Needless to say, money is damn important in Singapore. From the day you’re born until the day you die, money will always play a huge role in determining how good your quality of life was, is, and will be.
That’s a pretty profound realisation isn’t it?
I’m not going to say that money is everything because it’s not – you can be filthy rich but still be utterly miserable.
But I will say this – being financially literate can help you improve your quality of life. Yes, being financially literate will help you make good financial decisions that grow your money.
But it’s also about avoiding painful financial mistakes that can set you on the path to financial ruin. Either way, it sure as hell doesn’t hurt to improve your financial literacy!
Here are some financial literacy factors you must understand to survive in Singapore:
#1 Understand the Importance of Having a Budget
A budget is the foundation that keeps your financial house from crumbling. In short, it’s a clear financial statement showing you how much you earn, how much you spend and how much you’re saving every month.
Creating a budget sounds simple enough – just gather your financial statements (banks statement(s), credit card statement(s), utility bills, loan statement(s), etc.), tally your total income vs. total expenses and you’ll know how much you can save every month AND where you can make adjustments to free up more cash flow.
Having a budget makes it easier to appraise every major financial decision with the simple question, “can I afford it with my current budget”?
Sadly, too many Singaporeans think that they can get by without one or make excuses to avoid creating one. After all, if you can’t keep track of how much you can afford to spend every month – you’re more likely to overspend!
If you’re not sure how to go about creating your own budget, you can read this to find out.
#2 Understand the Importance of Building an Emergency Fund
Another potentially huge financial mistake that many too many Singaporeans make is not having an emergency fund.
I’m not kidding. According to one financial advisor we interviewed, nearly 9 out of 10 Singaporeans he met DID NOT have an emergency fund!
Yes, if you’re asking yourself “what’s that?” it’s probably something you need to start building up ASAP!
An emergency fund is simply a sum of money that you save and set aside in a savings account. Ideally, you’ll want to save up an amount equal to at least 3 to 6 months’ worth of monthly expenses if you earn a fixed income and 7 to 8 months’ worth of monthly expense if you earn a variable income.
And as the name states, that cash is for emergencies ONLY – that means situations that are guaranteed to cost you some serious out-of-pocket cash such as retrenchment, injury or illness.
#3 Understand What Appreciating/Depreciating Assets Are
Think about this question for a moment – can you name any of your possessions that you’re positive will grow in value over time?
If you were thinking about things like your replica katana, Casio watch, DVD collection, LG HD TV or your car – I’m sad to say that they’ll all pretty much be worthless in 5 to 10 years due to something called depreciation.
In short, depreciation is a decrease in value of an asset over time. Sadly, depreciation will affect almost everything you purchase.
For example, if you purchase a brand new car, it will depreciate in value on an annual basis at a rate of 10% each year (called the “straight line” method of depreciation).
Meanwhile, appreciation on the other hand is the increase in value of an asset over time. Typically, items that are in high demand and are in limited or rare supply appreciate in value.
For example, if you purchase an Executive Condominium (EC) for $800,000 and the resale value jumps to $1.2 million in 10 years, it appreciated at a rate of 5% per year.
Other purchases besides property that have the potential to appreciate in value are art, vintage wine, vintage cars, vintage timepieces, stocks and other investment products.
Think about depreciation/appreciation next time you contemplate spending hundreds on an electronic device that’ll be obsolete in a year or two. Wouldn’t that cash be better spent on investments instead?
#4 Understand Your Home Loan (and What You Need to Do to Get One)
When it comes to property in Singapore, not understanding your home loan AND what you need to do to get a home loan can lead to confusion and major disappointment at not being able to get that Housing and Development Board (HDB) flat or private property you want.
Over the last several years, the Monetary Authority of Singapore (MAS) has implemented numerous “cooling measures” in an effort to keep property prices from rising to the point of becoming unaffordable and to prevent another subprime mortgage crisis from happening in Singapore.
As a result, it’s even harder to get a home loan today for several reasons:
- Your Mortgage Servicing Ratio (MSR) is 30% for HDB Concessionary Loans – This means that the maximum amount of income you can use towards servicing a home loan is 30% (ex. if you make $2,000 a month, you can only use $600 max for the home loan). So even if you earn $2,000 and can easily set aside $1,000 for an HDB concessionary home loan, it doesn’t matter because the MSR is 30%.
