Nine money habits to adopt in the new year

PHOTO: The Straits Times

The start of Chinese New Year is a good time as any to take a closer look at our money habits and make any needed changes.

It is similar to the age-old Chinese tradition of doing a massive spring cleaning of the house before the new year. Every corner has to be cleaned to remove and drive away bad luck. And part of the custom involves replacing old things that are thrown out or given away with new items to signify a fresh start.

Here are nine money habits that have been rewarding for me.

1. REVIEW INVESTMENT PORTFOLIO

This is an opportune time to review my portfolio. After all, financial experts advise us to review our investments every six to 12 months.

I would have already received my banking and financial statements for the past year to give me an idea of how my investment portfolio has performed.

One exercise is to tabulate the dividends I have received from my stocks into an Excel spreadsheet and use it as part of my analysis.

Even though I adopt a buy-and-hold mentality when it comes to long-term investments, a rebalancing of the portfolio may be required so that it meets the original risk and return objectives.

I look at the price movements of my investments and consider the weightage of each one in the portfolio. Am I exposed to more risk? These could come in the form of specific sectors or even currencies.

As market conditions are volatile, risks will continue to prevail. As an investor with a lower risk appetite, I sleep better at night by investing in blue-chip companies with established business track records, sustainable business models and stable dividend yields.

This is vital as it means the firm will be able to ride out difficult times and still continue to provide dividends.

Diversification - in terms of sectors and geography - is key for any investment portfolio.

Consider these 4 easy ways to get into investing

  • Starting from January 19th this year, the minimum lot size for stocks on the Singapore Exchange will go from 1,000 shares per lot to 100 shares.
  • This means that more people will be encouraged to start investing in shares, since you don't need to have over $50,000 on hand in order to buy just one lot in a blue-chip stock like DBS or SembCorp Industries. (You only need $5000, which might still be out of reach for many)
  • A popular exchange traded fund in Singapore is based on the Straits Times Index, by investing in a basket of Singapore blue-chip stocks like DBS, OCBC, SingTel and UOB.
  • A tool called the Regular Savings Plan is available from DBS, OCBC or Phillip Securities to help you invest in the STI Exchange Traded Fund. Pick the best Regular Savings Plan for you to start investing.
  • Depending on the type of properties they manage in their portfolio, investing in some REITs are more likely to be low risk and provide recurring dividend income compared to others.
  • But even then, you should still do the necessary research in order to make sure you're comfortable with the investment strategy of the REIT Manager.
  • Open a CPF Investment Account with DBS, OCBC or UOB. Using this Investment Account, you can channel a portion of your CPF money into unit trusts, investment-linked insurance, fixed deposits, bonds and other products.
  • when you sell your investments, any money you make goes back into your CPF Investment Account. NOT your wallet. On the other hand, if you lose money on your investments, you won't need to top it up either. So, you're essentially building up your retirement fund without affecting your current cashflow.

2. ADOPT A LONG-TERM VIEW

While we have short-term obligations to fulfil, we should approach financial planning with a long-term perspective.

Experts have worked out the probability of getting positive returns against the number of years that investors stay invested. Research shows that the longer the investment holding period, the higher the probability of positive returns and the greater the expected return.

3. KEEP AN EYE ON RETIREMENT GOALS

I keep my retirement goals in sight at all times and this includes looking out for tools to achieve passive income flows during my golden years.

These include blue-chip stocks, retail bonds, preference shares, investment properties, Singapore Savings Bonds, Supplementary Retirement Scheme (SRS) and annuities.

One set of tools that I have featured extensively in my articles is the Central Provident Fund (CPF) schemes. For most of us, the CPF is an essential component of planning for retirement so it pays to understand the details in order to gain maximum benefits.

Even financial experts - local and foreign - are impressed with the attractive risk-free interest rates of our CPF accounts.

If you have the means, consider depositing spare cash into your CPF Special Account to build up your nest egg faster. The first $60,000 earns an extra 1 per cent interest, so you earn 5 per cent to be compounded until you turn 55. This assumes that the rate remains unchanged.

