Too busy to attend a financial planning seminar and plan for the future?
We have done the homework for you and distilled the collective wisdom of industry experts from GIC, OCBC Bank, and Providend to just five easy-to-follow points.
1. Inflation kills
Not doing anything with your personal finances, or simply placing your savings in a regular bank savings account, is a surefire path to disaster.
This is because the low interest rates offered by typical savings accounts are insufficient to offset Singapore’s rate of inflation, which averages about 2-3% per year.
Tay Yan Ling, GIC portfolio manager, used the example of mee pok, a popular local noodle dish. In 1997, when Tay was growing up, a bowl of mee pok cost her $1.50. Today, it costs roughly $3.
Which also means that if you had saved $1.50 in 1997 in a bank that gave anything less than 3.5% interest per year (which is practically every bank, btw), you would not even be able to buy a bowl of mee pok today.
2. Start early and take advantage of compounding
Tay stressed the fact that starting young is very important, because the power of compounding is immense. She cited a chart that showed how, if you want to have $1 million at retirement (assuming a 6% rate of return), you only need to save about $360 a month if you start at age 20.
Compare this to $990 a month if you only start at age 35, and $1,435 if you wait till age 40.
3. Invest affordably
What exactly does affordable mean?
Lee Yong Chye, a portfolio manager at GIC, sees affordable investments as those that incur minimal transaction costs. Examples include exchange-traded funds (ETFs, for short), which tend to charge significantly lower transaction costs than managed funds.
This echoed Samuel Tsien, Group CEO of OCBC Bank’s view that one affordable way to start investing is to look at regular savings plans such as the bank’s blue chip investment plan, which allows retail investors to invest in SGX-listed blue clips with as little as $100 a month.
Don’t underestimate transaction costs — they can build up over time. The more you spend, the less you have to invest.
A second aspect is time. After all, time is money. If you are investing in something and it takes up too much time, is it really worthwhile?
Lee uses the example of investing in a private/non-listed company versus investing in an ETF. The former requires a heavy and ongoing investment of time and effort in understanding the business model and capabilities of the management team etc before making a decision. Investing in an ETF, on the other hand, is relatively straightforward and need not require constant monitoring.
4. Learn by doing
Tsien believes that the best way to learn is simply by starting. Time spent in investing can indeed be worthwhile, so long as one uses it as a learning opportunity. This can be in the form of gaining a better understanding of the financial markets and investment products, or even about the underlying industry that one is investing in.
This is because, more often than not, it is only once you’re invested in an endeavour, that you will then feel more inclined to pick up the practical knowledge that will help you do well in said endeavour.
“If you stay on the outside and never do it, you will never learn.”
5. Buy insurance, but only buy what you need
The role of insurance is protection, not growth.
And while whole life insurance plans may sound like an appealing idea, you have to consider the opportunity costs carefully.
While whole life insurance offers protection and peace of mind for life, Christopher Tan, CEO of retirement financial advisory firm Providend reminds young investors that such plans are costly and there are alternatives for protection purposes, such as term insurance.
The key is to understand your own income replacement needs in the unfortunate event of death, disability, or illness. For example, because disability and illness can render you unable to work, it is important to have the necessary insurance to replace this lost income for the time that you are unable to work. This is especially so if your children are not yet of working age and cannot support themselves financially.
Tan thus recommends that you ask yourself three questions before considering an insurance plan: 1) How long do you need it for? 2) How much coverage do you need? 3) What type of coverage do you need?
The views made by the speakers are purely personal ones, and are in no way representative of the institutions they are with.
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