Posted on by CTKS

Resources I Use to Improve My Financial Literacy

In today’s digital age, there is a wealth of free information online, available to everyone who has an internet connection. This makes it possible to learn almost anything on the internet. As a firm believer in independent lifelong learning, I will be sharing about the resources I used to improve my financial literacy in this post. These are all resources that I have used and have proved beneficial to me. I will never recommend anything that I have not tried or do not believe in.

Before we begin, I would like to share a little bit about how I improved my financial literacy. Personal finance is not something we can finish learning overnight. It takes time for knowledge to build up and compound. It is through continuous exposure to educational content that we accumulate knowledge. By learning bits and pieces everyday, we slowly piece together a more complete picture. For instance, we may occasionally come across articles on the CPF and through these we may learn about the CPF accounts, their interest rates and their use. On other occasions, we may learn about roboinvestors and ETFs. There will also be other times when we come across articles on credit cards and loans. These information collectively will allow us to make more informed decisions on spending, saving and investing. Thus, for those who wish to improve their financial literacy, I recommend that you start by exposing yourselves to educational content on personal finance (such as this website and my telegram!). This post serves to provide some great avenues to increase our exposure to such content.

For all websites and YouTube channels, I have included links to the respective pages at the names to save you the hassle. I would like to emphasise that it is not necessary for you to use all these resources, just pick those that you think will be useful. For instance, there is no need to read the resources on stock picking if you prefer to adopt a passive strategy. Instead, there are other resources that have very useful content regarding basic personal finance that will be applicable to everyone, such as housing, CPF, Credit Cards, saving and many more topics. Additionally, this is by no means a comprehensive list. Thus, if u come across something useful please share too! You can contact me here and I will share it on The Dollar Sapling Telegram channel.

Resources for improving financial literacy

Seedly

This is an extremely useful platform to learn about everything related to personal finance. This platform consists of blog articles, opinions and also a forum where you can ask and answer questions. This is the perfect starting point to build up your financial knowledge. Just download the application on your phone and browse during your little pockets of time. They have a very warm community and the moderators are very friendly as well. If you find yourself struggling to make a financial decision such as buying insurance or how to fund your first home, simply search it up on Seedly or post a question on the forum! They also have an Instagram page where you can receive updates.

This is one of my favourite platforms and I am on it everyday. I enjoy reading their articles and interacting with people on the forum. You may be able to catch me answering questions with the handle CTKS.

The Woke Salaryman

This is another platform that I use to learn about personal finance. They also talk about basically everything related to personal finance in Singapore (HDB, CPF, side hustles). However, their differentiating factor to me is that they have very unique content on topics such as workplace harassment, upskilling and how to stay relevant without coding. Their opinions and articles are very insightful. Their philosophy is to work on increasing their earning power and adopt a passive investment strategy, perfect for the layman!

Personally, I follow their Instagram page and simply just browse their feed and story. Occasionally, they will have Q&As as well where you can ask questions as well.

“The Psychology Of Money” by Morgan Housel

This is a book that I will recommend to everyone who wants to learn how to manage their money. In an ideal world, people make rational decisions that are based on mathematical calculations, data and formulae that tell us what to do. However, this is not the case in reality. We, Humans, are beings of emotion and we make decision based on our personal experience, views of the world, ego, pride, marketing and many other factors. This book sheds some light on how people think about money and distils lessons on how to better make sense of life’s most important matters.

Resources for all investors (active and passive)

“The Intelligent Investor” by Benjamin Graham

This book by the founding father of value investing and Warren Buffet’s mentor, Benjamin Graham, has been seen as a stock market bible ever since its publication in 1949. While some content and data may be outdated, the lessons and philosophies here are timeless and will prove useful to anyone who wishes to be a successful investor. I will recommend this book to any beginner who wishes to learn more about investing. Do take note that the language used here is very classical and can be hard to understand at times.

