A Part of All You Earn Is Yours To Keep

Senator Elizabeth Warren’s 50-20-30 Thumb Rule allows you to navigate through your weekly, monthly or annual budget regardless of who you are– whether you’re a soccer mom, a businessman or a fresh graduate.

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So, what is the 50-20-30 Thumb Rule? According to Warren, you should split your budget into 3 categories:

  1. Your Must-Haves or the 50
  2. Your Savings or the 20
  3. Your Wants or the 30

 

Now, as per the Ministry of Manpower, the income of an average working class Singaporean for 2016 was 4056 SGD per month, which translates to 48,672 SGD per annum. Thus, your after-tax income or real income as per the Inland Revenue Authority of Singapore is approximately 47,746 SGD. You can then prepare your annual budget through 3 simple steps:

  1. Step 1: The 50

The rule recommends that you set aside at least 50% of your income for your basic essential needs such as housing and related expenses, food and groceries, clothing and the like. It is essential that you differentiate between your “needs” or “must-haves” and your “wants”, at this step.

 

Anything whose absence would seriously impact the quality of your life qualifies as a “must-have”. On the other hand, anything whose absence would only lead to a minor inconvenience serves as a “want”. Such “wants” should not be taken into consideration at this stage.

 

  1. Step 2: The 20

The next step focusses on setting aside 20 percent of your remaining funds for debt repayments and saving up in lieu of an emergency or for future retirement. Of course, if you’re fresh out of college, retirement may seem quite far away. However, you could always instead use these funds for your future home or other such investments that you may soon want to make.

 

  1. Step 3: The 30

The last step focusses on setting aside the remainder of your total real income for satisfying all “wants”.  It is this last step of budgeting that differentiates the smart-spenders from the thrifty ones. For instance, although budgeting for categories like groceries and clothing may fall under the initial step. It is important to make note of the type of groceries or clothing that is being considered. Although both Bread and Oreos fall under groceries, Oreos do not qualify as a want.

 

As with everything, certain items have such loose definitions that it’s hard to determine which category they may fall under. For example, credit card payments and insurance payments can fall under the 20% as well as the 50% category. So, how do we identify where each payment falls? As far as credit card payments are concerned, the minimum payment must be considered as a “need”. However, any additional payments towards your credit card must be included in the 20% as a debt repayment. This is because these additional payments do not prevent you from using your credit card. Similarly, in today’s world of uncertainty purchasing an insurance is essential and should be considered as a “need”. However, insurance payments can come under the 20% category as insurance premiums help you prepare better for the future. In fact, Hive Up can help you organize your savings and investments by directing you to the right advisors and enabling you to focus on your 30% of “wants”!

 

Of course, Warren’s Rule is NOT a drudgery-based budget method that must be strictly adhered to if you want to achieve financial success. Rather, Warren herself recommends that you simply use it as a framework and tweak the numbers based on your own personal needs and various other factors. The primary purpose of this rule is to help you identify where you spend and where you can cut-back on your expenses and save for your future.

 

How realistic do you think this rule is? Let us know in the Comments section below.

How to Protect Your Savings from an Inflation Risk

Startup Business People Working on LaptopInflation is that economic term that you’ve probably heard every second person use since time. At the macro level, it has the power to cause an economic crash or boom. And at the micro level, it has the power to make you, the consumer, rich or poor.

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So, what is inflation? Technically, inflation is the percentage change in the Consumer Price Index on a year-on year basis. But in simpler terms, it occurs when there’s an imbalance between demand and supply of money. Because of this imbalance, each unit of currency then starts to buy fewer goods and services. And that’s when you start to suffer.

Suppose, you’ve saved up SGD100 in a savings account that accrues an interest of 5%. At the end of the year, you have SGD105. Now, if inflation in your resident country has remained stable for the past year or has increased by a margin that keeps the overall rate below 5%, then your purchasing power or your ability to buy goods and services increases. But, if the inflation rate following the past year has risen to above 5%, then your purchasing power decreases. Thereby, compelling you to purchase fewer goods and services. The risk that comes with this rise in the inflation rate is called an Inflation Risk. Then the next question is whether there’s been a rise in the local inflation rate.

According to the Monetary Authority of Singapore, for 2017, core inflation is expected to average at around 1–2%, as against 0.9% in 2016. In lieu of such an increase, it is necessary that you prepare a safety net from market fluctuations. There are several ways through which you can ensure that your assets maintain purchasing power.

Here are a couple of tips for you:

  • Invest in fewer Long-term Bonds and More Long-term Stocks

Against common belief, bonds aren’t all that safe when compared to stocks. The problem lies in the fixed interest rate that accompanies the purchase of a Long-Term Bond. Suppose, back in the day, you purchased a Long-Term Bond at 5% but the current rate of inflation is at a staggering 10%. Although you’re still earning income from those bonds, it doesn’t have as much or any such value as it did when you initially purchased that bond.

Instead, try investing in stocks of commodity companies or healthcare names with the strongest profit margins in the market. But make sure that you’re investing with the objective of NOT selling out too soon.

