Getting Started With Personal Finance

Let’s Answer Your Questions

Content

Part 1: Managing Personal Finance

1.1 — How do I start putting a plan together?

Putting a financial plan might sound daunting, but it isn’t all that different from planning a holiday.

First, you have to choose the destination — Where are you now? Where would you like to be? Second, say you’ve chosen Thailand for e.g. There are so many things to do. Would you like to chill at the beach? Eat great food? Enjoy the shopping? That might narrow down it down to a city, but perhaps you’d like to visit multiple cities? Then you have accommodations — hotel or hostel? 5 or 3-star? Restaurant reservations or street food? Now that you have your destination and itinerary, you can work backwards to figure out how much money you would need.

Your own financial plan works the same way. Determine where you want to go, how much you need, and work backwards to see how you can fund it.

1.2 — What kinds of financial goals should I be setting for myself if I have absolutely no clue about the topic? Is there a framework?

Consider big-ticket items you might want — A big property or fancy car; maybe you’d like to stop working at 40 years old; perhaps you’d like to setup your own café or pub. Unless you already have a nest egg, you will need to find a way to fund these ambitions.

All these goals have a certain timeframe in which you wish to achieve them, and a specific cost attached to them. Using this information, you can work backwards to the present day to find out how much you need to set aside daily, monthly, or yearly, in order to attain these goals.

1.3 — How much should be in an emergency fund? 

The general advisable amount is between 12 to 18 months of spending needs. Assuming you just lost your job, you will typically need a few months to send out resumes and attend interviews before you find anything suitable. During this period, bills still need to be paid and living costs need to be covered. This is where an emergency fund comes in handy. You should not place your emergency fund into any form of investment whatsoever.

1.4 — Short-term and long-term considerations?

There is robust data and research on stock markets — US stock markets have more than a 100-year history, while Global and Singapore stock markets around a 50 year history. The data all tells us the same thing, in order to have investment success — to guarantee a positive return on your investments — your holding period needs to be at least 13 to 14 years. Anything less than that, and your chance of experiencing a loss goes up. Your chance of a positive return is around 70% if you hold them for 1 to 5 years. It goes up to 100% once you hold it for more than 14 years – even taking into consideration events like the global financial crisis.

The youth have time on their side. If they’re patient, they can almost certainly achieve investment success. They shouldn’t have too much to worry about unless they are looking for quick returns or get out of the game prematurely.

1.5 — What is the 50/30/20 budgeting framework?

I believe this framework was popularised by Senator Elizabeth Warren. They separate your income (after tax) into three categories respectively — ‘Needs’, ‘Wants’, ‘Financial Goals’. The percentages basically provide you with a framework for saving and spending. However, whether you want to follow 50/30/20, 70/20/10, or even 60/30/10, is a very personal decision and would depend on the needs and situation of the individual.

One consideration is how sustainable is the plan you have crafted. Maybe some people may be able to stick to it long-term, but many others may stray off course. Like an exercise regime, many of us would go full steam for the first month or so, only to fall by the wayside 6 months down the road. Isn’t that why we always renew our resolutions for the new year? Things change in our lives. You might get married, or maybe a family member needs some help, or you suddenly need to buy something expensive. It is possible that at some point you may bust your budgeting framework.

I find that a much more liberating way to think about setting aside money is to commit to a small but realistic amount — one that won’t force you to change your lifestyle or cause you to feel miserable; it could be any amount — $100, $300, $1,000 — and get this auto-deducted from your account into an investment or savings plan. This way, you know that you have some money set aside, and that your savings have the ability to work harder for you. Whatever you are left with, you are free to spend. So ultimately, yes, ensure you save, control some spending, invest regularly, work hard, but most importantly don’t forget to enjoy your life.

1.6 — Where should you put your savings? Should I open separate bank accounts? 

Like many other things, this is a very personal decision. Some people might be disciplined enough to segregate what should be spent and saved using just one account. However, there are others who may benefit from a physical separation of their money. Then again, if you have the tendency to be ill-disciplined with your money, a separate bank account isn’t going to stop you from dipping into your savings.

As mentioned earlier, I believe many would benefit from a simple program — a deduction of a small amount from their account to put aside in a some form of a diversified investment. This way, not only are you saving for certain goals you may have in mind, but your savings will also be able to generate a return above inflation, so that when the time comes for you to start spending it, you will have a sufficient amount for your needs.

1.7 — Do I need to get a credit card? Why or why not? 

This might be controversial, but a credit card has certain advantages over a debit card for pure cash transactions. Credit cards offer discounts and promotions on various transactions and also provides a form of protection from fraudulent transactions. In comparison, a debit card immediately deducts the amount from your bank account, so if someone has stolen your card or managed to get your details, your account can be drained pretty quickly. This will result in a long and tedious process with the bank to get back your funds. The pay-later feature of a credit card allows you to dispute transactions that are incorrect.