Resources for those passive investors

“The Little Book of Common Sense Investing” by Jack C. Bogle

The Little Book of Common Sense Investing is the classic guide to getting smart about the market. John C. Bogle reveals his secret to getting more out of investing: low-cost index funds. Bogle describes the simplest and most effective investment strategy for building wealth over the long term: buy and hold, at very low cost, a mutual fund that tracks a broad stock market Index such as the S&P 500 (these are called index funds).

In essence, this book talks about passive investing in index funds to achieve results close to the market average (which are not so average because 90% of investors fail to beat the market). If you’ve read my other post, you know why I am a huge proponent of ETFs (I understand that ETFs are not the same as index funds but I find it a suitable substitute). He also originated the 3 fund portfolio, which is a simple portfolio consisting of 3 funds (US stocks, international stocks and US bonds) designed to provide average returns. However, I have adapted that idea to the Singapore context which you can read more about here.

Resources for active investors

“5 Rules For Successful Stock Investing” by Pat Dorsey

This is one of the first books I read and remains one of my favourite books on stock picking. It consists of the basics of how to read financial statements, how to value different companies, as well as understanding the driving forces behind different industries. In my opinion, it is perfect for starters.

The Fifth Person

These are the people whom I first learnt how to invest from, they produce excellent content. While their courses are paid, they have a website with free content such as guides on how to start investing and many articles about investing and personal finance.

They also have a YouTube channel where they have discussions about stocks and investing. Some of their older videos also talk about how to invest, read financial reports and more. Occasionally, they also have free webinars. Click here to join my telegram group if you’d like to receive more updates on such free lobang!

Learn To Invest

This You Tuber is very honest and informative. His channel is very educational and he explains the concepts very well, making his content easy to absorb. I learnt a lot of the technical aspects of investing from him such as reading financial statements and calculating intrinsic value of a company.

Others

The Swedish Investor

If you are lazy to read books or want a sneak peak about what a book is exactly about before reading it, you can check out his YouTube channel. He makes excellent book summaries. His channel has summaries of most of the books I mentioned and more.

To end this post, I would like to urge everyone not to procrastinate. Many will close this page and comfort themselves by saying they’ll do all this when the time is right. However, we all know the odds of that happening is close to none as you will simply forget all about this post. So, do not procrastinate! Join my telegram, follow the Instagram pages and download the Seedly application and start exposing yourself to more educational personal finance content today!

Posted on by CTKS · 2 Comments

How to Start Investing With A Small Capital

If you have read my other post on The 8th Wonder of the World – Compound Interest, you would have understood the importance of investing as early as possible. However, there can be many reasons that impede one from investing early. Common reasons include lack of time, money and knowledge. Thus, I am going to share with you my personal story of how I started investing and how you can, too.

As investing is only a means to an end (with the end being financial independence), it is crucial that you check out my other post on how to embark on your journey to financial independence and make sure that you have completed the steps I shared in that post before investing.

First, let me share the 3 biggest challenges I personally faced when I started to invest with a small capital.

1. Insufficient funds for diversification.

Each time that you wish to purchase shares of a company, the minimum you have to purchase is one lot of shares. In the United States, one lot of share is one share. However, the lot size of Singapore listed companies is 100 shares. Thus, if I wish to purchase shares of DBS, I would have to buy a minimum of 100 shares. At the current price of $30, one lot of shares will cost $3,000 (100 x $30). If I were just starting out with $5,000, DBS will take up more than half of my portfolio, leaving me with insufficient funds to diversify my portfolio sufficiently.

2. Commission fees were eating into my returns

The need for diversification combined with a small starting capital also means that each position in my portfolio would be relatively small. For instance, if I wanted to maintain diversification by investing $5,000 equally across 10 companies, I would only have $500 for each company. Thus, commissions would be a large percentage of each position. When I first started investing, I used a non-custodian broker that charged $25 per trade (non-custodian brokers usually charge higher fees than custodian brokers). If I were to buy one lot (100 shares) of Frasers Centrepoint Trust which has a share price of $2.30 at the time of writing for $230, $25 would be 10.9% of my purchase. The average cost of each share would thus be ($230+$25)/100 = $2.55, 10.9% greater than the market price. Essentially, I have instantly made a 10.9% loss on my investment just by buying it. Of course, the average cost could be lowered by making a bigger purchase as the same commission of $25 would be spread out over more shares. However, as I was just starting out, I did not have the luxury of buying many lots as the need for diversification means that I cannot have too much of my portfolio in a single stock. Thus, this reduced my returns on investment substantially.

