Whether your financial goals are home ownership, early retirement, or passive income generation, here are 5 simple steps to help you reach them.
Each of us has major life goals, and most of those goals have a financial component. You may want to own a house, drive that dream car, or send your kids to that great school one day. And, of course, all of us need enough money to retire comfortably.
While this can look like a lot, staying disciplined about how much you save and invest monthly can make achieving your life goals more accessible and stress-free.
Here are 5 simple steps to making your money work harder for you, so you can start fulfilling your financial goals – and if you get to the end of the article, there’s a small gift to help you get started!
Step 1. Identify your goals
Well, this might seem like a no-brainer, but the reality is that most of us feel lost when it comes to financial planning because we haven’t sorted out what it is we want to achieve.
So ask yourself: What are your goals in life?
Perhaps you want to buy a house in 5 years and send your kids to college in the US or Australia in 15 years. How much will you need for those goals? And how much will you need for your retirement? Are you planning to set aside some money to leave a legacy for your kids?
Whatever your goals may be, the best way to achieve them is to understand what it takes to fulfil them. You need a plan!
Financial planning requires a timeline. For each goal, ask yourself:
- When do you need the money?
- How much do you need?
You will then be able to determine what your monthly savings plan should be by working backwards from your goal amount.
This will require some excel knowledge and time on your part. If you’ve never been a fan of math or would just like a straightforward alternative, StashAway has a built-in financial planning tool to make goal-setting as simple as possible for you.
StashAway’s tools will learn about you, your current financial situation, what your financial goals are, and then recommend a monthly savings plan while also building a personalised investment portfolio to help you reach that goal.
Step 2. Start investing early
Saving is great, but investing is better! Investing is a way to make the money you save work harder for you.
Here’s a quick example. Let’s say you are able to save about S$2,000 every month for 30 years. That’s S$720,000 in accumulated savings.
If you keep your savings in a bank account and assuming a healthy compound interest rate of 1.5% p.a., you can expect that amount to grow to around S$909,730 at the end of 30 years.
If instead, you had invested those funds in an investment product that gives you a net return (i.e after fees) of 6% annually, you will end up with S$1,950,000 at the end of 30 years.
That’s over S$1,040,000 (that’s right: over S$1 million!) in missed opportunities.
What accounts for this huge difference? Let me introduce to you the power of compound interest. In simpler words, it’s the “snowball effect”.
Compound interest is the effect of earning interest not only on the money you save (the principle) but also on the accumulated returns you receive every year.
If you invest a lump sum of S$100,000 and make 6% p.a., your 1st-year returns will be S$100,000 x 0.06 = S$6,000.
Your 2nd-year returns will be (S$100,000 + S$6,000) x 0.06 = S$6,360.
You 3rd-year returns will be (S$100,000 + S$6,000 + S$6,360) x 0.06 = S$6,741.60
And so on and so forth, until your avalanche gets stronger and stronger, and at the end of your 30th year, your returns alone will be S$32,510!
Because of this effect, it is very important to start investing early. For example, you want to save S$1,000,000 by the time you retire at 65. Assuming you started a monthly investment plan that gives you a net return of 6% p.a., you will need to start at age 25 with a commitment of $450 monthly. If you wait 10 years and only start at age 35, that amount more than doubles to $952 monthly! That further increases to S$2,023 monthly at age 45 and $5,404 monthly at age 55.
In short: don’t put your savings under the pillow (or in a cash account). Invest them, and do it today.
(Editor’s note: the figures above are purely indicative and based on an assumption of annual, not monthly, compounding)
Step 3. Evaluate how much long- and short-term risk you can sustain
What is the risk of an investment and how do you quantify it? Risk is often measured by its volatility, which can be observed by the daily or weekly changes in the price of an asset; the larger the swings in price, the greater the volatility.
Over the long-term, on average, higher-risk diversified investments will give you a higher return.
Over the short term, these same higher-risk investments can give you a lower return or experience a larger frequency of losses: they are more volatile than lower-risk investments.
For short-term financial goals like buying a car in 3 years or buying a house in 5, choosing a higher-risk investment product will mean that you will see larger volatility and potentially get lower or even negative returns.
With a short-term investment horizon, you do not have enough time to ride out the inevitable corrections and recessions in the market. In such cases, you should stay conservative in your investments.
On the other hand, for long-term financial goals such as your retirement portfolio, where the investment horizon is 10-30 years, you can afford to take on more risk. Markets will probably go into bear market territory (a negative market pullback of 20%+) a few times along the way, but because you are saving for your retirement and don’t need that money over the short-term, you can afford to wait for markets to bounce back. For long-term goals, you can afford to take more risk.
As you think through how much risk your various goals require, do keep in mind your own personal risk appetite and choose the investment that is most suitable to your risk profile.
You don’t want to be building an investment portfolio with a risk level that is more than what you are comfortable with and keeps you up at night. This is important because the last thing you want to do is make an emotional decision, such as liquidating your investments when volatility increases. This is when your portfolio can start to go into negative territory.
