HOLD ON TO YOUR CASH
“More people are recognising the need to save. That’s a good thing, but simply putting aside money every month is easier said than done,” says Alfred Chia, chief executive officer at SingCapital, and author of two books, Mortgage and Grow Rich and Grow Rich Singapore Style. “You have to look at the big picture, and take small but smart and practical steps to build your wealth over time.”
PRACTICE DELAYED GRATIFICATION.
Identify your needs and wants, but know the difference between the two, says Alfred. “It’s easy to want what everyone else has, like a designer bag or a new car, but ask yourself if you really, really need it. More often than not, the answer is no. And if you ask yourself that question every time you go shopping, you’ll find yourself spending less and saving more – all these costs add up over time.”
SET ASIDE YOUR SAVINGS FIRST.
“Instead of seeing what’s left over at the end of the month and then putting that money aside as savings, you should make saving your priority,” says Alfred. “Arrange monthly GIRO payments to a separate savings account when your pay cheque comes in. That way, you won’t have to think about whether you have enough to save.”
MAKE IT DIFFICULT TO ACCESS YOUR SAVINGS.
Andrea Kennedy, a certified financial planner and author of Own Your Financial Freedom, suggests depositing your savings into a separate bank account that has no debit or credit card attached to it. “That way, it’ll be hard for you to touch your savings and you will be forced to make do with the money that you can access.”
BUDGET – BUT MAKE IT FUN.
Budgeting can be a lot of work. But if you look at it that way, you’re bound to feel unmotivated to save, says Alfred. “If you follow my 4-3-2-1 principle, budgeting won’t seem that tedious: Apply these numbers to your monthly salary – spend no more than 40 per cent on your loan commitments, no more than 30 per cent on your regular expenses, put 20 per cent into your savings account and 10 per cent on insurance protection. This lets you see the big picture.”
REVIEW YOUR MORTGAGE RATES.
If you’re a homeowner, it’s important to review your mortgage rates every three years or so, says Alfred. “Be careful of rising interest rates. By doing a regular review, you can see if you’re paying too much interest and then ask yourself if you should refinance. Just being alert can save you a bundle of money.”
MAKE SAVING MONEY EASIER
Forced savings schemes are a convenient and effective way to save and make money. Here are four you need to know about:
SUPPLEMENTARY RETIREMENT SCHEME (SRS)
What it is: SRS is a voluntary tax deferment saving scheme to encourage people to save for retirement, over and above their CPF savings, says Alfred. You can contribute various amounts up to a cap of $12,750 (for Singapore residents) and $29,750 (for foreigners), per year. The amount you contribute each year goes towards reducing your chargeable income and thus, your tax amount.
Pros: What you contribute to the SRS can be used for a wide range of investment products such as shares, unit trusts, exchange-traded funds and real estate investment trusts. As this is parked in your CPF account, it’s also harder to access the money.
Cons: SRS monies withdrawn before you’re 62 years old are subject to a 5 per cent penalty, on top of being taxable, says Alfred. Also, after 62, 50 per cent of monies withdrawn are subjected to tax. The scheme allows you to withdraw SRS monies over a period of 10 years, which helps spread out the taxable amount and in turn, reduces the overall tax payable.
ENDOWMENT INSURANCE PLAN
What it is: Ideal for people who don’t like to take huge financial risks, an endowment insurance plan can be a good way to save. You simply put money aside every month and receive your payout at the end of the term.
Pros: It’s a low-risk way to get moderate returns on your savings.
Cons: If you cash out before the term is up, you pay a high penalty.
INVESTMENT-LINKED PLAN
What it is: This is an investment plan with insurance protection, says Alfred. For example, if you save $1,000 a month, a certain amount will go towards paying for the insurance or mortality charges, and the balance is invested.
Pros:“It’s like a two-in-one or combo savings plan – investment plus insurance,” Alfred points out.
Cons: As you get older, the mortality charges go up and this will eat into your returns.
INVESTMENT-LINKED PLAN WITH NO INSURANCE
What it is: This is an investment plan you can get through your insurance company, but without the insurance. If you take a 10-year plan, for example, and make no withdrawals during that time, you will be rewarded with substantial returns.
Pros: Unlike bank savings schemes that are flexible, this kind of plan forces you to save and makes it hard for you to access the money before the end of term.
Cons: If you cash-out early, the exit charges can be pretty huge, Alfred warns.
TRY OFFSHORE BANKING
Alfred notes that there is a growing trend among Singaporeans who park their money overseas, in the hopes of earning a higher interest on their savings. This is a good idea if you plan to send your child to a foreign country to study in the future.
“If you’re going to send your kids to, say, Australia in 10 years’ time to further their studies, then you may decide to open a bank account there now. The money you save over the next 10 years can sit there and earn interest, and you’ll spend that money when your kids go there, anyway.”
But he warns that you should take note of the taxes other countries impose on offshore bank accounts. “Keep an eye too on the currency exchange rate – if it depreciates or fluctuates, you may lose out. And don’t just stash money overseas for the sake of it. Offshore banking is really only something that makes sense if you have a need for it in the first place.”
This article was originally published in Simply Her January 2015.