5 Tips For Clueless-About-Money Singaporeans
We Singaporeans like to think of ourselves as financially savvy, and when you live in a banking capital, it’s easy to get overconfident about your knowledge of money.
But you can never stop learning and as the results of a recent MasterCard survey show, we Singaporeans aren’t quite as knowledgeable about money as we once were.
The financial world moves on, and we have to move with it if we want to give Taiwan (which took first place) a run for its money.
Financial literacy generally refers to personal finance, and describes your ability to understand how money actually works. A financially literate person should have a working knowledge of how is money earned and how to go about managing money.
You should also have a basic knowledge of how to save and invest money to grow your personal wealth. Knowing how to manage your money can mean the difference between spending your life chasing debts or living debt (and stress) free.
Although most of us may never fully understand the dirty secrets of how to play with money on a global scale, you can get a good idea of the basics of managing money in a few minutes or less, depending on how fast you can read.
Here are 5 easy ways to be smarter with your finances, starting today!
Learn To Tell The Difference Between Assets & Liabilities
The rule of thumb is, if it will make or save more money than what you spend on it, it is an asset. If it makes or saves little or no money, or worse yet, costs you additional money, then it’s a liability.
Assets make you richer, liabilities make you poorer.
Of course money isn’t everything, and you will want to take your quality of life into consideration, but knowing the difference between an investment and feel good spending is the building block of a healthy financial life.
For example, if owning a car is crucial to your business and that car is actively helping you make money, you could consider your car as an asset. If you own an expensive car to impress your friends or parade at the motor club on weekends, that car would probably be considered a liability.
Know Assets That Grow From Assets That Go
Some assets gain value over time, but most assets lose value over time.
As a financially literate person, you will want to invest most of your money in assets that gain value. The rule of thumb here is, if a lot of people want it but it’s hard to get, then it will gain in value. If there is more of it being produced than there are people to buy it, it will lose in value.
Condominiums and other types of property are a good example of an asset that will usually grow over time.
If you buy a flat for $500,000 now and sell it for $750,000 in 30 years you will have earned a profit of 5% per year. That’s generally much more than you would earn if you kept that money in a savings account.
Stocks and bonds, rare collectible cars, and fine art are other assets that may gain in value over time, although a good knowledge of these markets is needed to make sound investments.
On the other hand, electronic gadgets are probably the best example of assets that lose value fast. A device that you spend hundreds of dollars on today will probably be virtually unsellable a year from now.
Cars are another asset that normally lose value very quickly.
Live Within Your Income
In this age of easy credit and unlimited opportunities to spend money, spending more than you make is a very real temptation.
If your friends earn more money than you, it may be embarrassing to admit that you can’t afford to eat at expensive restaurants or buy expensive clothes as often as they do.
The best way to avoid this dilemma is to earn more money, but until your pay cheque goes up, it is very important that you stick to a budget.
If you earn $4000 a month, your monthly expenses should never be higher than $4000. It’s as easy as that.
Carrying a big credit card balance while you wait for that hoped for salary raise is not a smart thing to do.
If you must eat at expensive restaurants, but can only afford to budget $300 per month for eating out, then consider eating out less frequently so that you can keep within your $300 budget.
Spending more than what you have budgeted should never be an option (unless your boss wants to meet you out for lunch to discuss a raise).
Learn To Use The Force
I like to call compound interest the dark side of the force because most people don’t really understand how it works, but that doesn’t mean it is always a bad thing.
The rule of thumb here is that if you borrow money, compound interest is not a good thing, but if you lend money then it is!
When most people take out a $100,000 loan with a rate of 5% interest per annum (yearly), they expect to pay back $105,000 (loan plus 5%), but that only works if you pay back the loan in 1 year.
If it takes you more than one year to pay off your loan, you will pay much more than 5% of what you borrow as interest. Why? Because you will pay interest on the loan and on the interest you owe.
If you repay $537 per month you will have paid off $6444 the first year, bringing your debt down to $98,556. So add 5% interest ($4927) the second year and you will still be $103,483 in debt.
In the end, a $100,000 loan with a 5% compound interest rate will end up costing you a whopping $93,172 in interest if you pay it back over 30 years, or almost as much interest as the amount you borrowed!
The good news is that many bank accounts let you earn compound interest on your bank deposits. That means that if you deposit $1000 into an account that gives you 1% compound interest, you will earn $347.85 over 30 years. If you deposit $100,000 at the same rate, you will earn $34,784.89 over 30 years.
It pays to learn how to use the force.
Get Discounts Wherever You Can!
Credit card companies, shopping malls and airlines all have one thing in common - they like to offer discounts to loyal customers!
Opportunities to save money are all around us, but sometimes they are disguised as cash back, points, miles, coupons, vouchers and special offers.
In many cases, getting these savings can be as easy as using the right credit card to make a payment. For example, these top cash back credit cards in Singapore give you high cash rebates when you use your card to make purchases.
You can also do a quick search on your phone for the best deal before making a purchase.
The rule of thumb with discounts is, always check for discounts on spending you have budgeted for, but never buy something you haven’t budgeted for just because it seems like such a good deal.
Learning how to use discounts and offers without letting them use you is one of the keys to financial literacy.
This article was originally on the GET.com blog at: 5 Tips For Clueless-About-Money Singaporeans .
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