Read more about the relationship between risk and return.
Step 4. Diversify your portfolio
Never put all your eggs in one basket.
What does that mean in the context of your investment portfolio? Well, it means to diversify, diversify, diversify.
Your investment portfolio should include various asset classes, and within those asset classes, it should include exposure to different:
- maturity dates
The rationale is that if a particular sector was to do badly in any given year, at least it’s not your entire portfolio. Other asset classes that may have done better could have helped buffer that drawdown or the losses in your portfolio.
Portfolios can be optimised through financial math; it’s the science of “asset allocation”. What sort of asset classes can you include in your portfolio?
These asset classes may include equities (i.e., shares in private companies) in the US, Asia and Europe, with exposure to a variety of sectors such as consumer discretionary, technology and consumer staples.
It may also include different types of bonds with varying maturities, like short-term and long-term government bonds or investment-grade corporate bonds.
Finally, you may also look to get exposure in commercial or residential real estate in different regions and perhaps a commodity like gold.
If you remember the Global Financial Crisis in 2008, everyone who had FOMO (Fear of Missing Out) and poured their savings into the real estate sector alone would have seen much of their portfolio wiped out in a few months.
On the other hand, as real estate prices fell, and equities followed, bonds and gold did very well.
The moral of the story is that diversification helps you to manage the risks of your investment portfolio.
Step 5. Keep costs low
The fees that you pay on your portfolio have a direct and potentially large impact on the returns you receive from your investments: 1% more in fees means 1% less in returns for you, and you now know how compound interest works! When you are evaluating your investment options, look out for the various fees that are or might be applicable to you. This can be difficult when the fee structure is complicated or not explicitly disclosed but it does help to know what are some of the fees you should look out for.
When you are evaluating your investment options, look out for the various fees that are or might be applicable to you. This can be difficult when the fee structure is complicated or not explicitly disclosed but it does help to know what are some of the fees you should look out for.
- Entry fee (Initial Sales Charge): This is a fee you might have to pay when you buy into an investment fund (e.g., Unit Trusts/Mutual Funds), and is usually embedded into the pricing of structured investment products.
- Management fee: Most portfolio managers charge a fixed percentage of assets under management on an annual basis.
- Trading commission or transactional fee: The broker may charge a fee for each buy or sell trade
- Withdrawal/Lock-up fee: Withdrawal fees can vary depending on the amount withdrawn and how long you’ve had the portfolio. Ask your potential portfolio manager if there is a lock-in period or if you would have to pay a fee if you were to withdraw any amount from your portfolio at any time.
- Switching fee: If you want to switch from one Unit Trust to another, you may be charged a fee that goes to the bank or financial advisor.
Over the last few years, technology has enabled robo-advisors to disrupt both the wealth management industry and the traditional fee structure that has come to define it. The technology-driven automated processes used by digital managers create efficiencies that the robo-advisor can pass on to the investor in the form of lower fees.
Robo-advisors typically charge between 0.2% and 1% per annum, and often do not have other fees. In comparison, a Unit Trust from a bank in Singapore typically charges an entry fee of 2.5% and 1.5% per annum. On average, people change their investments more than once per year, resulting in them having to pay the “entry fee” very often!
Here’s an estimate of how much fees could potentially cost you:
Suppose you had 2 investments. You invest S$2,000 a month in both of them, and they each give you the same 6% annual return. The only difference is that Investment A charges an annual fee of 0.8% and Investment B charges you the fees mentioned earlier (conservatively assuming 2.5% entry every 2 years, and 1.5% annually).
|Investment A||Investment B|
|Fees||0.8% p.a.||1.5% p.a.|
2.5% entry fee every 2 years
|Duration||30 years||30 years|
Compounded over 30 years, investment A will give you a return of S$1,592,584. Investment B, however, will only give you a return of S$1,198,969. That is a difference of S$393,615!
If you’d like to start benefiting from lower fees and want to try out a robo-advisor in Singapore, StashAway has a simple fee structure that ranges from 0.2% to 0.8% depending on the value of your assets under management.
There are no entry or withdrawal fees, no trading fees, no lock-up periods, and you can change your portfolio settings and deposit whenever you want.
SingSaver’s Exclusive Offer: Enjoy waiver of management fees on up to the first S$40,000 invested in the first 6 months. No minimum deposit required. T&Cs apply.
Read these next:
Do You Have A Passive Income Strategy?
Pros and Cons of Having A Supplementary Retirement Scheme (SRS) Account
3 Myths About Retirement Planning in Singapore (And Why They’re Wrong)
‘Asian Women Need To Start Investing and Stop Thinking Of All Debt as Bad’
5 Money Lessons We Can All Learn From Game of Thrones
StashAway is an online investment management company headquartered in Singapore. The company was founded in 2016 and was the first robo-advisor to obtain a full capital-markets services license from the Monetary Authority of Singapore.