Tools for you

These are the immediate cash you can withdraw and use, or ‘liquid assets’. These are your savings account cash, 3 month fixed deposits, etc. Use multiplier accounts and short term fixed deposits here.

You should have a stash of cash as an emergency fund of a sizable account here for unexpected events (accident, illness, retrenchment). My personal take is to have a minimum of 6 months’ worth of expenses in cash here. Anything above that would be for interest or other purposes like payments, holidays, etc.

Once you start working, there are multiple savings accounts that you can utilise to get a better than average yearly interest (up to 3.5%). You’d have to meet certain criteria and have to deposit your salary into these accounts to do so.

Read up more at: https://www.dbs.com.sg/personal/landing/dbs-multiplier/

I personally use this savings account calculator (might be out of date) to see which is the best account for me to use. These accounts are easy to open. For example, DBS Multiplier accounts can be opened immediately using iBanking.

Debt

Debt is borrowed money, as student loans, credit card payments, housing loans etc. It is neither good nor bad, interest rates are the determining factor. If you can borrow money for free (0% interest) and put it into a fixed deposit account of 2%, you have essentially earned free money.

Think of debt not as an expense, but as a form of savings. Just that you are starting from a position besides 0. Once you are cleared of said debt, the money put towards it would immediately go towards other forms of savings.

This is also why interest-free payment schemes from your large purchases (like a TV or washing machine) is a good thing, so long as you don’t miss a single payment.

You can think of debt as a form of investment. Putting money into your student loan debt of 5% interest can be seen as investing in a 5% interest stock. In general, you should strive to pay off your debt in the following priority:

Credit card payments >> Student Loans >> Housing Loans or CPF loans

Side note: I have a personal thought that if you can, you should not use your CPF to pay for your HDB… simply because you are missing out on the 3% interest rate. Getting a bank loan at 2.2% would mean that you are saving on the 0.8% per year interest. Of course that is just my current thoughts, and if you do have the fiscal ability to do so.

Investments

Simplifying things, investments are stocks/shares or ETFs you can buy through a stock exchange. These are riskier products that *can* on average net you 7% to 10% returns annually, or lose you the same amount.

First and foremost, it is important to understand what you are getting yourself into. Reading books on investing is crucial in your journey through the ups and downs of the stock market. Here are some of my personal recommendations:

Stocks, Stock Market, SGX, ETFs etc

This is where most people would get the bulk of their capital gains (and losses) from. Over the past 90 years, the Standard & Poor’s 500 index (S&P500) index has gained an average of 10% per year. Of course, the flip side is true as well, where people can lose money in the stock market, in 2008 for example.

You, as a mid-20, early-30 year old person starting out on your personal finance journey, with ~25 to 30 years worth of time in the stock market, have the time to ride out the bumps in the stock market. If you bought 100,000 SGD into the S&P500 index before the 2008 housing crisis in December 2007 and held on to now, you would have 200,000 SGD in your portfolio.

Here in Singapore, your stocks would be held by the “Central Depository” (CDP) regardless of where you buy your stocks from for SGX (unless you’re using Standard Chartered). This means that you can purchase from broker A, and sell from broker B as the brokers do not hold onto your stocks. For local brokers, there are multiple ones to choose from, and it would do you good to compare them, in terms of cost and ease of use, and decide which broker suits you best.

The important aspect about investments are the costs related to them. Apart from the ‘upfront’ commissions that you incur from the buying and selling of the stocks, there may be additional costs relating to the stock that you have purchased. Take for example SGX:ES3, going into their fact sheet, you’d find out about its holdings, methodology, and it’s expense ratio (the cost every year). Knowing every cost along the way is important in knowing how your money is being handled.

0.30% expense ratio per annum is considered pretty good

For international stocks, like the S&P500 index from Vanguard on the New York Stock Exchange, I would recommend a US-Based broker, like Interactive Brokers or TDAmeritrade, although they do not function exactly the same way as the local brokers do, both in cost and functionalities.

There are also ones from banks called Regular Shares Savings (RSS) Plan.

These accounts allow the individual to save a small portion every month to invest in a selected few number of ETFs. Such account are like POSB Invest Saver accounts, or others from OCBC and Phillips.

Bonds

Here, I would consider Bonds to be ‘fixed interest’ instruments. You can purchase them through SGX (your broker much like a stock), a long term fixed deposit at a bank, the Singapore Savings Bonds (SSB), CPF, or others.

