Over the last seven years, I have conducted hundreds of lessons on Financial Health for members of the public at the Institute for Financial Literacy (IFL). The lessons are structured along the four pillars for good financial health: Money Management, Protection, Investing and Retirement Planning.
Whilst all four pillars are important to enjoy good financial health, I always tell my classes that if I had to pick the most important one, I would choose Money Management.
After all, if you don’t look after your spending and saving habits and live within your means, you won’t have enough money to buy insurance, invest or save for retirement.
Here are some money management tips:
- Pay yourself first
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For years, IFL’s guideline was that individuals should save at least 10% of nett monthly salary. However, this was recently raised to 20%, most probably in response to the disruption to families brought on by Covid-19. This is a good guideline to continue even for your retirement job.
- Maintain an emergency fund
Whilst it’s prudent to keep cash handy in case of emergencies, the question arises as to how much is prudent. Many financial advisers recommend three to six times your monthly income, but this is not what IFL teaches.
Instead, the recommendation is that households maintain an emergency fund of at least three to six times (preferably six times) monthly expenses, for the simple reason that for some households, income may not be enough to cover all expenses. So the focus has to be on covering expenses first.
- Smart ways to max interest while maintaining liquidity
Suppose you’ve worked out that you need $3,000 per month to cover your expenses, which then means your emergency fund would be $18,000. You could invest this sum in stocks but this would mean taking on the risk of loss, which isn’t advisable for money that could be needed at short notice for emergencies.
You could keep this in a bank savings account, but it would then earn only a negligible 0.05%.
Much safer alternatives would be fixed deposits or T-bills, but this would mean locking away the funds for a specified period and suffering possible penalties if the money is withdrawn before maturity.
IFL on the other hand, advises participants to consider placing their emergency funds in Singapore Savings Bonds (SSBs) which are Government-guaranteed instruments that pay interest rates which are higher than savings accounts.
SSBs also offer greater flexibility than fixed deposits or T-bills as they can be redeemed any time without penalty. You can learn more about SSBs here: MAS products-Bonds and Bills.
- Ensure debt-to-income ratios are manageable
If you have paid off your mortgage and car loans, congratulations! But for those still servicing the loans, do ensure you have enough income (passive or otherwise) to cover it. What is a good ratio?
Back in 2021, MAS issued guidelines on how much debt individuals can take.
The mortgage servicing ratio (MSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying all property loans, including the loan being applied for, and is capped at 30% of a borrower’s gross monthly income.
It applies only to housing loans for the purchase of an HDB flat, or an executive condominium where the minimum occupation period of the executive condominium has not expired.
Total debt servicing ratio (TDSR) refers to the portion of a borrower’s gross monthly income that goes towards repaying the monthly debt obligations, including the loan being applied for.
A borrower’s TDSR should be less than or equal to 55%.
- Monitor expenses and maintain a household budget
Once, in a class of about 20 middle-level managers, I asked how many were responsible for their department’s budgets and almost all raised their hands. However, when I asked how many maintain household budgets, only one person did so.
Yet which is actually more important – tracking your family’s expenditures so you know exactly where your money is going, or trying to save as much money as possible for a company that may or may not be grateful?
I always share with my classes the example of a good friend who is an executive director at a local bank who, despite being a high-income earner, maintains a monthly Excel spreadsheet on which he enters every single expense his family incurs, from groceries to petrol to children’s tuition, right down to the smallest amounts including car park charges.
- The 50-30-20 rule: balancing needs and wants
One way to organise your budget is to follow the 50-30-20 rule, which recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
About half of your budget should go toward needs. These are expenses that must be met no matter what, such as utility bills, rent or mortgage payments, health care and groceries.
As for wants, these would be expenses you can do without, such as eating out, going on holidays, Netflix subscriptions and so forth.
- Stay ahead of inflation, but don’t be overly worried
At the time of writing, it’s just been announced that Singapore’s core inflation for 2024 was 2.7%, down from 4.2% in 2023. However, whilst inflation appears to be trending lower, much uncertainty exists about the outlook because of the tariffs that the new US administration is levying, which has led to fears to global trade wars and higher prices.
My view is that when working out your retirement needs, it’s reasonable to use 3% as a long-term average for inflation.
Furthermore, although many financial advisers urge their clients to invest in various financial instruments in order to beat inflation, my advice is to only do so if your risk profile allows, and you understand what you’re doing.
Stated differently, don’t stay awake at night worried that you must earn a high return to avoid your money being eroded by inflation to the point that you end up buying financial instruments that you don’t understand, or products that carry a lot of risk.
This is all the more so if you’re a senior in retirement with no time ahead of you to recover from losses, or ride out market volatility.
More on IFL' programmes
The IFL is the public face of the Government’s financial education initiative MoneySense, which is funded by the Monetary Authority of Singapore and Ministry of Manpower. It offers free and unbiased financial education and training programmes to Singaporeans. They are split into 4 core pillars:
- Money Management
Participants are taught to pay themselves first (ie to save before spending), how to keep within prudent debt guidelines, how credit card and housing loan interest works and overall, how to approach financial planning.
- Insurance
Participants are taught the importance of having sufficient insurance, and how Government schemes from MediShield Life, CareShield Life, private insurance plans like critical illness and endowment work. There is also a module on protecting oneself from scams.
- Investing
Participants learn about risk and returns, and how to construct basic portfolios to meet investment objectives using tools such as bonds, shares, real estate investment trusts, exchange-traded funds and unit trusts.
- 4. Retirement Planning
This pillar has a heavy emphasis on how CPF works and how to use it as the foundation to build the desired income in retirement, before and after factoring in inflation. The other topics covered are the Supplementary Retirement Scheme (SRS), Estate Planning (writing of wills and legacy planning) and the need to have a Lasting Power of Attorney.
For more information, click here.
