Prevention is better than cure applies not only to your health, but also your finances — eliminating bad financial habits will go a long way towards getting into bad loans and debts.
Let’s take a look at some of the simple ways we can plan ahead in order to achieve financial freedom!
1. Not planning ahead with enough insurance coverage
No matter how much you scrimp and save for the future, all it takes is one unexpected event such as falling sick or getting into a major accident to completely wipe out your savings.
And one of the best ways to prevent that from happening is to make sure that you and your family members are insured.
Singaporeans have a pretty bad impression of the insurance industry mainly due to horror stories of people who paid for insurance companies’ investment policies and not having much to show for it at the end of its investment period.
However, you can completely ignore those insurance products and go straight for the important ones — term life and hospitalisation insurance.
BONUS: If you have served national service, you are actually eligible for MINDEF Group Insurance from Aviva. MINDEF subsidised a portion of the premiums, making these plans a lot more affordable. You can even buy them for your spouse and children!
2. Not sticking to a budget
One of the most common reasons why people get into debt is that they did not budget and often spend more than they thought they did.
Here’s a method you can try if you aren’t sure where to start with budgeting.
The 50-30-20 ratio
50% in spending — this includes your things like your travelling cost, food and bills
30% in investments or wants — you can use this fund for investing in your retirement or to buy things that you want
20% in savings — this will be your emergency or rainy day fund. A good gauge will be to save at least 6 months worth of living expenses in case you can’t work for any reason.
Besides budgeting, you can also start tracking your expenses to find out where all your money went in order to have a better grasp of your finances.
3. Not repaying credit card bill in full
As Singaporeans, we love our rewards, cashback and miles points, and some of us sign up for a myriad of cards in order to take full advantage of all the different promotions.
That can be a really dangerous situation, especially if you do not track your spending well, and wind up owing a lot more credit than you can pay off.
One of the worst things you can do with credit card bills is to only pay the minimum sum every month, and letting your debt roll with interest every month.
For example, if you only pay the minimum sum on a $5,000 credit card bill with a 25% annum interest rate, you will take almost 14.5 years to pay off everything and end up paying almost 3 times more than what you originally owe!
So, if you rely on credit card often, make sure you pay the full sum whenever possible.
4. Not checking your bills regularly
Singaporeans led a busy life and sometimes that means letting those bills sit on the table longer than it should.
This can lead to late payment charges or interest charges if you let your bills accumulate from month to month.
There is really no excuse to make this mistake and pay more than you should. Set a reminder or an alarm to take care of your bills on time!
5. Not spending within your means
This applies no matter how much you earn.
For example, if you compare someone who earns $100,000 but spends $120,000, and another who earns $50,000 and spends $25,000, who is in a better financial position?
Of course, it will be the guy who only spends 50% of what he earns. By spending only half of what he earns, he can invest or save the rest in preparation for emergencies and retirement.
Start making the right financial decisions today, and your future self will definitely thank you.