Growing wealth before retirement is essential, especially in Singapore, where almost everything around us is expensive. Investing in the stock market is seen to be one of the best ways to prepare for retirement. However, before we embark on that investing journey, we have to prepare for the long and volatile experience that we will be facing.
Like what John Maynard Keyes, Father of Keynesian Economics, said, “in the long run, we are all dead”. While preparing for our retirement is essential, preparing for our short-term needs should be placed at a higher priority.
Here are the things you need to have before starting on your investing journey.
(1) 6 Months Of Expenses Set Aside
You can easily track your monthly expenses using the various apps available for free download. By doing so, you can figure out your spending habits and where your money is going. You would want to set aside sufficient savings fro 6 months of expenditure. These should include your housing obligations, including the portion of the mortgage that is currently being paid from our CPF account.
Even 6 months may not be enough. Earlier this year, the Monetary Authority of Singapore (MAS) published its Macroeconomic Review report that said Singapore residents (citizen and PR) who have been laid off are finding it difficult to re-enter the workforce within 6 months (Page 45, paragraph 2, sentence 1).
This decision is personal and it should fit our own circumstances. Nonetheless, we advocate a minimum of 6 months in order to be “safe” in the current sluggish economic environment. The last thing you want would be to be selling your stocks to meet end’s need.
(2) Life & Health Insurance
Buying insurance should be seen as an expense, as there are no foreseeable returns from paying hundreds of dollars a month to get nothing. Truthfully, we would rather not earn anything from insurance, as that would mean that we are consistently healthy.
Of course, we can never be certain of the future. Bad things do happen and unfortunately, being underinsured during these time may mean incurring huge financial expenses that may burn a hole in our own pockets, or even cause our family members to bear the burden.
Why not pay a small sum of money to the insurance company on a monthly basis so that we can sleep at night knowing that we are covered for any unfortunate things that may happen.
(3) A Budget Plan That Will Stretch At Least Until Your Next Milestone
The next big event in life is a/an ( ) – MBA, marriage, child, please fill in the blank.
All of these milestones will cost money. It would be wise to plan for expected expenses because the numbers can easily be computed and the additional changes managed.
If we are preparing for an MBA, then we need to prepare for tuition, living expenses, relocation cost (if it is outside of Singapore), plane tickets and other unique expenses. Universities do provide very good guidance on tuition and living expenses, therefore we can then take that amount and start to save up and prepare for that milestone.
If you are getting married and buying a house in the next 1-2 years, plan your finances ahead such that it takes into consideration the future. For example, you may want to put off buying that dream car even if you have enough money because you know that you will be stretched in the future.
The longer the time frame, the better it is. We can save lesser each month and have more time to make adjustments for unforeseen additional amounts that would need to be provisioned for.
So start planning today. Once the money in your bank account starts to grow, it become addictive and easier to save.