One way to set yourself up for financial success in the future is to build a diversified investment portfolio and take advantage of compound interest. This is a beginner’s guide on how to channel your income from part time jobs and side hustles towards investing for your future. This article is written in collaboration with @gapyearsg, check out their page here for career tips, job opportunities and more resources!
1. Choose a brokerage
When you are just starting out, you are likely investing small sums of money. This means that large commissions will eat into your returns substantially. Thus, it is wise to choose the lowest cost broker. Personally, I use tiger brokers because they have extremely competitive fees for Singapore and US-listed stocks. Additionally, creating an account is fuss-free and their interface is easy to navigate. Other options include MooMoo that also provide very competitive fees and have an attractive sign up bonus. Here is a quick comparison between the cheapest brokerages.
For more information on the respective brokers, check out this Seedly article on the cheapest online brokerages in Singapore.
My advice here is to not ponder too hard on which brokerage to use. Choose the one with the lowest fees and move on. It’s more pertinent that you get started on investing than fall prey to the paradox of choice.
2. Choose an ETF to invest into
The next step is to choose a suitable ETF to invest in. For starters, I recommend choosing an ETF tracking a broad index such as the S&P500 or the world index. This is also known as passive investing where you try to replicate the market returns. The beauty of this method is that it is time and cost effective. Instead of spending hours reading annual reports and researching on individual companies, buying the whole index will allow you instantly have a sufficiently diversified portfolio that is going to give you decent returns. Furthermore, ETFs are very low cost investment products, having average fees of just 0.40%. These two reasons make ETFs the most efficient way of investing, allowing you to earn average market returns with minimal time, effort and money. For more reasons why ETFs is a great investment vehicle for starters, check out my article on how to start investing with a small capital.
While passive investing may seem boring, consider the fact that 90% of investors fail to beat the market. This shows that it is not that easy to beat the market and that average returns are not so average after all! As beginners, we should be contented with earning the average market returns and ETFs will allow us to do so with minimal effort. This will also free up your time so that you can pursue your interests and focus on your part time jobs or side hustles.
In order to help you with your decision, here is a simple comparison of some of the popular ETFs.
All 3 of these ETFs are sufficiently diversified and are suitable to be the core of any investor’s portfolio. The main difference between the 3 ETFs is the exposure to the United States market. Although both VOO and VTI will give you 100% exposure to the US, VTI is slightly more diversified as it includes the entire US market while VOO will only give you exposure to the top 500 companies in the US. Alternatively, if you would like greater geographical diversification, URTH is the one for you as it has exposure to other developed markets such as Japan, United Kingdom, France and many more. However, this will come at a greater cost of 0.24% compared to just 0.03% for the other two.
Once again, there are countless options to choose from. While it is important to choose the right ETF for you, don’t ponder for too long. What’s more important is that you choose a sufficiently diversified ETF and start investing.
3. Dollar cost average (DCA) monthly
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. DCA is an effective strategy that removes emotion from the decision making process, allowing us to avoid timing the market. Just have the conviction to stay the course and continue to invest every month without fail. Even if the market crashes tomorrow or a year from now, just keep purchasing ETFs at a cheaper price and you will be rewarded in time to come. For more information on DCA, read my other article here!
4. Sit back and let compound interest do the work
By working a part time job 8 hours a day for 5 days a week, you will earn about $1,600 a month assuming a pay of $10/h. By setting aside $600 a month to invest, you will end up with $7,200 invested after a year. Assuming that you do not make anymore contributions, your $7,200 will grow to more than $20,500 by the time you are 30! Let us now take a look at how much of a difference four years will make. If you had invested the same $7,200 at age 23 instead (after you finish your degree), your portfolio will only be worth $14,000 by the time you are 30. That’s a difference of more than $6,000 simply by starting to invest before you begin you university study instead of after! By working a higher paying job, cutting your expenses and having a side hustle, it is possible to save and invest more. This will put you in an extremely desirable position financially. Furthermore, if you continue to work part time while studying and make monthly contributions, your portfolio will grow exponentially.
That being said, investing is merely a means to an end. As Robert Kiyosaki said “It’s not how much money you make, but how much money you keep”. Thus, we should continue to improve our financial literacy in the mean time so that we can make better decisions in the future. If you would like to learn more about personal finance and investing, click here to join The Dollar Sapling telegram channel where I share more resources and articles.