Saving smart is the key to good financial health – but where do you start?
Saving is not a sexy subject. It makes you think of penny pinching and budgeting. But let’s turn that frown upside down. Saving is your launch pad for financial health, enthuses Jerlyn Wong, an independent senior financial consultant from Finexis Advisory.
Here’s how to become a financial guru on the money you earn right now:
Start with a “rainy-day shelter”
Think short term – If you got retrenched, how long could you live on your savings? “You need six months’ worth of expenses on hand. To achieve this, set aside 10-30% of your salary into a separate chequeing account. You’ll have ready access to these emergency funds, and such accounts usually offer higher interest rates than savings accounts,” says Colin Clark, an independent financial consultant from The Henley Group.
Clear debts first – If you have debts that charge interest (like high-interest credit card or personal loans), pay them off as fast as you can to prevent interest payments snowballing.
TIP: “Even if you have debts, it’s still a top priority to build an emergency fund of at least a few thousand dollars. Because one way you get sucked into debt is by getting caught without an emergency fund,” notes Laura Adams, author of Money Girl’s Smart Moves to Grow Rich, $26.95, from Books Kinokuniya. So how do you do it? Jerlyn advises, “Split the difference. So if you can save $500 a month, for example, put $250 towards paying off the debt, and the other $250 in your emergency fund.”
How much are you worth? Your net worth is the difference between your earnings and outgoings or debts. But few of us even know our net worth. “Working out a budget is one of the financially healthiest things you can do. You see where your money is going, sort out your spending priorities, and gauge how much you can afford to set aside for future goals,” says Richard Swainston, an independent financial consultant from The Henley Group.
TIP: After you’ve paid off your debts and set up your emergency fund, keep saving – but use this money to invest. “Consider putting 30% of your income towards short-, mid- and long-term goals. The allocation is up to you, but a general ratio to follow is 10:10:10,” Jerlyn says.
Now build your “dreamweaver” funds
Think about what you want to do in three to 10 years – that’s what mid-term savings are for. This money is for projects that make your life meaningful – like further studies or a family trip.
A cruise or a condo? Saving works best when you have a specific goal in mind, be it a waterside condo, your own business or a cruise in Alaska. So think about your life in the future and what you want. Sean explains, “Do your research to discover the cost of your dream – it’s often less than you imagine. This lets you set a schedule for achieving your plans. Divide up the total cost by your time span to arrive at how much you need to save every month.
Ask this question – It’s not the big purchases that prevent saving, it’s those $5 lattes and $10 dry-cleaning bills that all add up. It’s even worse if you pay with plastic or a no-cash method like PayWave – studies show we spend more when we don’t physically see the money leaving our hands! So before you buy, ask yourself this question: “Is the benefit of purchasing this now worth the ‘cost’ of delaying my dreams?” A few seconds pause can help you stay in control. Keep your dream in mind: “Ideally, you should save as much of your income as possible. For life’s extras, like vacations, use your bonuses,” Jerlyn suggests.
TIP: Seeing you say no to immediate desires helps kids learn useful life skills. In the 1970s, researchers at Stanford University studied toddlers and gratification. They told the kids they could have one cookie now, or wait 15 minutes and get two cookies. Then they tracked the toddlers as adults, and found that those who could wait for the extra cookie did financially better in later life. Why? Because they knew waiting a little (or saving for the future) pays off.
What’s your risk appetite? Ask yourself, “Can I afford to leave my savings in one place for years, so they can ride out the ups and downs of the market? Or will I need them in a few years? Am I willing to spend time keeping track of it, or do I want a ‘set it and forget it’ system?”
Managed funds run by professional planners’ pool your money together with others so they can buy and sell assets on your behalf. This can potentially bring you higher returns, but you’re not protected when markets take a dive now and then, and there are also high management fees to factor in.
If you need access to your money before that, fixed deposits in banks tend to be safer, but they also pay less interest. Endowment plans offer some protection by giving you guaranteed sums, but make sure they are at least the same amount as the total sum you’ve put in or more, to counter inflation rates.
Since these are your life savings, ask questions and clarify how much you can get out of it before committing to anything.
Retire in style
After 10 years of investing, you’ll probably want to see a chunk of cash – and you’ll be thinking about what to do when planning for retirement.
An HSBC survey reported that 41% of 1,000 Singaporeans have never saved for their retirement – we often assume our CPF savings plus the value of our home will be enough to fund our retirement. But it probably won’t be.
As a general rule of thumb, you’ll probably require about two-thirds of your last drawn income to live on when you are retired. Experts suggest these tactics: Factor in an annual inflation rate of about 4% for food, and 6% for education and medical costs.
“Get protected against life’s nasties – ”It’s crucial to get term insurance for the primary breadwinner in your family, especially if you have children,” Richard stresses. Term insurance covers you for a period of 10, 20 or 30 years, and is mainly used for income protection. Life insurance can also be used to build savings because it comes with a guaranteed sum at the end – this can be used to pay off the rest of the insurance should you be unable to work, or after you retire. However, it does come with higher premiums and associated insurance fees – so know how much you are able to pay before committing.
It’s not always about property – You often hear of Singaporeans who’ve built up a portfolio of rental properties, with some agents “guaranteeing” returns on rental properties. But, in reality, nothing in life can be guaranteed. So do your homework. “Check the location, the economic and population growth of your property’s area, and if there are infrastructures like transport and supermarkets,” explains Sean in Financial Joy.
Look for properties that will give you a 10% net yield after you deduct from the total projected revenue of all your expenses, including mortgage payments, upkeep of the property, agent’s and any other legal fees. Then divide your net annual income by your property value to check if it meets your yield criteria. So if you paid $300,000 for an apartment, you should be making at least $30,000 a year in net rental income after your expenses.
Is it time to move the eggs in your investment basket?
The closer you are to retirement, the more you should shift your investment portfolio to minimise risk. If you’re approaching retirement age, try not to invest aggressively in stocks, since you have less time to recover from setbacks. “As a rough guideline, subtract your age from 100 and use that number as the percentage of stock to have in your portfolio,” Laura suggests. So a 45-year-old should have 55% of her investments in stocks, with “the remainder in various asset classes like bonds, real estate and cash”.
By Madeline Lin, Singapore Women’s Weekly, February 2014