Getting that first paycheck is probably one of the most significant milestones in every person’s life — particularly for the growing number of millennials entering the workforce. But while it is definitely not bad to indulge ourselves with the fruits of our labor — we worked hard for it after all — we also have to think long-term and start investing a portion of the money we earn now so we can have financial security in the future. As Warren Buffett said: “Do not save what is left after spending, but spend what is left after saving”.
This is certainly true in the storied career of John Michael Lau, a wealth management consultant and wealth advisor at one of the leading life insurance companies in the Philippines (Pru Life UK). Lau has been advising clients on how to make their money work to make their future financially secure.
While it is easy to do away with worrying about the future especially for millennials and young professionals (early 20s and mid-30s), Lau shared that long-term thinking is key when it comes to personal finance and wealth management.
“Young people need to think about personal finance early because by the time they start earning, many are tempted to spend more than what they should save,” he shared. “Thinking long-term is important because you plan what is already ahead and [anticipate what] will happen.”
To prove that investing at an early age is not exactly as difficult as rocket science, Lau shares 6 tips for millennials (and, basically, everyone) on where to invest and what to take note of before taking the next step in your financial security.
1. The 70-20-10 Rule
One of the best ways to actually start imbibing discipline in your spending habits is to put a limit to it. Lau shares the 70-20-10 rule he practices and recommends to his clients: 70% for spending, 20% for savings and investment, and 10% for learning.
“Savings should be on top of [people’s] minds every paycheck, and that savings should be left untouched and allowed to grow through investments,” Lau said.
A good way to instill this discipline is to have separate bank accounts: one for checking and another for savings. Never have all your money in one account or, as the saying goes, don’t put all your eggs in one basket. Besides, having a savings account in most banks provide interest earnings. No matter how small the earnings are, you’re still better off than for it lying around idle, or worse spending all of it.
2. The 6-month buffer
Connected to the 70-20-10 rule through having multiple bank accounts is actually giving yourself the peace of mind and security in case of emergencies. Suddenly out of a job? Family emergency? Lau shared that, in terms of knowing the minimum amount of savings, people should consider the 6-month buffer: savings should be the equivalent of 6 months of your current monthly income.
“This will be their emergency or buffer fund that in case something happens, they have cash at hand,” the financial adviser said. “Given the chance that they have six months to adjust.”
Investing in time deposits, when maturities are reachable, can be handy in this case.
3. Life insurance
One of the smartest ways to invest a portion of your money, according to Lau, is funneling it to a life insurance. Not only will it allow you and your family to have a financial protection when accidents and other incidents happen, it will also save you the hassle of grasping at straws when things happen.
“Most of life insurance policies nowadays [provide] benefits [for instances] like disability, critical illness, accident, and hospitalization,” he said. “Without protection, savings will be reduced and sometimes cause people to go bankrupt.”
4. Real estate investments
Depending on their risk appetites, people can also invest their extra money in items that can mature over time and yield passive rental income, like real estate and property investments. Properties like parcels of land, constructed apartments, and high-rise condominium units are examples of this type of investment. The real estate and property market generally follow an upward trend when it comes to valuation — barring any valuation bubble and other financial downturn.
Investment in real estate and property is a good way not only to have a financially secure future, but also a good way to ensure to have a place called home.
5. Mutual funds or stocks.
This type of investment, in a way, a speculative way to grow your money and will also depend on people’s risk appetites. Most banks right now have their own mutual funds for those with low appetite for risk. Those with higher appetite for risk can opt to trade stocks either by themselves or through brokerage companies.
Lau said, however, that people should follow the market and stock fluctuations for this to work.
6. Start a business
Last but definitely not the least — and possibly having the highest risk and highest reward option — is starting a business. This could mean starting your own entrepreneurial venture from scratch or franchising a known brand. This, however, needs careful planning, business acumen, and commitment for the business to become profitable.
Lau said that “most businesses fold up because of a lack of expertise, lack of capital, [and entrepreneurs] underestimating the market.” That’s why learning the nitty gritty of running a business is crucial for the risk to become a reward.
As with anything in life, Mark Zuckerberg’s quote rings true: “The biggest risk is not taking any risk.”