We all want more money.
But money is often boring, confusing, and sometimes, downright cringy (I’m looking at you, YouTube financial gurus). Researching the right mortgage provider or insurance plan puts you to sleep. And it seems like everyone has a different opinion on where you should put your money: This new technology stock! No, fixed deposits are the way to go! No, it’s all about crypto!
The good news is, 95% of personal finance content online doesn’t actually matter for ordinary folks like you and I. Instead, effective personal finance is like choosing a phone. Most of the features don’t matter because you’ll never use them. So we simply need to know what we want, set up our system, and then move on with our lives.
While I’ve been writing about personal finance for over 10 years, I’ve never consolidated my entire system into a single post. So, I decided to write one. The goal is to give you a broad overview of my personal finance system. It’s light on the details, but meant to help you see that money is not this crazy complicated thing. Instead, it’s all about the 80/20 rule: Do the right 20% of activities, and you’ll get 80% of the benefit.
Here are the four parts to my personal finance system:
Parts 1 and 2 are about setting up a system to help you understand where your money goes, and Parts 3 and 4 are about growing your wealth. This is a long post, so don’t worry about reading everything from start to finish. Jump to the parts that interest you the most, bookmark it and come back to it whenever you need.
(As always, this isn’t financial advice. I’m simply sharing what works for me and how I think it could help others. Do your own research, don’t follow this blindly, etc etc)
Automated Savings
Most of us worry too much about saving: We worry about which bank account gives us the best interest, and what percentage of our income we should save. This is a fallacy. Why? Because you’re not going to get rich through saving. The return you’ll earn from your interest is so small that it almost doesn’t matter. Instead, growing your income and investing it are the two biggest levers you have to grow your wealth.
So why are we talking about savings? Because an effective savings system powers the rest of your personal finance system. It’s less about the returns you’ll get and more about the mechanics of allocating your income to different parts of your life.
Give Every Dollar A Job
For many of us, our entire salary goes into our bank account each month, we spend a part of it, and whatever left over is our “savings”. But by lumping all your savings into one bucket, you’ll never know whether you’ll have enough. And because we don’t know how much is “enough”, we end up over-saving to feel secure.
Instead, every dollar in your savings account should be earmarked for a specific, short-term purpose. Anything extra should either be spent or invested. (more on that later). What do I mean by a specific purpose? I mean big ticket items that you’ll spend on in the next 3 years. Examples: 1) A wedding, 2) A house downpayment and 3) an optional emergency fund.
The easiest way to separate your savings into different buckets is to find a bank account which allows for sub-savings accounts. Personally, I like OCBC’s 360 account, but there are plenty of other accounts like MayBank’s iSavvy that let you do this as well. Find an account that allows for this, credit your monthly salary in, and you’re all set.
Don’t sweat it if your bank doesn’t allow you to do this and you don’t want to change accounts. The underlying principle here is to identify specific purposes for your savings and give every dollar a job. Find a way that works for you, and stick with that.
Plan For Your Milestones
Because you’ve already given every dollar a job, you can now estimate how much you’ll need to save every month. For example, if you anticipate that you’ll get married in 5 years and that you’ll need $20K for that (remember that a part of it will be covered if you receive ang paos ), you’ll need to save around $300 a month from today. Don’t stress if you’re saving less than the the ideal amount now; you can always make up for it when your income increases.
What if you want to buy a home in the next couple of years? This is like the biggest expenses you’ve ever made so it’s important to lay out the numbers. I personally like to follow the 3-3-5 Rule:
- Rule 1 – 30% of property price: Your initial capital should be at least 30 percent of the property’s asking price
- Rule 2 – 1/3 of monthly salary: Your monthly mortgage payment should not exceed one-third of your monthly salary
- Rule 3 – 5 times of annual income:The purchase price of property cannot exceed five times of your annual income
Do you need an emergency fund? In my opinion, having one is nice but not completely necessary. Why? Because it’s primarily meant to cover you if you lose your job, until you find your next job. It is NOT meant for big, catastrophic expenses like medical bills, which should be covered by your insurance (more on this later). If you truly do encounter an unexpected expense, you can always dip into your other savings buckets. So set one up if it makes you feel more comfortable – 3 months of expenses is plenty – but don’t over-save.
Set Up Savings Buckets
This is where the power of sub-savings accounts really shines. Set up a 3-5 an instruction to save $X for each goal every month into each savings bucket. For example, if your salary comes in on the 25th of each month, set up your goals such that your buckets get credited on the 26th. So on the 26th of each month, $300 goes into your wedding bucket, $500 goes into your house downpayment bucket, and so on.
Now that you know 1) what you’re saving for and 2) how much to save, the last step is to save consistently towards your goals.