3. Lastly, I did not have sufficient knowledge to choose many stocks and did not have much time to expand my knowledge.

As one of the best investors in the world, Warren Buffet, always says “invest in companies within your circle of competence”. This means that you should invest in businesses that operate in industries you understand. This can be the industry which you work in or companies you interact with daily because your career experience will equip you with knowledge of the industry that an outsider will not have. As a customer, you will have first-hand knowledge of the product or service the company provides. As someone serving National Service, my circle of competence is unsurprisingly small. While it possible to widen your circle of competence by doing research, it is very time consuming to do so. As I spent 5 days a week in camp, I had to do most of my research over the weekends. Amidst juggling to spend time with my family and friends and pursuing my interests, I did not have much time to do much research. As such, my research on a single company would span several weekends and the list of companies that I wanted to look into never seem to end. Thus, I made very slow progress in finding great companies to invest in.

Reflecting on these challenges, this is how I would have invested differently if I could go back in time: I would have dollar cost averaged monthly or quarterly into ETFs. An ETF is a security that tracks an index, sector, commodity, or other asset, which can be purchased and sold on the stock market like a normal stock. For instance, the S&P500 is a stock market index of the largest 500 companies listed on the stock exchanges in America. By purchasing one share of an ETF that tracks the S&P500 index, you will essentially own very small percentages of the 500 largest companies in America. As the share price of the companies that are part of the index go up, so will the price of the ETF. In Singapore, there are also ETFs tracking the Straits Times Index (STI), which tracks the performance of the 30 largest companies listed on the Singapore Stock Exchange.

From the get go, an ETF will solve the first issue of having insufficient diversification as an ETF that tracks a stock index is highly diversified. By buying a single share of an ETF tracking the STI, you will own shares in many great companies such as DBS, OCBC, UOB, CapitaLand and many more.

At the same time, the fact that I do not need to worry about my portfolio being too concentrated means that I can buy multiple lots of an ETF at a time. This means the commissions would be spread out across more shares, reducing my average cost. For instance, the SPDR Straits Times Index costs $3.113 per share at the time of writing. As I need not worry about diversification, I could purchase 10 lots (1000 shares) for $3,113. With the same commission fee of $25, my average cost would be ($3113+$25)/1000 = $3.138. This is only 0.8% higher than the market price, resolving the second issue. However, as I prefer to use a dollar cost averaging method and only invest a few hundred month, a commission of $25 per trade is still substantial relative to the size of each trade. Thus, I would have used a custodian broker instead of a non-custodian one in order to minimise commission fees. Another method is to invest quarterly instead of monthly. By spreading out my purchases, I will buy less frequently and each purchase will be larger. Thus, commission fees as a percentage of total value of purchase will be smaller. As a rule of thumb, I try to keep my commission fees below 1% of my purchase.

Finally, as an index such as the S&P500 tracks the largest 500 listed companies in America, if one company falls out of the top 500 companies, it would be replaced by another company. Essentially, my portfolio would be automatically maintained as the index is rebalanced. This means that I do not need to devote much time into researching companies, overcoming the third difficulty I had faced. The S&P500 is also commonly used as the benchmark for the average stock market returns. While it is natural to seek returns that are as high as possible, we must remember that investing is not a get rich quick scheme. As beginners, we should be contented with returns equals to the average of the stock market. That is a sustainable and safe way to build wealth over the long term. In fact, research has shown that 90% of investors fail to beat the stock market. Average returns are not so average after all.