CPF as a bond? Yes. To not consider CPF as a meaningful investment and retirement fund is a missed opportunity. With up to 4% risk free returns annually on your savings, it can be one of the best long term bonds around. You’d have to treat it as such, with a lock up of 30+ odd years until you’ve retired. Just to sweeten the deal, your first 60,000 SGD in CPF would earn an additional 1% in interest, ie 3.5% and 5% in your Ordinary and Special accounts respectively.

The SSBs provide a new form of “bonds” that is highly beneficial to the average person. The main issue with bonds is the lock up in one (a huge one in CPF as well), and SSBs allow anyone to withdraw from it without penalty. The flip side is that it has a progressive bond rate instead to encourage people to stay in it. With up to 2.5% average compounded interest over 10 years, this beats most other fixed deposits with banks in returns. I personally do not see a large reason taking a fixed deposit over SSBs.

SSB has a pretty good calculator online: http://www.sgs.gov.sg/savingsbonds/Your-SSB/Calculator.aspx

Managed funds

There are managed funds that help the individual hold both stock and bonds, managed by ‘professionals’, typically for a fee of around 1% to 2% per year.

Automated ones are the Robo-Advisor accounts that we’ve seen coming up recently. I would recommend looking them to and giving them a try at the beginning. Most of these robo investors have a percentage fee on your funds every year. As you first start out, with a small capital, it can be fairly affordable compared to out right purchasing stocks. Once you get to a substantial amount of say 100,000 SGD, it can get expensive real fast. Some of these companies include:

I highly recommend reading this blog post before deciding on these robo-investment funds.

Real Estate as investments

You can buy properties as investments, selling at a higher price in the future, or utilise it as rental property for a second stream of income. These are very illiquid assets, as it takes a long time for you to purchase and sell a unit as compared to the other forms of investments.

This is an area that I personally do not have experience in (if I did that’d be a real eye-opener). What I do believe is that owning a piece of real estate would be a large hold up on your available capital, and a long-term leverage in your personal financial life (in the case of a house loan) that cannot be taken lightly.

My personal view on real estate is that it is an instrument based on a future valuation that is largely dependent on governmental and municipal policies. I do not believe real estate is the “guaranteed” investment that many others claim (see 2008 housing market crash).

Would you want to take up a 500,000 SGD loan over 30 years, to purchase a single stock, which has a 15% cost of selling that takes up to a year to be able to sell to someone else?

The positive side of this is that you can rent out your place as a form of passive income, diversifying your income streams and being less dependent on just your day job. Alas, this is beyond the scope of this ‘short’ article, and beyond the scope of my bank account at this point.

Insurance

Everyone needs insurance. It is financially irresponsible not to have one just to save on the premium on insurance. Every individual will require a different insurance package due to their individual needs.

The key idea in insurance is not about getting a pay out in case of something happens, or getting the best value for buck, but about ensuring that the people around you would not be affected financially should anything happen, be it illness, accident, or the worst case scenario.

For example, a construction worker will need the accident and injury insurance much more so than the software engineer who is in an office more times than not.

The key ones to cover are:

Health and hospitalisation (via NTUC or CPF medisave)

Term life insurance (MINDEF Aviva Group Life insurance)

Accident coverage (injury coverage)

Critical Illness

Being able to speak to an insurance agent on what may be needed for you as an individual is very helpful, but do take note of the conflicts of interest between your personal coverage, and the agent’s commissions. Having a basic understanding of the general insurance plans would allow you to spot any red flags from profit-focused agents who are simply pushing additional products that would not suit your personal life. eg, the officer worker who needs a comprehensive accident coverage

Insurance-linked plans (ILPs) or Whole life insurance

Combining both insurance and investments into a single package is called an ILP, or whole life insurance (generalised). These tend to have costs at every stage, from 5% upfront fees, to 2+% fees every year with no guarantee of positive returns.

There is a common saying around, which is “Buy Term Invest the Rest” or BTIR. I personally will advocate this and purchase Term-Life insurance over Whole-Life insurance, along with avoiding investment-linked plans from insurances.

Why? Cost.