- Your Maximum Loan Tenure is Reduced to 25–30 Years – This means that if you take out a HDB loan (25 years) or a bank loan (30 years but at 60% LTV), you’ll have to make higher payment for whatever loan amount you borrow. Combined with the 30% MSR, the lower tenure makes it even harder to borrow more cash to purchase property.
- You Have to Deal with the Total Debt Servicing Ratio (TDSR) – This means that if your combined total debt obligations (student loans, auto loans, credit cards, personal loans and your prospective home loan) exceed a 60% of your income, you can’t take out a home loan. Also, keep in mind that the bank’s interest rate PLUS a stress test of 3.5% for residential properties will be used to test your TDSR to determine whether you can handle payments if rates increase.
#5 Understand Your Appetite for Risk When it Comes to Investing
Here’s the hard truth – if you want to retire comfortably, you’re going to have to invest to do it. Relying on your Central Provident Fund (CPF) account or on the TOTO/Singapore Sweep approach to retirement isn’t going cut it.
You’re going to have to invest.
Investment will take risk.
The amount of risk you take is ultimately your choice, but keep in mind there is no such thing as a “low-risk, high-return investment”.
If you want to build up your nest egg for retirement, you’re going to have to take some risk and you’ll also need to consider the following factors:
- Your Income: Having a higher income makes it “easier” for you to handle losses (and take more risk) whereas lower income makes you more averse to risk because every dollar is precious.
- Your Expenses: It doesn’t matter what your income level is if much of it goes towards paying your various expenses. The more disposable income you have, the more risk tolerant you’ll probably be.
- Your Savings: Not having adequate savings (3 to 6 months’ of expenses) is the greatest investment risk you can take. If you don’t have an emergency fund to help you in the event that you get retrenched or suffer an injury/illness, you should do that now!
- Your Insurance: Buying insurance is the best thing you can do to protect any wealth you accumulate through investing. If you’re covered by insurance, it’s easier to take a high-risk approach, but if you’re uninsured or underinsured, taking a lower-risk approach is better (until you get better insurance coverage).
- Your Age: Depending on where you are in the 4 Financial Phases of Life, if you’re younger you’re probably going to take more risk to build wealth as fast as possible. But if you’re nearing retirement, your appetite for risk is low because you want to “protect” your gains.
Ideally though, if you started investing early on in your 20s, your risk appetite would be high, but would gradually become lower risk as you got closer to retirement age.
Of course, even if you’re a “late starter”, there are still ways to generate more income to feed your investments.
#6 Understand How Compound Interest Works
If you’ve never heard the term “compound interest” until now, take a moment to let the following words fill your sink in – it’s your best shot at building up the wealth needed to retire comfortably.
That’s no lie. It’s mathematical fact. Compound interest can grow your cash exponentially if you park it in an investment that earns a high enough interest rate.
Now consider the Rule of 72 – if you want to find out how long it will take you to double the amount of cash you have invested, simply divide the compounding interest rate by 72.
If you invest $10,000 into a diversified investment portfolio earning 9% interest – it’ll take 8 years to double to $20,000! (72/9 = 8 years). Keep that $20,000 in your portfolio and it’ll grow to $40,000 in another 8 years… and well, I think you get the point right?
Compound interest can be your greatest friend or your worst enemy when it comes to money. Here are two examples that you should think about:
Leaving a lump sum of $10,000 in your investment portfolio earning 9% interest will grow to $132,600+ in a span of 30 years.
Not bad huh?
Now, here’s where compound interest gets really good – leave that lump sum of $10,000 in your investment portfolio earning 9% interest but ADD another $1,000 to it annually. Your portfolio will grow to $281,200+ in the span of 30 years.
OK, so compound interest also has a bad side too – especially when it comes to debt. Credit card debt IS THE WORST when it comes to compound interest making your life hell.
Now, this is just an example:
Let’s say you have a credit card with a balance of $10,000 that you’re making minimum payments on.
The interest rate on your credit card is 24%.
Assuming you DON’T increase the balance of the credit card and start making minimum payments of 3% of the balance or $50 (whichever is higher), how long do you think it’ll take you to pay off?
Answer – 19.5 years. Oh, and the amount you’d have to pay back in total would be $17,774.
What about if you just decide to default on that credit card? (We know the banks would send a black ops team to your HDB if that happens, but let’s just assume shall we?)
If you let that $10,000 balance at 24% sit for a mere 5 years – it’ll grow to $29,300+.
That’s the power of compound interest.
What are some other financial basics Singaporeans need to know about right now?