Even if you do not wish to jump straight into investing, I highly recommend you to start saving and learning more about investing now. Understand the risks involved and some crucial concepts such as compound interest.

To sum it up, ETFs provide diversification, reduce fees and save time, making it suitable for a beginner’s portfolio.

Posted on by CTKS · 7 Comments

Compound Interest – The 8th Wonder of The World

The story I am about to share with you showcases the beauty of the 8th wonder of the world – compound interest. In essence, compound interest is earning interest on interest. It is an all important concept to investing and it is necessary for every investor to understand its effects if he/she desires to be a successful investor.

The famous legend goes like this. When the inventor of chess showed the game to the Indian king, the king was so enthralled by the new tactical game that he told the man to name his reward.

The man responded, “Oh king, my wishes are simple. I only wish for one grain of rice for the first square of the chessboard, two grains for the second square, four for the third square, eight for the fourth square and so on for all 64 squares. With each square having double of the grains of rice of the square before.”

Amazed at that the inventor had asked for such a small reward, the king happily agreed to his request.

However, after a week, the king had to give away his kingdom because he was unable to fulfil his promise to the inventor. On the sixty fourth square, the king would have to put 18,000,000,000,000,000,000 grains of rice, which is enough to cover the whole of India with a meter thick layer of rice!

For some reason, compound interest is a concept that is challenging to wrap our heads around. This is why one of the greatest scientist, Albert Einstein said “Compound interest is the 8th wonder of the world”. Thus, I encourage everyone to pull out an excel sheet and do the calculations to see the compounding effect for yourselves.

Of course, in reality our investments don’t double every year. Regardless, the same principal of compound interest holds true. Suppose that Tom has an annual income of $50,000 and invests 10% of his income ($5,000) a year in an ETF that returns an average of 8% annually (This is a reasonable benchmark).

In the first year, the returns would be a measly $400. That would be good to buy a nice set of headphones but you can’t retire off such a small return.

After 5 years, Tom’s portfolio is now worth $30,000. This provides a return of slightly more than $2,300. The idea of investing is making your money work for you. Yet, Tom feels like he is working harder than his money. However, always remember that these are only the first few squares of the chessboard and that the investments has only just begun compounding.

By the 10th year, Tom’s investment will grow to $72,000, returning more than $5,000. This is more than his annual contribution and you can begin to see his money working for him.

Another 5 years later, his portfolio’s annual return will be $10,000. Double that of his annual contributions. By the 25th year, Tom’s portfolio will return almost $30,000 annually. That is 6 times his annual contributions. You can now visualise how as time goes by, his portfolio starts working harder and harder for him.

If Tom begins investing at 20 and retires at 60 his investments would snowball to $1,295,000. This will yield him $100,000 annually, double his annual income of $50,000! Tom can now retire comfortably and happily with his family 🙂

Additionally, implied in the above example is that compounding takes time to ramp up. Let us see what happens if Tom only begins investing 10 years later at 30 years old and retires at the same age of 60. He will now have an investing period of 30 years. Based on the excel sheet calculation, his investments will amount to only $566,000 (the row highlighted in green). He will enjoy a mere annual return of slightly more than $45,000, meaning that he would thus be unable to retire as comfortably. This goes to show how big a difference time can make, simply by starting 10 years earlier will allow you to retire with more than double the amount of money!

Thus, it is important to start investing as early as possible, no matter how small the contribution. Remember, the earlier you invest, the more time your investment will have to compound and the more money you will make. To learn how to begin investing with a small sum of money, check out my other post here.

Below is an illustration of how the S&P500 index looks like when you zoom out. You can see that it takes the shape of an exponential curve! This is the marvel of compound interest.

