SAVING SMART

Is hav­ing $100k by the age of 30 just a pipe dream?

Men's Health (Singapore) - - MONEY -

“I’ll never get rich,” a friend ex­claimed re­cently dur­ing a ca­sual catch-up.

“I earn so lit­tle and I don’t think I’ll ever get $1 mil­lion. Heck, even $100,000 seems far off for now,” he lamented.

I was caught by sur­prise at his out­burst, but de­cided to ask just how much he earned. It turned out his in­come was more than $3,000 a month – pretty de­cent for a fresh grad­u­ate in the first few years of his work­ing life.

My friend was prob­a­bly just de­spon­dent that, like most of us, his earn­ings fall far short of what in­vest­ment bankers get. A fresh grad­u­ate in that rar­efied field can earn more than $9,000 a month, I am told.

But is it true, as my friend frets, that it is im­pos­si­ble to get ahead fi­nan­cially on a reg­u­lar salary? I de­cided to in­ves­ti­gate this claim, tak­ing as my start­ing point the ques­tion of whether a fresh grad­u­ate can rea­son­ably ex­pect his sav­ings and in­vest­ments to chalk up to that nice, round fig­ure of $100,000 within six years of work.

These cal­cu­la­tions were for a male start­ing work at the age of 25 after two years of na­tional ser­vice and four years of uni­ver­sity, and who is hop­ing to hit the tar­get by age 30.

For the sake of the exercise, the start­ing pay was taken as $3,050 – the me­dian salary for a fresh uni­ver­sity grad­u­ate last year, mean­ing that half of them earned at least that. The grad­u­ate was as­sumed to get a 4.5 per­cent pay rise yearly, and 15 months of salary a year, in­clud­ing the 13th month, plus two months of bonus.

He was then taken to save 20 per­cent of his take-home pay, after Cen­tral Prov­i­dent Fund con­tri­bu­tions. This is the min­i­mum sav­ings tar­get for young adults with­out large fi­nan­cial com­mit­ments, say fi­nan­cial ad­vis­ers.

The grad­u­ate would have two op­tions in deal­ing with his sav­ings. First, he could put them all in the bank at al­most zero in­ter­est rate, as has been the case for the past five years since the fi­nan­cial cri­sis.

Or he could save 40 per­cent for a rainy day, and take some risks by in­vest­ing 60 per­cent in the stock mar­ket, where he may ex­pect a yearly re­turn of around 6 per­cent – the av­er­age an­nual re­turn of the Straits Times In­dex over the past 10 years.

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