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Timeless advice for better financial health

 Claire Tan Si Ning
Claire Tan Si Ning12/8/2022 11:34 AM GMT+08  • 8 min read
Timeless advice for better financial health
The new year is a good time to relook and review our finances / Photo: Towfiqu Barbhuiya via Unsplash
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Looks like we won’t have to wait till Christmas to know that 2022 has been placed on Santa’s naughty list. It definitely includes these events:

1. The Russia-Ukraine war

2. The US interest rate hikes

3. The fall in both stocks and bonds,

4. The ongoing Covid19 pandemic. The list goes on.

2022 might just be the worst year in modern history.

See also: The roles of AT1, CET1, bail-in and TLAC in banking stability

As Oprah Winfrey once said: “Cheers to a new year and another chance for us to get it right.” As cliché as it sounds, now that 2022 is ending, we can look forward to a new year with new hope. The fresh start gives us a clean canvas to reflect on what is important and what we can do better.

Financial review for the new year

The new year is a good time to relook and review our finances unless we are one of the disciplined ones who do it periodically.

See also: 2023: What you need to know about market volatility and your investments

You probably already know the drill: Review your goal, check on your emergency funds, rebalance your portfolio and use your money to make more money (invest!). Of course, these are timeless seeds of advice to achieve better financial health.

But with the rising interest rates, risk of a global recession and a volatile market, it can be nerve-wracking to plan our finances on our own. Without a crystal ball to predict the market, we are left to prepare for the worst.

Therefore, financial stress has become one of the most common stressors in the modern world. We spend a lot of time worrying about money matters, but we hardly discuss how to improve our relationship with our money.

Timeless advice for healthier financial health

While hunting for a good read on financial planning, I chanced upon a gem of a book written by Morgan Housel called The Psychology of Money — Timeless lessons on wealth, greed, and happiness.

In this book, Housel shared about finding the goldilocks zone between investments and your mind. Knowing the importance of investing is good, but being able to sleep well at night despite the inevitable market swings is another.

Here are three pieces of advice that I gleaned from his book:

For more stories about where money flows, click here for Capital Section

1. Staying wealthy beats getting wealthy

Good investing is not necessarily about choosing the right investment, most of the time. It is about survival skills — the patience to hold for long periods of time, without wiping out or getting forced to “forfeit” your investment amidst rocky market events.

Why is it necessary to have such a survival mentality? It all boils down to the counterintuitive math of compounding. Akin to growing a Banyan tree, little to no growth will be observed in the first year. Instead, looking at a growth period of 10 years, we will be able to see the tree take its form, while a 50-year growth period will prove the tree’s ability to weather through even the harshest situations.

Likewise, in the financial world when compound interest comes into play, the longer the duration, the more interest you will accumulate, thanks to the compounding effect. This is because you earn interest on both the money you have invested and also on the interest you’ve earned. Interest on interest!

One of the ways you can reap the benefits of compounding interest is via a regular savings plan (RSP). As a RSP allows you to start investing with a small amount at a regular interval, you do not need a huge amount of capital to kickstart your investment. These small regular contributions stack up to make a healthy foundation which could make a significant difference later in your life, if you start early and weather through the unpredictable ups and downs in the market; that is when survival skills are vital.

At PhillipCapital, there are three types of RSPs which you may consider using to compound your money: Share Builders Plan, Unit Trust RSP and Recurring Plan.

2. To each his own

Everyone has their own perspectives, game plans and goals. When it comes to investment, we have different risk appetites, time horizons and investment objectives.

Market prices that look ridiculously high to me may make sense to you. Hence, it is important to be mindful when taking financial cues from your friends or acquaintances who are playing a totally different game from you.

We know that planning and executing your financial plans on your own can be daunting. “Should I invest in a high-risk, high-return or low risk, low-return product?”, “Should I invest 20% of my savings or 80%of my savings?” If you are stuck in this common dilemma, you might want to engage a financial advisor representative, more commonly known as a financial planner, to save you from this misery.

A survey conducted by Herbers & Co in 2021 found that those who seek advice from a financial advisory consultant/representative were statistically happier as compared to those who did not.

A good financial planner will be able to help you to:

• build a financial strategy based on your goals and risk level,

• identify suitable investment products from the dizzying multitude of selections,

• provide expertise and knowledge to make you feel more secure, informed and confident with your financial decisions.

Besides the tangible benefits, there are also the intangibles. A financial planner gives you peace of mind, a sense of security and confidence about your future, as they guide you through life’s curve balls.

3. You don’t need a reason to save

Growing your wealth has little to do with high income or high returns, and lots to do with how fast you can save.

Some save money to buy a condominium unit, the latest Tesla or a coveted Chanel Classic handbag. But what if you don’t have a material goal? Do you still need to save?

Yes, saving without a material goal has lots of intangible perks. It gives you options and flexibility, the ability to take a few days off work when you are sick without having to break the bank, or the ability to cherry-pick job opportunities without succumbing to pressure to accept the first less-desired offer.

Hence, saving money to buy time and options is far more valuable and satisfying.

However with the rising inflation rate, should we be saving all our money in the bank?

Let’s say you have $100,000 in your bank account right now. The current interest for that account is at 1%. You would have $101,000 in your account at the end of one year. However, if the inflation rate is at 5%, you would need $105,000 to have the same buying power that you first started with. That is a shortfall of $4,000 for the first year. Your account balance has increased in numerical value but decreased in buying power.

Although parking money in the bank would give you the freedom of access, parking too much of it could be detrimental to your overall financial planning. As long as your interest is lower than the inflation rate, the value of your money will depreciate, unfortunately.

Cash is the oxygen of independence. Therefore, it is advisable to keep at least six months of emergency funds in your bank account and park the rest of your cash into an account with a higher yield. Outside of your emergency fund, you should not let your cash idle away. Therefore, you may consider is a cash management account.

Using a cash management account

Cash management accounts are typically offered by brokerages and investment platforms. They invest in money market funds which have higher interest rates than a savings account but carry a low level of investment risk. Cash management accounts offer liquidity with no lock-in period, making it a safe haven to park your money during volatile times, with the flexibility to withdraw and invest it in higher risk/reward products when the opportunity presents itself.

To sum it up, they are stable, low risk and offer high liquidity. At PhillipCapital, our cash management facility, Phillip SMART Park, parks your idle money without sales charge, administrative fees and lockin period.

SMART Park invests in one of the largest retail SGD Money Market Fund, Phillip Money Market Fund, in the market, based on the total new assets figures reflected in FundSingapore.com. SMART Park allows you to enjoy interest on deposits in both SGD and USD with a minimum account balance of $100 when you opt in the facility with a POEMS account. Simple but sound financial decisions can contribute significantly to success. For me, it definitely helps when I hone my survival skills with a solid partnership with my professional financial planner as I invest in the ever-changing market. Put that default plan in place and all else will align.

Claire Tan Si Ning is business development assistant manager with the investment solutions department at Phillip Securities

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