Now that the rainy day is here, how much savings are enough?

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SINGAPORE - Start investing young is a mantra I'm hearing a lot these days and it's piling on the pressure for me to quickly park my funds in investments.

 

A friend in her mid-20s told me that she has about $30,000 invested despite working for just three years.

 

Stories like this make it sound ever more enticing to channel some money into investments, even starting with your first pay cheque.

 

But is it more important to save or invest first? Save for a rainy day, as the old adage goes, and although it might be a cliche, there's truth in it.

 

So much is said about investing, but for a young working adult who has not laboured in the workforce for many years or not is earning a high salary, should it really be the first thing we think about when that monthly wage finally comes in?

 

Certainly, invest when there are excess funds, but before all things, savings should come first.

 

More than a rainy day, the pandemic seems to be creating a whole rainy season, and for the first time, I found myself really asking if what I had saved is enough.

 

Not much is usually said about the simple act of saving, of putting money into the proverbial piggy bank that is only to be broken open during the most dire of emergencies.

 

"Pay yourself first," says DBS Bank's head of financial planning literacy, Ms Lorna Tan, and with the pandemic, that message seems to be more resonant now than ever.

 

A quick survey via texts and over meals of my peers in their mid to late 20s found that they save about $500 to $1,000 a month on average from salaries ranging from $3,500 to $5,000.

 

So what are the best ways to ensure your savings grow and how much money is enough for a rainy day?

 

1. Save a minimum of 10 per cent of your salary.

 

Before investing or buying insurance, savings should come first. But how much should we put aside a month?

 

Most bank experts put it at 10 per cent of gross monthly income, which means about $250 to $500 a month for young adults, especially those who have just entered the workforce and are drawing their first pay.

 

Ms Tan Siew Lee, OCBC head of wealth management Singapore, said that almost 40 per cent of OCBC's customers who are professionals, managers, executives and technicians aged 20 to 30 save at least $500 a month.

 

And how long should emergency savings last? When a pandemic lasts for two years with job prospects dimmed and the rice bowl on the line, how much money would be enough to weather the storm?

 

Six months to a year should be sufficient, the experts say. That means about $6,000 if your monthly expenditure is $1,000, depending on needs and spending habits.

 

2. Have two bank accounts

 

Instead of just one account with everything in it, experts advise working adults to channel their savings automatically into a separate specific savings account each month.

 

This means the emergency pot will not be touched for various reasons, such as needing to pay for my Spotify subscription or buying another bookshelf on impulse, but will be sitting there for an actual rainy day.

 

For instance, a UOB customer can choose the UOB One Account for salary crediting and spending, which will help them earn bonus interest. Meanwhile, their savings can be squirrelled away into the UOB Stash Account, which can earn interest of up to 1 per cent just by increasing their monthly balance.

 

Putting money into two accounts will not really earn less interest in the long run, as each account allows the user to earn interest using different criteria.

 

For example, accounts like UOB Stash and POSB Save As You Earn award bonus interest for savings and maintaining or increasing the balance, while accounts like UOB One and DBS Multiplier award bonus interest for crediting salary or credit card spending, among other actions, instead.

 

3. Tracking expenses

 

The old fashioned way of keep on top of expenses meant me withdrawing the amount of cold hard cash I needed for the month and when the wallet emptied out, that would signal the end of my spending.

 

But now with cashless payment methods prevailing over several websites, including numerous digital wallets, tracking expenditure becomes that much harder.

 

Some of my peers said they use excel sheets, others just rely on the bank apps. But one friend has turned to "gamified finance" to liven up the task.

 

He uses an app called Fortune City, which grows a virtual city as expenses are noted. For instance, recording $4 spent on bubble tea can sprout a cute little cartoon coffeeshop. Perhaps it also provides incentive to complete the rather dull and tedious act of personal accounting.

 

The internet banking apps such as the UOB Mighty Insights, DBS Nav Planner and OCBC digital app, can all help to track expenses, set goals and observe monthly trends.

 

It is also possible to have a consolidated view of your finances. The announcement of the SGFinDex last December last year means users can log in with SingPass and track their funds across different banks and Government agencies with one look.

 

But in this digital age, it seems that personal accounting is still a largely manual exercise.

 

4. Saving for big-ticket items

 

But how about saving for larger things, like a Master's degree, a house or a car? The $500 carefully put away every month might take ages to amount to anything close to what is required.

 

So sacrifices and decisions have to be made, experts say, such as choosing a cheaper house for the first home. Above all, it has to be realistic.

 

OCBC's Ms Tan says that you must first think of the target amount, which has to be based on the state of your current finances, rather than just a fantastic amount that is ultimately not achievable.

 

Your lifestyle must then be tailored to reach that amount, including cutting down on expenses like the daily Starbucks. That might sound like pittance, but if each pumpkin spiced latte costs $8 it definitely adds up.

 

Other factors like how long it will take to work towards the target and when the down payment eventually needs to be made will also determine the amount that has to be put aside monthly and the lifestyle pleasures that might have to be cut back.

 

For certain large expenses like further studies, a student loan, which has a lower interest rate and may not incur fees for full or partial repayment, can be ideal in saving money in the long term as well, DBS's Ms Tan adds.

 

5. And eventually, investing.

 

And at the end of the day, investing can still supplement savings. When savings are comfortably being put away each month, some money can also go towards investment, especially since the interest earned from parking money in bank accounts is not enough to overcome inflation over decades.

 

Dollar-cost averaging - the practice of putting aside small fixed sums on a regular basis - is usually the expert advice when asked how to invest for a beginner. That certainly makes the prospect less daunting, especially as the returns can be compounded over the long term, and the pinch may be felt less in the here and now.

 

Robo advisers are growing in popularity among those in their first job, says Ms Tan from DBS. These advisers are digital platforms that provide either fully automated or hybrid algorithm-driven investment services.

 

Their minimum investment sums are also relatively low. DBS's digiPortfolio allows first-time investors access to diversified portfolios with a minimum lump-sum investment of $1,000.

 

Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.

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