By Lorna Tan
With the year ahead of us, it is an opportune time to review our financial health, ensure that we are on track to achieve our goals and make necessary adjustments.
Buoyed by a booming economy, many are looking forward to a round of hefty salary increments and year-end bonuses.
Some of you might be on the receiving end of a handsome windfall, thanks to the unexpected collective sale fever that gripped Singapore last year. There were about 27 collective sales with a total transactional value of more than $8 billion, up from $1 billion in 2016.
Financial experts say it is prudent to resist the tantalising temptation to splurge it all. Before you rush out to make a down payment on a new car or buy that two-carat diamond ring, think about how you can use this extra cash for even greater long-term gains and financial security.
"Take the opportunity to do a complete portfolio review and this should include your assets, investments, your loans and insurance policies. Apportion your bonus based on your needs for loan repayment, insurance, investment, and cash holdings which include funds for emergencies," says Mr Brandon Lam, Singapore head of financial planning group at DBS Bank.
Review your priorities such as much-needed home renovations, family holidays or festivities. Also remember to top your Supplementary Retirement Scheme (SRS) account for tax savings, Mr Lam adds.
1. Pay off debts with high interest costs Financial experts are unanimous when it comes to which debts almost invariably incur the highest interest costs. Focus on clearing off personal debts that are costly to maintain, such as credit cards, which charge as high as 24 per cent a year.
Try a different approach to monthly budgeting: Pay yourself first. Saving just 10 per cent of your net pay is a good start to accumulating wealth over time. This will force you to become more frugal and careful in your spending as the other bills must still be paid. In fact, if you are fortunate to get a pay rise, putting away the increment each month will go a long way towards helping you achieve medium-or long-term goals.
It is a good idea to review your portfolio once a year and consider rebalancing your plan whenever you go through major life events, such as getting married or having a baby.
The trouble with making just the minimum payment on your credit card bill, instead of paying in full each month, is that interest is charged on the principal sum owed. So if you have a $5,000 debt against your card for a year, you could end up paying $1,200 in interest alone.
Bear in mind the so-called Credit Limit Management Measure has kicked in since Jan 1. It is aimed at borrowers with unsecured debt, such as personal loans or credit card debt, that exceeds six times their monthly income. Banks will not be allowed to grant any increase in credit limits or any new unsecured credit facilities to such a person if these cause his total credit limit to exceed 12 times his monthly income. Affected borrowers can continue to use their existing unsecured credit facilities.
To check your outstanding balances and credit limits with all the banks, you can buy a credit bureau report.
For those saddled with heavy debts, check out assistance schemes and repayment plans, such as the Debt Consolidation Plan (DCP). Under a DCP, multiple debts are consolidated into a single account so borrowers need to pay only a fixed monthly amount to one financial institution, making it easier for them to clear their debts.
Do not bother about investing until you have lowered your debt to a manageable level.
2. Kick-start a savings plan A windfall presents a good opportunity to kick-start a savings plan. Many people prioritise their monthly spending in this order: The biggest item is likely to be the mortgage or rental, followed by car loan instalments, utility bills and food. They then scrape the bottom of the barrel to cover the monthly minimum on their credit card bills.
Try a different approach to monthly budgeting: Pay yourself first. Saving just 10 per cent of your net pay is a good start to accumulating wealth over time. This will force you to become more frugal and careful in your spending as the other bills must still be paid.
In fact, if you are fortunate to get a pay rise, putting away the increment each month will go a long way towards helping you achieve medium-or long-term goals.
Mr Vasu Menon, senior investment strategist at OCBC Bank, suggests setting some of your bonus aside into a savings account or time deposit, as unexpected events could hurt the economy or the industry you are working in, and this in turn could dampen your job prospects.
"The peace of mind that comes with knowing you have sufficient funds to tide you over should you lose your job is priceless," he says.
And if you do not have an emergency fund that can cover at least six months of your monthly expenses, your bonus can be used to start one. Aside from the risk of a job loss, the fund can also help you to cover other unforeseen events such as unexpected medical expenses due to an illness or temporary disability due to an accident, adds Mr Menon.
