Tip for millennials: Start early to accumulate your ‘first pot of gold’

It seems hard for millennials to save, given limited salaries.

All of us have dreams for the future, though, and we need a “first pot of gold” to put us on the right track.

Even on a low salary, it is possible to accumulate funds.

Only by managing your finances well and investing your savings will you be able to accumulate an initial nest egg that lets you buy a home, retire early or do something else.

What is essential is starting to save and invest early.

If you invest S$100 a month starting at age 25 and it earns 5 per cent interest a year, for example, you’ll have S$81,869 by the time you’re 55. Wait until you’re 35 and you’ll end up with just S$40,745.

Or if you invest S$10,000 earning 5 per cent interest a year when you’re 25 and leave it until you’re 55, you’ll have S$43,219. Wait until you’re 35 and you’ll get just S$26,532.

The power of compounding, or earning interest on interest, means that starting to invest early makes a massive difference. “It’s your personal finance that you should pay most attention to”, as investment advisory site Seedly puts it. “Personal finance is everything to do with managing your money, saving and investing. The hard truth is: your finances are not going to manage themselves.”

HOW TO START SAVING

The good news is that, contrary to images of millennials as over-spenders, an analysis by UOB bank found that millennials are outpacing Generation X and baby boomers in growing their savings.

And Etiqa Insurance found that 65 per cent of millennials are willing to cut back on their expenses in order to save money.

While it’s easy to see that starting to invest early can put you in a great position and millennials have that intention to save more, actually getting down to putting money aside can be hard.

That said, there are still ways to get it done.

The first thing to do when you start your first job and receive your first pay cheque should be to open a savings account and deposit part of your salary.

Insurance giant USAA also suggests setting up a direct deposit so that 10 to 15 per cent of your pay goes into your separate savings or investment account automatically before you even see the money. Saving upfront will not guarantee financial success, USAA says, but it will "probably work better than trying to save what’s left after you’ve funded your lifestyle". 

To figure out how much you can save, insurer Manulife suggests taking an honest look at your finances and using a simple "money in, money out" balance sheet so that you know where your cash goes.

You can keep that cash flow in mind when you decide what to spend, and you can look for cost-efficient alternatives.

And a key part of saving relates to lifestyle.

Keeping up with trends can be very expensive. Instead, look for better alternatives.

As Time magazine noted, although social media might be great for keeping in touch with friends, “it enables a voyeurism that makes people compare themselves with their peers. That can have negative consequences, like overspending. The truth is, most people project an idealised version of themselves online. Instead of comparing yourself to others, focus on your own goals”.

HSBC bank’s research also identified four steps to improve your financial well-being: Save earlier and more, balance your investing so you can spread the risk and maximise the returns, plan for the unexpected by using tools such as insurance to protect yourself, and take advantage of technology such as online planning tools.

And if you want some help with saving, a new mobile application here called Balo can prompt you to save. Balo reminds you to save every day and provides suggestions on how to have money to put aside, or you can use auto-save to have money automatically transferred to your savings account.

START INVESTING

While saving is important, it’s essential to do more than just put money into a savings account.

As investment advisory firm Motley Fool Singapore explained, “Investing doesn’t mean leaving our money in the bank”.

It added that “banks give us paltry returns of around 0.05 per cent (while) investing in an index fund tracking the Straits Times Index would have produced an annualised return of 9.2 per cent” over the past 10 years.

Saving S$300 a month for eight years and earning 9.2 per cent can give you S$41,957, enough for the downpayment for some Housing and Development Board flats without using the Central Provident Fund.

What you need to do, then, is to start investing. If you don’t have much investment knowledge, you can automatically move your money into exchange-traded funds such as the Nikko AM Singapore STI ETF that tracks the Straits Times Index, or the ABF Singapore Bond Index Fund that tracks the iBoxx ABF Singapore Bond Index.

You could also use a “robo-adviser” such as Smartly, Stashaway or Auto-Wealth to get automated help with selecting and managing investments that meet your risk profile and goals.

While saving might have seem difficult, using a few small tricks can make all the difference. By saving early and consistently investing your funds, you’ll be well-positioned to achieve your dreams.