To end this, I would like to sum up 3 takeaways I hope everyone has learnt from this post:

  • Don’t take out the returns to buy the latest iPhone or PC, leave the money in there to take advantage of compound interest. Reinvest dividend pay outs as well to maximise the compounding effect.
  • Compounding takes time, so start early, stay the course and let compound interest do the work.
  • It does not matter how small your contribution is. Although the returns might seem measly at the start, it will ramp up as time goes by due to compound interest.
Posted on by CTKS · 4 Comments

Dollar Cost Averaging

Dollar cost averaging refers to an investment strategy in which an investor divides up the total sum to be invested across periodic purchases of the target asset in order to reduce the impact of volatility on the overall purchase.

This is a popular strategy used by many to reduce the impact of unavoidable and unpredictable market volatility on their portfolio. Let us delve into the math to see exactly how it works.

Say for example that the share price of company ABC is $100. From January to February, unfavourable news of ABC is published and the stock price falls from $100 to $50 (a 50% decrease in price). However, the fundamentals remain sound and the stock recovers back to its original price from February to March (a 100% increase in price).

Tom, unaware of what DCA was, decided to use his entire capital of $10,000 to purchase 100 shares of ABC at the start January. By the end of March, he would have just broke even (assuming that he did not panic and sell during the 50% drop, which requires much conviction).

Jerry, on the other hand, read about DCA on a blog post and decided to employ it. Let us see how his investment has done during the same period.

In January, Jerry used $5,000 to purchase 50 shares of ABC (at a cost per share of $100). From January to February, the value of his investments would have fallen by 50% (from $5,000 to $2,500).

At the start of February, Jerry remains convinced that the fundamentals of the stock has remained unchanged, and that ABC is severely undervalued at $50. Thus, he invested the remaining $5,000 into ABC, purchasing an additional 100 shares. He now owns 150 shares for a total cost of $10,000, reducing his cost per share from $100 to $66.67 ($10,000/150). As the price rises back to $100 from February to March, the total value of his investment is now $15,000 ($100 x 150 shares).

His total investment of $10,000 is now worth $15,000, earning a 50% return on his investment thanks to this nifty trick!

You may be wondering, why not wait for stock to crash 50% before entering a position? This way, when the share price doubles (as in the above example), you’ll earn a return of 100%! This is because one can never tell where the price of a share will head in the near term. No one can state with 100% certainty whether the price of a share will rise or fall tomorrow.

Let us now take a look at how DCA can be employed in the real world. The calculations below shows how an investor’s portfolio would have performed if he had invested $5,000 into an ETF tracking the S&P500 index at the start of every year from 2000 till 2021.

As you can see, despite entering the market at the height of the Dotcom bubble and investing through the Global Financial Crisis and Covid-19 pandemic bear market, the investor still made money as long as he stayed the course and invested $5,000 regularly. In fact, he tripled his total contributions!

All too often, investors fall prey to their emotions. They get greedy when they see huge run ups and panic when they see huge declines (as depicted below). This results in them buying at the top and selling at rock bottom. This is how most investors lose money.

Dollar Cost Averaging is thus an excellent strategy to remove emotion from the equation and drown out the noise of the market. As long as we are committed to investing at fixed time intervals, we will not panic sell when crisis strike and instead accumulate more shares at a cheaper prices.

That being said, there are some caveats when implementing DCA:

  • higher transaction cost
  • you may end up buying more shares of a business that is deteriorating

With respect to the first point, one must strike a balance and not over trade. This is because excessive trading will cause fees to add up and eat into our returns. One method is investing in ETFs/blue-chip stocks regularly every month or quarter (instead of every week). Another method when investing in individual companies is to use DCA when the prices drop substantially (10-20%).

The second point highlights the importance of understanding the fundamentals of a company before investing in it.

Sometimes, unfavourable news such as lawsuits, fines or missed earnings/revenue estimate may cause the stock market to over react, resulting in the share price of the company to fall by 10, 20 or even 30%. Often, investors will panic and sell out of their position, only to see that down the road, the share price hits new highs.

However, there are times when the decline in share price is justified by the deteriorating fundamentals of the business. For instance, with the onset of E-commerce, many retail businesses that are unable to keep up with the trend are seeing their profits being eroded and blindly buying more of these businesses because of DCA is a losing strategy.

