Just because it's boom time doesn't mean you should put saving on the back burner. Saving, and investing for the long-term, are the only ways to make the good times last.
Singaporeans are rolling in the good times.
The country is experiencing a 'golden period' of growth, the unemployment rate is at its lowest in six years and wages are set to rise for the yet another year.
And everywhere, the newest, biggest, and trendiest lifestyle and consumer products are vying for the attention of cash-rich Singaporeans.
The key to
smart saving is making this money work, and
growing it to create wealth. In other words,
while saving is an admirable trait, it is how you put
your savings to work that will determine
your wealth.
It's easy to get caught up in the current wave of optimism and splash out on everything our hearts desire. After all, when everyone else around us seems to be spending like there's no tomorrow, the idea of curbing our expenses and remembering to save can be such a drag, can't it?
It's a time-honoured value that has been preached to us from the time we were first taught about money. But why do we save other than to provide for the proverbial rainy day, or because we've been told it's a healthy money habit to have?
The answer, in a nutshell, is so that we may enjoy good times over the long term.
In spite of the current boom, a recent survey by The Straits Times - Aug 11, 2007 - revealed that seven out of 10 workers polled fear that they wouldn't have enough CPF savings to last them through retirement.
Out of the 636 Singapore citizens surveyed, 91 per cent said they intended to supplement their retirement funds with other savings, investments or insurance, 42 per cent said they would take on part-time work, 34 per cent would rely on family members and 20 per cent would downgrade to smaller homes.
Saving, or setting aside money now for the future, affords us the lifestyle and financial goals that we set for ourselves. A new car, a bigger home, that grand holiday, a comfortable retirement - we all aspire towards certain material possessions or a particular lifestyle that require us to not just to earn our keep now, but to put away some of it.
Yet, stashing away money in our sock drawer isn't quite enough to help us reach these goals. The key to smart saving is making this money work, and growing it to create wealth. In other words, while saving is an admirable trait, it is how you put your savings to work that will determine your wealth.
Savings, put towards long-term investments, takes advantage of time and the magic of compound interest. Imagine this: Jane puts away $10,000 each year in an investment portfolio that yields returns of 10 per cent per annum. At the end of one year, her money would have grown to $11,000.
Assuming she reinvests this whole sum, the money will have grown to $12,100, by the end of the second year. Instead of her money growing by $1,000 like before, it has grown by $1,100, because the $1,000 she had earned in the first year had grown by 10% too.
Over a long time, such compounding, or generating earnings from previous earnings, can grow the original $10,000 into a large sum. In fact, by year 20, Jane's initial $10,000 would have grown to $67,500.
The preceding example also clearly shows that there is no secret formula to wealth creation. Savings, time and a healthy rate of return are the surest ways to generate wealth.
Too many people confuse 'saving' with 'investing' and misguidedly think they're doing good by themselves when they manage to put aside of their income each month into a savings account.
Others, while well aware of the difference, eschew the potential of higher returns on 'risky' investments for the 'safe' guaranteed low returns that come with savings accounts.
Yet, while regular, consistent savings contributions can go towards building a nest egg, they are not the most efficient or effective way to make your money work for you.
A better approach would be to channel a portion of your savings to long-term investments, which will grow your money at a higher rate of return.
The rest of it can go towards meeting short-term goals, such as annual holidays or planned big ticket purchases. This money will also serve any emergencies and should be kept secure and accessible.
With savings, you're concerned with maintaining a steady account balance, rather than high return potential.
On the other hand, when you invest your money, you are seeking 'growth'.
Making your money work harder for you can grow your wealth to meet your longer term lifestyle and financial goals, such as sending your children to university overseas, buying that golf club membership and, of course, enjoying a comfortable retirement.
Investing does involve greater risk than saving, but you gain from the possibility of greater growth for your money.
Knowing the difference between saving and investing, then, is the key to making more informed choices about your money.
Of course putting away a portion of your income each month for savings and investment purposes can seem restrictive if you haven't identified your lifestyle and financial goals. Once you have done this, regular savings contributions - according to a sound investment strategy consisting of a diversified portfolio at a level of risk that you can stomach - will in turn help you reach those goals.
And, as with most things in life, time is the essence. Starting on your savings and investment plan as early as you can will help you to better take advantage of compounding, and is a great step in building your financial future.
Scott Mitchell is a senior client adviser and Licensed Financial Adviser Representative with ipac financial planning Singapore private limited, which is licensed with the MAS, Financial Adviser's Licence No. FA100003-2. Questions about financial planning, please email a1admin@sph.com.sg.
In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any person. Before making an investment decision, you should speak to a financial adviser to consider whether this information is appropriate to your needs, objectives and circumstances.
