I thought this would be a very good blog entry so I decided to write it.
I was out with my junior from Ngee Ann Polytechnic. He wanted to get himself a nice Cello before he serves NS so we went Cello shopping. After viewing some nice instruments we sat down at TCC and I had a chat with him.
My first advice to him was not to spend his life savings on a Cello. He assured me that that was not all the money he had and he had intended to use some of his savings to invest in blue chips. My first reaction was 😮 (not bad for a 19yr old!)
I asked him, what kind of yield are you expecting from, say, $5,000.
“5-7%”, he said.
“That’s pretty much nothing”, I said.
It works out to $250-$350 per year or about $20-30 per month if the yields meet his expectations. I told him that he’s still young and while his earning power is zero at the moment his expenditures are at an all time high. I sold him a new concept that at this point in life he should first learn to reduce his expenditure because that gives a better “yield” in relative dollars versus investing his life savings of several thousand dollars, not to mention the risks of investments.
Afterall most people spend a larger portion of their income than save and it is generally easier to save 10% more than to earn an additional 10% from the savings.
N.B. Saving does not mean scrimping, i.e. being a cheapskate to an extent that it impacts the wellbeing of yourself and people around you.
One way to go about doing this is to leverage credit cards with cash rebates. But the bill must be paid in full at the end of each month, i.e. do not overspend. For example I have a UOB One card that gives me approx 3% cash-back on my expenses. If I spend on average $800 a month that works out to about $20+ per month, which is about the same amount that he would have gotten if his investments of $5,000 yielded 5%-7%.
This is just one example, and probably not the best. There are many, many of these cards out there. I heard Standard Chartered even gives you $100 for a new sign up!
If you are a student and not eligible for a card, just get an adult to sign up for you or be your guarantor. It is actually a good way to build a positive credit rating and to learn to manage your finances.
Of course some apply for all the wrong reason, e.g. to get discounts eating out at fancy restaurants or simply to show off. It’s not that discounts are bad but when you keep eating out for the sake of that 15% discount, you are doing it for the wrong reasons. A plate of $3 chicken rice versus 15% off a $30 buffet is not savings.
Without self control all these credit facilities can go out of hand and that’s exactly what the banks want — for you to default payment and pay the hefty 25% p.a. interest rate and $50 late payment fee, or to buy that Prada bag and miss one of your 12-month installments.
Saving is a virtue and one should always start with that. Investment is one of the many methods to grow your money only when you already have enough money to go around.