Thus, an intelligent investor will first access whether the fundamentals of the company has been affected by asking himself questions such as the following.

  • Is the situation is a one-off event or one that has lasting impact on the company?
  • Has the ability of the company to earn money has been affected?

If the impact is temporary and the business model remains intact, the investor should have the conviction to hold or even buy more shares to lower his average cost. However, if the fundamentals are indeed deteriorating, the investor should then sell out of his position and take the loss instead.

Thus, understanding a business (or the index) is key to implementing DCA effectively.

To end this post, I would like to emphasize the importance of having a plan when investing. Without a plan, we are vulnerable to our greatest enemy, our emotions.

Posted on by CTKS · 4 Comments

How To Begin Your Journey To Financial Independence

Financial management is an all important skill in life that I believe should be taught in every school. The fact that this important life lesson is not taught in school is what motivated me to create this blog. For this reason, I am very excited to be sharing about how to begin your journey to financial independence in this post and I hope that you will feel motivated to take your first steps.

As financial independence is a lifelong process, I am a proponent of starting as early as possible. Thus, I hope you find this blog useful no matter how young you are as it is never too early to start planning for retirement (for reasons I will cover later).

Financial independence refers to the status of having enough income to pay for one’s living expenses for the rest of one’s life without having to be employed or dependent on others. In other words, an ideal retirement.

Why do people not plan for retirement?

Before we begin, it may be helpful to understand why some people fail to plan for retirement. I hope that when you face these common pitfalls, you will recall this article and make the best decision.

The main problem here is one of instant gratification. Psychologically, people place a greater emphasis on satisfaction gained from consuming a good or service now than in the future. For instance, when weighing the satisfaction from the latest iPhone, PC or TV today versus the benefits of a secure retirement 40 years later, many will place a greater weight on the former. Furthermore, the fact that retirement seems very far away (especially for someone in their 20s who just started to work) only exacerbates the issue as the benefits of financial freedom seems very intangible and tends to be underestimated, compared to something tangible like the latest gadgets today.

Another common reason is that people fail to see how their small actions today can have profound impacts their future well-being. For instance, saving $10 today might not seem like much when you require hundreds of thousands to buy a house. However, the small amounts of money that you save can quickly add up to a significant amount. Furthermore, owing to the power of compound interest, money saved and invested early can grow exponentially to a substantial amount! Another benefit of these seemingly small actions is that it will help you form a habit of saving, which you will undoubtedly find beneficial throughout your lifelong journey to achieve financial freedom, especially when your income increases and you start managing more money.

Finally, many people think that they have a long time to plan for retirement. As it is human tendency to procrastinate, it is no surprise that many fail to start planning ahead. To this, I have one very compelling reason to urge you to start as early as possible: the earlier you start, the easier your journey to financial freedom will be.

The final reason is also why I am a huge proponent of starting as early as possible. Let me now elaborate on why starting earlier will only help you on your journey to financial freedom.

Why you should start to plan for retirement as early as possible

Firstly, starting earlier will mean that you have a longer run up to take advantage of compound interest. This will allow you to compound your investments exponentially and make it easier for you to achieve financial freedom.

In order to illustrate this, let us take a look a hypothetical example.

Tom, who is 30 years old, and Jerry, who is 20 years old, begin to invest in the same S&P500 ETF that has an average annual rate of return of 10%. Assuming that both retires at 60 years old, Tom will have 30 years to invest while Jerry will have 40.

Tom makes an initial investment of $500 and subsequently, makes monthly contributions of $500. Using an investment calculator, he will have almost $1,050,000 at the end of 30 years. Not bad! But let us take a look at Jerry, who makes an initial investment of only $250 and makes monthly contributions of merely $250. At the end of 40 years, he will end up with more than $1,400,000. This is $350,000 greater than what Tom has! Furthermore, at age 60, Tom’s total contribution will add up to $180,000 while Jerry’s will equate to only $120,000. In other words, Jerry has contributed less and ended up with much more. You can now see how much difference 10 years can make and why it is easier to hit your retirement goals if you start earlier.

