Asked by Anonymous
Asked on 05 Jun 2019
I came across an article recommending to separate our savings into short-term and long-term in a 1:2 ratio. How would you do yours? Is simply setting aside an amount monthly will be enough?
For example, let's say the short-term goal is buying a house and the long-term goal is retirement planning.
Ultimately, it’s about:
1) Pre-empting or estimating the cost of future expenses (e.g. wedding, BTO, insurance, car), taking into account estimated annual inflation rates
2) Identifying how flexible your timelines are for each of your milestones (e.g. first home by 2022)
3) For short-term savings – placing it in a high yield savings account like OCBC360, which offers 1.2% interest on the first S$35k, and 2% interest on the next S$35k (capped at S$70,000)
4) Ensuring you’ve set aside a minimum of six months’ salary – a rainy day fund – for unforeseen circumstances, whether a medical emergency or retrenchment (God, no!)
5) Taking stock of your progress quarterly
My salary is credited to my OCBC 360 account, of which around 45% is then transferred to my POSB Savings account for monthly expenditure – which could include anything from food and transport to taxes. In order to finance the down payment for my BTO, I plan to funnel $20,000 into a short-term endowment plan like the Aviva MySecureSaver. I’m also looking to GIRO 20% of my monthly salary to my CPF Special Account, which would yield up to 5% interest annually.
Some level of risk comes into play if you hope to grow your funds at a quicker rate – so diversification is crucial.
i) investing in stocks that can withstand inflation, e.g. Singapore Savings Bond (averaging 2.13% interest p.a if held for ten years, based on interest rates for the June 2019 bond), and
ii) dabbling in higher risk investments like bonds, stocks (e.g. STI ETF) and REITs.
At the same time, topping up your CPF in January rather than December could earn you 20% more interest on your savings over ten years.
1) Review your process to reach these goals regularly, every 3-6 months. Act and adjust accordingly when the progress is not up to mark.
2) Have different high savings accounts for different purpose. E.g I have my DBS mutiplier account to PAY MYSELF FIRST and build my war chest, parked my emergency funds at SSB & save up for my property downpayment in the Citiabank Maxigain account.
I do Jar method.
Long term - Fixed amount monthly to a parking slot
Short term - All money in that Jar, and sweeping occurs (Manual Sweep)
I would classified buying house is LONG term instead of short term as buying a property typically pay 5-20 years.
Just set money aside and have a logical way of evaluating it and optimised to your style.
Given that both are fairly large amounts (ie. not saving $3k for a trip to Japan), I would still look to put it into high interest yield savings accounts and long-term investments respectively.
To buy a house - or at least save enough for the down-payment, this would probably be a six figure sum. Say it's $200k, look at how much of your salary you would need to put aside, and work back to check how many months you would need to get there. A high interest yield savings account allows for liquidity when you need to put down the down-payment, but still gives you a good 2% interest rate.
For retirement planning - apart from the inevitable CPF, also explore other asset classes that you can have a long term horizon on.
If I am a fresh grad and just starting out in my career, this is what I would do.
Start putting 10-30% of my income on GIRO basis into a savings account to build up funds.
When I built up some funds in the savings account, I will take out 10-30% of the savings and put it into longer term assets such as stocks,funds, bond, endowment, ssb, fd etc.
In this situation, you will build up short and long term assets at the same time together.
It is important to save for short term for someone starting out in their career due to many life changes coming up. Marriage, reno, new house, kids, cars etc. But not neglecting long term financial stability, I will channel some funds towards long term planning.
I would also advise you to have a savings account for self education. I think that is the account that makes me the most return. By investing in yourself and knowledge (books, seminar, coaching etc), the return that you get from your skillset will outwin any investments that you make.
