Managing our finances is increasingly becoming something that needs to be addressed now rather than later. We speak with Dr. Jeremy Goh from the Singapore Management University for his advice on planning for our future in the current economic climate.
What were your growing-up years like with regards to money?
Having excess pocket money was a luxury for me back in the 1960s and 1970s. Times were different then and there weren’t too many avenues for spending. So I learnt to be thrifty from young and would try to find inexpensive sources of entertainment when possible.
What habit of yours has made the biggest difference in your personal finances?
I spend within my means, and I save for rainy days. I live by the 10% rule – that is – I set aside at least 10% of my income as savings before budgeting my expenses for the month.
What has been your biggest financial mistake?
Since I’m quite risk-averse, I haven’t made any devastating financial mistakes. However, I’ve sometimes given in to greed and invested in assets that were too risky.
For example, I have seen penny stocks that have gone from 20 cents to 1 cent. This may seem like a small difference, but it means the value of the portfolio would shrink by 20 times. Fortunately, my investment in these type of stocks is limited both in quantity and dollar amount. At the end of the day, such financial mistakes can be mitigated by investing in a well-diversified portfolio.
What is your financial portfolio like now?
Approximately 65 per cent of my investments are in corporate bonds, and the rest in a well-diversified index. I also own individual shares but they make up a small portion of my entire portfolio.
What has been the best financial decision you have made?
Though not strictly financial, I believe the best decision I’ve made is to invest in my own education. One cannot just stop pursuing knowledge because knowledge is ever-fleeting. Constantly learning new investment techniques and keeping up with the market makes me a better investor as a result.
What is the most common misconception Singaporeans have when it comes to money?
Many Singaporeans think their insurance and CPF savings are sufficient to guarantee financial security later on in life. However, with rising inflation and growing lifestyle needs, life insurance and CPF savings may not be sufficient to cover the needs of those looking to maintain a higher standard of living in retirement.
Young people seem to live by the mantra “I will enjoy life now and start saving later”. This makes it easy for them to fall into the “instant gratification” trap, without giving due thought to having any retirement plan.
What is the economic outlook for 2016, and how can Singaporeans better prepare themselves for it?
Most economic indicators suggest a global economic slow-down. The U.S. Federal Reserve’s outlook isn’t too optimistic and they do not appear to be hiking up interest rates as often as they have in the past. The recent Chinese stock market correction may also be an indication of a slowing economy.
With this in mind, Singaporeans should prepare for situations where pay raises may not be as high as before. This is a good time to re-evaluate your spending habits. Try to live within your means and be more conservative in forecasting expected income. Some ways to get started can be taking less costly vacations.
What is the most important concept about retirement planning Singaporeans should understand?
It’s all about time. The earlier you start your financial planning, the easier it will be to achieve your retirement goals. I would advise young people in their 20s to start reading up on retirement planning instead of waiting till their late 30s. Starting early can make a great difference in allowing your savings to grow, or letting your investments ride out its short- to mid-term risk.
Another important concept is asset allocation. Dividing your savings into components such as equities, corporate bonds and other alternative asset classes such as real estate goes a long way in retirement planning.
This can differ based on your goals at each life stage. For those in their 20s, they should try to build a portfolio with mainly equities, diversified with stocks. Closer to their 40s, they must begin to think about re-allocating their holdings to include high quality corporate bonds. For example, some hold 70% in equity and 30% in bonds when they are in the mid-40s. Closer to pre-retirement age of 55, it would be prudent to allocate more wealth in high quality corporate bonds rather than stocks, to reduce the risk due to the shorter time-horizon (for example, 70% in bonds and 30% in stocks).
What is one small action Singaporeans can take that will make the biggest impact on their finances in the long run?
Start investing early! Put aside 10% of your salary in an investment portfolio. If you’re starting to invest in your 20s to early 30s, allocate the bulk of your portfolio in equity such as plain vanilla exchange-traded funds. With an investment horizon of 30 to 40 years, you do not have to be too concerned about short-term market volatility as it will cancel itself out.
The views and opinions expressed in this article are of a general nature and do not take into account your personal situation. You should consider whether the information is appropriate for you, and if necessary, seek professional advice from a financial adviser or planner.