If you’re looking at achieving financial security in your 30s, saving is a great place to start. But, saving alone will only get you so far.
In Singapore, interest rates (we’re not talking about high yield savings, or those that require lots of banking transactions or high initial deposits) have been hovering around the 0.15% range. This means that even if you put in S$1,000 a month, your annual S$12,000 savings will only earn you S$18 in interest.
If you want to build your wealth, you need to make your money work for you even as you work for your money. There’s no better time for this than your 30’s.
1. Understand compound interest
Before you start investing, you need to understand compound interest. That’s when you add your interest to your principal sum and draw interest from that new sum. So, if you save S$12,000 a year, earn S$18 in interest and leave that amount in the bank; then in year two, you will draw interest on S$12,018.
This may seem like small change. But when you combine compound interest with investments, the numbers tell a different story. Consider this: if you invest your S$12,000 into a diversified investment portfolio and earn a 10% interest, with compound interest, you will double your principal sum in a little over seven years.
This is the famous Rule of 72 in action. It’s simply an easy way to calculate how long it will take to double your investment.
Number of years to double = 72 / investment rate in %
Within 14.5 years, your S$12,000 would have grown 400% to a whopping S$48,000. And that’s just from one year’s worth of savings invested.
2. Appreciate appreciating and depreciating assets
What do you have that will increase in value over time? Not much. That’s depreciation – when your asset loses value over time. Knowing this puts much of what you want to buy into perspective.
Appreciation is the reverse. Property is one of the few things that can appreciate in value. 10 years ago, an old HUDC flat cost S$450,000. Today, that same flat is going at S$1.2 million.
Instead of sinking cash into depreciating assets, invest that money wisely. Depreciating assets would be the latest car or tech gadgets.
3. Learn about investment
You don’t need mega bucks to grow mega bucks. Several banks and brokerages let you invest in shares, bonds, blue chip stocks and unit trusts with as little as S$100 a month. Other investment possibilities include mutual funds, equity, precious metals, and forex.
4. Understand insurance
Consider investment and insurance a two-prong approach to growing and protecting your wealth. Insurance buys you the security to take greater risks when you invest. Life insurance, health insurance, critical illness coverage, and permanent and total disability coverage are the standards. Singaporeans and Permanent Residents have an advantage. Since 1 November 2015, they are all covered under MediShield Life.
To decide what types of insurance you need, think about what risks most concern you and how likely they are to happen. Then, calculate the financial losses from them.
If savings is step one, then being in the ‘in’ crowd is step two on your road to financial stability in your 30s. Happy journeying!