MoneySENSE 5: Budgeting/Saving

17 06 2009

Lorna Tan, in the article ‘Start early, and time is on your side’ (The Sunday Times, 27 May 2008), suggests that the greatest benefit of saving early is the ability to reach financial independence more easily. This is achieved through the effect of compound interest. Compound interest allows one to earn interest on interest, thus the larger the amount you save now, the easier it is to attain a particular amount of money in the future. This is well exemplified in Tan’s article: 

Consider this: If you start saving at the age of 20, putting away $2,000 a year until you reach 30, and you continue to stay invested without any further input of cash till you turn 63, you will have nearly the same amount of money socked away as a person who also saves $2,000 every year but starts a decade later, between the ages of 30 and 62.

To illustrate this, let’s assume Mr A started a yearly investment of $2,000 at age 20 and stayed invested for 10 years, at a rate of return of 6 per cent. Then, from age 30 to 63, he allowed his investment to continue growing at 6 per cent without any further annual inputs of $2,000. At age 63, his investment would total about $191,150.

In contrast, take the case of Mr B, who embarked on a yearly investment of $2,000 only when he turned 30. He must continue putting in $2,000 a year all the way till he turns 62 before the total value of his investment grows to about $192,690.

Besides the effect of compound interest, what other factors would you consider when deciding how much to save now?

Also, why is saving important? Is there an appropriate amount to save/danger of over-saving?

 
Suggested Readings:
– ‘Start early, and time is on your side’. The Sunday Times. 27 May 2008. <http://www.asiaone.com/Business/My%2BMoney/Planning%2BYour%2BRetirement/Investment%2BAnd%2BSavings/Story/A1Story20080526-67088.html>.
– ‘Budget Beginnings’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Budget_Beginnings.pdf>.
– ‘Managing Your Day to Day Money’. MoneySENSE. December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Managing_Your_Day_To_Day_Money.pdf>.

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29 responses

18 06 2009
Chan Ze Ming / RIJC / TTWW

Compound interest is actually a wonderful tool. Most people understand how it works, but much fewer actually know the true value of it. Compound interest can enable people to grow a small sum of money into a big sum over a long period of time. This is the rationale behind saving early.

But of course, compound interest doesn’t necessarily mean that if you start saving early, you will be able to accumulate a great deal of wealth. Other factors to be taken into account with regards to savings are the inflation rates, the risk factor and the opportunity costs. Generally, for every person, money can be dealt with in 3 ways: Save, Invest or Spend. So, these 3 methods have different consequences depending on compound interest, inflation rates, risk factors and opportunity costs.

Saving money generates interest over the period of time. With a higher interest rate, the eventual gains are higher and the longer the period of time, the more accumulated at the end when the money is withdrawn. However, savings must take into account inflation. This is because just as compound interest adds value to the money in the bank account, inflation leads to depreciation of that value. If the inflation rate is higher than the interest rate, as we all know, that means that you are making a loss each year in real terms. However, saving money generally has nearly zero risk, unless a bank collapses, which is quite unlikely. So, this is a much safer way of storing cash compared to investment. Saving money also has an opportunity cost since money saved is money not spent, meaning we get to enjoy less welfare when we save more.

To analyze how much money we should save, we should look at investing and spending as well. Spending is quite basic and can be divided into spending on necessities and luxuries. Of course, there must be a basal level of spending for each person and then occasionally we spoil ourselves by spending on luxury goods. But generally, for a Singaporean or anyone else in a First-World country, such spending usually takes up a small part of income. So, most people usually spend first, then the remainder of the income is used on savings and investment.

The right balance between savings and investment will always be different for each person. A lot of factors must come into consideration, like age, planned retirement, children’s education, mortgage, planned standard of living, assets and liabilities and so on, the list will never be exhaustive. But basically, investment can generally cover inflation while savings cannot. Savings interest in Singapore is really quite pathetic, being from 1% a year to at the most 4-5% for fixed deposits. These are savings which are roughly risk-free, meaning that there’s no chance of losing the principal. In fact, in the recent economic crisis, the government has guaranteed all deposits in Singapore banks. Investment on the other hand, carries some risk involved. Generally, the higher the risk, the higher the returns. So, by investing in multiple products at once, it is possible for a person to maintain or even increase his/her wealth each year by beating inflation, which would mean an increase in value by about 4-5% each year. To reduce the risk, investors can of course choose to diversify their investment portfolio to split the risk over multiple products.

