Regular Shares Savings Plan: The Piggy Bank For Young Working Adults
When it comes to saving for retirement, a holiday, or anything really. We tend to set lofty saving goals that are eventually unattainable. Or somehow just can’t seem to have the discipline to see it through. Especially when it comes to simple things like food.
Remember how our parents used to put a portion of our pocket money into a piggy bank – against our will – when we were young? Maybe we need an adult equivalent that ideally can help us grow our savings too… That’s where a Regular Shares Saving Plan comes into play.
Squirrelling Away Your Income Before It Reaches The Leaky Bucket
It’s easy to declare that you “want to save XXX amount” every month.
But when your salary is credited into your bank account and you DO NOT have a savings plan in place… That’s when you’ll find yourself facing:
- Expenses like your transport allowance and telco bills
- Inflation which eats away at your money if you just left it in your bank account
- Temptations like the latest electronic gadget, or a pair of expensive sneakers that’s all the rage
- Wants like a brand new car so you can finally not have to endure those long train rides to work
To better illustrate this, picture a leaky bucket.
Now imagine that the water flowing out of the tap is your income. But because there are holes (expenses, inflation, wants, and temptations) in your bucket. It’ll start leaking whenever your income fills the bucket. And it will continue leaking until it is depleted.
We may be able to plug a few holes (like our temptations and wants) from time to time, but it’s nearly impossible to save any of our income if we just allow it to hit the leaky bucket.
“How can we work around this,” you ask?
This is why we need a plan.
And one of the most effective ways to get around this is to squirrel away some income into a Regular Shares Savings (RSS) Plan even before it hits the leaky bucket.
Once this automatic system is in place, you’ll always have a percentage of your income that goes into an RSS Plan, or “secured bucket”, that you wouldn’t even notice. This way, the amount that we save is not dependent on our ability to withstand temptations or our ability to control our spending on our wants.
So What’s The Difference Between An RSS Plan And A Normal Savings Account?
On top of saving a percentage of your income, an RSS Plan also invests that amount to help you grow your wealth.
Is this magic?
Well… Kind of.
An RSS Plan grows your wealth by also investing in a financial instrument like an Exchange Traded Fund (ETF) that tracks say… The Straits Times Index (STI). This means that you’re effectively investing in Singapore’s market without having to pick out individual stocks to buy.
Best of all, if you start your RSS Plan early, you can also reap the fruits of compounding interest.
The Power Of Compounding Interest
Here’s a look at why you should start an RSS Plan early, and how much compounding interest can help you grow your wealth.
The following illustration maps out the returns of Investor A and Investor B, if they both invested in the STI ETF through their RSS Plan:
- Investor A starts at 30 years old, while Investor B starts at 40 years old
- Both investors invest $100 each month through their RSS Plan
- Both investors also hope to withdraw everything when they hit 50 years old
If we assume a 6% annualised return on the STI ETF, inclusive of dividends. Here’s how much each investor walks away with at 50 years old.
At 50, Investor A would have invested a total principal amount of $24,000 while Investor B would have put in $12,000.
In turn, Investor A would have received $46,564, while Investor B collected $16,326.
That’s 89% in returns received by Investor A vs. 36% received by Investor B!
Oh, and considering that you only require as little as $100 a month to start, an RSS Plan is a REALLY affordable way for graduates on their first job, to start saving and investing.
The Advantage Of Dollar Cost Averaging
The most important advantage of investing through an RSS Plan is Dollar Cost Averaging (DCA).
What’s that and how does it work with an RSS Plan?
Let’s assume that you set your RSS Plan to invest $100 in the STI ETF on the same day of every month, regardless of price
- On 10 January, the price of the STI ETF is $1 so your RSS Plan will buy 100 shares of STI ETF
- On 10 February, the price of the STI ETF drops to $0.50 so your RSS Plan will buy 200 shares of STI ETF instead
- On 10 March, the price of the STI ETF hits $2 so your RSS Plan will only buy 50 shares of STI ETF
This is especially useful if you’re too busy to constantly monitor the stock market.
And let’s face it, it’s nigh impossible to determine the best price to enter the market as it can lead to incorrect decisions or you to lose out on opportunities.
Now that you understand the convenience of DCA, we’re going to use the historical share price of the STI ETF from Aug 2016 to Jun 2017 to explain why it gives you an edge.
You’ll notice that in August to October 2016, the STI ETF share price was at its lowest, so the units purchased were more. Conversely, the months leading up to June 2017 saw the share price climb steadily from $3.10 to $3.34. Which meant that lesser units were purchased from November 2016 onwards.
But more importantly, the total number of STI ETF shares purchased is 349 units, with an average cost price of $3.11 on Jun 2017. And if you stacked that against the market price then, that amount is way below the market price of $3.34!
An RSS Plan Sounds Like A Great Savings And Investment Tool! So What’s Next?
It’s important to be aware that every investment product carries a certain amount of risk. A Regular Shares Saving Plan does look like a good place to start your investment journey, but you should always make it a habit to find out as much as you can about a product before committing any of your hard-earned money to it.
If you’re interested to find out what is the cheapest RSS Plan in the market right now, you can check out this comparison of DBS vs OCBC vs PhillipCapital vs Maybank Kim Eng.