A simple, introductory guide for Singaporeans

To my fellow friends and acquaintances, your LinkedIn network may occasionally become “busy” because you received invitation(s) to connect with financial advisors (FA) / consultants / insurance agents / whatever you want to call them. If you are one of them, hello 👋

Don’t get me wrong. There is no harm in FAs sharing more about what kind of policies their companies have to offer etc. However, I do think that one would have a (very) high tendency to say yes to proposed policies if they do not have much financial knowledge. (I was one of those people…) It’s alike to how you would just take the medicine prescribed by your doctor right?

In an effort to hopefully help people make more informed decisions, I would like to share some financial knowledge that I have learnt from conversations with a few financial planners and (mainly) online research. Of course, this is my own understanding, not universal facts.

Disclaimer: Not financial or investment advice, I have no certifications 😐

Why do we need money?

No, not because of greed …

1. Pay for expenses (mainly food, transport, accommodation) & liabilities (e.g., paying for school fees debt, mortgage etc)
2. Prepare for unforeseen circumstances (falling ill, accidents, injuries, disability, cancer)
3. Work towards long term goals, such as buying a house, marriage, raising children etc. Long term goals typically span at least 5 years.
4. Retirement

What do we need to have?

1. Emergency funds: 3–6 months of expenses & liabilities

For purpose #1, in scenarios where you lose your job unexpectedly but you have not retired yet. The 3 to 6 months period is an estimate of how long one would take to land a new job.

2. Insurance

For purpose #2. The future is uncertain, anything can happen the next moment. Also, medical bills are hefty. With insurance, you pay a premium periodically so that in the event that you require a medical procedure, you can “offset” full or partial cost under your insurance plan(s). The number of pillars (hospitalisation, life, health, accident, travel, transport etc) you need in insurance is dependent on your lifestyle, number of dependents etc.

3. “Savings”

For purpose #3 and #4. Big ticket items cost a lot more, so you have to save more. When you reach retirement, your savings become your “income”.

Hold on … that’s it?

On a fundamental level, yes. That is the basic, but essential, understanding you need to have regarding finance. Please note that you should have enough money for emergency funds, before looking at insurance plans, and then thinking about long term goals and retirement.

If you want to know more …

Let’s delve deeper and look at purpose #3 and #4.

Depending on how big or grand your long term goals and retirement plans are, savings may just do the job. If that’s the case, then yay, you can stop reading this article and start a savings account!

But wait, we forgot something: Inflation!

A developed nation’s inflation rate is typically 2–3% annually, and a developing nation’s inflation would be higher. In simple terms (I will spare you the AD/AS graph), when there is inflation, items cost more for the same quantity. To maintain your purchasing power, your savings need to increase at the same rate as inflation.

Also, when it comes to retirement, we would be saving for a few decades. I’m almost in my mid twenties, so assuming that I retire at 67, that means I will be saving for roughly 40 years. Sounds like I can save A LOT of money, great!

However, in reality, bank saving accounts give us very low interest rates of less than 1%, some even lower than 0.1%. With current inflation rates, that means that if you save $100 today, it may only be worth $60 down the road when you use it for retirement (I didn’t crunch those numbers, but you get the point). In other words, your wealth accumulated through savings is not preserved and you actually lost purchasing power! *insert shocked face

Oh no, what can we do?

The “foolproof” way to beat inflation is to save more every year. If your salary is certain to increase year on year, that would work. If not, then you have to find ways to reduce your expenses to save more. But, “sometimes life just slips in through the back door” right? Your priorities could change or you could have more dependents as you grow older, which makes some expenses unavoidable.

Now that we know that we can’t just simply save (i.e. put our money in a bank savings account), how can we better preserve and even accumulate our wealth in the long term?

To preserve our wealth, we would need to utilise financial instruments that yield ~2–3% interest rate annually in the long run. You can use this as the first benchmark. In my opinion, that eliminates fixed deposit plans. Now, let’s take a look at some financial instruments we can use.

1. CPF (Central Provident Fund)

How does it work?