And if you are above 55, consider topping up to the Enhanced Retirement Sum of $249,000, to boost your nest egg so as to enjoy higher cash payouts for life after retiring.

Photo: Sunday Times Graphics

4. TAKE STOCK OF CASH POSITION

It is standard financial advice during ordinary times to have sufficient cash set aside to cover at least six months of your monthly household expenses for a rainy day.

With the ongoing market volatility and uncertain employment situation, having six months may not be enough. This is because we should cater for contingencies such as a pay freeze, a pay cut or an unexpected job loss. Last year, layoffs hit a seven-year high with 19,000 people getting retrenched or having their contracts aborted.

How much is enough? It depends on how risk-averse you are, your life stage and your financial commitments and liabilities. A good rule of thumb is to save up to 12 months of your monthly expenditure.

This means that if your monthly expenditure is $2,000, a buffer of up to $24,000 would be a good amount to keep in a deposit account.

Check out savings accounts such as Bank of China SmartSaver, DBS Multiplier, OCBC 360 and UOB One Account, where you can park your cash and still earn interest of up to 3.55 per cent a year, subject to terms and conditions.

5. SET A REALISTIC BUDGET

The key word is "realistic". I consider this the most basic money tool to control my finances because a realistic budget that is adhered to will go a long way towards helping me achieve my goal of financial freedom.

I do not track every cent but I have a general idea of my monthly expenses by keeping receipts and checking them against my credit card bills and banking statements. This keeps my budget regularly updated, and I know where the money goes and how much is left over. It also helps to guard against fraudulent online transactions. As the designated family holiday planner, I manage the travel budget as well.

And as I move closer towards retirement, part of my goal is to pay off the mortgage and be debt-free.

Generally, I review my budget every six months. It is also prudent to do so when your circumstances change, such as when you receive a pay raise, a windfall or inheritance, or when you have a new addition to your family.

3 things that are easy to stop spending money on

  • You don't have to be some Instagram fashionista to spend a ton of money on clothes. In fact, many of the people who are guilty of spending hundreds of dollars on clothes a month are actually perfectly boring-looking salarymen and OLs.
  • Clothes shopping is one of the easiest things to give up, especially if you've already built up a sizeable wardrobe over the years.
  • The fact is, clothes do not disintegrate or rot in your closet if you don't wear them. You can always wear something you bought last month, last year or even last century.
  • It's always amazing how many number of people get suckered into signing up for their telco's most expensive data plan because they wanted an iPhone at a "cheap" price a few years ago.
  • First of all, before you recontract at a higher price in order to get a phone, do the math to see if you'll be paying more over the course of two years than you would if you stuck with a cheaper plan and then bought the phone separately. You might be surprised to find that a lot of the time you're actually not saving much money at all.
  • Downgrading an expensive phone plan is really not that painful, considering most people work in places that give them free wifi all day, and then head home to their own broadband connections.
  • Many will be "investing" all your ang bao money in the annual Toto Hong Bao Draw.
  • For those people who have a stack of blank 4D/Toto cards at home, or who have their very own Singapore Pools accounts online, forgetting to buy 4D after witnessing a spectacular accident or missing the biggest Toto draw of the year ($12 million!) can seem like a disaster.
  • It is actually very easy to give up, and will not change your life in any way, apart from the fact that you'll now have a little more spending money on your hands.

6. CHECK ON PROTECTION

My family has several whole-life plans that were bought many years ago and once a year, I would take the opportunity to track the plans' surrender values. This is to provide me with an updated view on whether I would like to unlock the cash or leave it until a later life stage.

At least once a year, it is also prudent to keep an eye on the family's protection needs, including healthcare and term life insurance. And don't neglect the mundane stuff such as home contents insurance, and travel insurance when you go overseas.

7. PAY MYSELF FIRST

One habit related to budgeting is to adopt a disciplined approach to saving, by paying into your own personal bank account first. Better still, if this process is automated.

