The start of a new year usually comes with new resolution of goals that we hope to achieve. These include setting for ourselves financial goals.
While there are many good financial goals out there that we can include in our bucket list for 2017, nothing is more costly (literally) than setting the wrong goals.
Here are four common financial goals that we think you should stop aiming for in 2017.
1. Spend less, save more
Spending less and saving more is an extremely common goal that most people have set for themselves at one point in time.
As children, our parents taught us to be responsible in managing our money. We are taught not to spend everything that they give us, and to set aside some money from our allowance that we can use in a raining day. At the same time, we see our parents making the effort to save their hard-earned salary each month. Naturally, we think saving up is the right thing to do.
Unfortunately, you are no longer a child. Spending less and saving more isn't going to help you in improving your financial well being. Not if you aren't investing a portion of your savings. You need to invest so that you can beat inflation.
Your aim in 2017 should be to spend less and invest more.
2. Aiming to have more income streams
Many finance professional and experts would usually advise you to have more income stream. Their rational is that people cannot just rely on the income they earn from their job. We agree with that.
Sometimes however, this piece of advice gets taken too far.
While there are many ways to create multiple streams of income, creating a new and effective income stream isn't as simple as it is sounds.
For example, you can create an additional income stream by investing in dividend paying stocks, but you first need to know how to analyse and find the right stocks, before ensuring that you have sufficient discretionary capital to invest in them. This could take you a couple of years to build up your knowledge and capital required for such a plan.
Another method could be to invest in a 2nd property for passive rental income. Again, buying a 2nd property isn't as simple as walking into a showroom and choosing a condo of your choice. To execute it right, it takes multiple years of investment before it pays off, as interest, debt and mortgage repayment have to be managed.
For those who are closer to retirement, the CPF LIFE scheme could be the retirement plan you have in mind. If you have met the Full Retirement Sum, you can expect about $1,270 each month. An aim could be to reach the Enhanced Retirement Sum so that you can enjoy $1,845 each month instead.
The point here that we are trying to make is that instead of constantly finding new ways of generating more income streams through the buying of multiple products (i.e. ILPs, co-investing in multiple properties with other investors, etc), why not just focus on getting better in the one or two ways that you already know?
3. You should save XX% of your income each month
We might have read it in the newspaper, heard it over the radio or attended a talk. Someone says that we should save XX per cent of our income and we religiously adhere to the rule, without considering our circumstances.
Take for example 20 per cent. For Person A who earns $2,500 a month and have a family to support, saving $500 each month would be pretty impressive. In comparison, for Person B who earns $10,000 a month and does not support anyone else aside from himself, saving a mere $2,000 each month is pretty underwhelming.
Both individuals may have saved 20 per cent of their salary but their circumstances are drastically different. Person A is doing a great job in managing his finances while Person B is recklessly spending money on a lifestyle that may not be sustainable.
Instead of following predetermined rules on how much you should save, consider your own circumstances. Being able to save more than 50 per cent of your income when you are a fresh graduate is not unheard off. You should aim to save the most you can achieve.
4. Aiming for zero debt
It's normal to think that being debt-free should be a key financial goal. Who doesn't want to own a home that is fully paid for already?
Yet at the same time, clearing your home loan prematurely may not necessarily be the best use of your money. A HDB loan charges an interest rate of 2.6 per cent per annum, a mere 0.1 per cent higher than the base interest rate given by the CPF Ordinary Account. Other bank loans may charge a lower interest.
Instead of clearing his loan, an investor may be better off making his money work harder through investing. If an investor can earn a return that is higher than 2.6 per cent, or whatever the interest on his home loan may be, then it makes more sense to invest rather than to clear his debt.
Are you aiming for the right financial goals in 2017?
There are many financial goals out there worth pursing. But even as we pursue them, we need to ask ourselves what are the objectives of accomplishing them. Are they goals we have because they help us improve our personal finance well being, or are we simply copying what others have done just because it feels right?
DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.