Singapore Savings Bonds: A Practical Guide for Beginners

One question I’ve received after publishing The Newbie’s Guide to Budgeting is: “I tend to spend every dollar I see in my bank account, are there any alternatives where I can park my money so I can’t spend what I can’t see?” While there are many options available, the most indubious answer is to put our money somewhere with high liquidity (ability to withdraw anytime). This is especially important if we are saving for rainy days and/or any big purchases in the near future. In addition, according to a study by trading economics, the current annual core inflation in Singapore is 1.8%. Thus, to protect our capital from depreciating over time, we should look to park our money somewhere with high interest rates, preferably >1.8%.

Introducing Singapore Savings Bonds

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Image from Singapore Government Securities

What is a ‘Bond’

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. -Investopedia

How Bonds Work

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date). The interest rate, called the coupon rate or payment, is the return that bondholders earn for loaning their funds to the issuer. -Investopedia

In the case of Singapore Savings Bonds, the borrower is our Government and they pay the interest rate (coupons) every 6 months.

Is there any risk?

All bonds come with risks and they are measured with a Bond Credit Rating. SSB scores a rating of AAA for Moody’s, S&P, Fitch and R&I. According to the credit rating description, the obligor has an EXTREMELY STRONG capacity to meet its financial commitments. This means that the investment is EXTREMELY safe.

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SSB’s Credit Rating, Image from Singapore Government Securities

How does it work? What are the returns?

Every month, the SSB website is updated with the following month’s bonds (November 2018 will show December 2018 bonds etc). Interest rates change every month and you can purchase the bonds anytime within the application period stated on the website. Once your application is successful, the bonds will be credited to your CDP account on the following month. These bonds can be sold at any time in the event that you need money urgently, making SSB one of the best liquid assets to own.

As we hold the bond towards its maturity of 10 years, the interest steps up every year. Taking this month’s (November 2018) issue, i.e. applying December 2018 bonds:

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Dec 2018 Bonds, Image from Singapore Government Securities

As shown in the table above, the longer we hold the bonds, the higher the interest earned. The interest from 1 to 10 years is between 1.89% to 3.04%, with an annualized return of 2.57% after the maturity period of 10 years. That’s very impressive for a risk-free investment! For comparison, the guaranteed interest for short term (5 years) endowment plans issued by insurance firms ranges from 2% to 2.7%. Fixed deposit ranges from 1.4% to 1.9%. However, I must emphasize that SSB comes with no penalty should we withdraw before its maturity, making it a good place to store our cash for short term saving goals or in times of emergency.

Returns in dollars ($)

Taking this month’s bond for example: $10,000 invested in December 2018 bonds. Here’s how much we would’ve earned by Dec 2028.

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Returns for $10,000 invested in December 2018 bonds
SSB Dec
You can calculate your potential returns using their interest calculator.

Keeping the bonds to maturity would earn us $2,592, about an average of $259 additional income every year!

A couple of notes: 

1. Yearly interest is credited into your bank account every 6 months, twice a year.
2. Interest is not compounded (You can read about compounding here), you cannot reinvest in the same Bonds but can choose to reinvest in new bonds by purchasing bonds for that current month yourself.
3. You can apply for SSB with a minimum of $500, and in multiples of $500. The total amount of Savings Bonds held across all issues cannot be more than $100,000.
4. There is a one time charge of $2 when you buy and sell bonds.
5. Once the bonds are applied and approved, the interests are locked-in. Application for the following month’s bonds does not affect any of the previous bonds.

Sounds great! How do I apply for Singapore Saving Bonds?

Step 1: Opening a Central Depository Acocunt

First of all, you need a Central Depository Account (CDP account). A CDP account is similar to a bank account. But it is for Equities (Stocks, ETFs etc) and fixed income instruments (Bonds, Treasuries etc). Singapore Savings Bonds you bought will be stored under your personal CDP account. Dollars and Sense has written a step by step guide on how to create a CDP account in Singapore.

Tip: You can create through the firm you are planning to open a brokerage account with. I created my CDP account through DBS vickers, killing two birds with one stone.

Step 2: Linking your bank account

Secondly, you would need a bank account with DBS/POSB, OCBC or UOB and the CDP account must be linked with the bank account through Direct Crediting Service (DCS). Now you are ready to apply for SSB!