Thus, looking at all these, a prudent way would be to save just enough for one’s needs and leave a small amount of “rainy days”, while the remainder of the income is invested. Since investment brings higher returns, it makes more sense to invest the money than let it sit in a bank, where interest is minimal. Some investors, in fact, choose a “zero-savings” policy where all of their income earned is put into investment products. To protect themselves against “rainy days”, they invest in insurance policies instead to cover themselves against any unfortunate events. This is quite a risky policy since investment products are much more illiquid than savings, but if the person is young and has financial backing, this is still possible.

Overall, as we can see, there’s really no benchmark for how much to save. Rather, a lot of factors must be taken into consideration, both personal factors depending on each person’s circumstances and also more economic factors like compound interest, inflation rates, opportunity costs and risk.

18 06 2009
Sam / RIJC / TTWW

Perhaps to add on to Ze Ming’s point, there are other factors governing the need and the ability to save which merit analysis. First of which would be the other modes of generating income apart from saving, such as stocks, bonds, fixed deposits with higher interest rates. The choice to save arises as a decision that strikes a balance between the considerations of risk and rate of returns. Stocks provide one end of the spectrum, with fixed deposits on the other. The rate of return tends to be inversely correlated with risk, and thus such decisions often hinge on the risk aversion of the saver.

18 06 2009
Syamil / VJC / VJC008

Taking into account the current volatility of the financial markets, savings has become an increasingly important tool for early investors to gather capital. Besides the capital accumulation factor, savings also provide normal individuals with funds to help tide over difficult times. This can be seen in the current financial recession facing the world today. A good example would be the USA where the personal savings rate in 2006 was negative, and even though this has been steadily increasing to close to 3.6% as of Dec 2008, the low rate in personal savings has been one of the key factors that analysts have pointed towards the current credit crunch. A low savings rate is an indicator of high individual spending, which if unchecked, can lead to high consumer debt. This example illustrates that savings presents a key component to financial stability in the long run.

Ze Ming’s point of taking into consideration retirement goals and other factors when saving is valid as one has to take into account his/her own final outcome before deciding the amount to save. I, too agree with his point that savings should not form the key component of one’s retirement plan, since the real gains of savings are much less if one takes into account the prevailing interest rate and the inflation rate. Hence, diversification of the individual financial portfolio is recommended to reap significant gains en route to retirement. The money markets, as well as the stock market, are other areas to consider in this diversification. However, make up of the portfolio can be tailored to the age of the individual. For instance, a 25 year old adult with no family has a much greater tolerance for high risk investments such as stocks whereas a 75 year old elderly should instead have a large component of his assets in savings as they are risk averse.

One must not save blindly. Individuals should have goals on savings and the money should not just sit in the bank as it presents more of a loss than a gain, as the money can be invested elsewhere. Savings should be a stepping stone to investing and should be viewed as a short to medium term tool in managing ones finances. If individuals practice such “smart” saving, they would be better prepared to handle uncertainties in the future. Oversaving occurs when individuals actually, save what they should consume, and this puts a dent on their welfare. However, one can argue that in the long run, this can lead to a much more stable and affordable lifestyle but if a majority of people practice it, this has severe repercussions on the general economy as the aggregate demand is curtailed which would , according to Keynesian economics, result in a drop in supply and hence starting a cycle of deflation.

18 06 2009
Jocelyn Tan/ SAJC/ 19-ers

Why is saving important?

First and most common reason is for security (especially in this time of global economic downturn). Although people don’t like to hear about retrenchment and stuff but in today’s economic situation, we need to prepare and save for ‘rainy day’ because business prospect is very poor these days and there’s a high chance of losing your job or getting a pay-cut. Hence, we need to have a certain amount of money kept aside in the bank to ensure that our daily needs can still be met in times of retrenchment etc. We need savings to tide us through hard times, until a job is found or until our financial status returns back to normal.
We also need to have some savings so that in times of emergencies, we will have money to spare and use. If someone in the family is hospitalized, we need to use our savings to pay the hefty hospital bills. Hence, saving is important so that when we encounter emergency situations, we will not panic and there is no need to go around borrowing money from others.
Another reason is for future plans. Parents may need to save money so that they can pay for their children’s education. Couples planning to get married may also need to save in order to pay for their wedding expenses and for future family needs. And when we have sufficient savings, we can use them to go on a holiday, to relax and to spend quality time with family and friend 🙂

