This content was produced in partnership with Citibank Singapore
When it comes to saving and investing, it should not be an either-or approach.
It’s important to have both: Without savings, you could be forced to liquidate your investment assets on short notice; without investing, your money may not grow fast enough to meet your financial targets, or keep up with inflation.
The good news is, it doesn’t take a lot to get started doing both consistently.
What’s the difference between saving and investing?
Savings refer to cash set aside for emergencies. Mainly, savings tide you over for brief periods, such as to keep your bills paid when you’re between jobs, or to cover occasional urgencies, such as replacing a broken phone.
As savings must be ready for use at a moment’s notice, they are usually kept in savings or current accounts, where funds can be withdrawn at any time. However, such accounts usually have little or no interest paid; and your savings isn’t likely to grow significantly. Over time, inflation will lower the purchasing power of your savings.
Most people will need to save up to around four to six months’ worth of their expenses for financial safety, although this can vary based on their income and job. For instance, people with variable income, such as the self-employed, may need to save more.
To keep up with inflation, and to grow your money for major goals such as your first home or eventual retirement, it’s important to invest. This means placing some of your money in a balanced, well-diversified portfolio, which can outpace inflation.
A good rule of thumb is to set aside 20 per cent of your monthly pay for savings, and 30 per cent for investing; try to keep your other expenses to 50 per cent or less of your monthly income. This is often called the 50-30-20 rule.
Once you have accumulated four to six months of your income as savings, you can consider investing 50 per cent of what you have been saving (but remember to replenish any savings you use during emergencies).
It can seem tough to save and invest at the same time, but here’s how it’s possible to do both:
1. Start small, but be consistent
Don’t be worried about whether you have “enough” to invest: we invest to grow our wealth, and not the other way around. With sufficient time in the market, even a small amount every month can compound into a significant figure – this is due to the principle of Dollar Cost Averaging (DCA).
Remember: Time in the market is better than timing the market. This means that being consistently invested for longer is better than trying to guess, and second-guess, when a good time to enter or exit the market is.
Take unit trust investing, for instance. The DCA method used means that a regular monthly investment can be optimised despite unit price fluctuations. By contributing a fixed amount each month to invest into unit trusts, you can buy more units when the prices are low and fewer when prices are high. This is good for beginners or individuals who do not have time to actively monitor the markets.
Citi’s Regular Savings Plan (RSP) adopts this approach, which can help to average out the market's peaks and troughs. Over time, with the reduced average cost of investment, it will translate to higher returns when the market recovers.
2. Automate the process for successful outcomes
For savings, it’s best to automatically credit a portion of your income to your savings through GIRO. This ensures you’ll save the money before you’re tempted to spend it therefore setting yourself up for success in the long run.
For investing, you can get started for sums as low as $100 a month, through Citi’s RSP. This allows you to invest in a wide range of unit trust funds, which are managed by some of the most reputable names in fund management. Moreover, Citi’s RSP allows you to set specific calendar dates to purchase units in your fund. This can be changed to suit your needs, making it an automated and flexible way to invest.
Each month, Citi’s RSP will buy for you as many units in the fund as your invested amount allows. For example, if the units are $2 and you invest $100, you will get 50 units; if the units are $5 and you invest $100, you will get 20 units.
Again, DCA is in effect – you’ll automatically buy more units when prices are lower, and fewer units while prices are higher. The important thing to note is that you are staying invested.
The automated process ensures consistency on your part without having to otherwise cultivate the discipline or tenacity needed. If you are just starting out on your financial independence journey, an automated process like the above can also help take out the guesswork on how much to invest and what to invest in. For some, the automated process also minimises making rash investment decisions based on emotions.
3. Set investment targets
These can be a mix of specific short-term goals, and longer-term aspirations.
Short-term goals can mean saving enough for a wedding, the down payment on your first home, or just a much-deserved vacation. Longer-term aspirations are about your desired retirement lifestyle, or perhaps even legacy plans for your children or grandchildren.
There are RSP calculators online to determine the amounts that you’ll need. This can provide a general guideline on how much to invest, and for how long.
So start small, be patient, and be consistent: with these three qualities, you can be both prepared for emergencies, and well-invested for your future.
Discover how you can achieve your financial goals, your way. Whether it’s improving your financial literacy, saving more, or investing better, take the first step towards financial independence with Citi Plus today and enjoy up to S$686 in welcome rewards.
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