How I Handled My Finances In My 20s
Disclaimer: I'm not a financial advisor/expert nor I'm playing one in the internet. The things mentioned here are from my personal experience only. Do your own research.
Wow. And just like that my 20s were gone.
The past decade has taught me a lot of things – one of it is about money.
Having a solid foundation on financial literacy is I believe one of the most important lessons that anyone should learn at an early age. This is important especially for someone who just started to earn their own money. It is easy to defer making the smarter money decisions because of the perceived abundance of time.
Ironically as I have learned, time is a valuable asset when it comes to finances and you should take advantage of it. It's never too early to make the responsible financial decision.
Build an emergency fund
This is where I allocated major chunk of my salary when I started working. The goal was to have at least 12 months worth of my monthly expenses saved in a bank. This gave me a sense of security that I will still be able to live comfortably for some time in the event that I lose my job.
Every payday, about 70% of my net salary goes straight to a savings account - no second-guessing whatsoever. I made it seem like I didn't even received it at all. By doing this, I don't have to rely on discipline to make the responsible decision every single time. We all know how that plays out.
To help me maintain it as a "no-touch" account (all transactions should only be deposits), I made this savings account in such a way that it only has a passbook and no debit card. Add to the fact that I'm not a big spender, I was also fortunate enough that my parents never asked money from me which helped me reach this financial goal faster.
Invest in an index fund
Aside from the goal of building an emergency fund, leaving money in the bank isn't the smartest thing to do – it's literally losing its value because of this thing called inflation. Basically, it happens because interest rates of savings accounts cannot cover the constant increases in the prices of goods and services.
Buying stocks is one way to compensate this, but I knew I have no interest in constantly monitoring the high and lows of the stock market which is what daily traders do. So what I did was to just set aside a certain percentage of my salary and invest it to index funds regularly and just forget about it.
An index fund is a type of investment that lets you invest in a diversified portfolio based on the top performing companies, an example is the PSEi (Philippine Stock Exchange Index). This is definitely on the high-risk spectrum of investments so do your research first. I know that I'm in it for the long haul so the short term fluctuations of the stock market doesn't really bother me.
A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.
- Warren Buffett
Here are some of the index funds available here in the Philippines:
- BDO Index Fund
- BPI Index Fund
- Sun Life Prosperity Philippine Stock Index Fund
- Philequity PSE Index Fund
Buy nice or buy twice
As I gotten older, I started to appreciate quality a lot better and really take it to consideration whenever I buy things. Quality does comes with a price most of the time. But I realized that the pricier things that I bought from 5 years ago are still serving me well today which makes it all worth it.
Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.
- Ramit Sethi
Treat credit card as a debit card
I never had a credit card until two years ago, mainly because my fear that I wouldn't be able to control myself from overspending. It is indeed very tempting. The problem with a lot of people is that they're treating their credit limit as a cash in hand which is like digging your own grave.
Credit card is not inherently evil. Whenever there's a big purchase, I will use my credit card but also make sure that I already have the money to pay that off in full.