Savings is important

Savings is like the fuel to the fire. The more savings you put into a retirement portfolio, the more you will get in your portfolio. You might be able to generate 16% returns for 4.5 years consecutive, but it does not mean anything if you only have a capital of $1,000.

Example of 16% compounded returns for 4.5 years:
$1,000 = $2,000
$10,000 = $20,000
$100,000 = $200,000

Do not underestimate the power of compound interest. I'm sure you have heard the rule of 72. This rule is very simple. It simply calculates when your money doubles, given the returns (calculated in %). For example, if your fixed deposit gives you 3% per annum, your principal will double in 72/3 = 24 years, if you roll over the whole amount + interest every year. If you invest in a balanced portfolio of investments giving you 5% per annum, your principal will double in 72/5 = 14.4 years. See the difference?

Some people might say... Why talk about savings? I bank in my salary check every month. My bank balance increases every month. However, how many of us truly know how much we spend per month? If I ask you what's the % you spend on transport, and what's the % you spend on restaurant meals, can you give me an answer? If I ask you now to cut down on your expenses, do you know where to start?

Knowing your spending habits is important, for both the initial part of your retirement planning, and when you're finally withdrawing from it. By understanding your spending habits, you will be able to:

1. Know how much you save per month
2. Know how much of your spendings go to your needs, and how much spendings go to your wants
3. Budget, and invest effectively such that you'll be able to enjoy life now, and after you retire.
   

Yes, the last point is important. I for one never believe that we are only suppose to enjoy life after we retire. Retirement planning is also not an excuse for you to live like a hermit, and eat bread everyday for your 3 meals. If your retirement planning results in this, I think you need to review point 2. Cut down on your wants.

By knowing your needs and wants, you will be able to figure out just how much you really need when you retire? How much you spend on food? Do you need that car when you retire? Are you sure you need all those millions that everyone is saying?

The ballpark % of savings that you should have is roughly at least 20% of your take-home pay. I emphasize on the word take-home pay. Yes... The CPF money is our money, but look at the current trend now. Our "first world" government has been delaying the withdrawal age more and more. Previously it was 62, now it's 65, and its rumored to be 68 soon. For those who are still young, just imagine if they delay it until 70? What are you going to eat on if your retirement savings are stuck in the CPF? Not to mention that most of the money in your CPF will be invested in your home. There's really nothing much left in the CPF by the time you retire.

If you do not know how much you save per month, there are basically 2 ways, the basic and the advanced way. :)

Basic:
Note down all your withdrawals, Credit Card bills, Giro bills, etc. Anything that requires you to spend money. Do it on a monthly basis, for at least 12 months. You have to do it for a full year because there are some bills that are only paid in a certain month (e.g. IRAS, Insurance). Just spend about 15mins a month to note it all down. After which, use your annual salary + bonus, and calculate your savings %.

Some people might have many many accounts, and it becomes quite hard for them to keep track of all their spendings. One way is that you designate an account as the expense account. Transfer a fix amount into it at the start of every month. See if there's a balance at the end of the month. Simple way of keep track of your expenses.

This method though only helps you in knowing how much you're spending in relative to your salary. It usually can't tell you the specifics, but it's good enough though for some people. I'm currently using this method and it helps me keep track of my expenses per month. I've been doing it for at least 3 years. Simple, and yet effective.

Advanced:
This method is more for people who really want to differentiate between their needs and wants, and how much they spend on each type.

It consists of the following steps:

• Keep track of all your receipts for everything that you spend on. Every single expense item should always have a receipt, or you issue your "own receipt".
• Designate 2 boxes. One labeled as needs, the other as wants. Put in the receipts accordingly
• At the end of the month, empty the boxes and calculate your expenses for your needs and wants. Continue doing this for at least a year.
  

This method actually surprises quite a few people because it reveals alot on their spending habits. Some people for example put restaurant meals as a need, instead of a want. At the end of this exercise, you will be able to in detail, know how much you spend, and where it goes to.

I don't think you will be able to keep doing this method forever. This is usually done only initially, for you to be aware of your spending. Once you're aware of it, you can revert to the basic method, or maybe you do not need to keep track of it anymore. However, it is good to review this again when something significant happens in your life, like marriage, kids, etc.

Nowadays, many of us live to quite a ripe old age. 80 years old is not really that uncommon now. Just imagine you retire at 65, and you need to live for 15 years more (assuming you know when you pass on). 15 x 365 = 5,475 days!

Knowing how much you spend will be useful in deciding how much money to reserve for your retirement portfolio, how much you need for your day to day activities, and how much you need to keep for emergency. This I feel is just the basics that we need.

Next, I will be writing on the dreaded word people do not like to hear... Insurance. :p