MoneySmart.sg editor Mark Cheng recommends opening more than one savings account to save money more effectively to meet daily, short-term and long-term goals. "For long-term savings, pick an account that offers better interest rates for you to store and grow your cash... An account for short-term goals is something to consider as well," he says.
3. Earn more interest for 'loyalty' savings accounts In the past few years, several banks have rolled out "loyalty" programmes for customers to earn higher interest rates and enjoy direct monthly cashback capped at a certain amount, when they can fulfil some criteria like regular banking transactions, card spend, investments, and/or salary crediting.
These include the Bank of China SmartSaver, DBS Multiplier account, OCBC 360 account, POSB cashback bonus programme, and UOB One account.
4. Spend your bonus wisely One factor that comes into play is the life stage that you are in. Naturally, a couple planning to get married or a middle-aged couple with children will look at their bonuses differently from someone who is nearing retirement.
"The first may allocate more cash towards a grand wedding or honeymoon, or even set aside money to make the down payment on their matrimonial home. The middle-aged couple may have a longer-term plan in mind, and keep the money for their children's tertiary education. Some may even use the money to settle their debts, like a mortgage, if they are working towards being debt-free as soon as possible," says Mr Menon.
Those nearing retirement, on the other hand, may treat themselves to a holiday abroad, provided they have been diligent in building their retirement nest egg.
If they are still planning for their retirement, then they should probably use the bonus to meet this objective, like contributing to their SRS account which can yield attractive income tax benefits, or investing the money into a less risky product that can yield decent returns, he adds.
5. Top up CPF accounts To maximise your nest egg or that of your loved ones, consider topping up Central Provident Fund (CPF) accounts so as to leverage attractive interest rates and compounding.
6. Kick-start an investment plan Financial experts advise wannabe investors to map out their investment time horizon, determine a realistic timeframe versus liquidity needs and decide which asset classes are the most appropriate.
Once a holistic financial plan is in place, you will have a framework in which to make future financial decisions, which include knowing how best to optimise your windfall.
To understand the power of compounding interest, use the simple "rule of 72" to calculate how long a sum will take to double. If the investment return is, say, 10 per cent, then it would take slightly longer than seven years for an initial investment of $10,000 to double to $20,000. The number of years is calculated by dividing 72 by 10, that is, the rate of investment return.
Mr Lam's advice is to start by learning about investment products and strategies and begin to invest - even in small amounts - regularly.
If you have sufficient risk appetite, you could adjust your portfolio to higher risk - more exposure to risky assets - by overweighting your investment capital in shares versus in bonds or deposits. But you should always make sure you can afford the losses in worst-case scenarios. Insufficient loss tolerance can affect your morale and judgment so you should always stay within your tolerance limits. "It is always encouraged to start with a regular savings plan. With a disciplined approach to savings or investment, the commitment is fixed regularly and yet takes advantage during market volatility through dollar cost averaging and achieving diversification," Mr Lam says.
The POSB Invest-Saver is one such regular savings plan investing in an exchange-traded fund. It is suitable for consumers who are thinking of investing for better returns but may not have a huge capital, want to potentially grow their long-term savings for their children or their own retirement funds and are looking to diversify their portfolio.
7. Review your investment portfolio When constructing a portfolio, asset allocation and diversification is key, says Mr Cameron Senior, head of wealth and international at HSBC Bank (Singapore). This is because it is very unlikely that a single asset class will deliver the highest return all of the time. Therefore combining different asset classes in a portfolio can diversify the risks and improve returns over the longer term.
"The start of a new year is always a great time to review your investment portfolio. Not only would you have a sense of market sentiments given most governments and financial institutions would be providing their outlook for the year... (but) you would also have a clearer view of key life changes that will affect you in the year ahead," he says.
Furthermore, review and rebalance your plan as personal circumstances change. It is a good idea to review your portfolio once a year and consider rebalancing your plan whenever you go through major life events, such as getting married or having a baby.
Mr Senior suggests investing into multi-asset funds as these are typically structured to provide sustainable returns and ride out market volatility given their exposure to different asset classes, industries and geographic regions. Such funds are one of the more cost-effective ways for retail investors to gain access to diversification benefits, he adds.
8. Assess insurance needs Have a thorough audit to assess your insurance plans and cover. If both areas are lacking, you could consider using part of the windfall to pay for the cost of any additional insurance coverage.
