There’s a good chance your income will increase in the coming years – but don’t waste your pay raise on expensive things.
With the Progressive Payment Scheme in full swing, some Singaporeans can expect to earn more in the coming years.
So there is a very good chance that you will see your income rise this year. Before you rush out to splurge on a new tablet or shoes however, see if you can do something smarter with that money:
1. Pay Off Your Debts
There are many reasons to pay down your loans* early, if you can. Loans apply compounding interest to the amount owed. The longer the loan tenure, the more you end up paying.
For example, your credit card debts grow at 24 per cent interest per annum. Assuming you owe S$5,000, and pay back S$200 a month, you would take 35 months to fully repay it. That’s a total repayment ofS$7,000, for a debt of S$5,000.
Yes, credit card debt is very expensive. This is why we suggest you repay the full amount every time, and never owe anything.
In addition, paying down your loans will help your Total Debt Servicing Ratio (TDSR). When it comes time to buy your flat, your loan repayments are capped at 60 per cent of your income. This includes all your loans, including the intended home loan and your car loan, credit card loans, etc. So if you pay down these other loans early, you are more likely to be able to buy the house you want.
* An exception is if you have a personal instalment loan, with fixed repayments. There may be a prepayment penalty if you try to pay off these loans early – these penalties might mitigate any savings you get. Compare the cost of prepayments to the amount you would save.
2. Expand Your Insurance Coverage or Payouts
Insurance policies provide protection and can also act as savings plans. If you don’t like to invest yourself, you may want to consider enhancing your insurance.
Even a S$100 increase to premiums can result in significantly better coverage. You may be able to upgrade to a policy that covers hospital stays in a better ward, for example.
You may also be able to add riders that cover you in the event of accidents, or include riders that mitigate the need to buy travel insurance in future (e.g. a rider that makes your insurance apply even in places you travel to).
If your insurance plan has a savings component (it grows your money), raising the premiums can mean a much bigger payout for an endowment policy. The exact amount will vary based on your plan, but it’s worth speaking to your financial planner about.
Investing an extra S$100 or more can be enough to cover your children’s tuition fees, or provide for a more comfortable retirement.
3. Build Your Emergency Fund Sooner
An emergency fund consists of about six months of your income. Emergency funds are used to pay for unexpected costs, or to provide for you in the event of illness or retrenchment (remember, even insurance policies may take some time to give you a payout).
Having an emergency fund removes the need to use expensive loans when you need cash urgently.
The sooner you finish building the emergency fund, the sooner you can put more into retirement planning. Alternatively, if your retirement plans are well in place, building the fund sooner means you will have more discretionary income for vacations and shopping.
4. Enhance Your Retirement with Passive Investments
Now that you have more cash, consider passive investments, such as savings bonds (appropriate if you are older), or blue chip shares and index funds.
These are simple investments, which do not require you to trade (i.e. You do not need to time the market, and buy and sell to make a profit).
Singapore Savings Bonds (SSBs) provide savings at a higher interest rate than the bank, with the flexibility to withdraw at any month. Blue chip shares and the Straits Times Index Fund can be acquired for as little as S$100 a month – this service is available from participating banks such as OCBC and POSB.
But remember not to buy anything without advice from a professional – you can get help if your bank offers wealth management services (this comes with certain types of bank accounts, or premiere banking). Alternatively, speak to an Independent Asset Manager (IAM), or a licensed financial planner.
5. Upgrade Yourself
With the Skills Future programme in place, you already get S$500 to buy training courses. Don’t settle for your current raise – aim to get another one. Combine your new income with the government freebie, and get certified in the right skills.
Remember to check with your employer first though. You don’t want to waste money on a course that isn’t relevant to your career, or that will have a minimal impact on your job prospect. Ask your boss what skills the company most values or needs.
You should also consider building soft skills, such as leadership or expression skills, which are often needed in higher management.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.