Are you the sort who saves money by squirreling away loose notes into a Milo tin you keep under your bed? If that sounds a little old-school, what if we were to remind you that simply putting money away into a regular savings account with interest rates below one per cent is roughly as effective as the Milo tin method, seeing as you won’t beat prevailing inflation rates either way?
Many in Singapore still prefer to keep their money very accessible (ie in a regular savings account) instead of considering investments and funds which may make retrieving their money less convenient than a stroll to the ATM.
But there are ways to find a balance between keeping your money available if you really need it, while still getting it to work harder for you. Here are four to get you started.
Some assets are difficult to liquidate (convert to cash) on short notice. This may seem pretty obvious, but a very common mistake among Singaporeans is to sink too much money into buying the biggest house they can get. This is often done on the basis that the home is a retirement asset.
However, a bigger house means hefty mortgage repayments. And without proper planning, it’s difficult to get money out of your house when an emergency strikes. Even if you are willing to sell it, this is probably not something that can be done in a matter of weeks.
You should also be careful not to sink cash into exotic and illiquid assets such as wine, art, watches, etc. Unless you have the extra cash, of course.
Volatile assets, such as small cap stocks, are liquid. It is possible to sell them off in a matter of days. However, bear in mind that you may not be able to sell at the best price. Say all your money is tied up in shares, and the stock market is currently underperforming. You’re going to lose money if you need to sell them off to cover an emergency.
You may want to balance your portfolio with lower risk assets, such as blue chip stocks, which tend to have more stable prices. Speak to a professional financial consultant for more details.
Fixed and structured deposits may be safe, but they lock down your money. If you terminate a fixed deposit before the maturity date, for example, you will lose the accrued interest.
You should consider flexibility as well when buying financial products. For example, Manulife has a Flexi Protect insurance plan. This allows you to redirect your premiums from coverage to investment later down the road, to better aid with retirement. You can also adjust the level of insurance to suit your changing financial situation.
Singaporeans also have access to Singapore Savings Bonds (SSBs), which generate a higher interest rate than fixed deposits (around 2.6 per cent per annum if kept for 10 years), and allow you to withdraw the money on any month.
You should save as well as invest. In general, you will want to set aside at least 20 per cent of your income as savings, on top of any investments you make. Aim to do this until you have accumulated six months’ worth of your income.
This constitutes an emergency fund. In the event of a crisis, you can resort to it instead of liquidating your investments, or using expensive loans.
The best way to be ready for life is to allow a professional financial consultant to review your situation. Everyone faces different risks, so there is no single best approach to preparing for emergencies. The key is to have a range of assets or products tailored to your specific lifestyle needs.
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