I expect that there are many out there who will disagree with me — citing the often exorbitant interest rates on unpaid credit card bills — and they are absolutely right. One possible way to address this concern is by setting a very low credit limit for your credit cards.

At the end of the day, it is a personal decision. You ask yourself whether you will be comfortable using a credit card, or prefer cash or debit transactions.

Part 2: Introduction to Investments

2.1 — Can you explain investments and how they work? 

Think of investing like buying, owning, or lending money to a business. Using financial capital, a business produces goods or services that can be sold for a profit. In its simplest form, the three main investment asset classes are stocks, bonds, and cash.

An owner of stock in a company takes an ownership share in the business. An owner of a company’s bond is a lender to that business. Both expect an adequate return for the terms and risk of their investment.

Far too often, people tend to erroneously view stocks and bonds like gambling instruments. Investments should not be treated like 4D or Toto. Imagine you want to open a café. You’d probably need to invest $100,000 to get the café up and running. There’s no way you would be looking to sell your cafe 5 days after opening. It is likely you’d would want to hold your investment for one year or more, work hard at it, and hopefully wait for the cashflow to come in.

Unfortunately, many investors do not see buying stocks or bonds like having a stake in a business. Many of them want their investment to double immediately after buying it. The desire to make it big quick — looking to sell 1 week after acquiring it; this way of thinking can be extremely dangerous.

2.2 — Why should we consider investing?

Well if you had $100 million dollars in the bank you might not even need to think about investing. After all, even a minuscule 0.5% interest would net you $500,000 a year. But how many of us have that amount of money?

For the rest of us, we need to maximise what assets we have, allowing it to grow to a substantial amount over time so that we may live off it when we can no longer generate an income. Utilising our earning power to grow our assets when we are younger will prepare us for when we’re old or retired and our earning power decreases or goes to zero.

Inflation is another big reason to invest. It is a silent destroyer of wealth in the long term. You may not notice it at first but its overall effects can be quite significant. The amount of inflation you experience also depends on your lifestyle — the prices of some products have been democratised by competition or technology (e.g. mobile phone bills or Uniqlo t-shirts) while others have risen substantially over the years (e.g. education, housing).

More information and other reasons for investing can be found here, in one of our offered programmes under ‘Why Should You Invest?’

2.3 — How much money do you need to start investing? 

You don’t need much to start. There are options available for smaller investors around. Although the costs are usually much higher due to minimum fees that need to be met, there are some Robos out there that allow investing from as little as $100.

That could be one of the reasons why Robo-advisors are gaining popularity. Even for GYC we collaborate with a Robo-platform that allows investors to start with as little as $1. All that said, one thing to keep in mind is that the option is low-cost for a reason — you have to DIY a lot of stuff yourself: setup, funding, etc. — going through all these typically online steps on your own. There are times where you just want someone to check on you and talk to you when you’re feeling anxious about what’s happening.

GYC aspires to bridge that gap. Offering good advice from experienced advisors at an affordable cost. We also create simple investment and savings programmes for younger investors so that they can go about their investment journey in a fuss free way with someone walking by their side. One such example is our Mustard Seed Million Dollar Builder Programme (MSMDB) that allows the investor to accumulate $1 million after 25 to 35 years depending on your invested capital. The programme starts as little as an initial $5,000 and a contribution of $600 per month. Of course we also have programmes that require a much lower contribution.

2.4 — How does one start investing in Singapore? What do you need?

The first question that you need to ask yourself is: Are you comfortable going the DIY way? Would you be okay with monitoring the market, research what you need to buy, read up on some economics principles, study and understand companies, and decide the right time to buy and sell. If you’re happy to do all these things then typically you could set up your own brokerage account or Robo-advisory account and off you go.

However, if you feel that you don’t really have the time, energy, or desire to do all of those things, and would rather spend your time on other activities (e.g. friends, family, hobbies, etc.) then you have the option of working with an adviser. From there, you must choose what type of adviser you’d like to work with. Do you go to the bank and speak to the relationship manager? An insurance agent? A commission-based financial adviser? A fiduciary adviser? Fiduciary advisers are people you pay a fee to work for you and are generally not remunerated in any way else.

2.5 — What is the difference between the various types of investments: shares, bonds, unit trusts or funds, ETFs, and REITs? 

Having covered shares and bonds, let’s move on to unit trust or funds. Unit trusts are a collection of a handful of stocks — typically around 30 to 100 stocks or bonds managed by a professional fund manager. The types of stocks or bonds in the fund are determined by the forecast, prediction, or how the manager feels about the prospects of the firms that they are buying. There’s a lot more trading and buying and selling involved; you would also need to pay for the services of the fund manager. Due to this, the costs of unit trusts are typically higher.

