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Regular Savings Plan: The Piggy Bank For Working Adults

Turns caffeine into digestible finance content. You can contribute your thoughts like Ming Feng here.

If you are a true-blue Singaporean like myself who enjoys my morning indulging in my Bak Chor Mee and Kopi, you should be able to agree with me on the next point.

Singaporeans are ranked first in the Mastercard financial literacy index which indicates a good level of basic money management, financial planning and investment knowledge. Yet, when it comes to translating this knowledge into action, we contemplate. Most of us fail to follow through with it ultimately.

The main reasons behind this are simple:

  1. We are too caught up with work. In fact, Singaporeans rank among the global top when it comes to working hours.
  2. We prioritise the use of our free time on family, Facebook surfing and Game Of Thrones above personal finance.
  3. We constantly feel that we might not be knowledgeable enough to be trading in the stocks market when we are up against the big fishes in the exchange.

In fact, 1 in every 3 working adults is not planning for their retirement yet, further emphasising the importance of having a plan for your savings.

Remember how our parents use to put a portion of our pocket money into a piggy bank against our will when we were young? Maybe it is time to bring that to adulthood too, this time with a better instrument than your piggy bank. This is where Regular Savings Plan comes into the picture.

Stealing Your Income Before It Reaches The Leaky Bucket

Let’s face it.

Saving up is not as easy as we expect. Imagine our bank account and wallet as a leaky bucket. The holes beneath the bucket are made up of factors such as our expenses, wants and even inflation. Whenever our income fills the bucket, it starts leaking until it gets depleted.

income expenses bucket As humans, controlling the leak requires a high amount of discipline which we tend to overestimate ourselves of achieving. Many times, we believe in saving up a certain sum of money to eventually fall short of achieving it. On top of that, factors such as inflation are leakage from our bucket which we have zero control over.

This is why we need a plan.

One of the effective ways is to create a system that “steals” from the income tap before it reaches the leaky bucket. When one set up a Regular Savings Plan, he is creating an automatic system which takes a certain percentage of his income into a non-leaky bucket.

Now, with the Regular Savings Plan being a different bucket from all the expenses, one will no longer have to worry about ending up with an empty bucket. There will always be ” water” in the Regular Savings Plan bucket.

This can get rid of the risk we take when we leave our level of savings pegged to our level of commitment and discipline.

Power Of Compounding Interest

Investing through a Regular Savings Plan early will allow one to reap the fruits of compounding interest. The barrier to entry is as low as S$100 monthly, making it really affordable for graduates starting their first job. The impact is high should one invest earlier.

Assuming investor A and investor B, both invest in the Straits Times Index ETF.

  • Investor A invests at age 30 and Investor B at age 40 respectively.
  • They both invest S$100 from their monthly salary
  • They both hope to withdraw everything at age 50.
  • Assume a 6% annualised return on STI ETF, inclusive of dividends.

 

power of compounding interestAt age 50, Investor A would have invested a principal amount of S$24,000 while Investor B, S$12,000.

Investor A will receive S$45,564 at age 50 while Investor B, S$16,326. The returns for both is a huge difference, at 89% and 36% respectively.

Power Of Dollar Cost Averaging

The most important advantage of investing through a Regular Savings Plan comes down to the power of dollar cost averaging.

As mentioned above, Singaporeans are too busy to constantly monitoring their position in the market, or finding the right price to enter. On top of that, trying to determine the best price to enter can result in incorrect decisions or lose out on opportunities.

Unless you have enough financial knowledge or a magical crystal ball that predicts the future price of a stock, we suggest you get rid of the redundant stress and go with dollar cost averaging instead.

Here’s how it works:

  • With the Regular Savings Plan, the bank automatically purchases the amount you set aside to be invested on the same day of every month, regardless the price.
  • Given that it is a fixed amount invested, if the share price is higher, you buy lesser units of it.
  • If the share price is lower, you load up more units.

Dollar cost averaging explained

In the example above, we assume a $100 Regular Savings Plan that buys as many units possible regularly.

Realise that on months where the share price is high such as June 2017, the units purchased is lesser.

The end result shows 349 units purchased with an average price of S$3.11, below the market price! Hooray~!

Looks Good! What’s Next?

Be warned that every investment product carries a certain risk. As much as we believe that Regular Savings Plan may be a good start to your investment journey, it is always a healthy habit to read up more before investing.

There are a few banks providing Regular Savings Plan and we have made a comparison in our previous article. Check it out!

 

 

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