Step 3: Applying for SSB

There are two ways, applying through ATM or Ibanking. Because I bank with DBS/POSB, and this is how their users can purchase SSB. (Credits to POSB website)

Applying through ATM:

  • Insert your ATM/Debit/Credit Card and key in your PIN.
  • Select More Services and your preferred Language.
  • Select ESA-IPO / Rights Appln/ Bonds /SSB/SGS/Investments.
  • Select SGS / Singapore Savings Bonds, followed by Singapore Savings Bond Application.
  • Confirm the on-screen T&Cs and select the Bond that you wish to apply for.
  • Verify the Bond Details and enter your Application Amount. Press Enter to proceed.
  • Select your Debiting Account.
  • Select your Nationality and verify that your CDP Account Number is correct.
  • Check through all details and select Confirm to submit your application.
  • Collect your Card and Receipt.

Applying through iBanking:

  • Log in to digibank Online with your User ID and PIN.
  • On the Top Menu, under Invest, click on Singapore Government Securities (SGS).
  • Select Singapore Savings Bonds Application and click Next.
  • Select the bond, tick to acknowledge the Agreement and click Next.
  • Enter your personal particularsamount to purchase and select your debiting account. Click Next.
  • Verify your application details and click Submit to confirm your application.

Note:

  • A non-refundable transaction fee of S$2 will be charged for each application request.
  • Application via digibank Online is only available on Monday to Saturday; 7:00am to 9:00pm (excluding public holidays).

    TLDR: Why should we apply for Singapore Saving Bonds?

    1. It doesn’t require thousands of dollars. $500 is enough.
    2. High liquidity compared to fixed deposits and endowment plans.
    3. Interests beat fixed deposits and short-term endowment plans (occasionally, depending on the current month’s interest rate).
    4. Safe and protects our money against inflation.
    5. Suitable for all forms of savings, whether it is saving for a short-term goal or even retirement.
    6. Compared to a regular bank savings account, SSB doesn’t require us to fulfil any requirements (credit card spend etc)

Conclusion

Singapore Savings Bonds is a safe alternative to put our hard earned money to work. Although the interest changes with each application period, it usually provides higher returns than most fixed deposit accounts and short-term endowment plans. In addition to higher interest rates, SSB is flexible and can be withdrawn at any time with no penalties. In my next article, I’ll show you a simple hack to maximize our savings using SSB. Thank you for reading and happy building your layers!

*Featured image from SGS

Continue reading “Singapore Savings Bonds: A Practical Guide for Beginners”

The Magic of Compounding

If you don’t earn much and can barely pay your expenses, the idea of saving is ludicrous as just saving $30 or 1% of your monthly income may seem small and irrelevant. The old me would rather indulge in a good meal at Chomp Chomp than to save it in my piggy bank. Why would I even bother?

Because Rome wasn’t built in a day.

Everyone, including myself, has to start somewhere. Small pieces of bricks put together will eventually form a fortress. Our financial situation will improve over time and even the smallest amount of savings will definitely benefit us over the long run. This is largely due to the power of compounding.

Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period. -Investopedia

The Math Behind Compounding

Power of compounding proves that time is our greatest asset when it comes to building wealth. Here’s the mathematical breakdown on a fixed deposit account.

Formula (1)

For illustration purposes, let’s take $100,000 initial deposit with 5% annual interest and compare the differences between saving it for 5 to 40 years.

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From the graph above, it’s shown that the 5-year growth increases with the number of years deposited, causing an exponential effect. This proves that the longer you let your money compound, the better. Which is why investors always like to say:

Time in the market is better than timing the market.

However, the above formula represents interest compounding at a continuous rate. Realistically speaking, interest doesn’t compound every day and second. A high interest savings account such as DBS multiplier compounds every month while an endowment plan offered by banks or insurance companies compounds 1-2 times a year. To put it into simple terms, the more times the interest money is credited annually, the better. A 2.5% interest savings account that credits twice a year is better than a 2.5% interest savings account that credits annually. So do remember this when you are considering two or more saving plans at similar interest rates!

Effect of increased compounding periods per year

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As you can see, having interest credited twice a year is definitely beneficial. Although the returns are small and negligible during the first few years, they could really ramp up over the long run and this difference would mean having an extra holiday with your family or not!

