Your savings is the bedrock of successful financial planning and/or retirement planning. It is only after you are able to build your savings and cater for an emergency savings fund that you will be able to start investing.
It’s easy to think that you will start saving once you start earning sufficient salary from your job. The reality is that without a disciplined savings habit to begin with, you will likely squander the majority of your salary without realising it.
A habit, once formed, becomes an integral part of your life making it second nature for you to think of saving a part of your salary first and spending the rest, rather than spending first and saving whatever is left.
At the same time, it’s important to note that your savings should be seen as a means to an end, and not the end goal by itself. That’s because what you do with your savings is equally important as how much you are saving.
If you are saving large chunk of your salary each month only to leave it in your bank savings account, then you are running the risk of letting inflation slowly erode your wealth. Worse, you may be investing it blindly into asset classes that you don’t actually understand only to realise that they do not meet your investment objectives years down the road.
Are you guilty of not allocating your savings in an efficient way?
Squirrels make the effort to collect more nuts than they need to during spring, summer and autumn with a clear strategy, so that they will have enough to eat during the winter, when food is scarce.
In the same way, while saving up as much as you can is a good start, it’s important for you to identify what you are saving up for.
For example, one of the first things you want to do is build up an emergency saving fund worth at least 6 to 12 months of your monthly income. This will provide you the buffer you need to cover your monthly living expenses, in the unfortunate event that you find yourself without an income for a period of time.
Couples who are intending to settle down in a few years’ time should also save up towards their wedding, down payment for their home and renovation.
Just like the squirrel, it’s also important for us to save up towards our future retirement, when we may no longer be able (or want) to work for a living. The good thing is that unlike fruits and nuts, money that we save today is not only unperishable but can also be invested to grow in the long-term.
Saving and investing
Each year, when a farmer harvests his crop, he has to make a decision on how much he wants to consume or sell during the year and what he needs to set aside so that he can grow more crops next year.
Saving and investing follows a similar concept. In order to plan for your future retirement, or any other long-term goals that you have, you need to make a decision on how much you need (or want) to spend today and how much you want to save for your retirement.
If you spend everything you have today, you will not have anything left to save, and subsequently live on in the future. If you save everything (apart from survival costs), you will not be able to live a fulfilling life in the present.
To throw further uncertainties into the equation, even if you save everything today, there’s no guarantee that you will be able to earn from your savings to enjoy the retirement you want in the future.
Investing for the long-term
If you intend to save and invest over the long-term, it’s important to take a long-term approach in your investment decisions. Having the right investment knowledge and being disciplined are critical success factors to building wealth.
At the same time, not every investor may have the knowledge or expertise to become a successful investor. In the AIA Affluence Barometer 2019, we found that more than 3 in 5 affluent Singaporeans are not confident about creating wealth for the future, with many citing the growing uncertainties in global market and geopolitical climate as the reason for their lack of confidence.
Moreover, the study found that those confident of growing their wealth were confident because they had sufficient wealth protection measures to preserve their wealth.
When taking a long-term view of investing, you need to ensure you have holding power. This means being able to stay invested through market ups and downs.
When markets are down, you should not just be able to hold on to your current investments either. You should continue to be able to plough a portion of your salary into investments. If you are confident, you can even go a step further to take advantage of depressed prices to buy into good quality investments at lower valuations.
With the benefit of a long-time horizon till you need to start withdrawing from your portfolio, you will be able to compound your investments and potentially realise positive performance from subsequent market recovery.