It is the end of February with all mandatory contributions and cash top up in for the month.
OA to SA transfer for the month of February is also completed. SA balance currently stands at $98,250.04, slightly more than half of 2020 FRS or 54.3% of the journey.
There’s a slight change in strategy from February onwards. The COVID-19 has brought with it market opportunities with the dips it presents. As such, I have transferred all but an amount left in the OA to go towards the monthly housing loan. The cash at hand is channeled from payment of monthly housing loan towards the equities market.
Cash, savings account, government bonds and low interest-bearing time deposit account are not exactly good storage of value. In fact, these instruments are a sure way of losing your monetary or purchasing power over time. Inflation in essence is the cause — pure economists will relate it to the interaction of demand and supply factors in the economy to form what we know as price.
Every single one of us are affected by inflation, and first hand experience as a consumer. Why my daily coffee has risen 20 cents? A bowl of noodles now is 30 cents more expensive as compared to last year! And many more examples.
Any idea of the annual inflation rate in Singapore?
2%? 3%? For the past 5 years, annual inflation rate had been at 0.44% (2018), 0.58% (2017), -0.53% (2016), – 0.52% (2016) and 1.03% (2014). Surprised? Some would spend 5 sec to think about it: inflation is that low? Definitely manageable with the way I am managing my money now!
If we look further back, things were not always so rosy. Inflation rates were 4.58% (2012), 5.25% (2011) and 6.63% (2008) for instance. From a long-term overview, inflation rate is about 1.5% to 2.0% annually on average.
Why do we need inflation? Couldn’t the Central Body or government intervene to keep inflation as close to zero as possible? Low and stable inflation is thought to be essential for steady and sustainable economic growth year after year. High inflation is definitely not desirable; deflation is equally harmful, which we would then appreciate the logic for low inflation.
Deflation is a widespread, broad-based and sustained decline in prices for all, goods and services in the economy. This generally also means that companies and employers have less capability to pay out the same rate to employees due to decline in business and profits relating to price, which in turns leads to depressed wages and lower purchasing power for consumers.
So let’s not get too happy yet. 2% while low is still significant over the run long. At 2% inflation rate, $1 is worth $0.67 today, essentially losing 33% of its worth. You would require $1.49 for the same $1 purchasing power in 20 years time.
$1 today is worth in X years
2% annual inflation
3% annual inflation
How $1 today is worth in X number of years
To have the same $1 worth today in X years
2% annual inflation
3% annual inflation
How much you need to have to have the $1 purchasing power in X number of years
In short, the longer the period of time and higher the inflation rate will ‘eat up’ the value of your money more. It is quite straightforward to see that having an savings rate return or investment return of 2% only serves to preserve your wealth. Essentially, you need to substantially aim for a return much greater than 2% to actually grow wealth.
This is not to denounce cash instruments such as savings account, government bonds and time deposits as non-practical. They are an essential part of your portfolio, both for it maintaining relatively high liquidity as well as a smaller role in preserving your wealth in a relatively risk-free manner.
Instead of falling back on lamenting about societal circumstances, economic conditions, blaming the government etc, inflation is not something which cannot be beaten as long as you start taking an increased interest in investing. Honestly, I doubt people would actually take on additional jobs for more income to ‘beat inflation’. In fact, it doesn’t actually beat inflation; your monetary value is still being eroded over time. By far, investing is the only way to beat inflation.
Investing in equities or good dividend-paying stocks over a long period is one of the many ways to stay ahead of inflation. Dividends tend to keep up with inflation as they are tangible returns paid out by companies. The less investment savvy investors could turn to index funds or even robo-advisors to avoid the stress of stock-picking the right ones.
How is your own investment portfolio keeping up with inflation?
Prior to marriage, individuals have complete control, access to and allocation of their income. Once a family nucleus is formed, different ways emerged whereby money is managed in the household. Some families maintained separate control, taking turns to foot common bills; some have minimally a joint-expenses account, whereby both spouses contribute equally. In some countries such as Japan and even China, wives hold the purse strings traditionally, on the other extreme.