The actual formula for compounding is shown below:

FV = PV * [1 + (i / n)] (n * t), where:

  • FV = future value
  • PV = present value
  • i = the annual interest rate
  • n = the number of compounding periods per year
  • t = the number of years

Case study

Now that you know compounding is basically earning interest on interests and time is our greatest friend, let’s take a look at a typical scenario.

Johnathan and Mike have the same retirement goal of wanting to retire at 65 with $1,000,000. They both, however, led very different lifestyles. Johnathan is a smart saver and started saving $500 every month since the age of 25. Mike led an active lifestyle and was willing to double Johnathan’s savings when he hit 40 to compensate the loss in savings during his mid-20s. They both put their money in a portfolio which compounds yearly with an average return of 7%. Let’s take a look at their retirement accounts at 65.

mike vs johnathan (1)

Annual addition Years to grow Interest rate Compound
$6,000 Johnathan: 41 Mike: 26 7% 1 time annually
Total amount invested ($) Final amount ($)
Mike 312,000 881,806
Johnathan 246,000 1,377,793
Difference 66,000 -495,988
% Difference Mike invested 27% more Mike had 35% less

You must be wondering, how did Mike end up with 36% (496k) lesser than Johnathan despite saving 27% more? Ladies and gentlemen, this is the power of compounding! At 7% interest rate, taking the rule of 72, it takes roughly 10 years to double his capital. $6,000 would turn into $12,000, then $24,000 then $48,000 and finally $96,000 over 10, 20, 30 and 40 years. It was the final 1-2 doubles that really mattered and widened the gap between Johnathan and Mike.

“I’ll start saving next year”

Sounds familiar? Although there is little harm by delaying a few years, we could miss out on great returns the later we start. Here’s the graph showing Johnathan’s returns should he start at ages 25, 26, 27, 28 and 29.

savings at different age (2)

Age 25 to 26 26 to 27 27 to 28 28 to 29 Average
Difference ($) 96,136 89,847 83,969 78,476
Difference (%) 93.02% 92.99% 92.95% 92.92% 92.97%

On average, every year Johnathan delays reduces his potential returns by ~7%. Of course, this is not meant to scare any of you, but I hope these figures and graphs show you the importance of starting today. When people start to save, it often seems slow and pointless because things don’t change overnight. But as time passes, the rate of absolute change gets faster and faster and this is why the power of compounding is magical.

Before I finish, I would like to highlight that albeit the advantages of starting early, we should’t have a one-track mind and only focus on growing our wealth. If you’re like me and enjoy spending on movies, concerts and cafes, you don’t have to overly sacrifice your lifestyle just to lead the ‘suffer now, enjoy later’ life. Remember, progress is best made in a moderate and sustainable manner.

The future is unpredictable, so we should find a good balance between saving and spending. The best way is to set a goal and live within our budgets. I’ve covered this in my previous article: The Newbie’s Guide to Budgeting.

Lastly, if you don’t know how to find consistent returns on your savings and investments, my suggestion is to talk to your trusted financial adviser. I’m a huge fan of diversification and although I prefer to manage my own portfolio, I also feel the need to allocate a portion of my savings in a high growth investment plan. This protects me from the risk of losing all my savings if my investments were to turn ugly. If you are looking for an agent that comes from an investment banking background and managed to bring consistent returns for his clients, you may contact me at thefivelayers@gmail.com and I’ll link you up with him. Thank you for reading and happy building your layers.

The video below summarizes this article in two minutes.

*Featured image from Business insider

Continue reading “The Magic of Compounding”

My Top 3 Budgeting App Picks

In my previous article on “Budgeting for Newbies“, I introduced the golden rule of budgeting and showed how we can optimize our budget to suit our goals. The best way to prepare ourselves from upcoming price and GST hikes is to keep our spending habits in check by creating and sticking to a budget plan.

However, creating a budget plan is only the easiest part. What makes it difficult is having to track our expenses. Many tried but gave up after a period of time. Luckily for us, technology caught up and as we transition to a cashless society, tracking our expenses will be a lot easier.

Here are my top 3 picks:

1. DBS/POSB NAV

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*Image from DBS

DBS/POSB recently launched their GPS NAV, tracking the cash flow from our accounts. If you only bank with DBS or POSB, this would be the perfect tool to monitor cash flowing in and out of the account when you make cashless payments.

On top of that, it comes with a life goals tracking tool called ‘Sail’ which allows users to input and track their goals. It is really cool to play around with to see how much we need when we retire based on our current spending.

