Financial Planning for Millennials – Which Savings Plan Is Best For Me?
Millennials today are getting more proactive and recognise the importance of saving to attain their financial goals earlier. As a result, there have been an increasing popularity in savings plans among millennials as a way to grow their wealth.
However, when choosing a savings plan, not all will begin at the same starting point financially. While helping my friends organise their financial plans, I noticed that they generally fall under 1 of these 3 starting points which I have categorised them to be either:
1. The “Bobian” One (i.e Those with no choice)
They are the responsible ones who have inherited their existing insurance plans bought for them by their parents and have started taking over to pay for their premiums. While they are interested to start a savings plan, they wonder if they have the budget to do so.
2. The “Heng” One (i.e The fortunate ones)
They are the lucky ones that do not have to worry about insurance because their insurance policies are bought by their parents who are still paying for their premiums. Therefore, they are not looking to buy insurance for protection but may only look into insurance for savings.
3. The “Lost” One (i.e Those without any planning done)
They are the ones who do not have any insurance or financial plans to start with and have to build everything from scratch themselves. The good thing is that they get to be in control of their own planning right from the start. Therefore, are looking into getting a savings plan to kick start their wealth accumulation.
This was me. This was my starting point. So if you’re here… I feel you.
Therefore, I hope this article will help a few lost souls who were once like me to help you better understand savings plans before committing into one.
Key Considerations When Choosing Your Savings Plan
If you already own a savings plan or intend to start on a savings plan, here are 3 questions (with answers) to guide you in making a decision.
1. Why should I save with a savings plan?
It is clear that having a plan is better than having no plan at all. The main purpose of having a savings plan like an insurance endowment is to create a systematic and disciplined way to lock aside money. We will focus on returns later. Putting money in the bank as a form of savings will work if you are already a naturally strong saver. On the other hand, if you are a naturally strong spender (like me), the results may differ and simply putting money in the bank is not feasible for you. In this case, a savings plan will help you set aside a fixed amount from your income for savings first.
For people who are thinking of saving for a long period of time (10 years or more), an insurance savings plan provides additional benefits in the saving process. There is also no need for declaration of health when purchasing a savings plan.
2. How do I decide which plan is most suitable for me?
You can determine suitability based on these factors:
a. Your Goal
b. Your Time Horizon
c. Your Risk Appetite
d. Your Budget
a. Goal – What is your purpose of taking up the savings plan?
It is very common for people to have a savings plan just for the purpose of utilising it as a disciplined savings account. However, when deciding on a savings plan, having a specific objective or goal has its benefits.
Many individuals like keeping cash liquid, they prefer saving their money in the bank as they feel that it is the best way to save money. They always think that money should be kept for emergencies and forget that savings are usually meant for a long term goal.
By knowing exactly what you want and when you want it, it ensures that your money is best utilised towards your needs.
If we compare two different types of savings plans, you will notice the difference in maturity value and the year of breakeven:
For illustration purpose only.
b. Time Horizon – How long do you want to save for?
You have different goals in life and may need a lump sum at different stages in your life.
It could be for a car, capital to start a business, your future home, your wedding, dream holiday or even for your children’s education. Is there a specific time you would need the lump sum?
For a short term goal, you would look into short term plans and vice versa for long term goals. However, with an unspecified goal, it will be harder to decide which savings plan would be most suitable for you.
Imagine if you have that lump sum of money, where would you spend it on?
c. Risk Appetite – How much risk are you willing to take?
A savings plan is a platform that you can safely invest your money in and therefore suitable for those who are risk-adverse.
For those with a higher risk appetite, you can consider taking up an Investment-Linked Plan (ILP). However, it should not be misunderstood as a savings plan. An investment-linked plan is a combination of investment and insurance, the returns from such plans are ultimately based on the investment performance in an unpredictable and fluctuating market. It may not be suitable for those unwilling to take any form of risks.
d. Budget – How much should you set aside for a savings plan?
When it comes to financial planning, a savings ratio is defined as the percentage of income that is set aside for future consumption. A minimum of 10% is recommended and no doubt, the higher it is the better. In my opinion, a savings ratio of at least 15% should be considered for millennials as they are less likely to work in “golden rice bowl” type of jobs.
With the following variables considered, you can then decide which savings plan is most suitable for you.
3. What types of savings plans are there?
There are many types of savings plans from the different insurers, to put things simply, you can break down the different types of savings plans into 4 different categories.
1. Traditional Plan
With a traditional plan, you can decide the duration of the plan. During this period you would be required to pay for the plan regularly throughout its period. Your final lump sum is received at the end of the policy term.
2. Limited Pay Plan
With a limited pay plan, you can decide how long you wish to pay for the policy and how long you want to keep it for. For example, you can choose to pay for the plan for 10 years but keep it for 15 years to earn interest and increase your final lump sum value. Your final lump sum is received on the 15thyear.
3. Limited Pay Lifetime Plan
With a limited pay lifetime plan, you can decide how long you wish to pay for the plan and how long you are going to keep it for. The policy term for this plan is for life. Unlike other plans that have a specific maturity date, this plan allows you to keep your money in the plan to continue earning interest for as long as you prefer. Your final lump sum is received when you choose to end the plan.
4. Flexible Plan
With a flexible plan, you can decide the duration of your payment and how long you are going to keep it for. During this period, you will receive annual cash benefits which you can choose to withdraw or re-deposit back into the plan to accumulate interest and increase your final lump sum.
Pay Attention to the Guaranteed Returns
When it comes to choosing a savings plan, I believe one of the most important considerations is having a high guaranteed amount at maturity. This means if you intend to start a plan to save for 15 years, the guaranteed amount you receive on the 15thyear should be as high as possible.
When it comes to assessing the guaranteed returns in a savings plan, it is important to know that they fall into these 3 categories.
(1) Guarantee only a fraction of your capital (Invested $100,000, Guaranteed Maturity $70,000)
(2) Guarantee 100% of your capital (Invested $100,000, Guaranteed Maturity $100,000)
(3) Guarantee more than your capital (Invested $100,000 Guaranteed Maturity $120,000)
If you are looking to start saving using savings plans with guarantees that are equal or more than your capital, you can use this Guide to Savings Plans for Millennials – Capital Guaranteed at Maturity. It provides an explanation of the additional benefits you can add to a savings plan to customise it to your needs and a comparison of savings plans from insurance companies that will guarantee you minimally your capital at maturity. Click HERE to download the guide.
In my opinion, I strongly believe that individuals should get back a guarantee as high as possible or minimally the amount they put in a savings plan. This will give them a peace of mind that they won’t lose any money as long as they are disciplined throughout. I also believe that there is no one plan that fits all. Therefore, it is important to determine which is most suitable for you and your goals. One thing for certain, saving for the future is necessary and one that can only be accounted for by our own actions. So let’s begin this Savings journey together!
Article by Sabrina Tan