Many people mistakenly believe that you need a large sum of money in order to start investing. In fact, with the low interest rates given by the banks here, saving your money in the bank literally means your money lose value after taking inflation into consideration.
But for lower-income earners who might be living hand-to-mouth, putting aside money for investments can be difficult. On the other hand, it is also about how much you save from the money you earn. High-income earners who spend extravagantly may not have much left in their bank account at the end of the day as well. On top of that, their higher earning power may grant them access to easy credit tools like credit card which may encourage them to spend unnecessarily and take on more debt than they should.
So for those who are earning less than $3,000 a month, what type of investment options do you have?
Before we look at the investment products that have access to, let’s discuss a little about investing itself.
First, you should only invest money you can live without. What does that mean? There’s little guarantee of returns when it comes to investments, so you need to prepare yourself for a situation where you might lose more than you earn. So in order to ensure you put yourself in too much risk financially, always make sure you have saved enough before you start investing.
Most financial experts recommend saving at least 6 months’ worth of expenses as an emergency fund. This money should only be used to help you overcome an emergency, such as unexpected hospital bills or retrenchment. After you’ve saved up this amount. The extra money you put aside on a monthly basis can then form the foundation of your investment funds.
Since we are focusing on investment options for low-income earners, we will look at some investment products that do not require more than $5,000 and suitable for a lower risk appetite. Do however take note that with lower risk, your returns may not be as high as higher risk investment products as well.
Government issue bonds to raise funds from investors who are willing to lend them money for a period of time in exchange for interest earnings. This interest is also known as coupon. Coupon rates are typically expressed as a percentage of the principal amount, which is also known as the “face” or “par” value. Upon maturity, bonds are redeemed at the face or par value.
The Singapore Savings bonds are risk-free, easy to apply and allow for withdrawal anytime you want without incurring penalty. The downside of withdrawing before maturity is that you will not meet your target returns. Each savings bond has a term of 10 years, and at the end of the 10 years, your principal and last interest payment will be automatically credited into your bank account.
You only need a minimum of $500 to invest, up to $50,000. To give you an idea of how much interest you can earn, putting $5,000 into the SSB will earn you a total of $1,102 at the end of 10 years, equating to a 2.16% effective return per year.
Some people may resent the fact that they are “forced” to save money in their CPF, but I personally find it a great invention of the government. After all, without this system, would most of us actually have that discipline to save so that we can use the money within for our retirement or to buy a home?
However, the CPF system can be a little difficult to understand given its various schemes. But one thing for sure, it pays a good risk-free interest rate, and there are ways to maximise it for your retirement. This simply requires you to park your money in the CPF Special Account, which pays 5% interest rate.
You can do this by making voluntary contribution to your CPF online to contribute to your CPF account. Do note that you will not be able to choose to top up only the CPF SA Account. However, you can make a transfer from your CPF OA to SA if you are below 55 years old. This transfer is irreversible, thus we advise that you think of this as a way to save up for your retirement instead of investment.
Investing in equities and shares are usually one of the more accessible ways to make an investment, but for low-income earners, this may present too much risk and require too much capital. This is where Blue-chip investing plans can help you.
Currently, these plans are offered by some banks such as POSB and OCBC. These accounts allow you to invest on a monthly basis starting from just $100 a month and buy into blue chip stocks via Exchange -Traded funds. The benefits of this product include a low minimum investment amount, convenience as you do not even need to open a trading account, and that you get to choose to sell your units on any day.
Another key advantage is that over time, your average cost per unit is potentially lower, which means you have a higher chance of saving on the costs of investment.
As the investment suitable for each individual depends on their individual financial circumstances and objectives, always think carefully before you put your money in and refrain from any products that promise a quick buck!