Secondly, starting earlier will give you more leeway to make mistakes. While we want to minimise the number of mistakes we make, it is inevitable that we will make some mistakes along the way. Thus, starting earlier will mean that we have more time to recover from any mishaps. Additionally, learning how to handle small amounts of money will train you to handle larger sums of money. This will make you more adept at managing your money in the future. As you approach retirement, you will want to avoid any mistakes that will cause severe capital loss and set your retirement plans back by several years. Thus, the values you cultivate, lessons you learn and habits you form will only serve to make you a better manager of your own finances.

Now that you understand the pitfalls that people face when planning for their future and the reasons to start early, let me go through some crucial steps to kick-start your journey to financial freedom.

Things to do before investing for financial freedom

The first step is to save more money. This might sound like common sense but many people often take this for granted and unknowingly overspend. To put this into context, the extra money you save can easily add up to be greater than the returns on investment of a small sum of money. For instance, saving an additional $10 per week will equate to $520 a year. In order to earn an annual return as high as this, an investment of $5,200 will be required (this is assuming an annual rate of return of 10%). That is a considerable sum if you are just starting out.

I hope to motivate you to save more by introducing the 21/90 rule. The rule states that it takes 21 days to build a habit and 90 days to build a lifestyle. While it will require a lot of self-discipline to spend less initially, it will eventually become a habit and you will do it subconsciously after some time. Hence, I strongly encourage you to consciously make an effort to spend less and save starting from now.

Next, it is of utmost importance for you to pay off any high interest debts. For instance, credit card debts in Singapore has an average interest rate of 25% per annum and will eat away at your investment returns. In comparison, the S&P500 index, which tracks the largest 500 companies in America, has a returned an average of 10% annually. Few investors can achieve a return on investment higher than 25% consistently. Thus, interest payments on such debts will likely be greater than your returns, making you suffer losses and eroding your savings.

In order to visualise this, imagine that you have a credit card debt of $1,000 with an interest rate of 25%. If you pay off the $1,000 today, you will be saving yourself $250 in interest which will go straight into your savings.

If you had invested the $1,000 instead, you would have made $100 (assuming annual rate of return of 10%). However, you will have to pay $250 in interest. You will thus end the year with a net loss of $150 ($250-$100).

In other words, paying off such high interest debts can be seen as a guaranteed rate of return of 25% since you will be saving yourself from paying such high interests in the future.

It is also crucial for you to build an emergency fund in case you require money at moment’s notice due to unforeseen emergencies such as accidents, medical illnesses or loss of job due to a recession or pandemic (touch wood). When such incidents happen, you will not want to liquidate your investments without enjoying the full compounding effect or worst still, at a loss. Thus, it is crucial to put aside enough money for a rainy day. The amount recommended by experts ranges between 6-12 months worth of your monthly expenses. However, this is just a rule of thumb. You may want to put aside more money if you are planning to buy a house or have a wedding in the near future.

While trying to build your safety fund and pay off your high interest debts, it is essential that you take this time to learn the basics of investing. This will help you build a strong foundation that you will undoubtedly find helpful when you start investing. To get started, check out my my other posts related to investing here.

Once you have built a sufficient emergency fund, paid off all your outstanding high interest debt and learnt the basics of investing, you are ready to move on to the next step and start investing in order to achieve financial freedom!

If you are just starting out, it may be hard to build a sufficiently diversified investment portfolio with a small capital. I highly recommend you to check out my other post where I share how to start investing with little money.

To end of this post, I would like to quote part of a famous saying by Hillel the Elder: “If not now, then when?” So start planning for your future today!