I don’t deny that financial independence, as a person and individual, remains very important. By financial independence here, I mean the freedom to spend your income, to a certain degree. My spouse and I have our own salary crediting account and savings account. From a family nucleus perspective, I am of the view that family with common financial goals should tackle them together. Whether it is for kids’ education, buying your first or second properties, even for retirement… Would one party be able to commit to any of the goals above alone?
Of course, this is not a call for couples to definitely have joint accounts. I am keen to share from experience however, how does joint accounts help us tackle financial burdens and also reach financial goals faster as a team. We still manage our own monies individually. However, we also have 3 primary joint accounts:
Joint-kids investment account
Joint-kids investment account
As parents, we all know how expensive it is to raise children. We also know the time-value of money by the time our children reach their adulthood 20 to 30 years from now. It isn’t enough to just save or put aside some money in an almost zero interest-bearing account. You need to find ways to grow their money. My spouse has her own ways of saving up for our child, via endowment plans. I contribute to my child’s CPF account and make ad-hoc investments with funds from her savings account.
Together as a team, we also set aside $1,000 monthly ($500 each monthly) for my child’s regular savings plan. It started out as an individual $500 monthly contribution from my end, but I managed to convince my spouse that an equal $500 injection from her end is better off earning peanuts in a plain savings account.
While the numbers are nothing impressive right now, we are gradually building up her portfolio over the long term. With the equity market currently on a downtrend, and applying Dollar Cost Averaging (DCA), she is in fact getting more unit shares per each $1,000 investment injection.
Electricity and water bills, property taxes, vehicle road taxes, petrol consumption, child’s preschool education are some of the common expenses that we have. We take it as an equal share between us and contribute $1,000 monthly ($500 each monthly).
Individual expenses are still footed by each of us separately e.g. dinner with friends, credit card spends, parents allowances. But by having a joint-expenditure account, it gives a sense of common ownership and lowers the frequency of disagreement of who pays for what.
Essentially, we do not spend the full amount (aka $1,000) each month. What remains is saved, and accumulated as a savings account over time. Any amount beyond the first $2,000 overflows into the joint-investment account.
The joint-investment account serves as the source of funding towards our trading account and is our largest commitment thus far. Initial contributions started off $3,000 monthly ($1,500 each monthly). From February 2020, we decided to up the game to $4,000 monthly ($2,000 each monthly).
For us both, this serves as the foundation towards building our common retirement funds. In comparison, my spouse is less investment savvy. Her form of savings and investment are via savings accounts, fixed deposits and endowment plans. There is nothing wrong with the above instruments discussed. They are however not very attractive in terms of the yield over the long term.
I am however the person who is in comparison more investment savvy and greater interest in growing our wealth. She recognised this, and I have full control over the way this account is managed. Some advantages of a joint-investment account are as experienced:
Greater combined firepower.
I combined the effort based on individual effort and combined effort over periods of time. It is not hard to see that with greater combined effort comes greater financial firepower.
Solo effort (past)
Solo effort (present)
Essentially, my belief is that a family nucleus should work as a team. An individual can definitely save and scrimp and invest as much as he wants, but every effort is subject to a cap or limit. The table above only shows the investment capital put in up to a 30-year period, which reflects the amount of time we have before reaching the statutory retirement age.
If we were to look at it on a modest 8% per annum compounded returns, it could potentially form a very good retirement nest of $5.7 M at age 65 for both of us for a $1.44 M investment capital.
Economies of scale.
With combined firepower, it becomes more cost-efficient and time-effective than ever before in investing. For example, I am using Standard Chartered trading platform, which charges 0.20% brokerage for SGX market, with minimum brokerage fees of $10. What this means is that the optimum contract value for a trade is $5,000. Making a $4,000 trade would mean that the brokerage fees now form 0.25%; for $2,000 it means 0.50%. Combining firepower in a way, would allow us to bring down our brokerage fees should there be market opportunities.
