When it comes to money, the general rule is that “what starts well, will end well.” The bad news is that 2016 will be a volatile year, thanks to situations like China’s slowdown and a Federal interest rate hike. Here are some smart money habits to start your finances in 2016 right:
1. Start saving even as you pay down debts
By all means, make paying off your credit cards or personal loans a priority. However, don’t fall into the habit of skipping savings to rush debt repayment. Doing so could keep you in a poverty trap: if you blow all your money on rushing debt repayments, you could be caught with empty pockets during an emergency. Then out will come the credit cards and loans, and you’re piling up debt once again.
Make it habit to save even if you have debts to pay down. Even setting aside 20% of your income as savings will help immensely.
2. Make it a habit to compare everything
Few financial products are equal. For example, some loans are more expensive than others, and there is no advantage in the added expense. If you pay a higher interest rate on your personal loans or home loans, you could be doing so for literally no reason.*
With over 100 banks operating in Singapore, this used to be a time consuming task. But today, comparison sites such as SingSaver.com.sg can give you instant, free updates on different loan rates. Make it a habit to use such free comparison sites, and don’t just take loans on the basis of convenience.
(*For the most part, a bank’s interest rates are simply lower or higher based on whether they’ve met their lending quota, and not because of quality or the range of features.)
3. Pledge to use credit cards as a mode of payment only
Credit cards are ironically named: they are great for everything except credit. You should never borrow from the bank via your credit card – the interest rate is around 24% per annum, which is astronomical compared to other forms of credit (e.g. a personal line of credit might just charge 6 – 8% interest per annum.)
However, credit cards are great as a mode of payment. You can get reward points or cash rebates if you pay through the card. They are also the most convenient form of payment worldwide.
You can have the good without the bad, by using the credit card as a mode of payment only. This means you buy with your credit card, but immediately pay back the full amount. You will have the all the benefits of a credit card, with none of the expensive interest rates.
4. Aim for a retirement fund that beats inflation by 2%
If you haven’t already started, put together your retirement fund now. 2016 may be a turbulent year, but it offers many opportunities – from undervalued stocks to an increased issuance of bonds.
Of course, not all of us know how to spot such opportunities, or how to build a well diversified portfolio – this is where independent financial advisors and wealth managers come in. Until you become a seasoned hand at managing your own portfolio (if you choose to learn), it’s worth paying the expert’s fees. Just remember point 2 and be sure to compare their charges.
In general, a retirement fund should have returns that beat the rate of inflation by at least 2%. In Singapore, this usually means you will aim for returns of about 5% per annum. However, there is no “one size fits all” solution to retirement funds, and depending on your lifestyle you may require higher or lower returns.
5. Delete your credit card information from accounts
When your credit card information is saved in an online store account, two things will happen. First, you tend to spend more impulsively, because you can just click “buy” without even filling in your details.
Second, you are more likely to be the victim of identity theft. Someone who hacks into your store account can spend on your card; and if the bank decides you were negligent, you could be held liable for all the charges. So however inconvenient it is, make a habit of manually keying in your payment details.
6. Review financial services you are already paying for
If you have an insurance policy, mutual fund, or other related financial service, make it a habit to review them every quarter. Remember the old adage that “what gets measured gets managed.” Do this especially for 2016, as we in for a tumultuous year.
When China’s stock market crashed on 12th June 2015, many Singaporean investors were slow to react. Some didn’t even know they were exposed to Chinese markets, as they did not check the various assets in their mutual funds, or insurance policy sub-funds. Make it a habit to know what you’re buying; don’t simply trust fund managers or advisors without checking.
Make it a habit to speak to your wealth manager or advisor every quarter, to see how your various investments are performing (they should take the initiative to do this anyway, as good wealth managers understand the importance of calendar based rebalancing).
Demand answers if performance is repeatedly below expectations*, and be ready to switch to another service provider if needed. Remember, it’s your money at stake. (*This is inevitable some of the time. But if you see consistent underperformance over two or three years, it is a cause for concern.)
7. Stop automating payments beyond savings
Avoid automated payments to services such as gyms, game subscriptions, web tutorials, etc. This doesn’t mean you have to stop buying them – by all means purchase what you need – but you must be conscious of doing so.
Automated payments draw attention away from how much you’re really spending. Before you know it, the subscription to that game you play maybe 20 minutes every month, or to that magazine you never read, will have cost you several hundred dollars. The more automated payments you set up (except to a savings account), the more you tend to waste.
By making manual monthly payments, you force yourself to be conscious of what you’re buying.