Tip: Don’t go crazy with the buckets. You should have around 3-5 buckets max. Anything more means that you’re probably spreading your savings too thin. It’s better to aggressively save up for one goal, and then move on to the next.
This is what I mean by automated saving – saving towards clear, specific goals without any additional willpower from you. Once these are set up, you’ll never have to worry about whether you’re saving “enough”, since it’s already been taken care of. The best part of this is, once you are done, the rest of the money is yours to spend guilt-free.
Guilt-Free Spending
Now that you’ve set up your savings system, it’s time to move on to your expenses. Most people feel guilty about splurging on themselves, because they feel that that dollar could have gone towards something more “productive”. So they forgo massages, bags and holidays. But this is no way to live your life: You’ve worked hard for your money, so why not enjoy it?
The way to spend money guilt-free is simple: First take care of your savings, investments and important expenses, and spend the rest however you want. Want to splurge money on a Business Class ticket? Sure thing. Want to treat your partner to a $700 dinner? Go for it. In this section, I’ll talk you through one important expense (insurance), and then how to manage the rest of your expenses so that they’re automatically taken care of.
Buy Just Enough Insurance
Just like savings, many people overemphasise and overinvest in insurance. This is probably because some insurance agents like to position it as the central way to build your wealth, when it should only be a tiny part of your personal finance system. Why only a tiny part? Because you should buy only just enough insurance to cover your risks, and nothing more. (See this article from MoneyOwl on a great analogy of how insurance is like a fire safety system – there’s no sense in buying an expensive, state-of-the-art system when all you need is a cheap fire extinguisher).
Most Singaporeans will only need 3 types of insurance: 1) Hospitalisation, 2) Disability Income, and 3) a cheap Term Life plan. A young person can easily cover the cost of these with a couple of hundred dollars a month, often less.
- Hospitalisation: Hospitalisation is key because your biggest risk is to end up with a huge medical bill you can’t afford. Hospitalisation plans are super cheap when you’re young and healthy, and are highly regulated so there’s less of a risk of you overpaying for a plan you don’t need. You can also use your CPF to pay for all or most of it. When it comes to hospitalisation, go for the most premium one that you can afford.
- Disability Income: Your next biggest risk is for a crippling disability which prevents you from earning an income. This is where Disability Income insurance comes in, which pays you an income if you’re disabled. To keep premiums manageable, you can set the coverage to just your monthly expenses instead of your entire income.
- Term-Life: Lastly, if you want to ensure that your loved ones or dependents are covered if you pass on, get a cheap term insurance plan. This post outlines why it’s better to stick to term insurance instead of a more expensive whole life insurance plan or investment-linked plan. In addition, you can tag on an optional Critical Illness rider which gives you a payout if you ever need a big cash outlay to manage a critical illness.
Some insurance agents will try to convince you to buy a more expensive plan. But being super clear about what you want and understanding your options (You can get quote estimates from the MoneyOwl site here) will help you when you’re talking to them.
Pick The Right Credit Card
Next, find the right credit card to spend on, so that you can earn benefits on expenses you’re going to spend on anyway. There are loads of websites helping you to pick the right credit card (the MileLion is my favourite) so I won’t say too much more about it.
The main decision you’ll need to make is what kind of benefits you want: Cashback or miles? If you hate managing admin, then a simple, straightforward cashback card will do the trick. Every month, you’ll earn a certain amount of cashback which you can use to offset the bill.
But if you love travelling and don’t mind doing a bit of research, a miles card usually gives you a lot more value. I’ve used miles cards to travel on Singapore Airlines Suites and Business Class for years, paying only a couple of hundred dollars in taxes. Here’s how I do it – it takes a bit more time, but the value you get is often way more than what you’ll get with a cashback card.
Automate Your Fixed Expenses
The last step in managing your expenses is to simply automate all payments. You can do this by setting up automatic bill pay for your Netflix subscriptions, utilities bills, insurance premiums, etc onto your credit card. It boggles my mind how people still pay their bills manually every month. If you’re going to do the same thing each month, automate it! You have better things to do with your life. This will ensure that your bills are paid on time, in full, every month, without you having to lift a finger. And you’ll earn points or cashback on expenses you would have spent on anyway.
Next, automate your credit card bill payments from using your bank’s automated bill pay feature. Again, this ensures that your credit card bills are paid on time and in full, so that you don’t incur any late payment fees. If you’re paranoid about getting a fraudulent charge, simply set up monthly calendar reminders to check your statements. You can also set up an annual reminder on the date that your annual fee is charged, so that you can call them and ask them to waive it.
With all these set up, you’ll have all your savings and expenses set up and automated. Here’s an old post of what my personal finance system looks like, if you’re curious. Setting up something like this will save you hundreds of hours over your life, and free up mental capacity for other, more interesting things.
