Take 1: Three financial habits to make your life better

As I look through the last two years of difficult conversations,
these are the three hacks that would had the most significant impact on the lives of my younger friends:

1) Have a high yield savings account

Interest rates on high yield interest bank accounts have dropped recently, but remain decent. Still very much possible to achieve 1.5% to 2%, just for having your salary credited there and perhaps a few hundred dollars on credit card spend (which can be achieved by charging ez-link, mobile, and wifi / cable etc onto the card instead of GIRO). For an independent review between different bank accounts, refer to Seedly's comparison of best savings accounts.

Between the higher yield interest, and ordinary passbook / savings accounts of the past (which could pay as low as 0.05% per year), the difference in interest earned is usually more than 1% per year. Just to put this in perspective, I made a table below to illustrate the bonus interest amount, and what it could do:

If you feel that there are existing GIRO and other bank arrangements on the account, and its too much of a hassle to get this "free money", I would suggest you try this: 

- Open the high yield bank account and inform your HR of the new bank account for salary crediting

- Keep what you need for paying the bills in the old account and transfer the rest to the high yield

- Give yourself three to six months to change the GIRO arrangements

You could still keep the old account and use it as a spending account, but there's definitely no harm to keeping (most of) your money in a place that pays you better rates.

  2) Pay off credit cards in full

When you don't pay off your credit card balance in full by the payment due date, the card issuer charges you various fees and high interest. Usually the interest is about 27% per year (excluding other fees), and these fee / charges snowball quickly to put people into a debt trap that is extremely difficult to get out of. Here's a link to DBS fees and charges and OCBC fees and charges.

 

The table below is overly simple, but for illustrative purposes, it should show what happens when one only makes minimum card payment over 52 months (or 4 years and 4 months):

You easily pay an additional 50+% just in interest alone over 4+ years, and this can be avoided by just paying the card balance in full before due date.

3) Pay yourself first 

Most folks that step out of school into work have vague concepts of money management. And the financial situation can be different for each individual. A good guideline of the amount to save is at least 15% of take home pay, and the more the better - this means you keep your expenses at 85% or lower of your take home pay.

What do you do with these savings? I recommend in order of importance:

- if you have debt with annual effective interest rates of more than 5%, then you should keep a small portion (eg $50 to $100 monthly) for emergency funds, and use the remainder to pay off the debts, usually starting with the higher rate ones.

- if your remaining debt has interest rate of less than 5%, you should make a plan with your financial goals (eg marriage / housing downpayment) and these remaining debts, and allocate the savings accordingly. It really depends on your priorities and timing of when certain things will happen.

So really what this means is you need to keep your expenses in control until most of your high interest rate debt is cleared off, and you have more flexibility 

The challenge here is really keeping your  expenses at 85% or less of take home pay, and a good portion of savings to clear off high interest rate debt. The tip is really to focus on allocating the spending mostly on the needs, and less for the wants. 

I hope this article has given you new perspectives, and better ways to manage your money.