19 06 2009
Hong Wen/DHS/DHS01

Apart from securities and stability, savings also serves to prepare one for investment opportunities. In life there will always be good investment opportunities happening from time to time, be it in real estate(properties), stock market, business or other areas. They may provide returns higher than the usual investment options, but these opportunities are usually rare and require a sizeable amount of cash. Hence savings allow one to take up these investment opportunities and reap benefits out of them. For example, someone may be in desperate need for cash and hence selling off his properties (Condominium and etc) way below market price; a stock is undervalued due to temporary market sentiments and will probably bounces back soon; friends or family members having a good business plan but lack the capital to start up. Of course, I acknowledge that they are somewhat speculative and involve certain risk but in this instance, I am referring to investment opportunities arising from special circumstances and thus yield high returns and are exposed to relatively low risks as compared to a usual investment option. Thus savings do prepare us to take up good investment opportunities which may happen anytime and thus give us the chance to increase our wealth/assets.

20 06 2009
Nguyen Khanh Linh/ACJC/John Nash

Saving means different things to different people. It can mean putting money in the bank or buying stocks or contributing to a pension plan. However, to put it in economics terms, saving just means consuming less out of a given amount of resources in the present in order to consume more in the future.

Why is saving important then? Apart from what others have commented above, here are some other reasons for saving up. Some people feel that they do not need this cash cushion (savings), claiming that they can just run up credit card debt if they need to. While this may be true, taking on credit card debt is a dangerous trap to fall into, because the high interest rates make it difficult to escape from. Additionally, saving the money is a great idea even if you do not need it for an emergency, because then you’ll be able to use it toward your long-term financial goals. Others say that they have stock and could just sell it if they needed to. Again, they’re correct, but the downside is that circumstances might force them to sell the stock even when they do not want to.

The most important factor to consider if you are saving your money in banks is the interest rate, which measures the percentage reward for a lender for deferring present consumption for future uses. Interestingly, Albert Einstein is reported to have said that compound interest is the greatest force in the world, seeing that money left in bearing-investments can compound to extremely huge amount.

At individual level, some questions are needed to be answer when you consider what the right amount to save is. What are your financial responsibilities? If you’re the head of a household, or have dependents or anyone else who relies on your income, you’ll want a larger cash cushion. How willing are you to take risk? If you’re risk-averse, you’ll want a larger cushion. What expenses do you anticipate having in the coming few years? If they’re higher than usual, you’ll want a larger cushion. How regular is your income? If you are self-employed, work on commission, or otherwise have income that fluctuates, you’ll also want a larger cushion. What is the opportunity cost of saving that amount of money? Opportunity cost refers to the alternative cost that should be waived while consuming certain product or service. Before going for purchasing a good or service the individual thinks about the opportunity cost of that particular purchase and hence decides on saving. How about the theory of diminishing returns? The diminishing return says that after a certain point, the additional variable input unit does not yield the same but rather yields less additional output. This theory affects the decision making concept of individual and says that after a certain point the consumer prefers to save rather than going for more consumption.

However, people are not always right about the right amount to save. This might lead us to a problem, over-saving, which is ever more pronounced during this time of recession. Interestingly, instead of “Deficit spending, a burden for our times” in the NYTimes, we’ve got “Over-saving, a burden for our times”. Frugality is an important part of personal finance, and we all should certainly do what we can to curb costs. However, the article is a reminder that money is a tool and that if you are meeting your goals for saving, it’s okay to spend some on the things that make you happy. “There is risk in saving too much,” said Laurence Kotlikoff, a Boston University economics professor, “You could end up squandering your youth rather than your money.”

20 06 2009
Garrett/VJC/VJC001

I think it is important to take note of the mode of savings. For example, saving money in a savings account is the easiest way to save money. Not much consideration needs to be made as the money can be withdrawn easily without any penalties. However, if one plans to save money in a Fixed Deposit of Structured Deposit account, which is recommended due to the higher rate of returns, then one must take several factors into consideration.

Firstly, one must decide how much money he can spare for the duration of the maturity period. This can be estimated through current bills, current debts and loans. This is because Fixed Deposit and Structured Deposit accounts have certain charges and penalties when you withdraw your money before maturity.

For structured deposits, one also has to factor in the risk. This is because structured deposits and riskier than normal fixed deposits since returns depend on the performance on underlying financial instruments such as equities, interest rates or bonds.