  • Invest in Assets that Increase your Cash flows

Owning assets whose prices fluctuate with inflation can serve as a safety net from erratic market fluctuations. Investing in property is one such example of asset ownership. This is because property prices adjust according to the market. However, it is important that such investment is done with a long-term agenda.

(Pro-tip: In case you’re taking a loan against your property, take a mortgage instead of a fixed rate loan. This is because mortgages allow you to pay off a little bit of the principal over an extended period. But fixed rate long-term loans compel you to pay off your debt with cheaper currency.)

  • Invest in Independent Commodities

Independent commodities basically include all those commodities in the market that move independently of currencies. These normally include gold, silver, timber, or other such natural commodities. One way to invest in such commodities is by investing in farm land. The advantage of such an investment is that if people need such commodities they would be willing to pay for it in any currency. In this way, you always have purchasing power, in one currency or another.

  • Invest in Yourself

Investing in yourself is the one foolproof way of protecting your savings from inflation because it doesn’t require you to depend on anyone but yourself. Invest in educating yourself in contemporary fields that have future potential. By doing this, you can develop a versatile set of skills that shall ensure your employment in the face of a recession or an inflation.

Thinking of an Early Retirement?

Where do you envision yourself in 20-30 years? Are you still at work? Do you have a family? Or are you retired; with all the free time in the world to relax, travel and pursue your own interests? If it’s the latter you find yourself gravitating towards, then this is the article for you!

clem-onojeghuo-136261Photo by Clem Onojeghuo on Unsplash

Traditional retirement planning often emphasized saving in the form of passive investments, or in other words, a form of risk management that insures you against living a long and full life. This can take the form of a 401 k plan, or the Singaporean equivalent; the CPF Life Scheme. How this works is that by putting forth a premium payment, an annuity is able to pay you a fixed monthly income for life, starting at a certain age. Compulsory contributions to the CPF often occur in regards to Singaporeans and other residents. However, these contributions are not taxable. That means for whatever percentage of your salary that you agree to set aside is a tax-free payment. So if your marginal tax rate is 16%, then for every $1,000 that goes into your CPF, you save an extra $160. It may not seem like a lot now, but considering that this sum will only grow over the next 20 odd years, you can only imagine how vital that sum will be for your future.

And true, this kind of saving can work wonders for someone who plans to have a working career over the course of 40 years, in order to prepare for 30+ years of retirement. If you are looking for a shorter career and a longer retirement, then this strategy simply isn’t realistic. You will have less time to save more money, and unless you plan to spend the next 20 years in extreme frugality, there simply won’t be enough time to compound the growth of your assets.

So now that we’ve kicked that idea right out of the equation, here are a few other ways to aid in you saving for the retirement that you deserve:

Be Realistic
In the past, people have followed a 4% rule to ensure that once they’ve retired, they will live comfortably for the rest of their lives. The way this rule works is that say you have just retired, and the total sum you have saved is 1 million dollars. According to this 4% rule, you will be able to live comfortably throughout your retirement if you spend no more than $40,000 a year. Now imagine that you are married, that same rule will apply, regardless of how much you have saved in the bank. And for many people, depending on their intended lifestyle and where they live, this can work. However, what you must also factor is the tax deductibles that you may face once you have retired. It is true that while you are in the process of saving, often these accounts are not subject to any form of tax whatsoever, it is only when you start withdrawing cash that this exception becomes mute. So what we cannot stress more than anything else, is to have some leeway – do the math and always aim for a larger sum you intend to save; that way, you can save your future self from having to rejoin the workforce out of necessity.

Be Frugal
Retiring early isn’t just about what you make and what you save, it’s also about determining what kind of lifestyle you want to have when you retire. If you envision retiring in luxury, then you are going to have to spend the next 20 years living sub par. However, if you envision retiring comfortably, then the time spent working and the amount you’ve saved will be sufficiently less.

Save
As a rule of thumb, most people save roughly 50% of their monthly salary in order to retire early. Otherwise, you will most likely be retiring at the average retirement age of 65. Many people cannot stand the idea of not working; it is entirely dependent on your own personal choice. More than anything else, what really does wonders to your ability to save, is the addition of another paycheck. If you and your partner are happy to continue working, even if you have children along the way, this will propel your ability to save so much more.

Actively Invest
With a decent amount of savings, you can choose to do one of two things:
1. You can either continue to save and put aside the money for the rest of your working career or
2. You can dabble in active investments.

Of course, active investments come with a risk. Because of these risks, they are not suited for everyone. Patience and drive are your key ingredients to investing. If you truly believe that you have what it takes, you might want to look into putting your savings into a unit trust or exchange traded funds (ETF).

A unit trust and exchange traded funds both pool the money of investors so that it may be invested in securities such as stocks and bonds. The key difference between the two is to whom the responsibility of trading/buying shares lies with. Unit trusts are usually managed by management companies, and thus, investments are made through them as well. Whereas in an ETF, investors may trade their own shares on the market exchanges via a broker, as opposed to buying them from a specific fund management company.