So many different recommendations but ultimately boils down to discipline and curbing excessive or unnecessary spending. You will see your savings grow in the short term, and with perseverance it will stretch towards Long term savings.
only once you have save enough to consider further investments then you review your portfolio again. So for a start, can consider high savings bank account like uob one or DBS multiplier account to build up your emergency base. Create a separate account (easily done online) and put in a fixed amount for your monthly spendings if you do not have the discipline and control yet. Then you can start monitoring your Budget on a monthly basis and revise your spending allocation accordingly to meet your goals. A cup of Starbucks or bubble tea less per day can also help grow your savings over the Long term.
Having a discipline to set aside an amount every month In order to achieve short term goals. And invest the rest for Long term goal. Depending on how many more years you need to achieve your short term goals. For my case, I’ll do 50-50 of my savings. Some ppl do 70-30, 30-70. Hope this helps!!
As most of us were not all born well to do and there's limited resources we have on hand as we strive to upgrade, invest and gain more.
Just like an objective couldn't be achieve without meeting many small goals and milestone.
My thought would be :
Focus on short term non recurring goals, complete them then go for long term goals.
(A) Short term goal such as buying a house (down payment and stable installment), wedding, parenting etc, from the time we conceive or plan to have it , till D-Day, there's a relatively short runway. It pays to focus ALL the bullets on savings for these short term one time goal first.
(B) Long term goal: After we finish the short term goal, we'll have resources and focus on retirement which has slightly longer run way. We then may dedicate all our resources on savings and Investing towards these goal.
In terms of method, I would go for:
1. Savings 2. Job upgrading by studying / learning more skills 3. Investing
The first 2 Is the fastest and most effective way to do achive , then subsidized it with investment.
Hope it brings a different perspective.
You will need to do the maths first. How much you need for house? If 400K then work the Sun backwards to see how much you need to save every month. Same for retirement. Then you see if your current spending is too high or you can already hit the target 400K in X years time.
If you have an OCBC account, you can set aside saving goals and have little pockets under the same bank and same account.
if you have other banks then this is what you could do
1) use yahoo finance and have multi watchlist with different stock types A) long term stocks/bonds/unit trust B) short term stocks/bonds/unit trusts
2) separate accounts under the same bank for cash assets
For me, I know what are my fixed monthly expenditures (parents allowance, bills like telco, utilities and insurance, grocery and meals). So I try not to go beyond the fixed amount and save the rest, unless if there are special events like gatherings, weddings, birthday celebrations etc..
I've not figured out how much to i should set aside for investments once I've reached a comfortable emergency cash amount. So currently it's all going into 'savings' and I did not split this into long term vs short term.. but i'm comfortable using part of it for traveling when the time comes.. so, as long as i did not spend beyond what's needed, I know i've 'tried my best' to save.. to save more, i will probably need to find ways to increase my income instead..
I do not think that you need to have two separate bank accounts for two different goals because it will become obsolete after the goals are met. You have to take into account the minimum deposit incurred too.
My take on this is that you just need one bank account, one excel spreadsheet to keep track of all your goals.
First, find out how much u need for short term and long term goals.
Then, work backwards and set a budget and stick to the savings. If this is ur first time budgeting, review it monthly for first 3 months. This is to see if the budget set is challenging, yet achieveable. Once u get the hang of it, u can reduce the frequency of reviews, to say, a quarterly or even yearly basis.
For long term goals, u might wanna review if u can achieve consistent returns. For this, u would likely have to do it over at least a decade.
When deciding how much to save, short term goals are slightly easier to project, as it is less likely to be affected by things such as inflation, economy, etc as compared to long term goals.
You should probably be as specific as possible.
2) Defining Short Term
3) Defining Long Term
1) I'm not too sure your ratios should work like that because objectives have a price regardless of your timeline. So if I want to get a house in a year and I haven't even started, it's more likely that my short term savings would be 5 to 1 compared to 1 to 2, for example. Not that the general idea isn't there and its a good base for someone to start, but financial planning done generally is typically done poorly.
2) Short term has a huge range. For traders, its a couple of hours and for investors, it can be impossible to predict a year record.
