Heed these tips to make wise financial decisions. By Ryan Ong
Photo: Andriy Popov / www.123rf.com
Your parents and teachers meant well, with their spiel on working hard and saving money. Unfortunately, there are some common pieces of financial advice that are… let’s say halfway true. Here are some money myths and lessons from the school of hard knocks, which you can use to replace the old ones.
A Degree Determines Your Wealth
A degree determines your salary, which is very different from your wealth. There are many wealthy people who have low (or even no) salaries. Some examples include:
– People who trade stocks, commodities or bonds on their own
– People who have big trust funds
– People who made smart investments early in life, and now live off their returns while doing jobs like volunteer work
– Sales people who have low base pay but good commissions (and many sales jobs do not require degrees)
Having a degree helps in the sense that you will have more capital to invest. However, it is a truism that few people get rich from their monthly paycheque. More people get rich through their investments, or starting their own businesses, than through working for others. Don’t give up hope of financial freedom just because you lack paper credentials.
If You Just Save and Don’t Spend, You Will be Financially Secure
This is the most dangerous money myth that we tell. Saving money is important, but simple savings accounts and fixed deposits cannot rival the rising cost of living.
The inflation rate in Singapore ranges from 3 to 4 per cent per year, and no savings account in the country can compete with that. Even your CPF, growing at 3.5 per cent, struggles to keep pace. In effect, many people see their wealth decrease rather than increase with each passing year.
There is no getting around the fact that, beyond savings, you must develop the financial literacy to make investments. Sadly, this is rarely taught in schools unless you are a finance student, so you will have to do it yourself. At the very least, get a financial adviser or wealth manager to help you out.
Never Use Credit Cards to Avoid Debt
What is the interest rate on a credit card, for a responsible user? The answer is nothing. Credit cards have a high interest rate of 24 per cent per annum, true. But if you repay what you owe every month, 24 per cent of $0 is $0. Many credit card holders pay no interest, and can go their whole lives without doing so. They even come out ahead of people who pay cash. This is because they get discounts, cashback, and rewards from using the credit cards.
For example, say we both buy an item that costs $100. You pay in cash, so you lose $100. I pay with a credit card with 6 per cent cashback, which means I get $6 back later and effectively pay $94. I also get reward points that I can trade in for discount vouchers. Responsibly using your credit card also builds your credit score. When banks see you make repayments promptly, you could have an easier time with major loans later (e.g. home loans and car loans).
The proper rule is never overspend to avoid debt. It has nothing to do with credit cards (unless you deliberately use the card to overspend). You can get the right credit card with the best benefits right now, with SingSaver.com.sg’s comparison tools.
Follow Your Passion and the Money will Follow
There is no doubt that this is true. The question is, how much money will follow? Some passions are less lucrative than others. If your passion is coding apps, you could be self-employed and rolling in money right now. If your passion is building hats out of egg cartons, well, maybe there’s some money that could come from that, but probably not enough to pay your mortgage.
There’s no need to conflate your passion with your job. If you are truly passionate about helping endangered animals, for example, you don’t have to be the one feeding the panda as a full time job. You could be motivated to invest wisely and work like crazy as an accountant, mechanic, banker (insert job of choice) to fund the relevant charities.
If you can earn enough money, you can support any cause you want and make an even bigger difference. So let your passion fuel your job, but don’t obsesses over having it be your job.
Constantly Striving to Make More Money is Greedy
Constantly striving to make more money is one of the most caring, responsible things you can do. People who can’t make enough money are a burden on their family and friends. If you can’t pay for your medical bills, mortgage, food, or education, then someone else has to. And nine times out of ten, the people who do it will be your family or your closest friends.
Striving to earn more takes the burden off their shoulders. It reassures parents, in their old age, that you will be okay when they can’t look after you anymore. Furthermore, you will be in a position to help them when they need you.
If you look closely at people who have earned their wealth, you’ll see this is almost always their real motive. It’s not about yachts and planes and trips to Paris (although that’s a nice plus). It’s mainly about looking after the people who matter to you.
A version of this article originally appeared on www.singsaver.com.sg, a personal finance comparison site with useful tips and guides to empower everyone in Singapore to make sound financial decisions.