Conclusion
These contributions are not taxable. That means for whatever percentage of your salary that you agree to set aside is a tax-free payment. So if your marginal tax rate is ten, which goes into your CPF, you save an extra. That may not seem like a lot now, but considering that the accumulated sum will roll over to be quite a large sum, you can only imagine how vital that sum will be for your future.

Travel Insurance: Do I Really Need It?

No matter how old you are, there will always be people to worry about you whenever you travel. Whether it be on your gap year abroad, diving off the cliffs of Costa Rica, or your 50th anniversary spent in South Africa; both your friends and family may need that extra reassurance that you’ll be alright. Most importantly, no matter how confident you are in your own abilities, you can never predict what may or may not happen, so perhaps travel insurance can provide a little peace of your own mind as well.

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Regardless of your initial reason for purchase, the idea behind insurance is always the same; protection against the unplanned. More people than you realize end up paying obscene amounts of medical bills over the occurrence of just one unfortunate incident. With that being said, we do not want the fear of getting hurt to hinder your travels either. We want you to be able to hike up to the Tiger’s Nest of Bhutan, to Canyon down the waterfalls of Dalat; no adventurous soul wants the finances of bad luck to be a limiting factor, which is why travel insurance will not just benefit your family and friends, but your health and experience as well!

Annual and single trip coverage
A comprehensive travel insurance policy can assure that you are covered from most travel inconveniences possible; from travel interruptions to medical emergencies. If you are a frequent traveller, you may want to consider annual travel insurance, as it would provide you with the coverage you need, without having to go through the same paperwork each and every week. Otherwise, the bulk of us just trying to get the most out of our annual 14 days would be better off purchasing single trip insurance.

Most importantly, look beyond cost

You would want your insurance policy to cover the essentials for your particular trip, so make sure the policy that you are paying for covers you for the risks you may actually be exposed to, rather than the cheapest insurance policy out there that only covers lost baggage.

Many insurance companies have relatively strict claim procedures so as to protect themselves against fraud. This means that to claim insurance, you often are required to provide an extensive list of documentation prior to making a claim. Andrew, who had been on a ski trip in Japan, had misjudged a jump and fell head first, taking serious spinal and head injuries. An immediate phone call to the insurance company ensured that all the arrangements for appropriate medical care were handled directly by the insurance company; and since they knew exactly what was going on, claim procedures were a breeze.

Do ensure you are not already covered
Certain credit cards do provide coverage for travel purchases, and this already ensures you are covered, without having to purchase additional insurance. This is especially the case if you use a travel-linked card, such as a Citi PremierMiles Visa Card, or a DBS Altitude Visa Signature Card.

Where’s best to get it from?
Travel insurance is most commonly purchased through airlines, independent insurance companies, or through credit cards. If you’re not already covered by a credit card, independent insurance companies often do give airlines a good run for their money; their policies are often more comprehensive, and cheaper.

When to get covered
Please ensure you’re covered before you go for your trip. Don’t bother trying to purchase insurance for something that has already happened – you won’t be protected. That’s like purchasing life insurance for someone who has already passed away. As such, it is always advised to purchase insurance as soon as the trip is confirmed; you never know if you have to cancel a trip because of a family-related emergency that requires you to stay grounded. Pre-trip incidents are often included in the insurance coverage, and it makes sense to get insured early on to benefit from the full coverage offered.

In contrast to Andrew’s smooth sailing claim, the story of Tragic Sam might strike a chord with anyone of you who have had to make a claim before – as the leader of an overseas community service project, he had to file a claim for a volunteer who had contracted gastroenteritis during the trip and had to be hospitalized. What made the medical emergency claim difficult for him was the strict list of required documents to prove that everything was on a ‘must-have’ basis (insurance companies often aim to cover only essential services). This required doctor’s memos, and hospitalization invoices, documents which a local hospital in a developing country often don’t provide on hand. The fact that the grief stricken father of the volunteer demanded her to be flown back to Singapore to receive treatment did not help him with the claims in any way. Worst of all, the insurance company was not able to provide any help during the process, because of the lack of a customer centre in Vietnam.

Sam’s painful experience documents some important lessons; always ensure you are able to document your claims. When it comes to medical emergencies, it is often best to call ISOS, an international helpline, for assistance. As internationally-accredited hospital networks, they have the tools to provide you with the necessary help to make claims easier.

To sum up,
If you’re going on a really low-risk trip, like a weekend shopping trip to Bangkok, chances are you may never have to make a claim. But, there’s still a chance. Those of us that don’t want to deal with the anxiety may just find living life a lot easier and more enjoyable after purchasing an insurance plan; a deal I’d be happy to make. Insurances are always a gamble, and while you probably value the gamble for life insurance a lot more than over travel insurance, you don’t ever want to regret not buying insurance. Just make sure you’re not spending money for something that is completely useless, or something you already have.

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