It is important for each person to have savings and liquidity. I have suggested that each person should set aside 50% of current earnings (inclusive of CPF) for housing and the future. As CPF takes about 35% (including employer's contribution), the personal savings should be 15%. Younger people living with their parents can save a larger proportion (say upt o 30%) if they do not have to repay any study loan or contribute towards their family expenses.
It is also important for the savings to be liquid. They can be kept in a bank account to earn interest of 1% or less. This allows the savings to be withdraw without any penalty, to meet expected cash needs, such as medical bills, down payments or temporary unemployment.
For longer term investments, the savings should be invested in financial products that have low front end charges. For example, they can be invested in stocks and bonds traded on the Singapore Exchange, where the transaction cost is 0.3% of the invested sum. They can also be invested in a diversified exchange traded fund, where the annual fee is also 0.3%. As these products typically earn a yield of 4% to 6%, the upfront charge can be recovered within one year.
You should avoid investing in financial products, including life insurance products, where the front-end charge can take away up to two years of your savings. As you need liquidity, you cannot afford to incur such a large penalty. As you have the choice of SGX products with a front end charge of only 0.3%, why pay up to 200%?
If you need life insurance cover, buy a term insurance and pay the cost of insurance. It is small. Do not worry about getting this money back. Treat it as an expense.
Make sure that your savings earn an attractive rate of return. Invest in products that have a low transaction charge (say 0.3%) and a low annual fee (say 0.3% per annum) to enjoy professional management and diversification. Make sure that you have liquidity and do not have to pay a high penalty when you need to withdraw your savings for the unexpected expenses.
Tan Kin Lian
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