We have only been working for about 7 years and investing for about 6 years. The first year at our jobs was spent in Melbourne adjusting to our new lives as working adults from being university students before that. We were learning how to cook more regularly, interact & work with colleagues in a new environment, study for a professional accounting accreditation on top of work and picking up basic financial skills such as budgeting and expense tracking. We had little cash savings and was just trying to survive our first year at work overseas after graduating, much less spend time and money on investing.
It was after we finally got used to the routine in the second year that we considered investing some of our cash savings. From there, we spent the next 3 years doing basic investing in Australia and the 3 years after that doing less basic investing in Singapore. As you can see, we are still stuck at the basic level after 6 years but we know slightly more now than we knew when we first started investing then. There are so many things I wished we could have done differently with the little bit of experience we have now. You see, there is no Investing 101 course we can take at university. Sure, we studied about how to price financial assets, how to calculate rate of return, etc. But what & how can we actually invest?
Which is why I want to start a series of posts about the things I wished we knew when we first started investing. This should be especially relevant if you are a young and new investor who has just started working. It’s the best time to learn and make mistakes but be patient, consistent and don’t rush. Once you start the journey, you will be on it for a very long time, might as well enjoy the view and everything else in life.
How much can you afford to invest each month?
Investing is just another form of spending your money. The only difference is the stuff you invest in has the potential to make payouts and become more valuable over time. Of course, it can also become less valuable or worthless over time, just like all the other stuff you spend on. Which is why you should first work out how much you can actually invest each month and this depends on your budget. Even if you don’t like to track your expenses in detail, at a minimum, you should know the proportions of your categories of expenses and your cash savings every month. This is also assuming you have a job with an average salary income. If you are on a self-employment or entrepreneurial route, I suggest you read other personal finance blogs that have more relevant and useful tips for you. Your challenges and considerations might be entirely different from mine.
By the way, you are going to figure out that your salary income is tied to the industry you work in. It can differ greatly among your peers even when all of you are just starting out. A high performer’s wages in a low paying or sunset industry may end up lagging a low performer’s wages in a high paying or sunrise industry for quite a while. I know it’s unfair but that’s how the world is. Your passion for the low-paying job you are interested in might eventually translate into higher earnings in the future. But this will be a long and hard struggle. Make sure you are prepared and ready for it. Any job burns people out eventually no matter how much passion you have for it. The main problem is when it gets to you and makes you turn your back on that industry. Having to start again in a new industry when you are older hurts a lot. I’m watching someone close to me do it now and it sucks.
Salary income from your job is one of the most important considerations for investing
Assessing how stable and well-paying your job is and is going to be relative to your interests needs to be done at the beginning of your career. This matters to anyone who plans to use the employment route and salary income as the main source of your investment funds long-term. Not many people can achieve high investment earnings just with a small amount of starting capital. Most people will end up using their active income, specifically salary income, to drive their investment earnings. A mathematical illustration of this point:
100% return on a S$10,000 capital after five years leaves you with S$20,000. Gain = S$10,000
10% return on a S$100,000 capital after five years leaves you with S$110,000. Gain = S$10,000
You have a higher chance of developing the skills to find a job that pays you well enough to accumulate the S$100,000 capital than developing the skills to find an investment that provides a 100% return instead of 10% return after five years. Plus you are likely to take on a whole lot of risk for that investment to potentially provide a 100% return.
What does your monthly budget look like?
As a young and new graduate in what is at least hopefully an average paying industry, your monthly budget might look something like this:
Net salary income (after employee CPF contributions) – S$2,200
Less discretionary expenses (dining, travel, entertainment, etc) – S$1,000
Less non-discretionary expenses (telco, cash contribution to parents etc) – S$200
Cash savings – S$1,000 (45% savings rate on net salary income)
Make it a habit to keep both your discretionary and non-discretionary expenses low at the start. I can’t stress this enough. That’s the best defense against lifestyle inflation since low spending habits are much harder to kick. You should aim for a minimum of 40% savings rate on net salary income when you first start work. It’s simple. If you can’t get to 40%, don’t invest. You have much bigger problems to deal with. Either you are overspending on discretionary expenses because you are maintaining an unaffordable lifestyle or you are overspending on non-discretionary expenses because of personal circumstances. In any case, investing becomes a luxury you can’t afford. Deal with those problems first.
How your salary income progresses from here will depend on where, how hard and how smart you work. If you find your salary income stagnating after only a few years, either improve or go to another job/industry. Your expenses are only going to go up. Learn new job skills, go to another country. Do something. Or you are going to get stuck and being in limbo is not a good feeling. Can you imagine? Not being able to move forward or backward. This lack of progress in any direction is going to kill your dreams.
How to allocate your monthly cash savings?
Even if your net salary income and expenses increase at the same rate with your savings rate maintaining at a minimum of 40%, you still end up with a larger absolute amount of cash savings to invest with. Back to the scenario above, you now have monthly cash savings of S$1,000. I like to work with a round number and you really should get to this level of monthly cash savings first before investing. Besides, you probably can’t afford to invest all of the S$1,000 anyway at the start. It’s important to build up an emergency fund and investment cash first. Maybe do a split like this?
Cash on hand – S$500
Investment cash – S$300
Emergency fund – S$200
If you have built up cash savings from the first twenty odd years of your life, well done, you can get more aggressive in the allocation to investment cash. Notice how I haven’t allocated any of the cash savings for the deposit of a property. This is an important lesson I learnt from overpaying for my first property. 23% of your monthly wages are already going into your Central Provident Fund – Ordinary Account (CPF – OA) balances. That should form the deposit of your first property in Singapore when it’s time to buy one, whether by yourself or with a partner. Don’t touch your cash. If there’s not enough in the CPF-OA, you are either buying a property you can’t afford or it’s still too early. If the former, don’t do something stupid like me and drain your cash savings to buy the property even if you think it makes sense. You don’t know anything when you are young. If the latter, why are you rushing? Don’t let peer pressure make the decision for you.
If I had worked out how much I could have afford to invest each month at the beginning, I would have probably selected more suitable investment options, simplified and better structured my portfolio so it can grow in a more organised way. Of course, these considerations I will write about are linked to each other and shouldn’t be thought of in isolation. In fact, so many of these things should have been done before I made my first investment. It should become apparent the amount of preparatory work necessary before investing and we are not talking about analysis paralysis. Just practical steps to be completed to build a strong foundation for your portfolio.