An ETF is an aggregation of a wide range of stocks that typically track an index. This index or indices are created to represent a certain country, sector, or investment idea. ETFs for the most part don’t trade very much and rebalance their holdings maybe once or twice a year; this leads to a comparatively lower cost. However, it is important to highlight that you should do your own checks and due diligence — some ETFs are surprisingly costly; this could be because they might be trying to replicate a popular idea or theme, or may employ leverage (borrowing) within the fund, or hold derivatives or options.

REITs are basically property assets which are listed on the stock market. This allows investors to access property as an asset class, which typically comes with very high capital requirements, with much less money. While having access to property at a lower cost is an advantage, it comes with its own set of problems. One of the biggest issues is that REITs can introduce stock market volatility to an asset class which is traditionally very slow moving. Outside of REITs, buying a property would require a long process — dealing with agents, the bank for the loan, the authorities, etc. You’d need to jump through a fair number of hurdles before you own that title deed. REITs however, allow you to buy and sell within the day, and even within seconds if you wanted to. This makes REITs susceptible to a whole host of behavioural biases and problems that often causes people to hold the asset class for a much shorter duration than ideal.

Another type of investment is an asset class fund. Borne out of academic research, an asset class fund is meant to be much more diversified than an ETF, typically holding more than 10,000 securities. An asset class fund is very accurate in terms of the exposure it gives you, and is more precise in terms of measuring long term returns and risk. The cost lies somewhere between an ETF and a traditional unit trust. It has been popular in the more developed financial markets such as the US, Europe, Australia, and New Zealand. It has only been introduced to Singapore in recent years but it is slowly gaining traction.

2.6 — What can someone who is risk-averse consider?

Risk aversion exists on a broad spectrum. For e.g. Imagine someone has $100,000 and only starts getting worried if they begin to lose $50,000 or more. Next, imagine another individual who also has $100,000, but losing $5,000 induce a panic attack. Conceptually, both individuals could both be inclined to have a reduced exposure to risk but at different starting levels. It boils down to what you’re comfortable with.

E.g. Wallace’s holdings are 100% globally diversified. He holds a range of ETFs, asset class funds, and some GYC portfolios – but all in stocks. As we know, stocks are the asset class with the one of the highest risk. That being the case, Wallace may still consider himself risk-averse.

He knows with the holdings he has, a bad situation might cause him to lose half the amount, but he knows is temporary. A real-life example is experiencing the 2008 financial crisis and having these ETFs and asset class funds bounce back over time; despite identifying as risk-averse, Wallace has no issues holding these 100% stock positions. However, Wallace may have issues with bitcoin, trade options, or forex trading as there’s no certainty of returns. Being risk averse, he will not accept the risk of losing everything in the process.

Outside of Bitcoin which we all know is incredibly volatile, even holding one stock or a handful of stocks may make you experience losses with a slim chance of recovery — local examples are companies like SPH, SIA where for the past 10 years your money may have halved or more.

We are all unique individuals. You need to come to terms with who you are and consider how much you can really lose and still feel like you can sleep at night, and continue enjoying life. With that in mind, you can then check asset allocation guides to decide how much stocks or bonds you should hold. There are quite a number of such guides on the internet. GYC, through research and analyses, will walk you through the potential risks and returns for all investments made with us. Once you’ve decided, you can start putting your money to work.

Part 3: Some Advice

3.1 — What are 3 tips for someone at the start of their financial journey? 

It can be exciting to spend money on things you want. It makes you happy. But continuing down that path without consideration for the future will guarantee that you’ll have to continue working for a long, long time.

The first thing that you should be doing is looking at some form of budgeting framework — like what we spoke about earlier. But if that makes you feel walled in, then at least commit to one part of the framework — saving a certain amount every month. This way, at least you know that you have specifically set something aside, so you can spend and enjoy your hard-earned money, guilt-free.

Next, maximise those savings by putting that into some form of investment. Ideally it would be something that is very diversified, and globally diversified. This ensures that you won’t need to chase whichever country is doing well, and keep tabs on what you need to sell and buy. By making your savings work a little harder, this ensures that you harness the power of compounding returns; it also allows you to beat inflation over the long term.

Finally, enjoy the process! There are enough worries as it is, not only about money but life in general. Investing is not as complex as many make it seem to be, so take things, and your goals, one step at a time.

3.2 — What is 1 thing to take note of if someone is going to go into investing?

Always check whether what you want to buy is legitimate. There are far too many cases of people being cheated or scammed out of their hard-earned wages.

If someone approaches you and tells you they can make 20%, 50%, double your money, with little or no risk, I hope this raises some alarm bells in your head. If such a magical investment or asset were to exist, everyone would be piling money into it. And through simple economics — if large amounts of money gets funnelled into this, demand would soon outweighs supply. The costs will either rise tremendously, or this magic investment will no longer provide you the returns it promised.

Finally, the MAS runs an investor alert website that flags out suspicious investment products or firms. Doing a simple check before you decide to part with your money is a good practice.