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Before Investing: Savings

 


Having a healthy savings amount is really an important element towards one's goal of financial independence. Hence, be it saving up before investing or just saving up in general, I would always try to optimise my savings strategies on how to save and where to save it. 

How to save efficiently

As we all know, there are two inputs to savings: our income and expenses. Unlike income where it is difficult for me to influence, it is relatively easier for me to control my expenses to increase my savings. 


The goal here is to track and reduce my expenses as much as possible to drive the amount I save up. 

To track expenses, there are generally two methods that I use which are daily and monthly trackings. 

Daily tracking 

Firstly, I use an app called 'Money Manager' to manage my daily expenses. Whenever I make a transaction, I would record it accordingly in the app. It can be quite tedious at the start but does get easier over time as the habit develops. 


As seen above, after recording for the month of August, it will segment my expenses into a nice pie chart so that I can track my overall expenses as well as the composition of it. 

'Beauty' here refers to a haircut... I was lazy to change the description and left it as it is... 

Monthly tracking 

Once I have my monthly expense data, I will input it to my personal monthly income statement. 



For example, here I have a segment of my income statement showing only the expenses portion. From the table, there is a column 'Change' and it tracks the changes in expenses from the previous month. For example, my spending on shopping changed by -$40, which meant that I spent an additional $40 on gratification this month (September) as compared to the previous month. 

In addition to having a bird's eye view on my expenses, this also allows me to identify areas where I can reduce my expenses in the following month, such as reducing my shopping expenses. 

Where to save 

As many would know, there are many saving instruments out there in the market. (High-yield accounts, bonds, savings insurance plans, etc). Other financial forums had written up comprehensive guides on which instruments are the best and give the best rates. 

However, my perspective here will be sharing on 3 basic savings instruments with relatively high liquidity and low risk: Singlife savings account, Standard Chartered's Jumpstart account, and DBS multiplier

*Some maths are involved moving forward*

To illustrate, an average graduate, Tom, with $30k in savings and earns a monthly net income of $3,000 would find his best allocation below. Tom will also try to hit 2 of the DBS multiplier's categories since he wants to start his investing journey and have a high-yield account. 

For context: 

Singlife account: 2.5% p.a for the first $10k, 1% p.a for the next 90k. (Interests not guaranteed) 

SC Jumpstart account: 1% p.a for the first $20k, 0.1% for any incremental savings after $20k. 

DBS multiplier: the more categories you meet, the higher the interest rates. (with the highest at 3.8%) 

The table here shows the tier levels of DBS's multiplier account. 



Case 1 - Tom invests $100 monthly with DBS's recognised investment platforms and spends $10 monthly on credit card expenses, thus unlocking 2 categories at the 1.5% interest tier (0.13% monthly).

Case 2 - Tom invests $1,990 monthly with DBS's recognised investment platforms and spends $10 monthly on credit card expenses, thus unlocking 2 categories at the 1.8% interest tier. (0.15% monthly)

(I will not be touching on 3 categories of DBS multiplier as it requires $50k and above, which an average graduate do not have.)

Putting savings into Singlife and Jumpstart (Scenario A) 




If Tom were to put $10k into Singlife, $20k into Jumpstart, and his monthly salary into DBS multiplier, then case 1 would be the best for him. 

In this case, his salary can earn a 0.13% monthly interest, amounting to the highest interest between both cases. 

Putting savings into Singlife and DBS multiplier (Scenario B)



If Tom were to put $10k into Singlife, $20k into DBS multiplier, and $3k salary into DBS multiplier, he would benefit most from case 2 in the first month, followed by case 1 after the 3 months mark onwards. 

Insights

1. Overall, Tom would be better off with scenario B, while trying to reach a higher tier of interest (case 2 of 0.15% monthly) in the first two months. However, from 3 months onwards, the total interests he earns from case 1 would be higher. Given that Tom can only choose one route, it might not be the wisest for Tom to go after case 2 considering case 1 would be better in the long term for him, in terms of purely interest income.

2. Even though case 2 shows a higher interest initially, Tom is spending more to reach that level. As a result, his bank balance will be lower than case 1. As such, Tom should consider whether this trade-off is worth it. 

3. Adding on to point 2, even though the bank balance might be lower, Tom ultimately spent it on investments rather than credit card spendings. As such, the move might be ideal because he would have started his asset accumulation process at the same time. Note that such a high investment could be adding a significant amount of risks to Tom. 

4. If Tom only unlocks 1 category, his interest will drop to 0.9% annually and he will be better off putting the rest of his salary into Singlife which offers 1% annually on the next $90k after the first 10k. To be better than Singlife, Tom would need to spend at least $2,000 in one category to unlock 1.1% annually in DBS multiplier. 

Conclusion
 
Overall, this post is meant to show the savings processes that I have adopted and my thought processes in permutating the 3 savings instruments such that it will give me the best returns on my savings. Also, I feel that savings strategies should not be made in isolation and should also consider the best investment levels for yourself as well such that there are sufficient investment exposures and optimum interest income from savings. 

On a separate note, if you enjoyed what you read, please share the piece with your peers. Also, it would be a great help if you can head over to @assetincentives and give it a follow on Instagram! 

Disclaimer 

* Though I tried to express the pros and cons to the best I could, I understand that it may not be the most ideal table due to certain assumptions such as only holding the salary at 3k, no compounding effects of Singlife's column and not considering possible returns from investments, etc. 

*I am not a professional investor and am a complete beginner in the investing arena. As such, my investment thoughts should be taken with a pinch of salt and challenged if need be. Also, it should not serve as investment advice, When in doubt, please do your individual research and check with your financial advisor. 










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