5 Life Changing Financial Tips

Most investors have the same objective. They want to earn the highest possible rate of return on their investments while minimising the level of risk that their portfolio is exposed to.

Let’s analyse this investment goal and see how it works in real life. If you have S$100,000 to invest, you could put it all in a bank deposit. DBS Bank1 pays an annual interest of 0.8% on a one-year deposit and 1.35% for five years.

Is your money safe with DBS? Of course, it is. But at 0.8% annually (or even 1.35%), you’re effectively losing part of your capital every year. That’s because according to the Monetary Authority of Singapore (MAS)2, the yearly inflation rate in the country is close to 2%.

Now let’s consider an investment that provides a higher rate of return. The stock market is a favourite with many investors. But did you know that according to Yahoo Finance, between October 2007 and February 2009 the Straits Times Index, which tracks Singapore’s top 30 stocks, fell from a level of 3,805 to 1,595? That’s a loss of 58% in 16 months. S$100,000 invested in an index fund in October 2007 would have been reduced to S$42,000 in a little less than a year and a half.

Source: Yahoo Finance

So, where does that leave investors? Low-risk investments can erode your wealth while financial instruments that promise high returns are inherently risky.

Fortunately, there is a way out. You have to plan your investments in a manner that is in sync with your life’s goals. Bank deposits should form part of every investment portfolio as should stocks. In fact, there is a range of investments options that you should consider. A good financial advisor can be a great help in setting up an investment plan that is just right for you.

But there are specific steps that you have to take yourself as well. These are simple changes in the way that you manage your money. They are easy to implement, and the effect that they can have on your financial well-being can be disproportionately large.

Here are five life-changing financial tips:

Tip #1 – Pay yourself first

How do you allocate your salary? If you’re like most people, you use the money gradually. You pay your bills and withdraw sums for your daily expenses. At the end of the month, you invest the amount that is left over.

If you follow this method, there will be months in which you will meet your investment target and others in which you will not invest at all. That’s because, by the month-end, your bank balance may be close to zero. The correct approach is to turn your investment timing on its head. Invest at the beginning of the month, and not at the end. Within a week of receiving your salary, set aside sums for:

  1. Household, Phone and other Utility Bills
  2. Home or Car Loans
  3. Insurance
  4. Retirement Fund
  5. Children’s education

Tip #2 – Protection when you’re young, saves you grief when you’re old

Your financial plan is incomplete unless you have an adequate amount of insurance.

This is especially true if you have family members who depend on your earnings. Your spouse and your children, and your parents, could fall into this category.

Spend a little time in understanding the benefits that different insurance policies offer. Insurance costs a lot less when you are younger. Additionally, it’s possible to freeze the premium amount for the term of the policy.

There’s another reason why you should buy insurance as early as possible. It’s not very well known that there are a significant number of claimants for policies issued to young people.

A 30-year-old can buy a million-dollar policy for as little as S$1,200 per year. By spending a small amount, you can guarantee the financial security of your loved ones.

Tip #3 – When you’re younger, it is more acceptable to allocate a greater sum into higher-risk portfolios

You may have heard of the ‘100 Minus Your Age’ rule. Essentially, one needs to understand that with great risk there can also come great reward. As covered earlier, Fixed Deposits may give low returns, but on the other end of the spectrum stocks could provide great returns but with higher risk.

The rule of thumb is that when you’re younger and have time to build your wealth, higher risk investments may be acceptable, but as you age, you’ll need to move your investments to less risky investments.

Remember that you should not follow this rule blindly. A portfolio and diversification of risks may be complex but is very important. Reallocate your investments based on your needs and risk appetite. If you, like most people don’t know where to start, seek qualified advice. Which brings us to…

Tip #4 – The value of advice goes beyond investment returns. Pick an adviser you can trust

A competent, licensed financial advisor can help you to plan your investments in a way that serves your best interests. Said plan should reflect your needs and your aspirations rather than adviser fees, which are much higher than if you’d go to a bank.

Do you worry about daily investment news or Donald Trump’s constant tweets? A balanced portfolio tailored to your risk appetite should help you achieve your goals with less stress, and leave you able to ignore the constant financial media noise.

A good advisor will be able to show you how to harness the power of the investment markets, rather than constantly battling against them. A good advisory firm will be supported by an outstanding investment team, because time is money. Which also brings us to…

Tip #5 – Time in the market is better than timing the market

According to legendary investor Warren Buffett, “The stock market is a device for transferring money from the impatient to the patient.”

The fundamental principle of profiting from the stock market is to buy low and sell high. However, it’s practically impossible to get your timing right on a consistent basis.

A better approach is to stay invested in stocks that have good long-term prospects. By doing this, you can lower your transaction costs. You can also benefit from the consistent returns that well-managed companies provide.

The bottom line

Don’t aim for high short-term returns on your investment portfolio. If you take this route, you could be putting your principal at risk.

Instead, your goal should be to achieve a reasonable rate of return on a sustainable basis. Over an extended period, this approach gives the best results