Want to start investing but don't know if you have enough capital? The truth is you don't need a massive sum to begin.
This is a common question, which is actually a little off-base (we’ll explain why in a moment). But the gist of the question is: how much capital must I have set aside before I go out and make a big investment. The answer is a little more complicated than a simple number:
Investing Does Not Require a Tremendous Amount of Capital
Mostly due to misunderstood business articles, a lot of people think they need to amass a lot of capital (S$5,000, S$10,000, or even more) to start investing.
Now that is one way to start investing, but it’s not necessary, and most people don’t even get started that way.
You will need to amass a lot of capital if you want to invest in certain ways. For example, if you want to be a landlord, or start trading derivatives, then you will need to raise a lot of money to do it. There are also some funding options, such as financing coal mines, that will require you to put down a large initial investment.
But to be honest, these methods are not very practical for the average Singaporean. They are not even advisable, as it is very high risk to put a few years of your savings into an investment all at once.
So let’s look at what you can do instead:
Have an Emergency Fund Before Investing:
Before you start making investments, build an emergency fund. This is around six months of your income (or at the very least three months). You should have this stashed aside before making any investments.
There is no point investing your money if a single emergency would require you to cash out instantly. For example, say you buy some blue chip shares with your money. If you end up needing money for surgery on short notice, and the market is bad, you could be forced to sell your shares at a lower price than you bought them, thus incurring a capital loss.
Once your emergency fund is ready, you can look at Exchange Traded Funds (ETFs) and blue chips.
ETFs and Blue Chips
Blue chip shares come from companies with the highest market capitalisations (in a simplistic sense, they are the most “stable” companies in the market). Exchange Traded Funds (ETFs) are like mutual funds, but units can be bought and sold much more easily, and they have lower management fees.
Investing in these products only requires as little as S$100 a month, and can be done through banks that offer blue chip investment programmes. Use this method if you are new.
Alternatively, the Singapore Exchange (SGX) now offers some stocks that come in small lots of 100 (as opposed to the usual lot of 1,000). The price of a lot is the price per share multiplied by the lot size: so a company that is S$3 per share would cost S$300 for a lot of 100.
If you are in doubt as to what to buy, simply purchase units in the Straits Times Index Fund.
Note that you do not need to worry about trading (buying and selling)--simply hold on to the stock, and collect dividend payouts every half a year or so. Speak to a financial adviser or your stockbroker for more details on how dividends work.
Let Your Insurer Do the Work
Some insurance policies have an investment component, such as Investment Linked Policies (ILPs). Although these are expensive compared to investing yourself, they are still the most popular way to invest because they are hassle-free.
An insurance policy, besides providing protection, can grow your money. The amount you need to “invest” is bundled with your monthly premiums, so again you don’t need a huge amount of capital to start.
(We can’t tell you how much your premiums will be, as each insurer will give you a different quote. But you can expect it to range from S$200 to around S$320+ a month.)
So How Much Do You Need in Total?
You can summarise the amount as:
(Six months of your income) + (S$100 to around S$320 a month).
Remember though, the six months of your income is not to be invested, it’s to be set aside for emergencies.
Overall, most people can afford to start making investments after saving for just two to three years. This is also sufficient time to start learning more about investing methods. You do not “need” a capital of a few hundred thousand dollars in order to get started, nor do you need to take out big loans.
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