Savings and Avocado Toast

“When I was trying to buy my first home, I wasn’t buying smashed avocados for $19 and four coffees at $4 each.”

– Tim Gurner

 

In 2017, Australian millionaire, Tim Gurner, sat down for an interview with 60 Minutes Australia and made the above statement. It sparked a national furious debate and spawned heaps of memes on social media. While this author is not attempting to discuss the veracity of this statement, especially considering the prices of Singapore property today, one can see how his basis stemmed from the importance of savings.

Saving comes before spending. If you do not save before you spend, you will not save.

In this article, I am going to state the 3 key reasons as to why you should be accumulating your wealth.

First, we save for an emergency fund. In other words, we save “for a rainy day”. It is inevitable that at some point in our lives, we will be faced with emergencies or crises in some way, shape or form. When that time comes, we will be grateful that we have a pool of money to dip into to tide through our needs. People who earn a decent amount of money but spend it all without saving for an emergency can fall into poverty as quickly as someone who does not earn as much on a much lower income. Conventional wisdom suggests that an emergency fund should be around 6 months of your basic spending on food, rent and utilities.

For illustration purposes only

 

The monthly spend above adds up to S$1,870. On the back of that, one’s emergency fund will come up to S$1,870 x 6 months = S$11,220

Should we take into consideration current economic circumstances – i.e. rising inflation – this could be more. In Singapore, historically, overall headline inflation has averaged around 2%. For 2022, according to the CNA article published on 3 February 2022¹, Singapore’s overall inflation for December 2021 rose to 4% on a year-on-year basis from November 2021’s 3.8%, reaching an almost nine-year high¹. The estimate for full-year inflation is 3.8% , which is almost double that of historical average.

 

Second, we save to invest. While scrimping on avocado toasts and café coffees would unlikely buy you a home anytime soon, it could yield you some return should you put that amount into investing. Once you have an emergency fund, you could put your savings into investments. The type of investments that you choose will depend on factors such as your risk appetite, targeted return as well as time horizon. Understanding the risk-reward concept is crucial – the higher the risk of a particular investment, the higher the potential return.

¹ Source: ‘A perfect storm’: Why inflation is rising in Singapore and what can be done, CNA, 3 February 2022

DIFFERENT TYPES OF ASSET CLASSES

Here are the three main forms of asset classes:

There also exist other asset classes categories including real estate, commodities and precious metals. They are also known as “alternative investments”.

Going back to the story of “avocado toast and coffee” – hypothetically, having a meal of avocado toast and coffee twice a week could set you back around S$35 per meal (plus Goods and Services Tax (GST) and service charge); this amounts to S$280 per month and S$3,360 per year. Should one invest that amount into an investment that returns 5%, it will have almost doubled to around S$5,500 in 10 years’ time taking into consideration compounding effect. Every cent counts.

 

“If you don’t find a way to make money while you sleep, you will work until you die.”

– Warren Buffet

 

Third, we save for retirement. The sooner we start saving for retirement, the sooner we can life proof our financial wellness. While retiring before 40 is but a pipedream for most, proper planning can enable us to plan for a more comfortable retirement when we are old and grey. Retirement should not be put off until we are about to retire; in fact, we should be thinking about it as soon as we embark on our first job. For most young Singaporeans who are just entering the workforce, admittedly there could be limited pool of money to start investing and it could be difficult to save with your graduate salary. However, starting early allows us more time to benefit from the compounding effects of money. In Singapore, while we have CPF to fall back on for a certain degree, we should not simply rely on our CPF savings to provide for our retirement needs. Indeed, there are several platforms in Singapore that have been big on the importance of growing our CPF money to kickstart our retirement planning journey. The CPF investment scheme (CPFIS) allows its members to invest excess funds into higher yielding financial assets such as unit trusts. Platforms such as Endowus and MoneyOwl have been huge advocators on the importance of growing our CPF money to kickstart our retirement planning journey.

Below is a table taken from MoneySense (a Singapore Government Agency website) to illustrate the importance of saving for retirement.

Andy started saving S$250 a month 30 years ago while Bob started saving S$400 a month 20 years ago. Assume that their investments both grow at 4% a year:

Despite saving less per month and less in total, Andy ended up with a significantly greater amount of savings than Bob because he started out earlier. That’s the power of compounding and having time work for you.

Source: Introduction to planning for retirement (moneysense.gov.sg), 25 October 2018

 

CONCLUSION

Many studies have shown that to achieve your ideal weight, one has to have a plan to eat right and exercise well over a sustainably long period of time. Similarly, in order to reach your desired financial freedom, while one can focus on earning more money, you can reach your goals more quickly by focusing on saving more as well. As the old adage goes, there is no better time than now.

 

 

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Comparing the TER cost for 20 years

Here’s the difference a low cost advantage makes to cost savings

Here's how much you pay

$190,272.13
Selected TER 1.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $90,359.56 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 2 years and 6 months.

Here's how much you pay

$271,950.61
Selected TER 1.50% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $172,038.04 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 4 years and 9 months.

Here's how much you pay

$345,744.19
Selected TER 2.00% p.a.

$99,912.57
LionGlobal All Seasons Fund 0.5% p.a.

By investing a fund with low TER

You may save $ 245,831.62 over 20 years based on an initial investment of $1,000,000 compared with a TER of 0.5% p.a.

It is enough to provide for a monthly expenditure of $3,000 over the next 6 years and 9 months.

TER (Total Expense Ratio) is the sum of various identified operating expenses charged on an ongoing basis to the fund’s assets as a percentage of the fund’s average net asset value calculated over a 12-month period at the close of the annual and semi-annual financial statements of the fund for all the p.a. tabs (1.0%, 1.5%, 2.0%).

The above scenarios are for illustration purpose only. Past performance, as well as any prediction, projection or forecast on the economy, securities market or the economic trends of the markets are not necessarily indicative of the future or likely performance of the funds. Calculations based purely on costs with no market movement or investment returns.