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Three possible ways to build our savings (Don't see money, won't spend money).

Thursday, August 22, 2013

I know someone who finds it very hard to save money. 

He has hardly any savings as he spends money very freely. He sees, he likes, he buys. 

He is also generous to a fault. 

So, you can imagine that he is rather popular amongst his friends.

When I asked him if he was worried about having very little savings, he replied that there is always next month's pay cheque. 

This feeling of invincibility in an environment of extremely low unemployment in Singapore could be increasingly common but that is another topic.

Anyway, as I talked to him, I found that he is really a very pleasant person. No airs and not given to showing off. 

He is simply very easy with money.

He vaguely knows the importance of saving but being very comfortable now, he just spends freely. It has become a habit. 

So, since we arrived at the conclusion that if he sees money, he would be inclined to spend it, the only way for him to save is not to see the money.

Top up CPF-SA.

I suggested that he does the following:

Start an SRS account and contribute the maximum of S$ 12,750 a year. (From 2016: $15,300).

2. Minimum Sum Top Up of $7,000 a year to his CPF-Special Account.

3. Religiously lock up 10% of his monthly take home pay in 12 months fixed deposits with the auto renewal option intact.

#1 and #2 will also help in reducing the amount of income tax payable while #3 will help to create a higher level of liquidity. He needs to build up an emergency fund pronto.

Having never given much thought to how he should build up his savings, he said that the suggestions are practicable and also practical

He decided to adopt all three measures. 

I am glad I was able to help him take an important step towards personal financial security.

If we know people who make a good salary but have trouble with saving money due to spending habits, talk to them. 

We would be doing a good deed.

Related posts:
1. The very first step to becoming richer.
2. A common piece of advice on savings.
3. Build a bigger retirement fund: CPF-SA.
4. SRS: A brief analysis.
5. Ambassadors of financial freedom.


AhJohn said...

Good advice!

AK71 said...

Hi Ah John,

I hope so anyway. :)

Ray said...

somehow i dont think putting money into CPF is a good idea esp when he already has very little liquid savings. in case of emergency, he has no cash to turn to. CPF is too rigid and can only be tapped on when you retired. Fix Dep is also going to charge penalty if you need to take the cash out. But I guess for a person who spend all the money he can find, this may be the only way out. The best option, IMO, is still to re-wire his brains and make him see the need to curb his nonsensical spending.

AK71 said...

Hi Ray,

He belongs to the spending type and actually there are many like him around.

For some, really, locking up money so that they cannot access it is the only way to have some long term savings.

In this case, my suggestions will hopefully lock up some money and provide additional benefits in the process.

Talk to him about possibly investing his money, perhaps? That would be a natural next step. However, that would be a "riskier" next step if I were to take it. I am not sure I want to. ;p

My 15HWW said...

Hi AK71,

Yes, the next natural step is to possibly get him to sign up for those regular savings plan that passively invest in ETFs. POSB has one right now with pretty low fees.

However, you are also right that some people need a pre-commitment device in order to save and he might withdraw all those investments if it grows to a substantial sum.

Since liquidity is a bane instead of a boon to these people, the CPF SA top-ups would then a useful tool, at least till the person reaches 55.

AK71 said...

Hi Stoical Keynes,

Exactly. For some people, they really need to have money locked up. If they don't see the money, they won't... er... can't spend it. ;p

Personally, I have quite a bit of money locked up in my CPF-OA, CPF-SA and SRS account too. I am the type who might end up putting too much into investments. :(


Hi AK,

Me too. Seeing money around tempts me into throwing it into the market. Any good books to encourage me that Cash is king? ^_^

For your friend, perhaps you would like to encourage him to watch CNBC's Suzy Orman show for a start. Her weekly reminders of People, money then things, in that respective order of importance would certainly be something which your friend can learn and embrace.

Talking about CPF OA, mine is recently $0 due to my new HDB loan. I'm officially a member of the "Housing loan debt" club! Time to rebuild my CPF OA from scratch. Fortunately I transferred some into SA and making the very decent 4% 0 risk interest ^_^

AK71 said...

Hi Solidcore,

Well, you know cash is also an asset. So, I remind myself all the time that holding some cash is the most basic form of diversification and it is also the most liquid form. This way, I prevent myself from throwing everything into the market. Still, it is difficult. ;p

As for my friend, well, I might not see him again in a long time. Not a close friend. I hope he sticks to the plan.

My CPF-OA, once upon a time, was very depleted as well. Now, it is at full power what with the selling of my properties and the maturity of an endowment plan. Yes! It is my most powerful war chest to be deployed in the next recession. Otherwise, I am quite happy to leave it alone. :)

My 15HWW said...

I think topping up your CPF accounts will give you a more balanced asset allocation. Those monies are actually the bonds in our portfolio.

If one is close to 55 and already have excess of the Minimum Sum, doing a voluntary contribution is pretty worth it since after 55, the monies are liquid and earning a really high interest rate compared to normal deposits.

For me currently, it's still almost 30 years to maturity so probably won't top up for another 10 years. ;)

AK71 said...

Hi Stoical Keynes,

Good point. :)

I have to remind readers that there is an annual limit for topping up our CPF accounts. So, for those high income earners, they might not have a chance to do any voluntary topping up. ;p

"All CPF contributions, whether mandatory or voluntary, will form part of the CPF Annual Limit. From 2011, the CPF Annual Limit is $30,600."

I would suggest making an additional $7,000 contribution to the CPF-SA yearly as soon as it is practicable. The earlier the better as compounding will work its magic. Of course, there is tax benefit too.

However, for people who have met the minimum sum required, then, this option is not available.

AK71 said...

betta man said...
The following is extracted from Workforce SG facebook:

"My retrenchment was a huge blow to me. I didn’t see it coming at all.

"The first few days after the news, I woke up in cold sweat. I thought it was just a bad dream. After all, I was 48 years old then and I had been in the marine and offshore industry for over 20 years. I have three children, the youngest is eight years old. I couldn’t afford to be jobless...."

Fortunately, the person found a job eventually. Frankly, in a future world of disruption and uncertainties, in my view, it is better to keep family size small and not to have children too late. Coz in your later years, chance of getting retrenched is higher and getting a job is tougher. Unless one is wise enough to save up aggressively in his 20s or early 30s.

AK said...
In a world where job security is almost non-existent, unless we are born with a spoon made of some precious metal in our mouth, saving money aggressively when we are able to is a sensible thing to do.

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