Smart savings starts in your 20s

Written by Nipapun Poonsateansup, CFP®, Financial Advisor

If you haven't yet turned 30, you might think it’s still too early to be thinking about retirement. It’s likely your salary is not yet very high, so you probably believe that there’s little point in trying to save. But this belief is misguided. It’s of primary concern to establish and follow a rational financial plan regardless of your age or gender, whether you are rich or poor. The structure and details might differ according to an individual’s age, goals and specific circumstances. But stick to a savings and investment plan, and it will make a big difference in your lifelong financial well-being.

During your 20s, you are newly employed and at the beginning of your career. For many of us, these are years to focus on self-discovery, exploring different jobs and finding out which occupation is the most suitable.  Your salary is likely to be rather low, alas, especially in comparison to your spending needs, which might include a home, a car and various electronics. At the same time, you might be trying to save funds for things like a wedding, education or down payment on a car. Given all this, saving for retirement might seem unimportant or unrealistic. But the earlier you start, the richer you’ll be. 

Here are two simple steps toward a savings plan:

1. Track your revenues & expenses 

The first step in financial planning is self-awareness. Gather your financial statements and set up a budget to track your revenues and expenses. Now you can see where your money is going and which spending is excessive. 

Tip: Don’t take on a loan for a home or car too soon, because the interest rate will be very high. Paying off the loan principal and interest by installment will prevent you from having money left over for savings and investment. It’s better to stay debt-free as long as possible and avoid spending beyond your means.

2. Set up a savings target

Savings is the beginning of financial success. You need to put aside savings before you spend, not fund savings from what’s left over. Target a specific sum based on a percentage of your gross income that is at least 10 percent. Use this figure to set up an automatic transfer from your main bank account to a savings account.

Three tips to manage your savings:

                1. Save up and maintain an emergency reserve of cash equal to about three to six times your total monthly spending. This money will protect you in case of an unexpected incident like an accidental injury or loss of employment. Keep this savings in liquid assets, such as a bank savings account or fixed deposit account. Or invest it in a money market fund or short-term fixed income fund, which allow withdrawal on any business day.

                2.  Consider whether you need any insurance program, especially if anyone depends on you. If you are like most recent graduates, you are single, so you don’t have dependent children. In that case, you can forego life insurance. On the other hand, if you are your parents' oldest child and are responsible for taking care of them or of any younger siblings, they would suffer if you were to pass away. To protect them, you should enroll in a life insurance policy that covers a sum of about five times your total annual spending. As for health insurance and accident insurance, you should review your existing benefits to see whether they cover your needs.

                On the other hand, if you have adequate financial means and can afford an integrated policy combining a life insurance and health insurance, you should apply for it because the value of such a policy is high compared to premiums when you enroll at an early age.

                3. Take care to optimize the allocation of assets in your investment portfolio.  Because you are still young, you have a long time to save money. This means you can safely diversify your portfolio to include various high-risk asset categories in order to earn a high return over time. The volatility of each investment should be noted – you have to accept a higher risk of short-term loss in order to get a higher return in the long term. The list below outlines a typical asset allocation calibrated for a medium level of risk, which can be adjusted according to the investor’s age and risk tolerance. Before you make an investment decision, you should complete a questionnaire assessing your risk profile.

Portfolio allocation for medium risk
  • Cash deposits, money market funds   10%
  • Bonds, debentures, fixed income funds  15%
  • Thai domestic equities, equity funds, LTFs, Thai equity RMFs   55%
  • Foreign equities, foreign equity funds, foreign equity RMFs      10%
  • Gold, gold mutual funds, gold RMFs   10%

Financial planning benefits the new employee as much as an older one. If you start early on savings and investment, you’ll be on your way to financial achievement. As a younger investor, you can take on greater risk. That means you will enjoy a wider range of investment choices and opportunities than you will later in life.