DBS NAV.JPG

However, the calculation from their insights aren’t the most accurate and I feel there is room for improvement. When I transfer money from my personal POSB Savings account to my own Multiplier account, it is considered as “Money out”. Here’s my average money out when I transferred between accounts multiple times (Just for experimental purposes)

dbs insights

But if you don’t do frequent transfers between accounts, this app would be the best “lazy” app.

Pros: Automated tracking, simple interface with goals tracker, perfect for the lazy tracker.

Cons: Requires the user to log into iBanking every time they want to check their progress, only limited to DBS/POSB (But able to manually input non DBS/POSB “money out”)

2. Seedly app

New-App-Launch.png

*Image from Seedly

If your transactions are with different banks, tracking becomes a lot trickier as DBS/POSB NAV can’t track those transactions or even help us sort them into various categories. Thanks to Seedly, there is now an app that allows users to sync accounts across multiple banks, making it convenient to track our spendings.

seedly app.jpg

Pros: Able to track transactions from multiple banks, simple interface, comes with an input button for transactions paid in cash.

Cons: Requires the user to sync their bank accounts manually which includes logging into iBanking and entering OTP.

3. Money Manager

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If you are like me and enjoy looking at graphs and numbers, this is the app for you. The categories are fully customizable and allow users to delve deeper into which areas they are overspending on.

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Over here, you can see I spend a lot on beverages and I might want to cut that next month.

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I really like the fact that it comes with a ‘goal post’ which allows the user to see if he or she is on track.

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Classic and simple to use…

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This app doesn’t allow us to sync with our bank accounts. That means we need to cultivate a habit of tracking our expenses manually. Thankfully, it allows us to enable a shortcut on their notifications for quick and easy inputs.

Pros: Crunch numbers for those who enjoy analysis, day to day goal post, customizable categories.

Cons: Manual input of every expense.

These are my top 3 budgeting and money tracking apps. Let me know what you think and if you have a better app, feel free to share and I’ll definitely look into it! Thanks for reading and happy building your layers!

*Featured image from Singapore Business Review

Continue reading “My Top 3 Budgeting App Picks”

The Newbie’s Guide to Budgeting

Working more than 40 hours a week is daunting for many and we often resort to rewarding ourselves with a great meal over the weekend. Couple that with the active social lifestyles of millennials, controlling our expenditures on a daily basis can be difficult. As the cost of living continues to rise, the best way to prepare ourselves is to keep our spending habits in check by creating and sticking to a budget plan.

The Savings Layer

This introductory article talks about the different layers of wealth. Savings can be broken into two parts:

  1. Getting the most value from day to day purchases through cash backs, discounts etc.
  2. Putting aside a sum of money in a bank for future use.

The focus of this article is to introduce the golden rule of budgeting and how it can be fine-tuned to match our current financial situation.

50/30/20 Budgeting Rule

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*Image from The Balance

This golden rule allocates a portion of our take-home income (after CPF) into 3 different categories: 50% on needs, 30% on wants and the remaining 20% for savings. It’s as simple as that. However, I’m not a huge fan of this allocation as it doesn’t seem to be in sync with the goals of an average fresh graduate. According to the news, the median fresh grad salary take-home salary is $2,720. Following this rule means saving $544/month. If you have seen my goals, I’m targeting to save around $1,182/month and this doesn’t align with it.

Adding 13th-month bonus (assuming another 20% savings each year) and taking 2% annual pay rise, the average fresh grad takes about 7.4 years to save $56,750, equivalent to the average marriage & house renovations cost for each individual (excluding BTO downpayment). What happens after that? Savings go back to 0, leaving nothing in the emergency and retirement accounts.

The same concept applies when we have kids. According to an article by Business Times, 66% of parents are concerned about not having sufficient money to retire. Digging deeper, majority wish they had started saving for retirement earlier. This is why it is important to start early and let the power of compounding do its work, so we could take a breather and relax in the future.

However, if you are a working adult and have already made all your big purchases, then the above rule should work well if the 20% is solely for retirement. But I’ll always challenge my readers to find ways to increase their savings. No matter how financially savvy we are, there are always better ways to manage our expenses.

50/30/20 (Seedly version)

I came across an article by Seedly and they took the budgeting rule to another level.