If your short term is 3 years or higher, there are some asset allocations (investing) and short term bonds or structures which you can place your money in. This can help you to get a higher interest on those yields with specific predictability.
Common short term instruments are your enhanced bank accounts (e.g. Multiplier, 360) as well as SSB. For more return, you can speak to a Financial Advisor like myself to design an investment asset allocation depending on how short the term is.
Of course, thaht kind of investment also needs to be liquid because if you're looking at the most common short term things from start to finish, it can typically go in such an order:
1) Initial downpayment of house
2) Wedding preparations 1 (e.g. bookings)
3) Wedding preparations 2 (e.g. purchases of specific items)
4) Wedding preparations 3 (e.g. miscellenous)
6) Moving in
7) Items for the house
Etc. You kind of get it. Some people will bypass this entirely and stick with the common options, while some people whose short term is longer than they'd expect (1 year or higher) might even go for P2P lending, where you can get 8% yields pretty easily.
3) For long term its fairly straightforward in the sense that you know you'll be investing in the market - Unit Trusts, Stocks, Bonds, ETFs, REITs, etc.
Speaking purely from an advisory/investment specialist perspective, the asset allocation is important because your long term may be longer or shorter than a general view (e.g. retirement at 65). A portfolio that I plan for someone who wants to retire by 45 is going to have different components from someone who can retire at 65, assuming they start at 30 years old.
This is because you have to sell at some point, and unless you're a skilled trader you ideally want the probability of the portfolio to have a positive return at the end of your tenure.
In summary, you save up using short term instruments and long term instruments with precision and careful planning.
Do talk to a professional like myself if you require further advice and yields.
Top Contributor (Jan)
For short term, can do an automated savings. Look out for high interest savings accounts, see how you can get higher interest.
For longer term, you can consider investments. Because savings for retirement is not sufficient as inflation will erode your money value over time.
Simply set up two bank account,one to receive your salary and once to automatically transfer from the first one every month,money not seen is money saved:)
Tough question, and I see quite a bit of good answers. For somethings like retirement planning, its really hard to come up with an absolute amount. And there are unexpected things that happen that would dip into your reserves, so it wont be something that actually has a fixed pattern.
1) nowadays there are psuedo bank accts. They are called saving goals in ocbc, and I think dbs / uob has theirs too, maybe with a different name. Using saving goals you can do the long term and short term goals theoretically all in the same bank account. This would be the same as envelope budgeting.
2) with saving goals, you can set the target amount, required date, and whether to enforce monthly saving / accrual into the goal. They "lock" up the money and it is no longer part of the "available" balance.
3) someone else answered on monthly or quarterly check-ins. I do quarterly balance sheet at a minimum to get overall view. Getting disciplined once per quarter is not demanding. Plus do at least annual budget.
4) within the budget, plan on expenses first. Tally up expected income and then work out the possible savings. Portion out the savings according to your saving categories and readjust.
In practice, after working out expected income, I budget expenses according to:
recurring monthly expenses
annual / periodic expense like travel, investments etc.
For the so called short term / long term goals, I set up four goals / categories (i find that's better, too many categories usually means spend more time doing fine splits, and you may get distracted from overall picture)
rewards to cover basically travel, clothes, tech toys and just others
angpow + family emergency reserve
investment reserve to redeploy into investments, or srs
backup reserve = 6 month expenses + next yr annual expenses + built in component for inflation
Each of the reserves has an monthly savings / accrual debited from the free balance 2 days after my salary is credited to the 360.
Anytime a use comes up against the category, eg parents hospital insurance bill, I withdraw the amount from the goal, while it continues saving for next years bill.
At each quarter, I record the balance under each of the goals, and do my santity check against this year budget to see if the monthly accrual is enough or not. If under, I may need to adjust investment lower to topup saving under the other category.
For three year plan, I built in the target % of total net worth and then compare balances against the target %.