Because we don’t often talk to our children about money, young Singaporeans tend to grow up believing these financial lies. In general, we don’t teach our children too much about money. They’ll have to deal with it soon enough. Sometimes we miss out important lessons, and other times we tell small, practical-at-the-time lies.
Here are a few financial lies that young Singaporeans should unlearn:
It’s always bad to owe money
There is, in fact, one thing worse than owing money: that’s not having money at all. It’s tempting to rush to repay all your loans. But if doing so clears you out, you might get stuck in a cycle of poverty. For example, say you owe S$10,000 in student bills, and you have about S$8,000 in savings. You may be tempted to pay all S$8,000 to reduce your debt. It is, if nothing else, psychologically reassuring. But what happens if you clear out your savings and run into an emergency? If you get into an accident, take longer than expected to find a job, etc. you can’t take back the money you used to repay the loan.
Chances are, this will result in you applying for personal loans or using credit cards, both of which have a much higher interest rate. It’s important to clear your debts, but don’t take it to the point where you have absolutely no savings. Always keep about 20% of your monthly income as savings, even before you handle your debts. This may mean stretching a debt for a little longer and incurring some interest, but it’s better than having no safety net.
Leave money in the bank so it will grow
Leaving money in a current account is not a good way to grow it. You may need to keep some savings this way, so that you can access the funds whenever you need them. But don’t be under the impression that this will grow your money. It’s doing the opposite. Most current accounts only pay an interest rate of 0.125% per annum. This is insufficient to cope with the rate of inflation (the rate at which the cost of goods are always rising). In general, the inflation rate in Singapore is about three per cent per annum. This means that money stagnates when you leave it in a current account; its value grows less by the day, and you are losing your purchasing power. You could use other alternatives, such as a fixed deposit. But even then, these only tend to pay interest rates of under one per cent per annum (barring a few promotions or special deals). You should leave some of your money in a bank as savings, up to a maximum of six months of your income. Beyond that, the money should be invested in a balanced, well-diversified portfolio. There are many financial products that can help your money keep pace with inflation, such endowment plans. Speak to a financial adviser for more details.
Building passive income should be your first priority
Your first priority should be to focus on your current income stream, and stretch it as much as possible. Passive income is something to think about once you’re in a position to open businesses, invest in properties to rent out, or make other capital intensive investments. But unless you won the birth lottery (i.e. you were born rich), these are likely to remain pipe dreams. Your first focus should be ensuring you’re paid well for the job you do. That means being exceptional at your work, learning to negotiate a fair salary, and finding employment opportunities (or contracts if you are self-employed) that maximise your active earning potential. Your next priority will be earning a side-income, which is still not the same as passive income. Side-income often entails having to burn weekends, work past office hours, or even go for further studies, to boost your active income. When you’ve managed to significantly cross the median wage threshold, by about triple (median wage is around S$4,000 a month at the moment), then you can start thinking about things like buying a second property to rent out. Until then, lay off the castles in the sky, and focus on being fantastic at whatever job you do.
Thinking about money is materialistic and shallow
Thinking about money might be one of the most caring things you can do. People who can’t make enough money become a burden to their family and their friends. If you have no money and need life-saving surgery, the surgery will still happen. But the money may come from your retired parents’ Medisave, or the bank account of your sister who’s already struggling with two children. It might come from your friend, who works a 60 hour week and has a family of his own to look after. Thinking about money can be materialistic, if all you care about is designer handbags and yachts. But that’s generally not the motivation for most people. If you refuse to maintain an emergency fund, plan for retirement, or consider the needs of your elderly parents, that won’t make you an anti-consumerist crusader. It just makes you irresponsible.
If you have a degree from a good school, your salary should be S$X
Parents like to say this to their children, and it’s not entirely wrong. Having good paper qualifications doesn’t hurt. But here’s the brutal truth about the real world. Most bosses are not paying you because of the university you went to (or didn’t go to). They are paying you because they have a problem that needs fixing. If you have a law degree and someone needs a better kitchen sink designed, then the diploma holding engineer is the one getting paid, not you. It doesn’t matter how well you did on the bar exam. This means some – or perhaps even every employer you meet – won’t pay you what you expect, even if you studied hard. On the flip side, it also means that you can earn much more than your better-educated counterparts if you can find a need and fulfil it. The key is adaptability. The more useful you are to someone, the more they’ll pay you. Your income is more closely tied to what you learn after tertiary education rather than during. So stay informed, identify trends, and continually learn the skills to match them.
This article was first published at Singsaver, 26 July 2017.