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*Image by Seedly

Over here, 80% expenses on “needs and wants” are reduced to 50%. The additional 30% will be used to invest through the 3rd layer of wealth which focuses on growing our upcoming goals and retirement pots.

This is definitely a better approach for fresh grads like myself as I can build my retirement pot and prepare for my next big ticket purchase at the same time. The 20% savings will be focused on building my emergency funds (3 to 6 times of monthly expenses) before I divert it to accelerate my retirement pot.

Now you have a rough idea on the allocation, bear in mind that just because a budget plan works for the majority doesn’t mean it works for everyone. Let’s break into further details with a step by step approach to budgeting.

Typical Fresh Grad Example

1. Set a target ratio

Just because I introduced the 50/30/20 rule doesn’t mean you die die have to follow. Take some time and think. Some may prefer to save more and have a 40/40/20 ratio, some have more bills and expenses to pay and have a 70/10/20 ratio. Personally, I have my emergency funds ready, I do donations and give allowance to my parents, so my ratio is 60/30/10.

For the sake of this example, I’m sticking with the Golden 50/30/20 rule.

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2. Pay yourself first

interest

*Graph showing how much interests our student loans can add up to.

Set aside the minimum sum to pay our loans immediately after we receive our salary. This is a fail-proof way that prevents us from overspending and having to borrow from others just to pay our loans.

I couldn’t stress more on the importance of paying our credit card and student loans as bank interests could ramp up over the long run. Hence, the quicker we pay off these loans, the better. In fact, unless I’m very confident my annual returns on my investments will beat the interest on my bank loans, I wouldn’t even start investing and would rather focus my 30% (wealth allocation) on top of the $400 minimum sum. Taking the median fresh grad take-home salary, that would be $400 + 30% of $2,720 = $1216/month.

Note: If it is a credit card debt with 24% interest, I would allocate a much higher portion to pay the debt.

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3. Input your monthly expenses

Estimate your current monthly expenses. This includes bills, insurance premiums, food, transport, entertainment, healthcare etc. As long as money is leaving the bank account, it is considered an expense. If you can’t estimate your monthly expenses, try tracking it for a month using a budgeting app.

Note: Don’t forget to set aside a sum for income tax! Click here for rates.

Taking $1,200 (44%) for this example, there is 11% left for savings.

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4. Optimize it!

Optimization is important. It shows our current status and guides us to our goals.

To meet the 50/30/20 target ratio, expenses need to drop by 9% to push savings up to 20%. That means spending $250 less!

s4

What if I’m struggling to cut my expenses?

This is common and many struggle to adapt to sudden changes. Imagine if you decided to cut $150 from grab and another $100 from entertainment. That probably means you cannot afford to sleep an additional 30mins on rainy days that are so sleep-inducing or have 1-2 less drinking sessions with your friends! Similar to when one resorts to quitting smoking, those who quit cold turkey often fail and find themselves back to square one.

The solution? Progressive approach. From the stories I’ve heard, those who succeed don’t aim to cut 9% right away. They reduce their expenses by 1% each month and slowly but surely, they reach their targets. I’m sure there are better ways and would love to hear how you did it below.

Summary

The budgeting guide is easy to follow. It helps us spend within our limits and at the same time, it ensures we are saving enough for the future. However, one must not be too rigid with the golden rule as it differs for each individual. Always do proper planning and set realistic targets. Thank you for reading and happy building your layers!

*Featured image from WallStreetSurvivor

Continue reading “The Newbie’s Guide to Budgeting”

Understanding This One Concept Will Protect You from Going Bankrupt.

CASH FLOW

You’ve probably heard of the term ‘cash flow’, but don’t really know what it is. In layman’s term, cash flow is money flowing in and out of your bank accounts. Essentially, it’s subtracting your expenses from your income (salary + side income).

Cash flow into savings = Income – Expense

In this article, we will take a look at 3 different cash flow situations and how we can protect ourselves from bankruptcy.

1. Worst scenario

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The worst case scenario: Cash flow of some ‘wealthy’ people. Most of the time, they spend more than what they can afford. This is the worst case scenario because their savings are getting lesser as time passes. Eventually, they start borrowing money to pay the bills. Some even declare bankruptcy.

