My first tip on financial planning is to save regularly. You should save 15% of your monthly income. 

This tip applies to you, regardless of your income level. This saving is on top of your contribution to the Central provident Fund.

The only exemption are for people who do not have any income or are at the poverty level.

How is it possible to save 15% of your income, when you are not earning very much? 

SAVE FIRST, SPEND THE REST
The answer is - follow the advice of Warren Buffet. He is a billionaire who built his wealth from investments. He said - save 15% of your income and spent the rest. Do not spend first and save what remains. I am not sure if I got his quotation correct, but you get the meaning, right?

So, it is a matter of priority. You should set aside your savings first.

AVOID LIFE INSURANCE POLICY
This is also the reason why the majority of working people buy life insurance, such as an endowment, whole life or investment linked policy, as a form of savings. They have to pay their premium monthly. It is usually deducted from their bank account. They can only spend what remains.

While the forced saving that is embodied in a life insurance policy is a good mechanism, I do not recommend the purchase of life insurance as an investment. Why is this so? The life insurance policy takes away as much as 50% of your savings, inclusive of the investment gains, over the duration of the policy. You only get back 50% of the accumulated sum.

You should look for other types of investments schemes that take away only 10% of your accumulated savings, and leave 90% for yourself. I shall take about the other forms of investments in another article.

CPF SAVINGS
Why do you need to save 15% of your income when a total of 38% of the income is being contributed to the Central Provident Fund and kept in your personal account? This is the combined contribution from you and your employer.

The contribution to your account in the CFP is split into three sub-accounts to be used for housing, health and retirement. A large part is actually used for housing and health, leaving a smaller portion for retirement. If you wish to know the details of this complicated arrangement, you can read this article. 

Is the amount set aside for retirement adequate? It should be adequate to cover your basic needs, provided that you have a full working career until age 65. If you lose your  job for an extended period of time, your contribution to the CPF is disrupted and the saving in the CPF will be inadequate.

USE OF PERSONAL SAVINGS
The personal saving of 15% from your income (i.e. outside of the CPF) can be used to supplement your CPF saving on your retirement.

There is another purpose for the personal saving. There will be occasions in the future when you have to meet a financial emergency, e.g. when you lose your job or a member of your family (quite likely to be an elderly person, e.g. your parent) incurs a large medical bill. 

If you have personal saving, you can draw on it to meet the emergency. You do not need to take a loan or incur a debt that a carries a high rate of interest.

How should the personal savings be invested, if not in a life insurance policy? I shall talk about this subject in a future article.

Tan Kin Lian