Set-and-Forget Investing
Inflation will erode your savings, and your income won’t grow forever. Investing is the surest, most sustainable way to grow your wealth over the long term.
However, investing is also the one area that’s most susceptible to hype and BS. Every day, we are bombarded with news about the stock market, and your friends are constantly telling you how much they made from crypto. The good news is, much of what you see in the media is designed for entertainment, and doesn’t really matter to us.
Instead, investing is about 1) Having a long-term view, 2) Adopting a passive investing approach, and 3) Setting aside a small part to experiment with.
Take a Long-Term View
Let’s get this out of the way: You are not going to get rich overnight. Anyone investment promising huge returns in a short period of time is either a scam or asking you to subject yourself to extreme risk.
However, you can grow your wealth significantly if you invest early and for the long-term. And by “long term” I mean a 10-30 year horizon. For example, if you started with $10,000 and invested $500 a month at a 6.8% real return (the long-term return of the stock market, adjusted for inflation), you’ll end up with more than $600K in 30 years. You’ll probably end up with much more, especially if you ramp up your monthly investments as your income increases. You can calculate your own projections using this calculator.
Your end-goal for investing is to become financially independent. To calculate how much you need to achieve financial independence, follow the 4% Rule: Take how much you’ll need to spend a year and multiply that by 25. So if you estimate that you’ll need $4,000 a month to live comfortably, that’s $48,000 a year. Multiplied by 25, that means your financial independence number is $1.2M.
This number will likely change as your needs evolve, and that’s okay. The point of this exercise is to make your goal concrete. That way, you realise that achieving financial independence is actually very achievable, and not the crazy amounts that most people think that they need.
Adopt a Passive Investing Approach
Next comes the favourite question in all of personal finance: “So what should I invest in?”
There are plenty of options to choose from: Individual stocks, crypto, foreign exchange, real estate, and so on. But the most reliable long-term investment for any investor are the stock and bond markets. Notice that I said the stock market, not individual stocks. The reason for this is simple: It’s extremely difficult to determine which individual stock will do well, but the stock market as a whole goes up over the long term. This approach is known as passive investing, which means to invest in and track the entire market.
There’s loads of research on why passive investing is the undisputed king of investing strategies. For example, you can look through the regular reports from SPIVA and (more or less) the same thing: Over a 5-year period, 75% of professionally-managed funds don’t beat their benchmark. If these professionals find it tough to pick the right individual stocks, there’s very little chance that you and I can do any better. Therefore, if most professionals can’t beat the market, the most logical way to beat most professionals is to invest in the market.
The easiest way to get started in passive investing is to do it through a robo-advisor. Singapore has a few options like Endowus and Syfe which follow a truly passive investing approach. They allow you to get started with as little as $100 a month, and you can set up automated transfers to them. I am slightly biased towards Endowus because that’s where I’ve invested the majority of my portfolio, and I went to school with some of the founding team. (Here’s a referral code which will get you and I $100 off in fee credits if you sign up) But choose whichever platform that makes you the most comfortable to invest with – the idea is to make sure that they are adopting a truly passive investing approach, as I lay out in this article.
You can, of course, construct your own passive investing portfolio using Exchange-Traded Funds (ETFs), which can be more cost-effective. But it’s also a lot more complex and you have to worry about things like rebalancing and reinvesting dividends. That’s why I encourage new investors to simply get started with a robo-advisor, which is what I do myself.
Allow For Fun Money
This section is optional, but I’m including it because the reality is that passive investing is boring. Most people will be itching to try new investments and strategies after a couple of years. However, the key for an investing strategy to work is to stick with it for the long term. You won’t get anywhere by jumping from tactic to tactic, and from stock to stock. That’s why I advocate setting aside 5% of your portfolio for fun money.
Maybe you want to invest in a stock because you really believe in it. Maybe you’re interested to get some skin in the game for crypto. Maybe you’d like to invest in a friend’s business. I’ve done all three. Most of them haven’t turned out well, but I’m glad that I got to scratch that itch by allocating some of my portfolio for fun money.
Fun money is money that you’re prepared to lose. With this 5%, you can invest in whatever you want. This gives you the optionality to participate in the upside, but keeps you disciplined so that the other 95% of your portfolio remains in what’s tried-and-tested.
Earning More Money
Once you have your personal finance system set up, it frees up more time for you to focus on earning more. As I said in the beginning, this is where your focus should be at the beginning of your career. Don’t worry too much about optimizing every single aspect of your personal finance system.
Make Yourself Valuable
This is a whole topic in itself, so I’ll just say that the best way to earn more is to make yourself more valuable. You’ll only get paid if you deliver value to people. Nobody cares about your “experience” working at 20 different internships, or what your passions are. If you want to be paid more, make sure that you’re delivering value to your manager, to your clients, and to your coworkers.
