[Practical Finance] Financial Supervisory Service Team Leader's Guide to Early Career Money Management

Smart Financial Life by Life Cycle, Pointed Out by the Financial Supervisory Service Team Leader

▶Series Order
<1> Early Career Financial Management
<2> Newlywed and Childbirth Financial Planning
<3> Preparing Education Funds During Children's School Age
<4> Financial Planning for Children's Adulthood and Independence
<5> Healthy Retirement Life

When a young adult who has just started working suddenly receives a monthly salary of several million won, they often fail to control their increased spending. Seeing emotional cafes, clothes, and travel photos posted on friends' social networking service (SNS) feeds makes it hard to resist! Not only that, temptations like delivery food and hobbies they couldn't pursue as students are always lurking. The early career stage is an important time to plan for the future and to set financial goals and start managing financial resources in preparation for the many life events ahead. Let's learn some money management tips for early career individuals together with the Financial Supervisory Service.

Building Seed Money... Start by Saving on Coffee

# Yang Hanbin, who just graduated from school, is eager to start building seed money but laments that with an empty bank account, it's out of the question. She firmly resolves to save whatever money is left after spending, but the problem is that her unchecked spending leaves no money to save!

In such cases, it is better to reverse the order: save a fixed amount first and then spend the remainder. Also, if there are habitual spending items, try converting those expenses into savings. For example, if you save 10,000 won a day on coffee starting today and invest it in a compound interest savings account with an annual interest rate of 5%, the interest alone will amount to about 2 million won after 5 years, 9 million won after 10 years, and 43 million won after 20 years.

Starting is half the battle. By saving your coffee money today, you have taken the first step toward becoming a master of financial management. The importance of savings and deposits should not be underestimated. It is important because it helps develop the habit of saving without succumbing to spending temptations, and also because the magic of compound interest awaits even if the current interest rates seem low.

Einstein said, "Compound interest is the greatest invention of mankind." Compound interest means that interest is earned on the principal plus accumulated interest. The most important factor in the effect of compound interest is time. Therefore, compound interest is also called the "magic of time." Suppose four people aged 20, 30, 40, and 50 plan to prepare 100 million won by age 60 and invest in a product with a 5% interest rate. How much would each need to save monthly?

The difference in saving periods between the 20-year-old and the 50-year-old is fourfold, but the difference in the amount to be saved is as much as tenfold. As such, if you start building seed money early in your career, the magic of compound interest will cause your seed money to grow exponentially over time as interest accumulates on interest.

Now that you understand the greatness of compound interest, you need to choose the right financial product for yourself, but with so many options, it can be difficult to decide. In this case, visit the Financial Supervisory Service's financial consumer information portal 'Fine' and click on the 'Financial Products at a Glance' section to easily compare interest rates and returns of various financial products such as savings deposits and installment funds. Make use of this resource.

Managing Credit Scores Well... Not Just Getting Good Grades but Also Good Credit Scores!

# Go Giyeong, a junior employee, heard from a senior mentor at work that credit can be a valuable asset when needing funds for marriage or housing in the future. However, when trying to manage credit, she feels lost because she doesn't know which factors affect credit evaluation or how to manage them.

Financial companies use credit scores from personal credit evaluation companies as an important criterion when deciding on loans and other credit transactions. The higher the score, the lower the interest rate you can get, so managing your credit score is important.

You've probably heard that frequently checking your credit score lowers it. Is this true? Since October 2011, simple credit score inquiries have no impact on credit evaluation, so the idea that frequent credit score checks lower your score is incorrect.

If you have multiple delinquencies, which should you repay first to benefit your credit score: the loan with the largest overdue amount or the loan overdue for the longest period? Since longer overdue periods have a greater negative impact on credit scores, you should repay the oldest delinquency first when multiple delinquencies exist.

Also, multiple debtors may be evaluated as higher credit risks, so reduce the number of financial institutions you borrow from by consolidating loans. Even small but frequent delinquencies can lower your credit score, so use automatic payments for regular bills such as credit card payments and mobile phone installment fees to avoid credit score drops and the hassle.

Prioritize Enrollment in Protection Insurance... Start with the Most Needed Protection Insurance

# Jeong Gaeun, a new employee thrilled to receive her first paycheck, happily visited a bank branch to open a savings account to steadily accumulate her salary. However, the teller recommended a savings insurance product emphasizing its high guaranteed interest rate, and without much thought, Jeong Gaeun signed up for a 10-year maturity savings insurance. But three years later, when she needed a lump sum for marriage expenses, she had to cancel the insurance before maturity. Due to the nature of the insurance product, where contract fees and management fees are deducted from the premiums paid, she did not receive the full principal back and had to reluctantly cancel the insurance at a loss.

Unlike bank deposits, insurance products incur losses if canceled early, as the refunded amount is less than or sometimes none of the premiums paid. Therefore, when purchasing insurance, it is necessary to carefully consider your income and future financial needs. Early career individuals usually have low income and need to prepare large sums for marriage or housing, so it is better to prioritize protection insurance such as actual expense medical insurance, accident insurance, and disease insurance, which can be purchased with lower premiums, rather than expensive whole life insurance or long-term savings insurance.

Choosing a Primary Bank... Where Is My Favorite Bank?

# Lim Hyeonjeong, self-proclaimed queen of financial management and a 5-year working senior, holds various financial products across multiple banks, including deposits, savings, loans, funds, salary accounts, credit cards, and individual retirement pensions (IRP). People say that getting close to a bank is the first step to smart financial life, but is Lim Hyeonjeong, who is friendly with many banks, practicing the basics of financial management well?

Banks select preferred customers based on transaction performance and offer various benefits such as interest rate discounts and fee waivers on loans, deposits, currency exchange, and fund transfers. Therefore, rather than spreading transactions across multiple banks, it is advantageous to choose one primary bank and concentrate your transactions there. Especially, banks reduce interest rates based on customers' transaction performance, such as deposits, credit/check card usage, and automatic transfers when signing loan agreements. If you have financial transactions with other banks, concentrate your transactions at the bank where you will take out a loan to reduce loan interest burdens.

Life's time rushes at the speed of light and will soon take early career individuals into middle age. How you spend your early career can greatly affect your future 10 or 20 years from now, so don't delay applying the financial tips you learned today! For more information, visit the Financial Supervisory Service website and check the 'Life Cycle Financial Life Guidebook Volume 1: Early Career.'

Kim Gyuri, Team Leader, Financial Education Department, Financial Supervisory Service