Sometimes, it can feel like your salary increases are not keeping up with rising cost of living.
The matter becomes more urgent as you approach retirement.
To be sure, the Singapore government has the Central Provident Fund (CPF) system in place to ensure its citizens have their own basic retirement plan when they hit their retirement age.
However, the rise in inflation makes it look increasingly unlikely that the funds within the CPF may last us through our golden years.
The problem is compounded by the fact that Singapore faces a rapidly ageing population, tying up government and healthcare resources for this burgeoning group.
Moreover, people are also living longer, thus increasing the need for a larger retirement sum to last long enough for their needs.
Being aware of the need to live a prudent lifestyle is important.
But, it takes more than just savings alone to generate wealth and preserve it.
This is why I follow my three “I” philosophy.
This simple-to-remember philosophy provides a good framework for me to grow my savings, protect my family’s wealth, and build my nest egg.
You should consider adopting it to maximise your financial well-being.
No. 1: Income
The first and probably most essential pillar of personal finance is income.
Income refers to savings from salary, commission, wages, and bonuses.
The basic mantra to follow is to spend less than you earn so that you can save the rest.
This is not always easy, as there are numerous temptations in the world that can make you want to open your wallet.
Credit cards also allow you to easily spend more than what we earn, and if you are not careful with your spending, this card debt can quickly snowball.
So, monitor and track your spending.
Though this may sound tedious, there are many apps available that serve this function.
It’s often just a simple matter of keying in an expense as soon as you make it.
With more savings, you can then slowly grow your cash stash and create a buffer in case of emergencies.
The general recommendation is to have at least six months of expenses stashed away for a rainy day.
No. 2: Insurance
Many people may not realise this, but insurance should actually be a key component of your financial planning.
Having the right insurance helps to preserve wealth in the case of any unfortunate incidents or emergencies.
Insurance counts as protection, and I believe everyone should at least obtain hospitalisation and surgical (H&S) insurance, accident insurance (for falls, sprains, and broken bones), and term insurance (against critical illnesses, dread diseases, total and permanent disability, and death).
Leaving a legacy for your loved ones is all the more important for those with children or dependents, and insurance can provide you with peace of mind.
Even singles need to ensure they have adequate insurance to cover anything unfortunate that may occur.
No. 3: Investments
Once insurance has been taken care of, the next step is to grow your money through prudent and careful investing.
When you’re younger, investments should lean more towards growth as younger people have more time to compound their wealth.
The goal should be to look for businesses with a great track record and that are also priced sensibly.
Blue-chip companies such as Singapore Exchange Limited (SGX: S68), Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) provide growth as well as a touch of dividends.
As you age and your portfolio gets larger, the focus starts to shift towards a mix of growth and income.
You can then select investments that are more geared towards income production, such as REITs and cash-rich but slower-growing businesses.
Examples would include Parkway Life REIT (SGX: C2PU) and Mapletree Commercial Trust (SGX: N2IU).
This passive income stream will slowly start to supplement your earned income and boost your savings rate.
When you reach your retirement years, your portfolio should be big enough to provide a steady flow of passive income, and at that point, the focus should be on preservation of principal and sustainable yield.
Get Smart: Simple but powerful
This 3 “I” philosophy may sound simple, but its simplicity belies its powerful effect.
Not only do you diligently save up to build your capital base, but you can also protect your wealth through the purchase of appropriate insurance policies.
Finally, the investment portion helps you to grow your nest egg through investments that can also generate a stream of consistent dividends for your golden years.
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Disclaimer: Royston Yang owns shares of Singapore Exchange Limited and Apple.