To do this, set aside time to develop your skills . Start with books and read widely. I have never come across anyone successful who isn’t a voracious reader. When you’ve gotten a sense of the lay of the land of your particular skill, then invest in a top-tier course. Most courses are terrible (I’m especially wary of gurus claiming to teach you investing or ecommerce) but finding the right course can help you to unlock massive growth.
As Paul Graham says, look for smart people and hard problems. Be that person who gets stuff done. Aim to be the superstar in the office. All that effort, all those skills compound. When you combine them (e.g. having great product knowledge and knowing how to write well) they will become a superpower that no one else can match. And as a side effect, you’ll get paid more.
Save and Invest More
As your income increases, you’ll be able to save and invest more. As you earn more, you can ramp up your monthly savings, or prepay a part of your mortgage to save on the interest costs. You can also ramp up your investments. If you started investing only $100 a month, see if you can increase that to $500, then $1,000, or even $10,000 a month. Remember that every extra dollar you invest can accelerate your time towards financial independence.
When you earn more, you’ll also naturally spend more. Some personal finance bloggers will try to make you feel guilty about your lifestyle creep, but it’s actually perfectly fine! You’ve worked hard for your money, so you should be able to spend more and enjoy nicer things. The rule of thumb for spending more is simple: Never spend more than 50% of your income increase. If you stick to that rule, you’ll always be improving your timeline to financial independence while also being able to enjoy the fruits of your hard work.
Save Money On Taxes
Singapore has one of the lowest levels of income taxes in the world, and it is amazing. Having said that, once you get to higher levels of income, taxes will start to hurt. To mitigate this, here are three things you can do:
Top up your CPF accounts: First, make sure that you’re topping up your own CPF account. You can top up up to $7,000 a year which qualifies for a tax rebate. This is money that you’re giving to your future self, so treat it as part of your long-term investments. You can choose to top up your CPF-OA or CPF-SA, but I usually choose to top up my SA. This way, not only am I saving money on taxes, but I’m also adding to my investments at a risk-free return of 4% per year – almost unheard of anywhere else. If you still have spare funds, you can also top up your parents’ CPF account for an additional tax relief.
Top up your SRS account: Next, top up your Supplementary Retirement Scheme (SRS) account. You can contribute up to $15,300 a year and deduct that from your taxable income. The great thing about SRS is that even if you need to withdraw your money early, you’ll only have to pay a 5% penalty and pay the taxes on it. They’ll also waive the fees if you need to withdraw it on the grounds of a terminal illness. Even if you aren’t intending to top up your SRS account yet, it’s still worth opening an account and depositing a small amount – say $1 – into it. Why? Because withdrawals are penalty-free only if they take place on or after the statutory retirement age (which is 63 as I’m writing this in 2022) that was prevailing at the time of your first SRS contribution. Any other subsequent changes to the retirement age will not affect you. (Source) So it’s better to make your first deposit now in order to “lock in” when you can withdraw your money penalty-free.
Donate to charity: Lastly, you can also donate to charity. Doing so allows you to qualify for a 250% tax relief. So if you donate $100, that allows you to deduct $250 from your taxable income. To be clear, there isn’t a hack where your tax savings will exceed your actual donated amount, so don’t look at this as a way to save money. However, I’m a huge believer in giving back. Everything you have now – your job, your skills, your environment, a roof over your head, disposable income – is a gift. There’s no reason why you deserve it more than the next person, so sharing a part of your wealth is a good way to remind yourself of our common humanity. Donating to charitable causes that you believe in is a great way to do that. Singapore makes it really easy – you can select a charity in giving.sg and make a donation in a couple of minutes. They also automatically process your tax relief which makes it really seamless.
In Conclusion
So there you have it – everything I know about personal finance in Singapore, summarized into one handy post.
I’ll leave you with this: When I first started working, I was obsessed with money. I read every article, bought every book, and obsessively tracked my expenses in Excel. But this came at a cost – focusing too much on money meant that I neglected many other parts of my life, such as my family. I was often in a bad mood when I encountered an unexpected expense, or when some part of my perfect personal finance system wasn’t working.
It was only when I faced a personal crisis years later that I realised I had hit rock bottom. I had obsessed over building my dream life so much, that I had forgotten how to live my actual life. That’s why I wanted to write this post and help you to see that personal finance doesn’t have to be perfect. All you need is something “good enough”, something workable that takes care of your money, and you can move on with your life.
Money is just an enabler. If you mess it up, you can always earn more. Having more or less of it doesn’t make you more or less of a person. So while it’s important, it’s not the most important thing. Set up something that’s “good enough”, so that you can focus on living a truly rich life.