Saving is important because it provides additional opportunity cost of withdrawing money prematurely to spend on consumer goods which are not needed. Thus, people would not spend money unnecessarily. Saving also ensures that one’s capital is maintained in times of inflation since banks usually provides interest rates on one’s deposit. This money can then be used to finance one’s retirement goals, and perhaps his children’s education.

There is definitely an appropriate amount to save, which mentioned earlier, is the amount that one can afford to spare temporarily as one’s money will be tied up for a period of time. Over-saving can result in the withdrawal of money before maturity resulting in additional charges and penalties.

Since structured deposits are not covered by the Deposit Insurance Scheme under the Deposit Insurance Act 2005, there is the danger of losing all of one’s savings in the event that the bank goes bankrupt. However, that is very unlikely in Singapore and thus would not be a concern.

21 06 2009
Lu Yang/ RI(JC)/ asdfghjkl

Admittedly, compound interest is a powerful tool to accumulate wealth; one should also consider the interest rate, risk tolerance level as well as investment/ saving horizon when deciding how much to save and how to use the existing wealth one possesses.

If the interest rate is close to nil, the compound interest will not have much significance. Further, when taking into account of inflation, the interest of saving may even become negative. Thus, one has to consider whether he or she would like to put the same amount elsewhere, e.g. stock market or unit trust. If one is able to tolerate certain level of risk and has a longer investment horizon, he or she should not satisfy with the mere interest given by deposits. Rather, bonds, unit trust or shares would have better yield (be aware of the risk inherent in the investment though). Putting a certain amount in the saving or current account for emergency use, one should invest the rest to different classes of assets so as to maximize the potential earning. However, should one be reluctant to investment, it is understandable that one puts all the money in the bank.

Saving is important in the sense that the amount deposited in the saving or current account is liquid and can be withdrawn relatively easily for any emergency purpose. However, in my opinion, one should not put all the money into bank. As mentioned in the previous paragraph, there are many other places where money can be invested, subject to personal discretion. As to the exact amount to save, I guess it varies from individuals. Different people have different expectations and thoughts, insofar as one is comfortable with that amount saved and able to use the the rest of the money wisely, it will be a suitable amount of one.

22 06 2009
Agnes Tung/ JJC/ RAW

One important factor that considering how much to save now will be the financial goals of individuals. The financial goals may be to provide children with education up to university, to be retired by the age of 50, to provide a grand wedding for children and to tour around the world etc. Nonetheless, these financial goals definitely need a huge amount of money and there is a time limit in which the goals can be achieved when it comes to issues such as education and retirement. As a result, there is a minimum amount of money that must be save monthly or daily so that these financial goals can be met within the time limit.

Another factor will be the daily expenses that must be met daily. Such expenses are spent on necessities and these expenses cannot be reduced upon. Since savings = income – consumption expenditure, the amount of savings monthly will be the proportion of income that is not spent on consumption expenditure.

Why is savings important? It is important as we cannot foresee the future. In the future, anything can happens. We may be jobless for months or years, may become disabled because of an accident or something unfortunate may be happening on us. This will need money, regardless of whether it is for medical treatment or to survive through the hapless situation.

However, over-saving may be a danger to the economy as a whole. Obviously, when you say more, you will spend and consume less. As a result, there will be a fall in consumption expenditure (C). Since C is a component of aggregate demand (AD) amd assuming other components of AD remains constant, a fall in C will lead to a fall in AD. Hence, the national income will fall through the multiplier effect. Unemployment will rise and the economy will also be having a slow actual growth. This situation is worsen if the economy is currently in a state of recession.

22 06 2009
Agnes Tung/ JJC/ RAW

just to add on to my previous post. As factors affecting our savings vary, it is important to figure out our financial circumstances and make sensible decisions based on careful consideration. eg. if you are a fresh graduate, it is in your best interest to generate more profit than just having incomes and hence investmen‭ts that fits your risk profile should be your priority. as you move along in your life, the proportions of investment versus savings would gradually shift to the savings end. when we have retired, we would entirely live on our savings and the income generated from its interest payout and maybe some very low risk investment-linked insurance policy.
Study where you are now and figure out your best move. may we all be wealthy.

22 06 2009
John Wee / NJC / Team Koinonia

Other factors that can be considered would be the possible prospects that one can put his money into with a better rate of return. For example one may perceive the present savings account interest rate to be too low and can decide to instead invest in shares for a better return, albeit with a risk involved. Another factor would be the situation one is in. Given that one’s current financial situation may not be desirable, it would be more appropriate that he or she decides to start saving at present instead.

