5 Key Factors Singaporeans Miss Out When Managing Their Own Finances

Recently, Singapore has fallen to sixth place (second in previous year) according to the MasterCard Financial Literacy Index which covers three components: Basic Money Management, Financial Planning and Investment.

The main reason for the decline is due to a drop in consumers’ understanding of basic money management. This is not surprising even though Singapore is a well-educated and developed country as there is a lack of formal education on financial literacy in schools.

Financial Literacy can be made simple. Let’s explore 5 very simple areas where we can look at in order to improve our financial literacy.

1) BUDGETING

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Have you ever wonder why you always ended up with very little money left before your next pay check? Or have you ever thought about what had you spend on at the end of every month? The keyword here is Budgeting!

Most people do not budget for their expenses and tend to overspend before receiving their next pay check. These people do not have any idea on what and where they had spent their money on and ended up repeating the same mistakes months after months, sometimes incurring credit card debts in the process, resulting in additional expenses for future months.

Budgeting may sound like a very boring and tedious process. But it is through budgeting, we are able to set an expectation on what we will be spending on in future and being able to analyse our spending. We will be able to keep track on what we had intended to spend on, against what we had actually spent on, and in the process identify any particular expenses that require special attention. This will allow us adjust our spending habits accordingly. In a very ideal situation, you will end up spending much lesser than you had expected because you are able to control your expenditure, and this in turn will allow you to save more. And when you are able to save more, you are able to use these savings to pamper yourself. Now, who say budgeting is still boring?

2)      A DOLLAR SAVED IS A DOLLAR EARNED

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Costs of living have generally increased year after year due to inflation. A bowl of noodles cost $2.00 20 years ago, but these days, it cost at least $3. Can you imagine how much this bowl of noodle will cost 20 years later?

Even though costs of living have increases, but by doing some minor changes in our lifestyle, we will be able to enjoy greater savings by spending lesser. One simple example that can be done easily is to ensure that all electrical appliances are switched off when not in use. You will be amazed by the substantial amount of savings you can achieve. Some other options are by reducing any unnecessary expenses such as cutting down on the use of taxis and take the buses and trains if possible or stop drinking Starbucks. Food for thought – is it really worth it to spend approximately $7 on just a cup of coffee?

Another point to explore is that we always have the urge to buy stuffs such as a branded bag, a new car or even go on long vacations. However, most people are not aware that these urges are actually instant gratification in the making. It is a psychological mindset that makes us feel good by buying those stuffs at that very point of time. However, we will only realize much later that the money could have been put to better use if we were to spend them much later. For example, instead of buying a branded bag worth $2,000 on impulse and feel good now, you could have invested the $2,000 instead. The long term returns from the investment will outshine whatever good feelings you may feel now by allowing you to retire comfortably in future.

3)      INSURANCE

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As the old saying goes, “If you fail to plan, you plan to fail”. Getting insurance is one of the most important planning in life as it will definitely give us a peace of mind, knowing that money will be available to protect and support your loved ones in the event something unfortunate had happened to you.

Many people are not willing to get insurance as they felt that it is a waste of money as they do not get to see any immediate visible benefits. On the other hand, could you imagine the pain your loved ones will have to go through if you got into a serious accident or die and you do not have any insurance? On top of the emotional pain they have to go through, they will also need to experience additional financial burden as hospital bills are not cheap and a possible loss of future income due to injury or death.

For example, hefty hospitalization bills will be the last thing on your mind should you be diagnosed with cancer if you had purchased insurances covering critical illnesses and hospitalization plans. You can focus on recuperating instead of worrying on how to pay the bills. Similarly, in the unfortunate event that you had passed away, and had previously purchased a life insurance, your loved ones does not have to worry about any money issues (such as funeral expenses; loss of income) in the short term as the insurance payout will be able to take care of that.

4)      INVESTMENT

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As we all know, there are many risks and rewards associated with investing. While there are several successful stories of people making a fortune via investments, there are many more stories of people losing all their hard earned money in investments.

In simple context, investing allows us to grow our money at a faster rate than just putting our money in the bank, thereby beating inflation. However, in complex terms, investing could be very confusing by the various terms used such as fundamental analysis, technical analysis, valuation, Price to Earnings Ratio, Return of Equities, Value Investing, just to name a few.

Not many people are aware that there is one very simple method of investing. That is by buying Straits Time Index (STI) Exchange Traded Funds (ETF). STI measures the performance of the Singapore stock market based on a basket of the 30 blue chips stocks, which includes, Singtel, SPH and DBS. By buying the STIF STF, you are effectively buying the top 30 companies in Singapore. As STI only focuses on the best 30 stocks in Singapore; any companies who are not performing will be removed and be replaced with a much better company. The STI ETF average annual returns (including dividends) for the last 10 years are approximately 8%. This meant that a $10,000 worth of investment will grow to $21,589.

5)      EMERGENCY FUNDS

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What will you do if you are retrenched one day and are unable to find a job for the next few months? Will you be worried about your daily expenses? And because you have no income/money, are you able to put food on the table so that your children will not go hungry? Will it be a lot easier if you have managed to set aside a lump of money to tide you over this tough period?

We are always not saving enough for a rainy day. Therefore, it is critical that we set aside some funds strictly for emergency use only. Some examples of emergencies include unforeseen medical expenses, retrenchment or any other major expenses such as wedding and car accident. The objective of the emergency funds is to ensure that we have sufficient cash on hand to use instead of relying on credits or borrowed money in the event of any emergencies.

There is no magic formula as to how much money one must have for emergency funds. A good guideline is to keep at least 3 to 6 months of our monthly expenses. It is important to ensure that these emergency funds are kept in a separate (and harder to access) savings account to avoid the urge to use them under normal circumstances. Lastly, we must not use the emergency funds for any forms of investment as we will be putting the money at risk and making it even harder to retrieve or even losing part of the funds in the event of an emergency during a financial crisis.

Rais Bin Mahmud

Project X Team

P.S. If you are looking for returns of up to 15%-20% annually, on your capital, check this out.

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