Just ask yourself: What would you do if you hit the jackpot and win a million dollars? If your answer is to buy a new sports car and/or upgrade your house while your monthly salary stays the same, I hate to break it to you but you have poor management of your cash flow. You are spending more than what you can afford. You may appear wealthy at the beginning because of this new lifestyle, but if it isn’t sustainable, slowly but surely, the one million dollars will deplete and you will end up in bankruptcy.

“The easiest way to avoid this situation is just to ensure your monthly cash flow is +++POSITIVE

And that’s it! It’s that simple, if you are spending less than what you earn, there is no way you will end up in a situation where you have to borrow money to pay your bills.

Here’s another question: Is an endowment or retirement savings plan considered an expense?

Ans: Some may argue that an endowment or retirement savings plan shouldn’t be counted as expenses. But if the sum of your loans, bills and savings plan still put you in this scenario, wouldn’t the resulting situation be the same?

2. Typical scenario

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“The typical scenario is to save what’s left from your expenses.”

A typical fresh graduate cash flow: With a take home salary of $2,800, you spend $2,400 on loans, bills and day-to-day expenses. Minus that and you save $400. It may seem like a huge leap from saving $1 a day during secondary school days, but is it really enough especially when we are living in the most expensive city in the world?

How much should I save then?

On the day I signed my employment contract, I asked myself: “How much should I save every month?”

I’m sure this is a very common question most of us can relate to. With many factors such as marriage, kids education, retirement etc to consider, we can never seem to hit the perfect number. If that sounds like you, chances are, you haven’t decided how much you need in the future and are just saving whatever is leftover from your expenses hoping it is sufficient for your future needs.

Taking the typical scenario of saving $400 a month – if we have a milestone ahead of us, let’s say getting married, given the median wedding fees of an average Singaporean which is $32,500, we need 81 months (6.8 years) to save that amount. Even if the fees are split between you and your future spouse, saving for marriage will still take approx 3.5 years. Bear in mind this is only for wedding! Now add in BTO, honeymoon and renovation costs….unless you are willing to settle for something less, saving $400/month may not be the ideal figure.

BE A GOAL DIGGER!

“Setting goals is the first step in turning the invisible into the visible” -Tony Robbins

I’ve done a simple calculation for us to estimate how much we should be saving each month to reach our goals.

Simple illustration

Below is a simple illustration on the expenses of an average Singaporean couple. This is a debatable topic as marriage costs vary for each individual. There are grants given to Singaporeans depending on their income and location of BTO. We also have the option of using our CPF to pay for our BTO. Thus, the actual numbers may deviate significantly based on the points above.

Assumptions:

aa (1)

You can download the goals calculator for free here.

You may wish to add more columns as you need and the download button is at the top right corner (just in case you can’t find it). With this tool and a little Google magic, we’ll be able to have a general idea on how much we should be saving each month.

From this example, the ideal savings amount is $1,182/month. And to the large majority of us, saving $1,182 monthly isn’t a small sum. Thus, I couldn’t stress more on the importance of spending within our limits. Play around with the goals calculator and see what works best for you. Afterall, we do not wish to fall under the “Worst scenario” category.

Other considerations

If you’ve read my first article, you’ll know that my ultimate goal for us is to retire comfortably by building the five layers of wealth. The earlier we start, the better. Thus, you may wish to consider setting a goal for retirement.

Emergency funds are equally important as we’ll never know when we might lose our income due to unforseeable circumstances (recession, health issues etc). With that in mind, we would also want to build up our emergency funds for rainy days.

These topics will be covered very soon because they form the core of our savings layers.

3. Best scenario

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“Increase your cash flow by budgeting and/or earning more money”

By now, you should know how much savings you need but don’t know how to increase your cash flow.

There are 2 ways. Remember this formula?

Cash flow into savings = Income – Expense

Reducing our expenses, increasing our income or both, will increase our cash flow.

For example, cutting expenses by $800 and earning $500 additional income will increase our savings from $400 to $1,700. That’s an increase of 425%! This not only ensures we are on track towards our goals, we also have additional cash to build on our investment and passive income layers, better preparing us for retirement.

But how? The simplest solution is to gamble save through budgeting, finding ways to cut down on our expenses (credit card rebates, shopback etc) and/or finding additional income.

In summary, with proper management of our cash flow, we will be able to protect ourselves from going bankrupt and with goal settings, we are able to work towards an ideal cash flow situation.

Thanks for reading and happy building your layers.

 

*Featured image credits: Mick Stevens/The New Yorker Collection


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