Recently, someone approached me to look into saving solutions and seem to be expecting something with good flexibility while having better returns. Here's the interesting news, this person requesting such a solution hasn't accumulated much savings over the years despite a fairly good income. So why is this so?
As a FA, the opportunity to meet people from all walks of life and financial stability has provided me with an insight into peoples' spending patterns. More often than not, many individuals who claim to save X amount every month, do not have X amount multiplied by Y period in their bank balance. This led me to identify a common problem most people have. The ability to exercise self discipline and manage money.
The most effective way to help people with money management issues is simply to lock up their funds in an inaccessible place. This has been proven effective through involuntary national schemes like CPF and in Europe, taxes!
One outcome from these compulsory mechanisms is the enablement of many Singaporeans to own their own homes and have a basic retirement. In the case of Europeans, to continue leading a quality life without much savings through their pensions.
Is a saving issue limited to certain income groups?
No... as the saying goes, it doesn't matter how much you earn, it matters how much you save.
Lifestyle inflation is very common.
Through my observation, unless one became wealthy from very humble backgrounds or have a very thrifty upbringing, most people tend to overspend. Of course, there are multiple exceptions too. The serious cases are unable to identify where exactly their money went. The milder, more common ones are simply an over allocation to their wants. There's also a third group who are simply bad at making financial decisions. They fall for 'get rich quick' scams!
Why do we have 90% home ownership when many people aren't saving enough?
How can people afford big ticket items if their spending habits is so atrocious, was something I found myself asking whenever I meet someone who lives hand to mouth.
The answer is CPF.
Every employed working adult is forced to contribute to CPF. Most individuals below 55 contributes 20% of their salary while employers contribute 17%. This money cannot be withdrawn for any other purposes besides healthcare, housing and investment prior to retirement.
As a result, most working Singaporeans have the means to own public housing even with terrible saving habits.
What can we takeaway from this?
Most people need to have a mechanism to automatically stash money away.
When the money is not accessible, it actually accumulates.
Over a period of time, people will have savings.
Add a higher percentage return to the funds accumulated, the money will grow at a faster rate.
Most people can still function in society without compromising their lives too much despite of CPF.
Many prudent individuals can even save additional funds on top of their CPF contributions.
Understanding how saving plans work
Saving plans is a term known to the lay consumer as a structured way to save money. In reality, the proper term for saving plans is endowments. When we talk about endowments, it typically have a pre-determined saving period, and usually a breakeven period as well as either a maturity period or it terminates when the policy holder surrenders the solution. More often than not, these plans have limited flexibility and early termination or failure to fulfill the contribution period would result in losses.
Main purpose of a savings plan
I can probably safely assume that most people who take up or are looking for such solutions are seeking ways to:
Earn a better return than their bank deposit rates
Accumulate wealth
Endowments in general are have been performing at a return that can averagely meet inflation. Unlike investment instruments which can potentially generate 5% upwards, most good endowment instruments are meant to preserve wealth.
As shared in the CPF example, endowment instruments typically have long tenors partially because people need an automated mechanism to ensure that the saving habit sticks. However, unlike CPF, this is a voluntary mechanism because you need to sign up for it.
The lack of flexibility in endowment also meets the objective of ensuring that consumers can accumulate wealth. Imagine CPF being fully withdrawable from day 1, how many people do you think can afford their own homes after working for 5 to 10 years?
There's a good chance home ownership rates might drop to 50% instead of 90%. Likewise, if a saving instrument is as flexible as a deposit account, how many people do you think can hit their longer term saving objectives like children education, retirement and even buying a second property?
Learning from the Europeans
In Europe, it's common that many Caucasians aren't taught to save money. Instead, the state charge really high taxes in exchange for pension pay outs when they retire. To many individuals who might have money management issues, this system is an effective way to keep the state running.
In my view, one benefit of endowments is to automate one's savings and to set a safety net for the future. Very often, having the autonomy to manage money is very detrimental to most people.
Firstly, most people have no interest in finance. Speaking to financial advisors or even settling for random investments are a by-product of knowing that inflation exists. As a result, most people manage their finances begrudgingly.
Secondly, most people's default behavior to wealth management is to do nothing. The money accumulates in their savings account at best and might be losing its spending power daily. It simply isn't obvious when we are still working.
Thirdly, very few people end the year with more money than they envision to save. Very often, even when clients tell me they set aside X amount, what's left is usually lesser.
Endowments create predictability in your life
With endowments aka savings plans, people are basically automating their savings rate. They know every month or year how much surplus they set aside. They also choose how long do they take on this commitment and ensure that there are penalties in place to punish their lack of discipline when they save lesser or try to withdraw the money.
At the beginning, just like starting any new habit, it's uncomfortable. However, most people learn to accept and live with the new perimeters. Back when I was a banker, I once asked a client who saved for 2 over years how she felt about the endowment she took up. The client shared that at the beginning, there was buyer's remorse because it seems like an expense not a savings. However, 2 years on, she is thankful she did it.
In her own words:
Otherwise the money would still have been spent on something not useful.
Europeans live in a very automatic culture. In my opinion, designing such a system on our own helps us to accumulate wealth in a straight forward manner.
Summary
This might appear like a boring article to many because it sounds so common sense. However, a lack of savings and safety net is still an issue among Singaporeans particularly in the area of retirement. Since we are all susceptible to human nature and indiscipline, one of the best ways to ensure we have savings is to simply save it into instruments that lock up our money till its intended savings period and have a mechanism in place that requires us to commit to this responsibility.
Read also: 5 Retirement Strategies Common In Singapore
After reading this article, you may have some questions or may want to get started on a structured way to accumulate wealth. You can reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about retirement. About Janice
I specialize in portfolio optimization (ensuring you get maximum value for every dollar you put in) and retirement planning. Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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