On average, this means that I try to enter the market every 3-4 months based on my solo efforts to make the fees worthwhile. With combined efforts, this increases the frequency of staying vested to every 1-2 months.
Greater control over investment journey.
How many of us here face the issue over loose money control, not knowing where money is flowing or even knowing how much you may potentially have over a period of years?
By committing a ‘large sum’ monthly (which is a huge proportion of our monthly income) towards a common goal — which is to grow our wealth, we realised now how much greater control we have over charting our investment today as compared to the past. I know the potential upside and downside of my investment as an individual investor. My spouse however, would either be leaving the upside (unknown) into the hands of a third-party e.g. endowment plans or limiting the potential gains in stable and relatively risk-free but low interest-bearing instruments e.g. savings account and fixed deposits.
With joint accounts, we take greater interest as a family in financial matters. With such a high proportion of income allocated as a joint, it is no longer a matter of his money, her money BUT our money.
Money can be managed very differently from family to family depending on how money is viewed as an asset. Money for us is just a means to an end. We look forward to days by the beach, travelling around the world for experience and immersing ourselves in different cultures. We can choose to YOLO now or plan to enjoy a whole lot more later. Understanding delayed gratification is tough, but not something so tough that we can’t take it on.
Do couples like yourselves have joint-accounts too?
It is pretty interesting to note that parents who on one hand disagree on spoiling their children with a golden spoon, yet be willing to pamper them with the latest IT gadgets or wants. Some disagreements which we commonly hear are
Children should work and earn their own keep for their own university education. They should invest their own monies only after they come out to work in the society.
I am definitely of the same consensus that children should be brought up in a way that they are independent, mature and self-sustainable for themselves. As the saying goes, parents as educators should teach them how to fish, instead of plainly giving them fish. A child is highly dependent on his parents for survival till the time he finds work to feed himself. Throughout this 10-20 odd years however, parents have to have a hand in reducing their dependency on them in steps or phases.
Financial literacy and financial habits go hand in hand. FinLit is about understanding the value of time and money and the logic behind managing your own personal finance; financial habits is about inculcating frugality, thriftiness and delayed gratification.
In my opinions, parents in their strong beliefs in bring up their children well, sometimes fail to separate the needs versus wants. They are also probably more focused on goal-setting. I am more concerned however in the process of reaching those goals. Education, from my own experience, is more than just academic. Many people end up in careers far-off from what they majored in. It is more about the maturing process, getting interested in continued learning and discovery and networking with people who would be useful in their own careers in time to come.
Investing for my children is not about handing over that golden spoon. My focus is in the process of setting that very foundation from which they will take over and build on that wealth many times over.
The most common form that is passed down from one generation to the next is insurance policies. How many of us can dare say that our very own parents have walked us through the rationale on why they bought it for us or ensured the smooth transition of payer from parent to child? I have had a number of friends who started off their careers with sudden large annual premiums to take up on.
There are thus 2 things I am stressing here: inculcate good savings and investment habit and make this continued habit transferable and manageable.
The way and amount that I am currently contributing to my child’s SA is something that my child will be able to take up on when she starts working in future, and hopefully she will understand the logic and maths behind it.
$100 monthly contribution to CPF Special Account (SA)
So recently in January this year, I decided to up the game to $200 monthly contribution. Though not exact, the end result will roughly be about a good $700K in 65 years time.
Future considerations: $300 and $500 monthly contribution to CPF SA
We know that a dollar today will be worth so much lesser 65 years from now. It could be possible that $500 monthly contribution be a drop in the pond. I believe that savings and investing has to keep up with the times as well; it isn’t something static, and your portfolio and life goals must be constantly reviewed taking into account multiple macro economic factors.
It boils down once again to starting early, starting right. Have you considered how big your little contributions could be in the future?