Financial planning for a young graduate is very easy. This is how it can be done using the 1/3 rule. The 1/3 rule is:

• Set aside 1/3 of your salary for savings;

• 1/3 for spending like

  • mortgages,

  • clothes,

  • boyfriends,

  • girlfriends,

  • hand phones,

  • internet,

  • travel and

  • parental support;

• Another 1/3 for insurance.

Some practitioners advocate that we should be saving at least 10% of our salary. Personally I think it is more prudent for the young person to save more.

The following is a profile of a typical young graduate called Ms Prudent:

Profile of Ms Prudent

The following is the table that shows that by end of age 60, this person would have accumulated $1.4 million. I have used 5% per annum in return and I think this is achievable given a time horizon of 35 years.

Consider another scenario where another individual called Ms Irresponsible:

Profile of Ms Irresponsible

The main difference is that Ms Irresponsible has a high saving rate of 70% but due to ignorance places all her money in saving account yielding only 1% per annum. She does not buy any insurance because the remaining 30% is for expenditure. The table is a summary of how her savings will grow:

• It can be seen that after 60 of age, the cumulated wealth is $1.4 million as well. Both Ms Prudent and Ms Irresponsible achieve the same amount of wealth upon retirement.

• However, Ms Irresponsible is at greater risk than the first. She is not insured. Should an illness or accident occur resulting in say a lost of income, or incurs high medical cost, she is not going to achieve her $1.4 million. In fact it is possible to become financially insolvent (liabilities more than assets).

• On the other hand, Ms Prudent saves and insures herself. If an unfortunate event occurs, the retirement plan is likely to continue as usual due to the insurance cover.

• Ms Prudent expenditure is similar to Ms Irresponsible. Both spend nearly 1/3 of their salary. Ms Prudent still have 1/3 every month to spend on clothes and holidays (in this example, she spends 2800/3=$933 every month which I think is very comfortable for a young graduate).
  

Here are further few points to note:

• Both wealth protection (insurance) and wealth accumulation (savings) work hand-in-hand. Both are dependent on each other. Having a protection plan without savings will cause an individual to be very poor later on in life. On the other hand without protection, any saving plan is at risk of not been sustainable upon occurrence of an unfortunate event.

• Do not spend a single cent in “junk” insurance policies. These are insurance policies with very high premium but do not give that necessary cover in times of need. It is better to spent on movies and holidays than to spend on these junk policies. Junk policies are like:

  • Anticipated endowment (those which gives a regular payout over the years);

  • Investment linked policy (which has no guaranteed of cover due to escalating cost of insurance and the policyholders assuming all investment risks)

  • Insurance with premium refund after X years. These are actually a term insurance plus a saving component. The saving component usually has similar rate as fixed deposit or worst.

• Conversely, get insurance cover that is suitable and get it at the lowest cost. There is no point spending an additional 1% if there is another product that has identical feature but at lower cost.

• The interest rate used in these two examples: one is 1% (equivalent to fixed deposit) and another 5%. 5% is not difficult to achieve. A moderately conservative person can achieve it. A combination of regular premium endowment (a good one I mean) plus a small part in high risk unit trusts will do the trick. For those who are highly aggressive, they can put more into equity unit trusts regularly.

• Finally the above $1.4 million at the end of age 60 is not a big figure. If inflation is 2% per annum, that is equivalent to $700,000 in today’s value. If inflation is 5% per annum, that $1.4 million is equivalent to $253,800 in today’s value. This is because inflation works in a reverse compounding effect over a long period and in this case is 35 years.

• In the above illustrations, I used gross salary and have not taken into account of CPF contributions and the AWS. The employer’s contribution at age 25 is 14.5% of gross salary. This implies that the total salary is actually 2800x114.5%x13= $41,678. Thus, spending $11,200 in insurance a year is equivalent to 11200/(41678)=27% which is less than 1/3. That means there is actually more money for expenditure and savings.

This short article is to demonstrate that a financial plan for a young person can be very simple. There is no rocket science to it and it is just based on pure mathematics and reasoning. Ensure that you have a good start in your career and you will achieve your financial independence with just a simple plan.

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The author of this article, Mr.Wilfred Ling is a licensed financial adviser and Associate Director with Promiseland Independent. He can be contacted at This email address is being protected from spam bots, you need Javascript enabled to view it .