You're never too young to know your money. Boost your money knowledge with these 7 essentials for a sound financial foundation.
The start of a new year is a good time to take stock, and reflect on life’s various lessons. For Singaporeans who are turning 18 the coming year, it’s time to take stock of your own financial situation - after all, this is the moment you take charge of your own money. Here’s the bare minimum that you need to know:
1. Investing Money? Always Compare it to the CPF Risk-free Rate
Whenever you’re asked to make an investment, you should bear in mind the CPF risk-free rate. At present this is 2.5 per cent, and you should always weigh up potential returns against it. Why? The reason is simple:
Your CPF money and its interest is absolutely guaranteed. This means that, if you’re about to make an investment that involves risk, the returns should exceed the CPF’s 2.5 per cent. Otherwise, you’re better off just leaving money in your CPF account.
For example, if you’re asked to loan money at two per cent interest per annum, that’s probably a bad deal: you run the risk of not being paid back, and you could earn even more interest just by leaving it in your CPF.
This is one of the bare minimums you should know, before deciding to invest in anything.
2. Singapore’s Core Inflation Rate is 3% per annum
The core inflation rate measures the rising price of goods, excluding certain items (e.g. private housing and transport). To prevent your money from stagnating, it must at least match the inflation rate of three per cent.
For retirement purposes, you generally want returns that beat inflation by two per cent (i.e. five per cent per annum). Also note that, because core inflation excludes private housing, it’s actually might higher for people who can’t buy HDB flats.
Speak to a financial adviser or wealth manager for help on this; but bear in mind the figure of at least five per cent per annum, when picking retirement products.
3. Carrying Debt May Disqualify You From a Home Loan
When getting a home loan - whether for a flat or a private property - you’ll have to meet the Total Debt Servicing Ratio (TDSR) restriction. This restricts your total monthly loan repayments to 60 per cent of your income.
Your TDSR factors in all your debts - from your home loan to your car loan to your various credit card loans. This means that, if you don’t control your debt, you may not qualify for the home loan you want, when the time comes to buy a house.
You’ll be forced to either make a bigger down payment, take a longer loan tenure, or buy a smaller house.
4. You Should Know Which Loans Cost the Most
At some point in the near future, you’re probably going to need a loan. It pays for every Singaporean to have a basic understanding of how much the various loans cost. These are:
Licensed moneylender loans: In theory these are capped at 48 per cent per annum - but the various fees often make them much higher than they seem.
Pawn shop loans: The interest rate is around 12 per cent per annum. However, you must have something to pledge (i.e. some kind of security for the loan, such as your jewellery).
Credit card loans: These range between 24 to 26 per cent per annum. However, there’s no interest if you repay the full amount each billing cycle (26 per cent of $0 owed is still $0). As such, these should always be used as a mode of payment, and not as an actual source of credit.
Personal loans: These range between six to nine per cent per annum, on average.In case you’re wondering, yes: this is why you always use a personal loan when you need to borrow money, and not your credit card.
Car loans: These usually have a nominal interest rate of 2.78 per cent per annum, or around three per cent for used cars (used car loans have a higher interest rate). However, bear in mind that car loans are calculated using “rest rates” - the real interest rate is about twice as high as the nominal amount. As such, the “real” interest tends to be around 5.56 per cent per annum.
Home loans: HDB loans are always 0.1 per cent above the prevailing CPF rate (that’s around 2.6 per cent right now). Private home loans are too complex to fully explain here, but suffice it to say they average 1.8 per cent per annum.
5. Just an Extra S$500 a Month can be Life-changing Later On
Don’t have an exaggerated sense of how much more you need to earn or save - start with a small and manageable sum. You should know that just an extra S$500 a month - earned or set aside - makes a life-changing difference later.
Most reliable financial products, such as an endowment plan, can grow your money at around four per cent per annum (speak to a financial adviser for more details). This means that, setting aside S$500 a month for 12 years, you would have around S$93,760+ by the age of 30.
That’s more than enough to cover the down payment on a flat, or to go on a round-the-world trip while you still have the time.
A little bit of savings will go a long way, at your age.
6. NS Can be a Huge Financial Boon, if You’re Prudent
Many Singaporeans think National Service is a drag on their finances, as it slows them entering the workforce. But if you’re prudent, you can take good advantage of it.
Your NS days are probably the only time in your life when you’re fed, sheltered, and given medical care at no monetary cost to yourself. This allows you to minimise what you take from your NS allowance.
As most NS men will get around S$300 to S$600, see if you can save at least half. At the end of two years, you’ll have a few thousand dollars to kick-start a small investment portfolio, or to sustain you for a few months while you look for the best possible job prospects.
Don’t be forced to take the first job offered to you, just from lack of savings.
7. Buy Insurance Sooner Rather than Later
As you age, the risk of you suffering various diseases increases. Accordingly, your insurance premiums will rise with age. In addition, you may develop conditions for which you can’t be insured later.
As such, it’s a good idea to buy your insurance right now, while you’re healthy. This allows you to lock down lower monthly premiums - otherwise, you’ll suffer high-cost premiums at the worst possible time (e.g. later on when you’re saving to get married, or are facing the cost of raising your first child).
This doesn’t mean you should buy insurance from the first agent you come across, however. Take your time to visit comparison sites, or even consider buying online (it may be cheaper).