Your 20s: Starting out

In the span of 18 months, my daughter’s friend, Nikki, has been promoted thrice in a call center that provides technical support to a United States-based computer company. At 23, Nikki is now an operations manager, earning P40,000 a month. She’s also still single and living with her parents. Her contribution to the household is paying for the P3,000 monthly salary of one of the domestic helpers in her parents’ home.

Like other people in their 20s, Nikki has a big appetite for life. Savings often seems less important than spending. She would like to have a car, to travel, to buy fashionable clothes. Money management skills have to be learned.

Expenses

The first step to taking financial control is to have an accurate picture of your current income and expenses. This will help you see:

• how much you can save;

• whether you are spending more than you earn;

• what pleasures you can afford; and

• the possible financial effects of a major change, such as moving to another company.

Usually, the income section is much shorter than the list of expenditures, which is probably why most people dislike drawing it up–it makes us realize how much money we spend unnecessarily.

Hopefully, your income after expenses is a positive number but, when you are young, it may not be. Don’t despair. You have the ability to change this by a disciplined approach to managing your money and building your wealth.

If you develop the habit of monitoring your income and expenditures, you will find it much easier to cope with life’s financial pressures, which are not always predictable. New taxes are introduced, new "must-have" consumer products come to the market, and prices are always changing (usually upwards).

The pressure to finance the shortfall by using your credit card or paying for things through installment may be great but the interest payments on the loans simply increase your cost of living. It is far better to reduce your living expenditure to the point where there is a surplus available. Try to live within your means. For instance, use the landline instead of your cell phone for long conversations. Instead of spending your money and keeping whatever is left of it for savings, do the opposite. Set aside a specific amount each month for savings, and then use the rest for your expenses.

Even if you can keep your own spending under control, your parents, siblings, and "significant other" may come up with unexpected requests. Without monitoring your budget carefully, you cannot know accurately whether or not you can afford it when, for instance, your sister, an incoming high school junior, suddenly asks you to pay for her prom dress.

This does not mean you have to be a miser. By having immediately access to your cash flow, you can set ground rules for your spending and ensure there will always be enough money for the essentials of life.

Financial Advice

Even if your earning power is low, you can plan your financial future. In your 20s, you have the luxury of time to make your money work for you. If you choose to invest at this stage of your life, then you get a head start in the race to reach your financial goals. That’s because the longer your money is invested, the greater your earning power (provided, of course, that you have invested in the right instruments). In starting young, you are able to enjoy the advantages that only time can give you. Wait another 10 years and you will have to save much more in order to reach your financial goals.

Your investment stance at this stage of your life will vary according to your circumstances. Seek the advice of a financial planner. Some financial institutions offer free, one-time consultancy. On a prolonged basis, having access to a financial adviser can be had for a minimum of P300,000 in bank-related business.

Before going to one, prepare a wish list and classify each wish as either essential or non-essential. Put a time frame to each wish. For example, if you want to take up graduate studies, when do you intend that to happen? Attach a financial value on each wish.

A financial planner will ask you about your savings. Having too much cash in the bank may not be a good thing since a deposit account fetches just 1% per annum, which means your money is actually losing its value due to inflation. Keep just enough cash to pay for all your normal expenses over a period of time, say, from three months to a year.

You also have to set aside some money for emergencies. You may opt for a higher-yielding deposit account that allows you to make emergency withdrawals. These accounts typically have a higher interest rate than the usual deposit products.

Longer-Term Goals

To meet goals such as retiring at 55, longer-term investments have time to recover from losses and so have a better chance of meeting expectation. This is especially true of investments lasting 20 years or more.

While it is true that you have the luxury of time, it is foolish to think that you can put all of your savings in the riskiest of investment instruments. You still have to cover your bases, meaning you will have to work on safeguarding your money and your possessions.

Some advisers point out that since a diversified portfolio of equities is likely to outperform all other types of assets in the very long term, young people stand to make excellent gains in the long term if they adopt a savings scheme that is linked to mutual funds or to the newest product in the market, the unit investment trust fund offered by different local banks. Look for a scheme that allows you to vary the amount you save, so that you don’t have to contribute when you need to spend money on other things.

Protection will also have to be among your primary goals. If you are not married, you could take a no-frills insurance plan. If you are in good health, this will be relatively inexpensive.