There are many ways you could build up your wealth. You could spend less, change jobs, take on an additional job, start a business, invest your money, and the list goes on. But whatever means you choose to grow your wealth, it all boils down to one basic principle. It is essentially widening the gap between how much you earn and how much you spend. It is no secret formula. The principle is simple, but it takes a mindset shift, discipline, hard work and time to put into practice.
Let’s first take a look at the basic formula here:
Income — Expenses = Savings
Increasing Income
To increase your savings, you could either increase your income or reduce your expenses, or do both. Increasing your income could be achievable through different ways — performing better at work for a salary raise, undergoing training for a career change, taking on an additional job, creating a passive income, or starting a side business. However you choose to increase your income, be prepared to put in lots of time and hard work.
Reducing Expenses
Next, let’s take a look at expenses. Your expenses should be lower than your income. The larger the gap between income and expenses, the more wealth you accumulate. Track your spending and monitor where your money goes to. Being aware of how much you spend could help you in changing your spending habits. Do you really need to spend that $6 everyday on that latte on the way to work? Perhaps you could consider making your own coffee instead. Look for ways to cut down your spending — separate your needs from your wants. With work-from-home measures being implemented, this may be a good opportunity to review your lifestyle expenses. But that does not mean you have to be all thrifty and stingy, if you’re on track meeting your financial goals, give yourself a reward once in a while!
Beyond Savings
Most financial experts recommend putting at least three to six months of income in your emergency fund. This would help to tide you over in case of unexpected events like job loss or health problems.
So you have already saved enough for your emergency fund and have also accumulated some savings. You have set aside a sum of money that you have diligently built up and are looking to grow. What’s next?
The most conservative way to grow that sum of money is to stash your savings away in a regular savings account. Most regular savings account offer an annual interest rate of 0.05%. But with Singapore’s core inflation (which excludes accommodation and private road transport costs) averaging 1.4% for 2019, you might want to consider investments that could beat the inflation rate.
As life expectancy increases, more people are seeking out products that pay out regular income even after they are no longer working, i.e. passive income. Insurance savings plans are designed to offer an income stream upon reaching a targeted age. Policy owners have the options of either withdrawing the entire lump sum, partial lump sum, or partial monthly income. The beauty of such plans is that you will know how much and when you will be getting a payout, adding certainty in your retirement years.
Investment-linked policies (ILP) is another product for those who would like to have a taste of investment. It is suitable for any stage of life, from young adults looking to build up a nest egg to those in retirement, and desiring a regular income stream. ILP is a hybrid to meet both protection and investment needs. A portion of the premiums are used to pay for insurance and the rest for an investment fund. This product is suitable for those with a long-term investment horizon, and it makes your money work for you.
Before you take the plunge into investments, you need to understand your own risk appetite. All investments, from bonds to stocks, involve some degree of risk. Typically a low risk investment would give a low return while a higher risk investment would yield a higher return.
Assess your own financial situation and determine your risk appetite. You might need to consult a financial advisor unless you have enough knowledge to do this by yourself. A qualified financial advisor can help you develop a strategy to diversify your investments and accumulate wealth beyond your hard-earned savings.
This is the third in a series of articles for a finance blog and I had fun collaborating with a friend who inspired some ideas in this piece.
