If you’re Singaporean, you probably heard for the first 10 years of your life how important it is to save money as a Singaporean.
You’ll also probably heard this from your parents:
‘You need to save money incase the economy crashes.’
‘You need to save money for rainy days.’
There’s nothing wrong with saving money. It’s how you go about saving money that matters.
Through the years, I’ve heard my fair share of crappy advice on saving money in Singapore. First, you get financial ‘experts’ telling you to ‘cut back on Starbucks’ or even worse… ‘get cash back rebates’ through shopping apps.
Whenever I hear advice like that, I slap on multiple mental facepalms.
Let’s be honest with ourselves, how many of you actually are able to hit your saving goals by giving up your caffeine needs or 0.X% cashback rebates?
These are superficial tactics that ‘financial gurus’ dish out. They sound good on paper but do not actually work. These tactics don’t account for our human psychology.
Let me ask you. How many times you told yourself you aren’t going to buy Starbucks for the rest of your life and you actually went ahead and bought yourself that $7 cup of Starbucks and told yourself you ‘deserve it’ because you work hard in school or your job?
YES. Everyone does it.
You can replace Starbucks with a round of drinks with your friends, Grabshare rides and bubble tea treats. Starbucks is mostly a metaphor.
Saving 6 dollars a day not drinking Starbucks from the age of 25 – 55 invested in the STI ETF fund at 4% will give you $135000 dollars compounded returns. That seems like a nice figure. However, it’s pointless getting $135000 at 55 years of age and giving up 30 years of your life not treating myself to something nice. You’re not even a millionaire. It’s like saving up sex for old age.
I also noticed that when it comes to saving more money:
- Rarely track what they spend on
- Spend more than they admit
They then spend all their time debating un-important details such as interest rates, hot stocks but never take time to understand any bit of personal finance.
The Psychology of How to Save More Money in Singapore
Now, let me introduce to you the very concept of cognitive misers.
Firstly, you and I have limited willpower and attention every day. If you’re constantly nitpicking minor financial decisions like cutting back on Starbucks, you’re not maximizing your willpower and attention on more important things.
Secondly, your behaviour is determined much more by the environment around you. There are psychological researchs showing that situation, and not personality traits are determinants of behaviour. They can influence if you gave electric shocks to helpless people to the amount of food you eat.
Let me ask you. How many of you told yourself that you’ll obsess over every single financial detail but never get around it?
How many of you overspend in a month and you SWEAR UPON yourself you’ll cut back the next month and the whole thing repeats itself?
The trick is not to overwhelm yourself with small choices such as cutting back on Starbucks.
However, it is to focus on BIG WINS such as building a system around your budget, keeping out of debt and automating your investments.
Some points I’d like to emphasize:
- Constantly worrying over tiny purchases like Starbucks is draining and ineffective. I rather focus on automating my finances, earning more, investing so that I don’t have to worry about that one or two Starbucks purchase.
- The whole point of accumulating money is to spend a portion of it on things you like and enjoy. It should NOT be a source of guilt.
- Singaporeans are taught from day one to believe that the only way they can make more money is to save more money. That isn’t true. There’s an only a limit on how much you can save.
- The best way to save more money is to stop worrying about tiny financial decisions such as getting your Starbucks that kicks off your day for work, but to automate your finances, earning more, and start investing.
If you’re not convinced, let’s look at some Math.
How Much You Actually Save on Cutting Back on Daily Starbucks:
Cost of Daily Starbucks for 1 Year: $7 X 365 = $2555
Cost of Daily Kopi for 1 Year: $1X 365 = $365
Your Savings in 1 Year: $2190
If you invest your savings from cutting back on your daily Starbucks in the SPDR Straits Times Index fund, you’ll have made a 4% annualized returns on the average for the last 10 years.
You’ll have made an extra: $87.6 per year.
(Data as of 6th September 2018)
I’m pretty sure you’ll forgo the $87.6 a year to get your much needed caffeine boost in the morning.
