1. Not having a plan and a budget
As they say, if you fail to plan, you plan to fail. It is important to have a long-term plan (five to 10 years) that helps you keep track of measurable and achievable goals, with milestones achieved along the way. Your income minus your expenses gives you a sum that should be your savings. Distribute these savings to your various goals such as your child’s education, retirement fund, emergency fund and others.
What you can do:
• Start saving 10-20% of your disposable income, gradually increasing this to 30-40% in later years.
• Your expenses should not be rising in proportion to the increases in your income. Increase the level of savings instead.
• Invest according to your risk appetite in the various financial instruments like equity, bonds and unit trusts.
• If you can’t meet the goals with savings, then go back to the budget. Be ruthless about cutting down expenses.
2. Overspending on baby costs
While a lot of this spending is necessary, some of it isn’t. Your baby can’t tell if he’s wearing Armani or a hand-me-down T-shirt from his cousin.
What you can do:
Before you start setting up a nursery, come up with a spending plan. Remember that a lot of what you buy will only be used for about a year, sometimes less e.g. baby clothes and shoes. Accept hand-me-downs, buy in bulk and shop during sales.
3. Not saving for your children’s tertiary education
There are various sources of funds available to fund your child’s education needs, such as bank loans, CPF (the amount available will depend on how much has been used towards the purchase of an apartment), scholarships etc.
What you can do:
• Start saving early, as soon as your child is born or even before birth.
• Work out how much your family will need for all its financial commitments (education, living expenses, healthcare etc.) should anything happen to the main breadwinner. You will need to replace that loss of income.
4. Over -using credit cards
Dump that “buy now, pay later” mindset. What often causes financial problems is debt that is unnecessary accumulated and strategically used. Prioritise your spending ruthlessly.
What you can do:
Try to clear your credit card bills every month.
5. Taking on too much debt
There are “good” and “bad” debts. Credit cards are considered “bad” as the interests chargeable are very high and it’s tempting to end up servicing only the minimum payment each month. An example of a good debt is housing loans, with the assumption that the value of your home will rise in 20 years.
What you can do: Assess your lifestyle: Do you really need a car? Could you travel for pleasure closer to home? You have to figure out if you are spending on a “need” or a “want”, and if you can do without it. If you are in debt, look at your goals and objectives again and put yourself on a strict “financial diet” that will clear the bulk of, if not all the debts incurred.
6. Not having an emergency fund
Some people have investments that can be easily liquidated, such as insurance policies (for their cash values).
What you can do:
• Start creating an emergency fund amounting to three to six months of your monthly pay.
• Establish or apply for lines of credit, but under no circumstances must you use them except in a true emergency.
7. Not having life insurance (or skimping on it)
Once you become a parent, having enough life insurance is essential. If one or both parents dies, you have to make sure your dependants will be provided for. Life insurance coverage through your employer is not enough — if you get laid off, you lose your life insurance. For your child, what’s important is not life insurance but one that covers health-related concerns, such as hospitalisation plans.
What you can do:
• How much insurance do you need? Generally people need five times their earnings, plus the total amount of their household debt and enough to cover tertiary education costs for their children.
• For new parents, term insurance meets most people’s needs and it’s the simplest and cheapest kind.
8. Not saving for retirement
When you are only thinking of saving for your child’s education, it’s easy to shrug off saving for retirement. Your CPF is not sufficient as the bulk of it will have gone towards funding your home.
What you can do:
Go back to the plan and work out if you are able to lower the term of payment. Leaving more money in CPF would generate more stable and reliable returns.
9. Failing to teach children about money
You are your child’s greatest role model so be aware of your actions.
What you can do:
While your child is still a baby, start cultivating healthy spending and saving habits and you’ll find it easier to inculcate the habit of saving in your child from a young age.
10. Not having or postponing making a will
Many parents assume they don’t need a will, because they don’t have large estates. But if you have a child, a will is essential to designate guardians. This is very important for young families — you want to ensure that your children will have the best care possible.
What you can do:
Hire a lawyer to draft a will — it’s not very expensive, about $300 — in which you name an executor who would pay your debts and distribute your assets, and a guardian for your children.
Remember: These may be two different people; your sibling may take great care of your children, but he or she may not be good with money.
~ Thio Eng Huat, vice president at iPac Financial Planning Singapore
