Most of us will agree that saving and investing are necessary if we want to have comfortable lives for ourselves and our loved ones. It is much easier to meet our financial goals if we start early.
To begin, you need to save – that is, you must pay yourself first (i.e. save first before you start spending). Spend less than what you earn.
After setting aside cash or emergency savings and getting basic health and life insurance policies, think about how you can invest your money, what goals and investment objectives you have and how much time you have before you need the money. Also consider your existing commitments, how much you can afford to invest and your appetite for risk.
You can start small. There are low cost investments that require less capital outlay. You can invest in bonds, shares, exchange traded funds (ETFs) or unit trusts. But read up before you invest. You need to be familiar with a range of investments so that you can build a diversified investment portfolio. Individual investments can go up or down in value, but over a sufficiently long time, a diversified portfolio of assets can give you a positive return better than leaving your money in the bank.
All investments come with risks. The actual return from an investment may be different from what you expected. There is also a real chance of investment losses from time to time – part of the amount you invested, or even all of it. Investing in different products is usually a good strategy to diversify and reduce the risks.
Your financial goals may include paying for your children’s future education expenses, or building up a nest egg for retirement. To get you closer to your goals, you can choose to invest your savings to get higher returns over the long-term than bank deposit rates. Do note, however, that higher returns tend to come with higher risks, and so the chance of losing money is higher as well.
You may utilise this generic goal savings calculator to make plans to reach your goals.
One major financial goal for many of us is ensuring that we have sufficient retirement funds. If your aim is to be able to live out your Golden Years without financial stress, you should start planning, saving and investing early. The CPF Board has a retirement calculator which can help. It will help you compute how much you will need.
The calculator will need inputs like your desired retirement income – determined by your lifestyle needs – as well as your targeted retirement age. From your investment portfolio, you can get an estimated rate of return on your savings.
To find out more about building a financial plan, click here. There is also a free online course on the topic.
You will accumulate a lot more if you start saving and investing early. By investing $2,000 a year from the age of 35, with a 3% return you will have $98,000 at the age of 65. But if you start 10 years earlier at 25, you will get $155,000 or over 50% more.
If you start early, your money will have more time to compound and grow. Compounding refers to the process of interest earned on top of interest. You get better returns if you start investing sooner; the later you wait to invest, the harder it is to enjoy the benefits of compounding.
Also, you will be able to have a longer investment horizon if you start early. Generally, the shorter the investment horizon you have, the lower the risk you can bear.
A longer investment horizon allows you more time to ride out short-term price fluctuations on your investments. So you will be better able to weather the market’s ups and downs if you start investing early.
One extra benefit to early investing is that you will pick up better spending habits from young. If you know you have to invest a certain amount of funds to reach your financial goals, you are much less likely to overspend. The right habits picked up from young will set the solid foundation for a brighter financial future.
There is a long list of products available in the market, such as bonds, shares, unit trusts, ETFs, whole life and investment-linked insurance products. The ideal product mix will be different for different people, depending on your age, income and risk profile.
You need to set your investment objectives which should be in line with your financial goals. There are three possible investment objectives: Security, Income or Growth.
If you are a conservative investor or have already reached your financial goals, your investment objective may be to protect what you have saved (i.e. capital preservation). You may then wish to consider Singapore Savings Bonds, Singapore Government Securities or retail corporate bonds for your portfolio.
If you have retired or are retiring soon and need to have easy access to your savings, your objective may be to ensure that you can convert your investments quickly to cash without a substantial loss in value. You may also want your capital to generate regular income. In this case, you may wish to consider Singapore Savings Bonds for your portfolio. You can withdraw the money you invested when needed, for your spending needs.
If you are younger and have just started to build your retirement savings, your investment objective may be capital growth or accumulation. If so, you could consider shares or exchange traded funds (ETFs) for your portfolio if you have the risk appetite for them.
Some of you are likely able to take more risks as retirement is still far away and your investments will have time to ride out the market’s ups and downs.
As your investment objectives will change over time, it is advisable to review your investments periodically and make adjustments. As you age and need easy access to your savings, you may shift away from higher-risk products like shares towards lower-risk ones like bonds issued by the government or credit-worthy (i.e. financially strong) companies.
Learn more about basic investing concepts through this free online course.
In the next few sections, we will introduce the different products that can help diversify your investments beyond shares and cash.
Singapore Savings Bonds help individuals like you and me save for the long term. Savings Bonds are issued and backed by the Singapore Government. You will earn regular interest that increases over time and enjoy the flexibility to get your money back without penalty. Be sure to have your individual Central Depository (CDP) Securities account ready with Direct Crediting Service (DCS) activated before you invest. To apply, head to the nearest DBS/POSB, OCBC or UOB ATM or do so online through DBS/POSB Internet Banking.
Find out more at www.sgs.gov.sg/savingsbonds or call 6221-3682.
Retail corporate bonds are issued by companies or statutory boards, and are denominated in smaller sizes for retail investors. You can subscribe through ATMs or internet banking. It is also possible to buy retail corporate bonds through your broker or bank, as they are listed on the SGX.
When you buy a bond, you are essentially lending money to the issuer in return for interest. In other words, you are taking the credit risk of the issuer. If the issuer runs into financial trouble, it may not be able to pay the interest or the principal of its bonds and you could lose your entire investment or a huge chunk of it. So it is important that you understand the financial strength of the company issuing the bond. Do not buy a bond just because it is issued by a company with a familiar name or the coupon rate is high.
Most bonds pay a steady stream of interest income, known as coupons, throughout the life of the bond, offering you a stable return.
Find out more here.
Exchange traded funds (ETFs) are listed and traded on stock exchanges. You can buy ETFs through your broker. You can also buy certain ETFs using CPF or through banks and brokers that offer ETF Regular Shares Savings Plans.
ETFs aim to track the performance of an underlying index (like the Straits Times Index) or asset (like commodities). ETFs allow you to build a diversified portfolio easily and in a cost-effective manner, as you need not buy into individual constituent stocks. For Investors who want to diversify their portfolio and not just hold a single stock, it may make sense to invest through ETFs.
Also, ETFs have lower fees compared with unit trusts or mutual funds because they are passively managed.
Depending on the ETF structure, you may or may not be buying the shares that make up the index being tracked. Before you invest, find out about the risks involved.
Some ETFs are more complex than others. Complex ETFs are classified as Specified Investment Products (SIPs). To invest in SIPs, you need to undergo a Customer Account Review conducted by your broker or bank.
Find out more here.
Investments offering potentially higher expected returns over a long investment period expose you to a higher risk of investment losses from time to time. Be extremely sceptical when an investment scheme claims to offer high returns but at low risk to investors – there is no free lunch.
When assessing an investment, it is important to check if the financial institution offering it is licensed by the Monetary Authority of Singapore (MAS). Check the MAS website for a list of financial institutions that it regulates, available at https://masnetsvc.mas.gov.sg/FID.html. You can also access https://masnetsvc2.mas.gov.sg/drr/rr.do for a list of individuals licensed to provide financial advisory services. Deal only with licensed financial advisers and financial institutions that are regulated by MAS.
From time to time you may come across unregulated entities offering investment options that MAS does not supervise or regulate. You should avoid these, as you will forgo the protections under MAS’ regulatory framework if you invest your money in these schemes.
Click here to read more on the pitfalls of dealing with unregulated entities.