Saving money is good and all, but let me be frank here. When your financial strategy is on par with a chipmunk hoarding acorns, I don’t see wealth and comfortable retirement in your future. That’s for the people who actively grow their money, and here’s why:
The Difference Between Investing and Saving
Saving money is essentially hoarding. There are more elaborate options, sure, like fixed deposits and all. But that said…it hasn’t come far from the days of mum cramming bills into a Nestle can.
Investing, on the other hand, is about growing your money. This is done by buying assets (e.g. property, equities, art) that either appreciate in value, or generate income.
A healthy financial approach requires both: You need to save AND invest.
You can’t rely purely on investments, because you can’t tell the dentist doing your emergency root canal to hang on for three years while your structured deposit matures.
But at the same time, you can’t just rely on savings either. That’s because of…
Inflation, Which Defeats a “Savings Only” Strategy
As economies grow, the prices of things go up. That’s why satay was one cent a stick in grandma’s time, but is almost a dollar a stick these days.
We can measure how fast prices rise (the inflation rate) with the CPI, or Consumer Price Index. Over the past years, we’ve had a CPI of around 4% in Singapore, sometimes reaching more than 5%.
That means every year, the general price of goods goes up by about 4% to 5%.
Now if you take a close look at your money, you’ll realize something important. When prices go up by 5%, the number on your bill doesn’t magically change to compensate.
Unlike the price of goods, the cold cash in your wallet (or the bills you’ve shoved into a convenient sock) don’t rise. It’s static.
So assuming a CPI of 4% over 10 years, the money you have will effectively be worth around 30% less by 2023.
And if you think keeping the money in banks helps, you have seriously overestimated them. A typical savings account grows your money by a microscopic 0.125% per annum, which is nowhere close to the CPI.
Even if you use a fixed deposit, you’re looking at rates of around 2% (varies between banks), which again doesn’t beat inflation.
So the longer you leave your money in the bank, the more you’re indirectly “losing”.
That’s why you want to invest in private property, where all you need is a capital of several hundred thousand dollars.
(Yeah, why don’t you just go get that from the ATM right now?)
Alternatively, you can pick something more accessible. Like equities.
Why Invest in Equities?
For starters, you don’t need huge capital. $1,000 is enough to get started (although most people set aside around $5,000 when they first start investing).
Plenty of products on the stock market can help you beat inflation. Singapore REITs, for example, often provide high yields reaching 9%. Some Exchange Traded Funds (ETFs) also pay out dividends, and provide returns of around 5%.
Or if you’re big on cash flow, there are perpetual income bonds, which give you regular payouts for as long as…well there’s a reason they’re called perpetual.
On top of that, equities are highly liquid. You can buy and sell them at the drop of a hat. What happens if you’re in an emergency? You can’t get on the phone and cash in your shoebox apartment in 10 minutes. But you can with stocks.
You can also…
Boost Your CPF With Equities
Let’s say you rely heavily on your CPF to retire (which, by the way, is as clever a plan as using UHU glue to fix an airplane engine).
Your CPF grows at around 2.5% (ordinary account), and 4% for the special account. Not an impressive showing, against Singapore’s high inflation. The good news is, you can boost it by investing your CPF money.
If you have more than $20,000 in your ordinary account, and more than $40,000 in your special account, you can invest a portion of it in stocks. Putting that money in something like ETFs will allow it to beat the usual 2.5% interest.
True, the money will still be stuck in your CPF. But your pension will last longer, and you’ll get a bigger lump sum come your draw down age.
For more details, contact a broker or visit the CPF website.
But Isn’t the Stock Market Complicated and Dangerous?
So are power tools in the wrong hands. The stock market can be complex and ruinous, if you play the trading game.
But I’m not suggesting you buy and sell stocks like a trader. Leave that for the speculators, and the red faced people yelling about sell signals, and where have their heart pills gone this time.
It’s easy to be a passive investor.
Products like REITs, ETFs, and bonds don’t require you to actively buy and sell. You can choose to buy only, if you understand the risk and rewards involved. And then sit back, and watch the dividends roll in. You don’t need to worry about complicated graphs or market timing.
This Year, Give Equities a Try
Set aside a bit of money ($1,000 to $5,000), and try investing in equities this year. I’m sure you’ll find it’s not as complicated as you imagine.
Remember that stagnant money is lost money. And that investing isn’t just for “nice
And the sooner you start investing, the bigger your pot of gold at the end.
Decided you want to begin investing? Before you start, you need to determine your risk appetite and how much you can tahan when it comes to market swings. Read our next article in the series on determining what kind of investor you are.
A MoneySmart Investment Series in collaboration with SGX
This is the first of a 6-part series, focusing on investment for beginners. For more on starting your investment plans, like SGX on Facebook . Over the next few weeks, we’ll be introducing you to the most basic elements of the stock market, and how a non-expert can still profit from it.
How do you prefer to invest? Comment and let us know!
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