This article is written in collaboration with SIAS. All views expressed are the independent opinion of DollarsAndSense.sg
During the span of our adult lives, we will have many financial commitments to pay for. Broadly, there are two main types of expenses we have to consider – daily expenses and major life expenses.
Daily expenses include what we spend on food, utilities, clothes, transport, telecommunication bills and entertainment expenses. These are usually expenses that are incurred on a daily, weekly or monthly basis.
The other type of expenses we have to think about are our major life expenses. This includes buying our first home, paying for our home renovation, paying for our children’s university education, retiring, and many more. These are usually big-ticket items which require us to plan for years, or sometimes, even decades, in advance.
Major Life Expenses – Start Planning Early
Since most major life expenses do not need to be paid for immediately, many of us tend to ignore saving or investing towards them. Due to this, we may even prioritise other less important things that we want such as nicer clothes, a new laptop, frequent restaurant meals and dream holidays, over our major life expenses.
What many of us don’t recognise is that in order to comfortably afford our major life expenses, we should start planning for it as early as possible. Of course, this doesn’t mean we can’t have fun. However, it means we should only have “fun” after ensuring we’ve set aside enough savings for these major life expenses.
Further, we can’t just rely on saving a percentage of our monthly income to pay for our big-ticket expenses in the future. We must invest our savings, so that we can increase our returns over time.
We also need to understand our timeline to pay for these major life expenses. This will dictate our investment time horizon, which is important to how we should be investing and what we should invest in.
We highlight several major life expenses below, and how we could go around investing our savings to pay for them.
# 1 Home Renovation
Assuming we apply for our HDB homes within a couple of years after starting work, this is a near-term major life expense that many of us will have to pay for within five to six years.
With such a short time horizon, we need to start saving for this expense as soon as we receive our first salary.
A short time horizon also impacts our investment decisions – as our portfolio may not have the time to rebound from any market crash, should it happen.
If we have a lump sum saving already set aside, we can consider putting it into a savings plan that has an investment maturity which is in line with when we would need our money.
We could also consider investing into corporate bonds or even the Singapore Savings Bonds (SSB). These are generally safer investments that will deliver stable returns.
# 2 Children’s Education
Even though we don’t have children when we start working, we can never start investing for them too early. In the past 20 years, education saw the fastest rate of inflation, increasing close to 95%, or almost three times as much as core inflation rate in Singapore.
For most first jobbers, this expense will only be due roughly 20 years down the road. Given this longer time horizon, we can afford to take more risks as we ride out swings in economic cycles and market fluctuations.
For this, we do not need to make a lump sum investment. Rather, we could embark on a regular shares savings plan, where we contribute a sum of money each month to invest in the stock market. Such a portfolio could include a broad country index, such as Singapore’s Straits Times Index (STI) ETF, or blue-chip stocks, such as DBS, SingTel or CapitaLand.
Since we have a longer time horizon to grow our portfolio, we can afford to take more risks with our investment. We could also channel a portion of our monthly investments towards higher risks investments such as growth companies, value stocks, real estate investment trusts (REITs) or other companies we think may do well in the long-term. Of course, we should ensure that our investments are based on research that we ourselves have done into the companies we intend to invest into.
When investing for the long term, it’s important not to ignore monitoring and rebalancing our portfolios. As our investments grow, we need to make adjustments to ensure our portfolio allocation to bonds, country indexes and riskier investments stay at the level which we’re comfortable with.
We also need to continue paying attention to our time horizon, as the date we need the money draws closer. We could do so by switching our riskier stock investments to less risky investments such as country indexes, bonds or savings plans.
# 3 Retirement Planning
For most young people, retirement only happens in about 40 years. This shouldn’t mean we don’t plan for our retirement today. Instead, what it means is that we can take on larger risk if we start investing early.
Outside of investments, we can consider government schemes such as the CPF Lifelong Income For the Elderly (LIFE). We can make voluntary contributions to our CPF accounts in order to enjoy higher payouts during our retirement.
If we’re planning to invest on our own, we’ll be maintaining liquidity. That’s an important consideration, since we cannot predict our financial situation over a long time horizon.
For the funds we invest on our own, we can utilise a similar strategy to investing for our children’s education. We can allocate a portion of it to riskier investments, and gradually switch to less risky investments as our retirement age draws closer.
Another scheme we can make use of is the Supplementary Retirement Scheme (SRS), which also provides a dollar-for-dollar tax relief for contributions. We can continue making similar investments on our own after contributing to this account.
Depending on our income and ability, our home can also form part of our retirement assets. We can either downsize when we retire or rent out spare rooms once our children strike it out on their own.
Read Also: Get Savvy With Investing For Youths
Investing Is A Young Person’s Game
Investing is a young person’s game. With youth on your side, you have years to let your returns compound while allowing your investments to ride out short-term market volatility.
If you like to better understand how you can start building your portfolio and to achieve your dreams today, head on down to the Securities Investors Association Singapore (SIAS)’s 7th Singapore Investment Week from 19 May to 2 June 2018.
Hear from the CEOs of listed companies as they speak about their own financial and investment journey before you considering investing into any of the companies they run. There will also be industry professionals, analysts and financial bloggers who will take you through the ropes of different investment ideas and platforms that you can use to get started.
Registration is free. Sign up early today before registration closes.