Lim Boon Tat, Applied Mathematics at Brown University
Updated on 07 Jun 2019
Hi, good question, and as with most important decisions in life, it's always about finding the right balance, for yourself. I think others have given you a good perspective. Let me share something slightly controversial: some fruit for thought.
With little to no savings, investing with whatever spare cash you have could be dangerous, especially if you're value-investing. Value investing (see my other posts) requires that you hold the investment for sustained periods of time (normally 3 years). If you suddenly have an emergency (medical, family, personal etc) and need the money, you may be forced to sell your investment at a loss. Typical financial advice suggests that you keep between 3- 6 months of expenditure as "emergency savings". Note that this is "expenditure" and not "gross income".
Without knowing the exact figures, your current income level, your potential income level (highly correlated with your education level in Singapore, especially in your early career), it's hard to give precise advice. But let's assume that you have $X in cash and wish to invest all of it, and assuming that you're fairly decent in investing and average 20% per annum, at the end of a decade, $X becomes around $6X. Huge returns right?
Well, not really. It really depends on how much X is, relative to your current income. At lower income levels, and especially early in your career, the amount of X you have to invest could be a very low percentage of your total income, simply because there are certain things that we ALL have to do: eat, drink, travel, rent a room etc. After subtracting all these, you dont really have much X left. Conversely, as your income grows (and because you've been reading Seedly) but your "quality of life" maintains its current level, your X (the amount of $ that you can save) becomes much higher (both in terms of % as well as absolute amount).
Long story short, it may make sense in your earlier years to see if you can "re-invest" your $X to increase your primary income skillset, so that you can make more income: this could come in the form of buying coffee to your mentors to learn from them, attending more workshops/seminars to improve your skillset, getting more certifications etc.
A numerical example may be more illustrative: Say you are earning $3k in gross income, and save around $300 a month after expenses (e.g. CPF, eat, drink, travel, rental, filial piety money to parents etc). So in this case, you have 10% of your income every month to invest. After 12 months, you have $3.6k. Two scenarios:
Scenario A: invest at 20% per annum and make around 22k back in 10 years?
Scenario B: invest in yourself, change to a higher-paying job, perform better and get higher annual bonus and increase your salary from 3k to 4k? 3k to 5k? Most salary increases tend to last for a while. So a 1k increase in monthly income this year, will likely persist through for at least the next couple of years.
Which scenario gets you more $ in the long run?
I've mentioned this a few times but when starting out with a small portfolio, don't get caught up with percentages. Look at the absolute dollar figure return.
Even if you invest 100 a month, and in the first year you make 10% return, that's still only a $120 growth.
That's something you can earn over the weekend taking a part time job.
When you don'y have a lot to begin with, spend more time earning additional income because the risk you take to earn that $120 is a lot.
Small investments add up yes, but it's also important to extract the most economic value from yourself as well.
You don't have to rush things. Grow your capital first, save 6 months of money as an emergency expense, and when you have about 10k in excess, then start investing.
Invest in yourself first, like what others have described in detail. Acquiring skills to obtain high...
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