Read the CPF overview here.

Did you know that our Ordinary Account (OA) grows at 2.5%, while our Special Account (SA) grows at 4%, both entirely risk free! That means that you can not only preserve your wealth, but accumulate it with time! If you have really low (or zero) risk tolerance, do consider making regular top ups to your CPF! In fact, with CPF SA, it is possible for you to reach 1 million by retirement age. You can start making CPF top ups using this form.

Pros

• Risk free!
• Interest rate is (much) higher than bank savings rate

Cons

• Low liquidity (for good reason as CPF Special Account is designed to save for your retirement)
• Every CPF account can only be utilised for specific reasons specified by the government
• You will only start receiving payouts from your retirement account when you reach retirement age (set by government, not you ah)
• CPF top ups / transfers are irreversible → So only top up money you are confident you won’t need in your remaining working years

2. Endowment Plans

How does it work?

For a set policy term (e.g., 5–10 years), you must pay a premium on a regular basis (e.g., monthly). The sum of all your premiums paid for the entire policy term is called “capital”. For capital guaranteed plans, when your policy matures, you would get your full capital back and any bonuses gained if any. The bonuses form the “non-guaranteed returns” component. Where do these bonuses come from? During the policy term, the insurer would use your premium to invest in their own special funds, which can consists of bonds, stocks or other asset classes. If the fund performs well, then you would receive greater bonuses. Typically, non-guaranteed returns are projected to be 3.25% or 4.75%. Bear in mind that projection may (& most probably will) deviate from actual returns. Also, the policyholder would enjoy life insurance coverage for the policy term. Each endowment plan offered by different insurance companies will have different terms and conditions, so read the fine print carefully and clarify before signing!

Pros

• You can choose a policy term that is as short as 2 years, or as long as 30 years. As compared to CPF, endowment plans have a higher liquidity, especially since policyholders can decide the policy duration.
• As most endowment plans guarantee 100% capital return upon maturity, you don’t have to worry much about losing money when you sign up for one.
• Quite predicable returns
• A low-risk tool for savings, insurance and long-term wealth
• Facilitates disciplined savings, as you are “forced” to set aside a fixed amount regularly to keep the policy ongoing → Good for “obsessive spenders”

Cons

• Low liquidity due to “lock-in” period
• If you terminate your policy prematurely (i.e., surrender the policy), you would only get a portion of your premiums paid (i.e., surrender value). This means that if anything major happens down the road and you wish to withdraw your funds, it is absolutely certain that you would lose money.

Author’s thoughts

I personally won’t go for endowment plans as of now. But if you are planning to save for a mid to long term goal, such as your child’s university education, endowment plans offer you the security you need over your money, while potentially earning the bonuses too.

3. Unit Trusts / Mutual Funds

How does it work?

This is a collective, not individual, investment tool. When you participate in a unit trust (or mutual fund if you are feeling angmoh), your money is pooled together with other people’s and managed by a fund manager. The fund manager will decide the fund portfolio and your returns will depend on that fund’s performance. Once again, each unit trust offered by different companies will have different terms and conditions, so read the fine print carefully and clarify before signing!

Pros

• If you don’t know or are unsure what to invest in, you can leave that decision to a professional fund manager with financial expertise.
• With the 3 broad types of unit trusts: (1) fixed income (lowest risk), (2) balanced and (3) equity fund (highest risk), you can opt for a unit trust that suits your risk appetite.
• Can yield higher returns than endowment plans (depending on fund portfolio)
• Most do not have a “lock-in” period, which means you can exit anytime and liquidate your assets on any business day

Cons

• Incur management fees (which goes into your fund manager’s pocket) regardless of fund’s performance, which can eat into your returns / profit in the long run
• You don’t know what exactly is the fund portfolio, it is a “black box” to you. This can make it harder for you to predict or estimate expected returns
• Higher risk than endowment plans. You may lose a significant amount of your capital! Fund managers are not liable for protecting you from any (capital) losses.

4. Invest — Do It Yourself!

How does it work?