Posted on by CTKS

Making The Most Of 2 Years Of National Service

“I could be working and earning $12 per hour”

“I could be doing an internship”

“I could have gone to University 2 years earlier”

These are just some of the complaints about the high opportunity cost of National Service (NS) in Singapore (I myself am guilty of saying these at times). However, as NS is necessary to safeguard Singapore’s sovereignty (and compulsory), the optimist in me prefers to look on the brighter side of things. As someone who is currently serving NS, I will share how I have made use of this time as well as what I plan to do moving forward. Thus, instead of viewing NS as a “complete waste” of two years of your life, I hope to inspire you to make the most out of these 2 years.

If you are here, you’re probably keen to learn about investing and how to begin your journey to financial freedom. This is the perfect time to do so. I began learning about investing 1 year before NS. However, I could not devote much time due to A-levels and other school commitments. Thus, my progress was slow. After A-levels, I had a lot more time to focus on investing and I continued to do so even after I enlisted. During my free time in NS, I read books and articles and watched plenty of videos on YouTube. This was how I began my journey to financial independence. NS has also provided me with much more free time to screen the stock market for any undervalued stocks and conduct thorough analysis. This has led me to finding my biggest winners. I cannot emphasise how important doing your due diligence on every potential investment is. This is also why I spend so much time studying companies. Moving forward, I will continue investing regularly and learning more about investing. I aim to take this two years to build a strong foundation in investing that will set me up for successful investing when I start to earn more money in the future.

Apart from time, the NS pay has also provided me with capital to invest, no matter how small. Let us take a look at a hypothetical scenario to see how the money you save and invest during your NS years can grow to a substantial sum at the end of 10 years.

Imagine that Tom draws basic BMT pay for the entire duration of two years ($630 at the time of writing). Tom wisely invests $200 per month in an Exchange Traded Fund (ETF) that tracks the S&P500 index. Historically, the S&P500 has returned an average of 10% annually since inception in 1926. Thus, assuming that the average returns remain the same for the foreseeable future, we can calculate the return on investment using a simple investment calculator.

After 2 years, the total contributions by Tom will amount to $4,800. This $4,800 will grow to a decent amount of $5,550. Assuming that Tom continues to contribute $200 a month for 10 years, his contribution of $28,800 will compound and almost double to $54,689! That’s a handsome sum at only 30 years old that will set you on the right path to purchasing your first home.

In this example, Tom draws a basic pay of $630 and only invests $200. By going to command school and/or spending less, it is possible to draw a higher pay and set aside more money to invest. Thus, by taking on more responsibilities to ensure the safety of our country, it is possible to make the most out of NS and start working towards financial independence. This is something that I intent to continue doing for the remainder of my two years.

Furthermore, NS allowance is received monthly, similar to how you will receive your salary in the future. Thus, this can be an opportunity for you to learn how to manage your finances through practice. Take this time experiment with different budgets, learn how to save, learn how to control the urge to splurge and find out what works for you. As financial freedom is a lifelong journey, the habits you form and lessons you learn will go a long way as you start drawing higher pay when you start working.

Last but most definitely not least, apart from investing in the stock market, it is also possible to invest in yourself. In this day and age, there is a wealth of information that is readily available to us. With just a few clicks, you can enroll into a course or download an eBook. As such, you can learn virtually anything online. Take these two years to explore your interests. For me, that would be economics and investing and I did so by reading books, attending courses and watching videos. It need not be something related to your future career. Explore a wide variety of things and even if you may not use it in the future, you would have learnt how to learn. In today’s fast-paced and dynamic world, the only constant is the need for continuous learning. Thus, these values and life lessons are what will allow you to continually grow and remain competitive. For instance, I recently started to learn the basics of Python programming, something completely foreign to me and may not be applicable to my future career. As Warren Buffett, one of the greatest investors in the world, so aptly put it “The best investment you can make, is in yourself”. As a firm believer in self initiated learning, I strongly urge you to take advantage of this time to pursue an interest of yours.

I hope that this post has given you some insights into how you can make use of your time in NS. I would like to end of this post with a classic proverb – when life gives you lemons, make lemonade! Whatever you walk away with after these two years is the lemonade.