However, do ensure that any additional regular premiums are affordable and sustainable.
9. Refinance home loans if it results in savings The rising Singapore Interbank Offered Rate (Sibor) has prompted major local banks to raise their home loan rates since November and it is likely that Sibor will continue in an upward trajectory, says Mr Ee-Qiang Baey, head of mortgage at MoneySmart.sg. At the same time, those who want to sign on to a new fixed deposit-linked home loan rate are also faced with price hikes.
Refinancing - switching to a loan package that offers lower rates - is a great alternative for those whose lock-in periods are ending. However, says Ms Phang Lah Hwa, head of consumer secured lending at OCBC Bank, do ensure that the total amount saved from doing so exceeds the cost, such as refinancing fees, legal fees and pre-payment penalties or if you are able to secure an additional facility if required. She cautions that interest savings will diminish in a rising interest rate environment.
"Most home loan packages come with lock-in periods of two or three years, and there are penalty charges for redeeming the loan early. Hence, you should refinance your loan only if the savings from the new loan package are significantly greater than the penalty charges," she says. "After the lock-in period, you can choose to refinance with another bank or reprice the loan with the existing bank, if the cost of switching and the new offering yield savings compared to the existing package."
Ms P'ing Lim, DBS' head of deposits and secured lending, says other options to manage your home loan commitments include right-sizing your loan amount via capital repayment or lengthening your loan tenor.
She has observed that more home owners perform capital repayment to reduce their loan amount in the beginning of the year, probably using their bonus or savings.
"This is a good practice to reduce your financial commitment especially if these are spare funds where you are unable to get a yield higher than your loan rate. Generally, we advise home owners to use cash instead of CPF funds since CPF pays at least 2.5 per cent and the funds could be used for retirement or for a rainy day," she adds.
Regardless of interest rate trends, Ms Lim advises anyone with a housing loan to set aside funds as a buffer against interest rate hikes or any unforeseen circumstances.
"Ideally, home owners should set aside some savings in cash, CPF funds or liquid assets that can be used to pay their monthly instalments for the next two years. This gives them sufficient time to restructure the loan or even sell the property should they run into any financial issues," she says.
10. Beware of credit traps when stepping up expenses When spending your windfall, ensure it will not increase your overall monthly expenditure. Do not fall into the trap of making new acquisitions that will be paid by instalments which, when added up, might exceed the original windfall - this would eat into other savings.
The fastest way to build your savings is to maintain your regular expenditure when your income rises and to save most of your annual bonuses.
11.Look out for credit cards that best suit your needs With the wide selection of cards and their reward schemes, it is no wonder that some people are confused as to which is the best credit card. The truth is that there is no perfect card, but there is usually one that matches a certain lifestyle, says Mr Vinod Nair, chief executive at MoneySmart.sg.
He recommends that people first identify their spending categories. Banks have partnerships with various retailers to bring shoppers the best savings with their purchases.
The next step would be to look at the card's rebate limit. A high cashback rate may appear attractive at first glance, but it is usually capped at a certain point. Lastly, shoppers should find out the minimum spending to qualify for rebates - they should ensure that they are comfortable with spending that amount each month.
Mr Anthony Seow, DBS' head of cards and unsecured loans, says that with the right credit card, cardholders might actually generate more savings with their usual purchases. "Customers can enjoy card benefits such as discounts, cashback rewards or miles on all their purchases. The POSB Everyday Card, for example, offers up to 6 per cent in cash rebates on purchases at merchants such as SPC, Sheng Siong, Watsons, StarHub and SP Group.
"For those who love travelling, DBS Altitude Card offers the fastest way to earn air miles with up to 3 miles per $1 on your purchases, and points never expire," he says.
It is also prudent to take a close look at the various card fees first. These include annual fees, late fees and interest levied on outstanding debt, says a Maybank spokesman.
12. Live a little While bonuses may be a windfall, pay increases should be viewed as a buffer against inflation, says OCBC's Mr Menon.
For those who have addressed their immediate savings and retirement needs adequately, treat yourself a little. After all, your bonus is something you have worked hard for and you deserve to enjoy some of the fruits of your labour, he adds.
Refinancing a home loan – working out the sums