In fact, if you’re someone that cannot go without caffeine, the drop in your personal productivity can affect your work. Costing you a lot more than being frugal over cutting back on Starbucks.
The Psychological Proven System to Save More Money
So far we’ve determined:
- Environment matters a lot more than willpower when it comes to saving money
So let’s take a look at how you can create environments and systems so that you can save more money, and even possibly make more money?
One of the best way to build a system is to determine ahead of time where your paycheck goes into. This way, you’ll stay out of debt by paying off your credit card bills, mortgage expense and living costs first. You then, set aside a fixed percentage every month for saving, investing and guilt free spending.
Your Fixed Cost Budget – 70%
- Rent/ Mortgage
- Debt (Student loans)
- Utility bills
- Credit Card bills
- Phone bills
- Gym membership
You can pay off your monthly fixed costs using credit cards that accumulate rewards or miles. These fixed costs must be paid off immediately to avoid racking up debt. Secondly, the key to using credit cards to MAKE SURE that you pay them them off in full at the end of every month. You do NOT want credit card debt and interest working against you.
Saving Budget – 10%
It’s a good to hold some liquid cash in your savings account in case of emergencies and ‘rainy days’. You can also save for you wedding and your year end of the year vacation trip with friends or family.
Investing Budget – 10%
Here’s one of my favourite topics: investing. Investing is going to make you a lot more money than cutting back on Starbucks or getting cash rebates from shopping apps. I’ll explain this from a mathematical standpoint later in this article.
Guilt Free Spending Budget – 10%
When it comes to saving money, it’s all about spending on things you love and saving back on the things you don’t need. For example, I don’t subscribe to Spotify, Netflix or spend my money on overpriced cafes, clothes in Singapore.
However, I spend guilt free on conveniences like Grab rides or my chai tea lattes from Starbucks. Your guilt free spending budget should include for buying yourself presentable clothes, a night out with friends and definitely your daily Starbucks.
Mindset Shift: Save to Invest Your Money
I’m going to share with you advice that I wished I acted on much much much earlier in my life: that is to start investing earlier! I remember making a couple of bad trades and losing ¼ of my portfolio in one month. I didn’t touch the stock market for the next couple of years.
I also remember when I was 15 or so, I begged my Mum to open a brokerage account under her name. She of course turned me down and told me to go finish my school homework. If you had started investing early on in life, it’ll make a huge difference in your life decades down the road.
What If You Invested 10% of Your Pay Cheque a Month for 10 Years?
If you had started investing 10 years ago at $250 a month, 10% of a $2500 a salary in the SPDR fund tracking the Strait Times Index…
Total Amount Invest Over 10 Years:
10 Years X 12 Months X $250: $30000
SPDR Fund Returns Over 10 Years:
Cumulative NAV Figure: 49.29%
Total Amount Returned Over 10 Years: $44700
Total Gains: $14700
(Data as of 6th September 2018)
The beauty of investing in the SPDR fund tracking the Straits Times Index is that there’s no need to worry about which stocks to pick. It’s already all done for you. In the SPDR case, it tracks the top 30 companies in Singapore through a computerized method.
This automated strategy is a lot more doable than cutting back on lattes every single day. It’s also done after setting aside guilt-free spending, accounting for your fix costs and putting aside another 10% for savings.
Discipline is a Prerequisite for Investing Success
One of the keys of successful investing is discipline. In general, there’s the dollar cost averaging method and there’s the lump sum investing method. Either way, you’re NOT trading in and out of the market and both methods require discipline.
If you and I have limited willpower and attention every single day. How do you go about being disciplined about it?
Hence, through automating your finances by setting aside budgets for different areas of your life, you can save and invest your money effortlessly. That’s because you’ve built a system around it.
Lastly, if you’re a little more adventurous and are looking to accelerate your investment results you can take a look at Dr Wealth’s investment strategy. Here at Dr Wealth, we manage to generate 49% over in the last 5 years (that’s half the time from investing in the SPDR fund) from our real-time 6 figure portfolio.
However, like I mentioned, not everyone has the discipline to actively manage stocks, it’s not for everybody.