Many people get stressed even thinking about managing their money, seeing it as just too complicated. But the basics of personal finance boil down to two simple steps: Start saving early and letting your money work as hard as you do.

1. Start Saving Early (And Automatically)

While we have our CPF to “force” us to save, we know that the savings from CPF is not going to be enough for our journey to achieve financial freedom.

Meanwhile, don’t forget that banks are also offering financial planning tools and services to help us achieve financial freedom.

Make Use of the Bank’s Automatic Savings Function

For example, OCBC’s ibanking has the function of setting a savings jar. Under the savings jar, you can choose to set a fixed amount of your monthly income to be “deposited” into the savings jar. Once the amount is in the savings jar, you will not be able to spend unless you transfer it out of the jar.

Source: OCBC iBanking

Source: OCBC iBanking

Understand How Your Mind Impacts Your Saving Habits

Psychology researches have shown that humans feel less emotional when they are spending/saving money that they don’t see. This is why you are often encouraged to pay via instalments or credit where you don’t physically see money being transacted. In that way, you won’t feel heart aches. When it comes to saving, when you do not see the extra money you have in the account, you won’t feel tempted to spend it.

The point is to get in the habit of saving. Even if you start small, it will make a big difference in the long run. Seeing your money grow can be very motivating.

2. You can Try CPF Investments, but with Caution

Under our CPF scheme, we have the option of investing some of our CPF money to achieve higher returns. The CPF Ordinary Account (OA) currently offers reasonable returns of 2.5 percent per annum, while the Special Account (SA) guarantees 4 percent interest per annum. However, astute investors can achieve higher returns through the CPF Investment Scheme (CPFIS).

CPFIS provides members with the option to invest their CPF savings in various instruments such as insurance products, unit trusts, fixed deposits, bonds and shares. But note that this should complement the current financial planning you have with your “non-CPF” money.

Deciding What to Invest With Your CPF Money

One of the advantages of investing with your CPF money is the long term view it “forces” you to hold. Since you do not have the choice of withdrawing your CPF savings till you retire, you should use your retirement age as the investment horizon when you invest. While not all investments are bound to have sizeable returns, a long-term investment horizon will greatly increase the probability of making positive significant returns.

Avoid ILPs

Investment-linked policies (ILPs) are the most profitable products under life insurers. This is because of the expenses that are being incorporated into the design of the product. Don’t be talked into buying ILPs so easily. While ILPs have a protection element, it makes up only a small proportion.

Find the Unit Trust That Suits Your Risk Profile – Sharpe Ratio

Unit trusts offer us the opportunity to have professional managers to manage our money at a low expense. For a smaller amount of money, unit trusts allow us to invest in a diversified portfolio of assets, which could cost much more to buy if we had to pay for each asset in the fund individually.

Source: Money Digest

Source: Money Digest

The unit trusts are listed based on their investment focus, Sharpe ratio and 3-year performance. Sharpe Ratio is a measure for calculating risk-adjusted return. A higher Sharpe ratio means that you are either exposing yourself to lower volatility or higher return for the same amount of volatility. These are useful information in deciding which type of unit trust to invest in.

Make sure that you fully understand a unit trust in terms of its investment focus, risks and historical performance before you invest in one. Do not simply invest in a fund because its 3-year performance is the highest, or has the highest Sharpe ratio.