Building a financial plan? You may already be on your way
This article was first published on The Straits Times on 25th July 2021
Younger people with their lives stretched out ahead of them can afford to be more gung-ho when it comes to investments. While building a financial plan may not be a priority, many do make an effort to invest when they have some savings.
When it comes to growing investments, having a long runway and a plethora of digital tools put young adults in an advantageous position.
Whenever his mother plays mahjong with her friends, invariably the conversation turns to what their children are doing, said Mr Paul Lee (not his real name).
Not that it bothers him as he also wants to know how his peers are faring, especially their career trajectories, who’s dating or about to get married, or just having lots of fun.
One aspect of the conversation Mr Lee, who will soon turn 32, enjoys is hearing about the various investments the friends and their children get into, and how they are doing.
After all, he has also been investing since he was in school, using his hongbao money, and wonders if he has been making the correct decisions.
What Mr Lee should do — besides benchmarking his investment strategy to his peers — is to instil some discipline to his decisions.
He does not need to be overly rigorous as that would make investing tedious, but taking stock of his financial situation and understanding his short and long-term objectives is not a bad start.
Some people find it difficult to take stock of their financial situation, because they fear they may find out that they are actually spending more money than they have and they feel compelled to cut back on enjoying themselves.
Begin with a personal budget. Find out how much cash is left over at the end of each month, and target increasing the savings by a modest amount, say an additional $50 to $100.
The idea is that the extra being socked away is sustainable: it should not inflict any pain, otherwise, you will give up. One way is to set a realistic and achievable target, like ending the year with more money in your savings account — regardless of amount — compared with 12 months ago.
Tapping tech to keep track
Use a digital personal finance tool or app which can sort your money inflows and outflows automatically into categories such as transport, eating out, shopping and so on.
Mr Barry Tan (not his real name), a recent graduate, started using the DBS NAV Planner as he was looking for a financial planning app to track his spending. Like most male Singaporeans, he has a POSB/DBS account and one day received a prompt from the bank about the planner.
“I like that they auto-categorise purchases that you make, which makes it a whole lot easier to keep track of everything. I’ve found that other apps usually have you manually input your purchases and categories,” said Mr Tan.
He also likes that it’s easy to set a budget for specific categories and see how his spending on those has varied over the past few months.
Mr Tan, who will be going to London in September for his master’s degree, said it would be nice to be able to link foreign bank accounts to the app as well.
“Rigorous and prudent financial planning should be a way of life for everyone going forward,” said Ms Evy Wee, DBS Bank head of financial planning and personal investing.
Since it was launched in April 2020, 2.4 million customers have started using the DBS NAV planner, she said. “We want to help a million of our customers get invested and insured by 2023.”
With the release of the Singapore Financial Data Exchange, or SGFinDex, in December last year, planning one’s finances became even easier as the platform can pool all of one’s financial information seamlessly — including accounts held in other banks as well as from the Central Provident Fund (CPF), the Housing Board (HDB) and Inland Revenue Authority of Singapore — for a consolidated view.
According to Ms Lorna Tan, DBS Bank head of financial planning literacy, some common pitfalls in financial planning include not having a holistic picture, not taking any risks, or trying to time the market.
“The conversation on managing money typically focuses on investments and the flavour of the month,’’ said Ms Tan.
A holistic financial plan involves budgeting, credit management, insurance, investing, home planning, retirement, and estate planning. In other words, it’s about your whole financial picture. - MS LORNA TAN, head of financial planning literacy, DBS Bank
No risk may be the biggest risk, she said. “Not taking any investment risk poses a risk, because your purchasing power with the same dollar shrinks with time. Any time your savings don’t grow at the same rate as inflation, you are effectively losing money.
“This is very real considering that interest on savings is virtually zero presently. Some retail investors see financial security as synonymous with the absence of volatility or price fluctuations. However, in seeking security, they overlook the danger of outliving their savings due to longevity and inflation.”
Timing the market is challenging, even for experts, said Ms Tan.
Market timing is the strategy of making buy/sell decisions by attempting to predict future market price movements.
Instead of trying to time the market, adopt the dollar-cost averaging strategy — where you invest a fixed sum regularly into the same choice of investment over a period. That way, you accumulate more units when prices are low and fewer units when prices are high.
Losing sight of long-term goals is yet another pitfall, said Ms Tan.
“The earlier you start, the longer the time horizon for your funds to compound and grow over time. It helps to give you a long-term investing perspective while you are working towards short and mid-term goals like buying the first home, annual vacations and children’s education. At all times, do not lose sight of your long-term financial needs,” she said.
In addition, knowing that you have time in the market increases your confidence that you should be able to ride out the volatility in the investing environment.
“You can ignore the noise in the market and minimise adverse knee-jerk reactions,” said Ms Tan.
Take action, take control
Don’t forget to take advantage of government schemes like CPF and Supplementary Retirement Scheme (SRS). Maximise your nest egg or that of your loved ones by topping up CPF accounts to leverage attractive interest rates and compounding.
You can also use SRS to defer taxes and stretch your dollar by investing the money. Novice investors including Mr Lee and his girlfriend found the DBS digiPortfolio a painless way to invest more.
While the minimum is $1,000, subsequent amounts are as little as $10. It’s been one year since they began with digiPortfolio, and returns are double-digit.
“It’s the best return of all my investments,” said Mr Lee’s girlfriend who usually puts her savings into the Singapore Savings Bonds (SSB) which is fully backed by the government. The SSB average return over 10 years is 1.5 per cent.
Building a financial plan isn’t that hard. You may already be on your way without realising it. Having some help to structure your finances could free up more cash, which is always useful.
One of the most important considerations before even starting on investing is self-awareness: understand your propensity towards risk.
If you’re conservative by nature, stay true to that and do not get swayed by others’ success stories.
Often you hear only the winners as most people don’t talk about their losses. Even well-known fund managers make mistakes.
The writer, an ex-Business Times journalist, finds budgeting is one of life’s challenges.
At your fingertips
The free DBS or POSB digibank app features access to the DBS NAV Planner which has a Money In Money Out function that automatically tracks expenditure against income.
It will show the average money spent on dining, for instance, even distilling further into restaurants and bars.
Its new digital investment adviser can also recommend suitable investment products tailored to one’s investment profile.
The planner helps customers approach planning and investing holistically by considering the cash flow and balance sheet as well as changing life stages and financial circumstances.
All in one place
SGFinDex is a joint initiative by the Monetary Authority of Singapore and the Smart Nation and Digital Government Group, with the support of the Ministry of Manpower.
It is built on Singapore's National Digital Identity (SingPass), and developed by the public sector in collaboration with the Association of Banks in Singapore and seven participating banks.
With SGFinDex, individuals can use their SingPass to retrieve their personal financial information (such as deposits, credit cards, loans, and investments) from the participating banks and their financial information (such as HDB loans and CPF balances) from the relevant government agencies.
This will help individuals better understand their overall financial health and plan their finances holistically.
This is the second of a seven-part series in partnership with DBS
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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