The main thing about insurance savings plans or whole life plans is that the insurance company would be the one managing your investments. I had previously mentioned that costs is a huge issue in investments, both in the upfront, and the expense ratio (or ongoing cost). Here is one example fund that the insurance company would place your money into:

Note the costs of this fund that is recurring annually

Compared to the other management funds, this example has a high 5% cost when buying and selling your portfolio, along with a high 1.25% fee every year. Assuming you buy yourself into a 20 year plan, and the market remains flat for these 20 years, you would end up with the following:

-5% purchase cost + -1.25% ^ 20 years + -5% selling cost = 70% of original amount

If you had placed the amount into your CPF instead, you would have had an 80% increase in your money. In order to get the same return for your money in this specific ILP, you’d need to have more than doubled your money just to match CPF’s return, with the risk of possibly losing money in the stock market. Not to mention, should you have simply done the investments yourself, you would not have incurred the high costs of the ILP for the gains you’d have received.

Note the foot note of an insurance fund fact sheet: there may be even more fees that are not included in the annual expense ratios.

Along with a penalty fee when withdrawing early, the high costs of the funds, the limited number of funds available, and the lack of monitoring services or apps that tell you your current portfolio that comes free with other services, I personally do not use ILPs in my planning.

There are merits to these plans, and the biggest one I can find is convenience. Having a single plan covering all aspects of your life is reassuring, covering your investments, insurance, and health at the same time… but at what cost?

Side note: if you do require advice for insurance or investments as a whole, I do have friends who work in this industry whom I would be able to recommend whole heartly

Tax deductions or deferment

Singapore has a very low income tax rate. Much lower than other countries. If you were to earn 4000 SGD per month, you would end up paying only 494 SGD in taxes for the year. This may increase up to a few thousand a year as you progress, but compared to other countries, Singapore has a very low rate of tax for income, and as a result, tax deduction opportunities are less effective.

Regardless, I would state some here in case some readers are unlucky (or lucky) enough to have to pay substantial amounts of income tax right out of university.

The good thing about being in Singapore, as opposed to other countries, is that our taxes are much simpler compared to others. Most of your taxes are filled automatically in your tax deductions. Apart from the standard deductions, you can actively utilise cash to deduct off your tax obligations. Here are some of the larger ways you can do so.

Tax deductions work by reducing the income that is being taxed, ie, assume you earn less than you did.

Here are some areas of tax deductions that the average fresh grad can utilise:

Central provident funds (CPF)

20% of your personal monthly income (up to 6000 SGD a month, and up to 5 months of bonus per year), would already contribute towards CPF. These amounts are not included in your income tax.

If you earned 10,000 SGD a month with no bonus, you’d contribute 6000 * 20% * 12 to CPF per year. If you earned 5000 SGD a month, with 6months of bonus, you’d contribute 5000 * 20% * (12 + 5) per year.

What we are interested in is the additional amounts you can get deducted for on top of your 20% individual contribution. You can contribute an additional 7000 SGD for your own account, and another 7000 SGD for your parents account for a total of 14,000 SGD to be deducted off your taxable income.

The main thing about cash donations would be that every dollar donated would yield a 2.5x tax deduction. If you are on a 15% tax bracket, and you donated 1000 SGD, you would save 375 SGD, or 2500 * 15%, in taxes. Your net donated amount by yourself would instead by 625 SGD instead of 1000 SGD.

Do take note of the organisation that you are donating to, and to ensure that they are eligible in this donation tax deduction.

If you are doing a part-time study, or taking additional courses that is for a professional or academic qualification, such as the Professional Engineers qualification, or a part-time masters from a university, you are able to claim the relief.

Other smaller reliefs

You can find most of these tax deductions in the IRAS website. Some of these deductions include NSMen relief, Working Mother’s Child Relief, and others. The main thing is that these reliefs are normally already accounted for, and that there isn’t financial actions for the individual worker to maximise these reliefs.

Tax deferment

Supplementary retirement scheme (SRS)

Tax deferment of the amounts placed in the SRS account from your annual income. Any withdrawal after retirement would be taxed at 50% income, while withdrawals would be taxed at 100% with a 5% penalty on the withdrawn amount.

This scheme presents an individual with an interesting way of minimising tax in the future, if it makes sense for you. Once retired and without a yearly income, you are able to withdraw 40,000 SGD per year tax free.

You are also able to use this at times of unemployment, where you are able to withdraw 20,000 SGD per year income tax free should you be unexpectedly become unemployed for a long period of time at a 5% penalty. If you had saved >7% in income tax due to the SRS deferment, you would still come out ahead even after the 5% penalty due to the tax saved.

Fin.

Hopefully this article would be useful to you in the long run. At the very least, let you know where to start looking in terms of your personal finances. Do always look to learn and grow in your career, and ultimately your finance is just a means to an end, not the be all and end all.

Good luck to all.