For instance, I have a Giro arrangement where a portion of my income is channelled to another savings account which I do not touch. Increase this portion when your income goes up, such as when you have pay increments or annual bonuses.

8. WATCH MY SPENDING

To accumulate my savings, I avoid impulse buying, whether online or at physical stores, eat at home and consolidate purchases.

Growing up in a low-income family, I have learnt to enjoy simple pleasures and I avoid splurging on wants. Outside work, my time is spent with the family, doing church work, reading, movies and exploring park connectors on my trusty mountain bike.

When I do spend in a big way, it would be for investments that will contribute to my retirement goals, as well as for family meals and holidays to grow the precious memory bank.

9. REDUCE TAX BURDEN

The start of the year is a good time to consider schemes that can help reduce your tax burden.

The Retirement Sum Topping-Up (RSTU) Scheme lets you build your retirement savings and enjoy tax relief by topping up your own CPF accounts or those of your loved ones.

In total, you can enjoy tax relief of up to $14,000 in each calendar year if you make cash top-ups for yourself, and your parents, parents-in-law, grandparents and grandparents-in-law.

You can also do this for your spouse and siblings, but only if they are handicapped or if their income did not exceed $4,000 in the year preceding the year of the top-up.

However, you can enjoy tax relief for cash top-ups to your own or your recipient's Retirement Account only up to the current Full Retirement Sum (FRS), which is $166,000 effective from Jan 1 this year. Cash top-ups beyond the current FRS will not be eligible for tax relief.

Another tool is the SRS, which provides disciplined savings to accumulate retirement funds. It also helps cut your personal income tax, as you can claim relief on SRS contributions up to the maximum annual sum of $15,300 for Singaporeans and permanent residents, and $35,700 for foreigners.

Do note that a new personal-relief cap of $80,000 per year of assessment will take effect from the Year of Assessment 2018. This cap applies to the total amount of all tax reliefs claimed, including any relief on cash top-ups made under the RSTU Scheme and SRS, made on or after Jan 1 this year. This means individuals who are already hitting the personal-relief cap - even before taking into account the RSTU and SRS reliefs - will get no tax relief for these contributions.

So, evaluate whether you would benefit from tax relief on your cash top-ups and make an informed decision accordingly.

I wish all readers a healthy and prosperous Chinese New Year... Huat Ah!

5 tax deductions you should know about

  • There are a number of tax deductions Singaporeans may not know about for the Year of Assessment 2016, which will go some way in reducing your taxable income.
  • There are a handful of typical tax deductions that most Singaporeans would probably know about.
  • Parent Relief is to subsidise maintenance of your parents, grandparents and even your in-laws.
  • Spouse Relief, for those with spouses who are handicapped or whose annual income does not exceed $4,000.
  • Child Relief, to help support your children under 16 years old or who are full-time students.
  • If you take public transport to meet clients and your employer doesn't fully reimburse you for your travel expenses, you can actually claim your transport costs as employment expenses.
  • For example, if you take a taxi to visit clients and have a meal with them, and it costs $150 but your employer only reimburses $100, you can actually deduct $50 off your annual income as employment expenses.
  • The question to ask is, is it worth the hassle to claim these expenses? IRAS expects you to keep complete and proper records of all expenses incurred for 5 years.
  • Rent payments earned from your property is subject to income tax, but certain expenses like mortgage interest, property tax and fire insurance can be claimed to help reduce the taxable income.
  • Donations, in cash and kind, may make you eligible for tax deductions, though it'll need to be to an approved Institution of Public Character.
  • The Parenthood Tax Rebate is given to encourage Singaporeans to have more children.The more children you have, the higher the tax rebate.
  • Note that this is a one-time tax rebate per child and should be claimed in the child's year of birth or year of adoption.
  • Reducing your taxable income is especially important if you're on the border of a tax bracket, as it may mean the difference between paying more and less tax.

lornatan@sph.com.sg


This article was first published on Feb 5, 2017.
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