Besides the financial benefits of saving, there are also other significant effects of savings. People can learn to cut back on their present spending in order to achieve a greater return in the future in terms of a larger disposable income due to the interest rate. Some may also argue that by saving, people can learn to control their impulses to buy something they really want to get at present and yet in the future may deem it unimportant.

Of course like all other things, saving should also be done in moderation, just like spending itself. One should not just yearn to save and save with no future goal in mind. It should be done with an appropriate goal in mind, say to buy your dream car or to save for a rainy day etc. Only then can saving truly be useful.

22 06 2009
zhenyi

In this discussion, I will define saving as putting aside money to save in bank deposits, or invest in stocks/bonds or other form of investments, while deferring the purchase of consumer goods. The reason why people save is to keep more money for future uses, however inflation often erodes the value of our money if we do not put our money into good use. Therefore, while deciding how much to save now, we need to decide how much is needed in the future while taking into consideration inflation rates. Such considerations involve what kind of life one will lead, a high-life with luxuries and vacations or a simple life.
Then one should account for the inflation and estimate what is the monetary value of that life, so that he or she can work towards getting that.
Secondly, a person should also work towards passive income and decide his/her retirement age. The person should make sure that after retirement, he or she will still receive enough passive income to lead comfortable life. Passive income is income generated from investment and not through work.
Therefore, amount save now must allow him to work towards that goal.
In summary, how much to save/invest is decided upon based on his goals and targets of his gains.

Savings is important because we all will not want to work til old age and will wish to retire early. As the saying goes, the rich get richer, poor get poorer, money and capital is the key to getting more money and capital. It is always desirable to retire early and allow money to work for itself while a person can receive a passive income without working of perhaps at least S$2000. As investment generate enough gains, one will not need to work. This is financial security and it is important.

Over-saving means sacrificing current consumption for the benefit of later. As many work towards early retirement, it is always easy for one to be too ambitious and too much of a goal-getter, such that one may put too much money to invest for the future. However, one should also pamper oneself while he is working and spend some money. Retirement comes much later and it is not desirable to work too hard ,save too much money, spend too little til the age of at least 40.

22 06 2009
Wee Zhen Yi/TJC/ Team SCIMONOCE

Sorry, I forgot to include my School and team.

In this discussion, I will define saving as putting aside money to save in bank deposits, or invest in stocks/bonds or other form of investments, while deferring the purchase of consumer goods. The reason why people save is to keep more money for future uses, however inflation often erodes the value of our money if we do not put our money into good use. Therefore, while deciding how much to save now, we need to decide how much is needed in the future while taking into consideration inflation rates. Such considerations involve what kind of life one will lead, a high-life with luxuries and vacations or a simple life.
Then one should account for the inflation and estimate what is the monetary value of that life, so that he or she can work towards getting that.
Secondly, a person should also work towards passive income and decide his/her retirement age. The person should make sure that after retirement, he or she will still receive enough passive income to lead comfortable life. Passive income is income generated from investment and not through work.
Therefore, amount save now must allow him to work towards that goal.
In summary, how much to save/invest is decided upon based on his goals and targets of his gains.

Savings is important because we all will not want to work til old age and will wish to retire early. As the saying goes, the rich get richer, poor get poorer, money and capital is the key to getting more money and capital. It is always desirable to retire early and allow money to work for itself while a person can receive a passive income without working of perhaps at least S$2000. As investment generate enough gains, one will not need to work. This is financial security and it is important.

Over-saving means sacrificing current consumption for the benefit of later. As many work towards early retirement, it is always easy for one to be too ambitious and too much of a goal-getter, such that one may put too much money to invest for the future. However, one should also pamper oneself while he is working and spend some money. Retirement comes much later and it is not desirable to work too hard ,save too much money, spend too little til the age of at least 40.

22 06 2009
Hong/HCI/Team 2

Over-saving!!!

In game theory, a player in a repeated prisoner ‘s dilemma settings might be tempted to default and get the money for now. That is because money is one mercurial entity. The money you save or spend today might have a different value tomorrow. Counter-intuitive as it seems, we can over-save because the opportunity cost of trading present enjoyment for future greater savings is ofter underestimated. So instead of spending that sum for a memorable first date, you put it aside. You saved $100 (and were rewarded $50 by the bank for your unromantic frugality ) for not giving her the fresh roses when you two were dining along Clark Quay, but you probably lose more later buying a $150 chocolate cake that hardly impressed. May be first date impression is stronger or may be she is particular about a perfect first time. May be it s just doing the wrong thing at the right time. Spend some days (moderately) and save for the rest. We need optimal saving, not more saving.