DIY = you have to figure this out on your own 🙂

Why?

The older folks may say: “Investing is so dangerous and risky!” & I agree.

But … everything has its own risks. Crossing the road is extremely risky if you don’t check the traffic beforehand. Driving a car is extremely dangerous if you haven’t gotten your license and lack patience too. But we still do it because we prepare ourselves well enough to mitigate the risks.

If you have enough risk tolerance to opt for unit trusts, then consider investing on your own. When you invest independently, you can save cost in the long run because you don’t have to fork out accumulated huge fees to pay a fund manager. If you are hesitant to start investing on your own because you are worried that you will make “wrong” choices since you don’t have any financial background, then the solution is simple: educate yourself. Be it attending courses, talking to a FA (consultation is free in Singapore btw), or online research, there are so many avenues and platforms for you to gain financial knowledge.

That said, if you have tried to brush up on your financial knowledge for a while and am still not confident of investing on your own, then do your best to find unit trusts that have lower management fees and have a portfolio that fits you well! On the other hand, if you are ready to start investing on your own …

How can you start?

There are 2 ways you can do so.

The first would be to use a brokerage. After setting up your account, you can deposit funds into your account and start trading. Personally, I currently use Interactive Brokers (IBKR) because they enable fractional shares. What’s the deal? Let’s say you want to buy Google stock, but each whole share is $2000+ USD. If you only have $200 USD to invest, you can just buy one-tenth of a Google share! This feature essentially allows me to invest within my means! It’s important to understand that you should only invest money you don’t need in the short term and can withstand losing.

If you would like to open an IBKR account, here is my referral link. If you sign up using this link, for every $100 USD that you deposit into your account, you would get $1 in IBKR share. Even if you are not ready to start trading just yet, treating your brokerage account as a cash account would entitle you to the free share(s) too! Details on IBKR’s referral program can be found here.

So far in Singapore, only Interactive Brokers and Syfe Trade allows fractional shares. You can consider the latter too. Of course, you can also research about the different brokerages available in Singapore.

The second way is via a regular savings plan (RSP). Similar to unit trusts, you will put in a certain sum regularly. The difference is that you choose what to invest in, meaning that your RSP is self designed. And if your account does not have enough cash for a particular month, your account simply does not trade anything for that month, but your plan stays active. Another feature of RSP is that the trades are all made on the same day every month, so you can’t time the market. If the thought of looking at market charts scares you and you are afraid of getting your emotions involved in every trade, RSPs are a great way to be an independent investor! Personally, I used FSMOne Regular Savings Plan and utilised GIRO to automate cash top-ups monthly. But, I have recently terminated mine (but still held onto my positions) after I opened my IBKR account. If you would like to open a FSMOne account, you may use my referral code, P0479597, when registering!

Conclusion

This article serves as a starting point for people who have zero to little financial knowledge. It is intended to cover key concepts in simple terms instead of technical jargons, hence the absence of any calculations.

Our wealth is accumulated across the years using this special weapon: compound interest! The earlier we start, the more powerful it is. And in case you think it’s too late for you to start, just know that so long as you live to see another day, time is already on your side 😄

I also want to add that it is important for you to know why you are doing what you do. When your purpose is clear, you can take meaningful steps to fulfill that purpose. Remember that no one cares more about your wealth than you! & Be careful, don’t be consumed by greed.

After reading this article, I dearly hope that you would start managing your own finances. Be it saving up more diligently for your emergency fund, settling your insurance plans, or opening a brokerage account, what matters is that you take action! Awareness without action is futile.

Summary of financial instruments available to build your wealth:

1. CPF
2. Endowment Plan
3. Unit Trust / Mutual Fund
4. Brokerage
5. Regular Savings Plan

You may also want to find out more about:

1. Compound interest
2. Passive investing
3. Dollar-cost averaging
4. Investing VS Trading

I am no expert for sure, but I am willing to learn and educate myself. So if you have any financial knowledge to share, please leave a comment! Also, let me know if this article was helpful for you!

Thank you for reading!