a Licensed Financial Planner (CFP) who is passionate about helping people make sound financial decisions and achieve their financial goals. Her personalised strategies and advice have helped many to gain better clarity and take firm control of their financial future. She can be contacted at soo.yee@ipp.com.my

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