Personal Finance Part 1 – Pillars of Wealth Building

This is part 1 of a brand new series on personal finance. I will be discussing various methods of building wealth, including how to minimize expenses as well as covering topics such as credit cards, cars, property, loans and other financial matters pertaining to individuals. Investing will of course be touched on as well as part of personal finance, as I believe investing is the only way to grow and build your long-term wealth as CPF simply isn’t enough (yes, even with that extra 1% I am very sure it is still insufficient for retirement !).

I would like to start off the series by introducing my own personal 3 pillar of wealth building: Savings, Insurance and Investment. These are not methods by which one can get instantly rich (try Toto if you want to win instant riches !), but I believe they help us to prepare for contingencies and also to build long-term sustainable wealth which can be passed on to our next generation. Always remember that we are not only earning money for ourselves, but also our loved ones (e.g. father, mother, siblings and spouse as well as children). Thus, it is not enough to merely earn enough for yourself, but it is also critically important to grow our wealth at a reasonable rate (in this case, I mean greater than inflation rate) and to compound our savings so that we can enjoy a comfortable, worry-free retirement. Below are my three pillars and a brief summary of each. As this series moves along, I will elaborate more on each pillar. Feel free to leave comments if you have other wealth-building ideas or if you need to share your own experiences on wealth accumulation.

Savings

Most people under-estimate the power of saving regularly. Although saving itself will not guarantee that we can “grow” our money, at least it doesn’t cause our money to simply vanish (especially if you are one who does not track your monthly expenses). My belief is that one should at least attempt to save 30% of their take-home pay (i.e. gross salary less 20% compulsory CPF contribution to CPF OA). Remember that it is now much one earns, but rather how much one spends which determines how much he is able to save every month. A “high-flyer” earning S$10,000 (net) a month and spending S$9,000 on luxury items, partying and car accessories will only end up with S$1,000 of savings (10%). However, a thrifty person earning a S$4,000 net salary and spending only S$2,500 can manage to save more in monetary terms (S$1,500 per month as opposed to Mr. Spendthrift) as well as percentage terms (37.5% compared to 10%). I personally keep a spreadsheet to track my expenses in terms of meals for the month, transport as well as “other” purchases like movies, books and clothing.

Insurance

Insurance acts as a safety net should anything happen to oneself. Most people who think insurance isn’t important or that they don’t need it obviously have NOT considered what happens should they die or meet with a serious accident one day. Please remember that when something bad happens to you, it is the loved ones around you who suffer (either from lack of your steady income to support them, or expenses incurred in providing you with appropriate and constant care). Thus, insurance is a form of safeguard against financial loss and gives you peace of mind. These days, insurance also comes in the form of savings plans (which I will elaborate on more in a future post) which allows you to save regularly at an interest rate higher than inflation. This allows one to protect one’s earnings as well as save constantly and compound one’s wealth. I personally have 3 insurance policies (2 life and 1 life/term/savings) while my wife has 2 (one life and the other life/term/savings). Notice that I did not mention ILP (Investment-linked policies)…..this will be elaborated on in more detail during my posting on insurance and financial planners.

Investing

Finally, the most important and powerful way of building wealth is through investments, either in property, equities, bonds or unit trusts. If one follows prudent principles for investing for the long-term, one can enjoy very good returns of 11% (30-year period), which is nearly 3 times the average level of inflation (3%). By introducing value investing, I hope to show readers that slow and steady wealth building through long-term investing is a sure way of growing your nest egg. Foolishly exposing oneself to the unpredictable patterns of the daily stock quotes in an attempt to second-guess sentiment and emotions is at best futile, and at worst foolish. I have mentioned the difference between trading and investing in a previous post so I will not go into it once again. Suffice to say that proper temperament and studious research and reading are important pre-requisites for doing consistently well in the market. As this is mainly a value investing blog, I will not touch too much on unit trusts and bonds but I will be making a brief mention on property investing in a subsequent post.

In Part 2 of Personal Finance series: I will explore the use of credit and debit cards and introduce some features of the latest cards to readers. I will also discuss the pros and cons of credit and how we can maximize the use of the credit card.

In my next post: I will touch on Boustead’s S$300 million contract to build a township in Libya and also cover Swiber’s appointment of a new VP for FSO operations.