Saving early - Why it's worth it
Updated: Nov 22, 2018
Ever wondered what is the simplest way to start investing your money? The answer is simply to save! We live in a day and age where corporations and companies constantly seek to create wants that you never need. As we are unable to predict what may happen in the future, having savings not only allows you to be financially stable, it may also act as a safety net from unexpected emergencies.
So how is saving money linked to investing? A financial advisor named Nick Vail came up with a strategy called the stave and stack method. It is centred around the power of compound interest where young individuals commit to living a simple life for a set period. During this period, you would live on 50% of your income while saving the rest of it (stack). But of course, ensure that 50% of your income can cover your daily needs so that you don’t starve literally! If you are unable to save 50% of your income, try a lower percentage. Often, you would hear friends saying that now isn’t the right time for them to invest and that they are waiting for the right time to start doing it. On the contrary, the best thing you could do is to invest as much as you can early on.
Below is a graph by JP Morgan Asset Management showing how much of a difference it makes when you start investing earlier.
Source : JP Morgan Asset Management
To better illustrate this example, let’s compare 2 friends with a 1-year time span
With the need to constantly keep up with the latest trends and impress his friends, john has been living the high life eating at fancy restaurants, shopping for new clothes and he even bought a car on credit to show his status.
William on the other hand realizes the importance of saving and stashed away any remaining income after budgeting. His monthly expenses which includes taking the public transport, setting aside a sum of money to go out with his friends and other miscellaneous cost.
Notice how much of a difference it makes between these two lifestyles if you make the effort to save? Compound that over a period of several years and, that sum will be highly significant. Now, William will be able to take his savings and put them in investment vehicles such as mutual funds, ETFs and bonds, compounding it into even more money. Therefore, instead of enjoying short term happiness, dedicate yourself and make sacrifices while you are still young so that you may better reap the rewards in the future.
As a student, these are some simple tips you can follow to cut your spending.
Shop wisely – Don’t follow trends. Instead, opt for articles of clothing that are timeless.
Take the public transport – Singapore is a small and well-connected country, learn to make full use of it instead of buying a car or getting cab.
Eat out less – Learn to cook and prepare your own meals. They are a much cheaper and healthier alternative.
Buy and sell used textbooks – Visit platforms such as Carousell where you will be able to get textbooks.
By: Wan Him, Ng