Financial asset is not just your money or property. It is you!
Every February, the Singapore Department of Statistics releases the Key Household Income Trends. We had that release today, 20 February 2020. A common response to this report is that of feeling rather underwhelmed yet without surprise. All employees know that increments are incremental. Even then, 2019 household income growth was yet a shade weaker than the year before. Median household income including employer CPF contributions in 2019 was $9,425, a nominal increase of 1.4% from last year, versus 3% the year before. Over the last five years, the average increase was 2.6% p.a. Does the quantum sound familiar, maybe from your company’s annual increment exercise?
At least there is still an increase in real terms, you might say. Well, there is some marginal real growth. The one-year and five-year increases in household income after taking into account inflation were 1% and 2.5% respectively. But inflation has historically been low during this period; last year’s core inflation was only 1% . Over the longer term, inflation has been around 2% p.a. This brings real return from income growth down to about 1% p.a.
This year’s situation is likely to be worse. The Ministry of Trade and Industry, in view of the impact of the COVID-19 virus, has already downgraded Singapore’s GDP forecast to -0.5% to 1.5% (from 0.5% to 2.5%).
For most ordinary working Singaporeans, our Most Important Financial Asset is ourselves, or more specifically, our ability to generate income. Most of us are not endowed with enough capital to give us the equivalent investment return at acceptable risk levels that matches our monthly income, such that we do not need to work. The decades when we are working are when we earn the most and spend the most. However, even after we slow down and stop earning, we still must spend until we pass on (and life expectancy is nearing 85 years old). Sometimes, our ability to continue working is taken from us forcibly because we fall sick, get injured or lose our job. This means that we need to have a plan, which starts from our Most Important Financial Asset.
So, what can we do when the annual statement on our Most Important Financial Asset issued by the Department of Statistics is showing a modest return and the outlook for this year is even more dismal? Below are some suggestions.
The first step, before we talk about growth, is to handle the basic “Income – Expenditure = Surplus/ Deficit” equation well. All future spending when you stop working will be funded by the pool of “Surplus” either directly or indirectly (through how you grow the Surplus). For a start, do up a budget to see where you stand. You need to have an Emergency Fund of at least 6 months in cash, to continue paying your expenses and loans even if something happens that causes you to lose your income. In times of economic uncertainty, such as the current situation, scrub your expenses and see if you can be more prudent and do not take on additional loans. With the goodies provided by the Care and Support package that can amount to $1,300 for a young family announced in the Budget, there may be some support as well.
We can increase the Surplus in a few ways. We can try to increase Income by continuing to upgrade our skills so that when the right opportunity comes, we can secure that promotion or job to bring us to a different salary level. In the Budget, the Government has given each Singaporean $500 to $1,000 more in SkillsFuture credit to upskill or pursue your interest. Knowing that we are our most important financial asset, use this opportunity to build up new capabilities and improve your earning capacity. This might only happen in the medium term, but it is a worthwhile investment in sustaining your earnings. Even in the short term, it is important to be very good at your job so that the value you add to your company makes it extremely difficult for your boss to replace or retrench you.
But when our Income increases, we must also handle the Expenses part of the equation well and not allow them to grow too quickly, by managing credit and lifestyle. This can be difficult because our natural aspiration is to keep up with the Jones. We can seek a point of sensible balance by allowing ourselves to spend more as a matter of motivation, but not at the same rate as our Income increase. Having a mindset of sufficiency rather than maximisation is what will free us to do this.
Second, we need to protect this Most Important Financial Asset against events or crises that cause us to be unable to work (such as death, critical illness and disability) or which threaten to deplete the Surplus we have put aside (such as large hospitalisation expenses). At MoneyOwl, we strongly advocate using term insurance because most of us only need insurance to cover the years when our earned income is needed and/or when dependants are around. You are unlikely to need an expensive Whole Life plan with which you cannot fully cover yourself. A suite of protection tools encompassing Term Life (to cover dependants), Critical Illness and Disability Income insurance for a term-limited to your income-earning years and/or up to when your dependants no longer need your income, plus a Hospitalisation Plan for medical expenses for life, would be fit-for-purpose for most working people. Check out our insurance platform for a guide to what you need.
Third, grow your Surplus to comfortably beat long-term inflation, by investing a meaningful part of it every month into a suitable portfolio of low-cost, market-based funds. When you have an annual bonus, invest part of that also. You can do this through a Regular Savings Plan (RSP) with MoneyOwl, starting from $50 a month, and one-time investments from $100.
When you start to invest in a financial portfolio, you have added yet another asset to the pool of resources that can help finance your goals in the long run. If you think of both your financial portfolio and your income-earning ability as assets, some of the investment philosophies we advocate will become more apparent. For example, having globally diversified portfolios across countries and sectors is not just about diversification within the financial portfolio. There is the angle that your Most Important Financial Asset (your human capital) is already subject to the ups and downs of the Singapore economy and business cycles. Instead of doubling down, it makes sense to invest your financial capital more widely to diversify your exposure.
You can take this framework one step further and think about the nature of your Most Important Financial Asset – do you have a stable income that behaves like a bond, or a highly fluctuating income with a large but uncertain payoff? This affects your risk appetite and that is where our human advisers come in to supplement pure roboadvisory – hence our emphasis on Bionic Financial Advisory to bring human wisdom and technology together in advice.
A final thought about earned income and investing. In an earlier article, I wrote about how most people ought to have at least some equities or shares in their investment portfolio. In other words, take some of what is generated from your earnings as an employee and effectively make yourself a shareholder (albeit a small one) of hundreds of companies across the world. Then, even if the return on labour as seen in annual income statistics remain modest, you can also participate in the much higher return on capital through diversified and sensible portfolio investments.
MoneyOwl is an NTUC Social Enterprise and a Joint Venture between NTUC Enterprise and Providend. We are Singapore’s 1st bionic financial adviser, delivering advice through fully-salaried, non-commissioned advisers augmented by an ISO27001-certified technology platform. We provide comprehensive financial planning services that fully integrate national schemes such as CPF, as well insurance and investment advisory services, and an online will writing service. To find out more, please visit www.moneyowl.com.sg
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