Sometimes when saving gets pathologically compulsive, some people will save for the sake of plumping out the saving account. Yet they might forget how brief and fragile life can be, or even more importantly, saving heavily for the rainy days that might not come soon enough is futile. This is not to promote extravagant spending altogether; after all living beyond our means is never wise. But it is worth reminding that life is ultimately in the present, and over-saving can be as regrettable as over-spending. Try asking the 80% of American retirees born between 1931 and 1941 how it feels like having too much to age with at the end of the day.

For numbers and figures, and a good dose of interactive graph, do check this out : http://www.nytimes.com/2007/01/27/business/27money.html

22 06 2009
Jeremy Foo

A person has to decide what type of account is most suitable for him by taking into consideration why one is putting money into bank. For example if money is used to pay for consumption if one’s everyday life, it would be appropriate for one to deposit money into current and savings account. This is because money is more accessible in these two cases. However, if a person set aside money as a long-term savings, and it would be better to save in a fixed deposit account since the returns in this is higher.

Why is saving important? Is there an appropriate amount to save/danger of over-saving?
Savings is important today and we all recognise that. The importance is such that the Singapore government see it as a tool in ensuring that our economy can prosper in the long run. Most people, excluding some self employed, are required by law to save a portion of their pay as CPF. The accumulated amount of money can only be withdrawn upon reaching a certain age of around 55 years. With this amount of savings, our senior citizens are self reliant and in crude terms, not becoming a burden to society. This allows the economy to channel more of its resources to achieving economic growth. Hence savings are of high importance to Singapore and especially so since we have little resources to start off with.
On an individual level, savings cushion us from unexpected blows such as a sudden economic downturn, emergencies and business failures. The future is unpredictable and savings bring about greater stability in our lives, allowing us to pursue other goals in life with a peace of mind.
The question of how much to save in liquid cash really depends on the individual. Some may save more now at the opportunity cost of better consumption in the present and vice versa. However, a danger arises if people over-save. This can stagnate the economy as our aggregate demand falls. This is fuelled by the multiplier effect. Our propensity of withdrawal is very high due to our high imports, if savings (which is a component of withdrawal from the economy) increases; our national income will not increase much due to a small multiplier.
In fact, Keynesians will encourage a small country like us to spend more to stimulate the economy, though admittedly this may contrast with the thrifty nature of Singaporeans.

22 06 2009
Wu Hong/HCI/Team2

I agree that the export-led growth model may not sustain an economy’s growth, especially during economic turmoil when consumers in wealthier countries start to save. As many have discussed the importance of diversifying growth engines and boosting domestic demand, I shall not belabor this point.

Talking about diversification, we can also discuss diversification within the export sector. The common view about export is to export goods to wealthier nations, such as US and Europe nations, because of the cost advantage. However, trade can also be done with developing countries such as China, India and Brazil. Though these countries may not be big consumers of high end products, they also have large appetites for cost-efficient goods and intermediate products. Through diversification of consumer profiles, a major economic downturn will thus hit an export dependent country less hard if the country does not depend for its exports entirely on rich nations. For now, while the US and Europe consumers are tightening their belts, China is still spending lavishly on infrastructure building, and hence has a huge demand for capital goods. The point is, an economic downturn will affect all nations, but not with equal impacts. Diversifying one’s trading partners’ profiles will allow a nation to stand a better chance of survival in an export crisis.

22 06 2009
Lee Wan Kiat/SRJC/srjc

The factors to be considered are inflation rate,future outlook,the ability to pay for daily needs and other investment opportunities.

Firstly, the current inflation rate is one of the most important factor in determining the real value of your savings. If the inflation rate outweigh the interest rate the bank provides, this would cause the erosion of my money. So in determining our savings, we have to look at the inflation and subsequently the future outlook of the economy which you are living in as the stability of the economy would largely determine the inflation rate. This is vital of such savings as it is long term.

Secondly, the ability to pay for daily needs such as installments,meals etc, would determine the amount one will save. Overestimation of the amount need for daily needs may result in overspending and underestimating it would create cash flow problems.Such actions may disrupt ones’ saving plan.

Lastly, as mentioned earlier,such saving depends on long term return. For a better way of gaining wealth, we should put some of our money into short term investment.Though it carries a certain risk,but investing the right way would generate greater wealth for more investments and savings thus i would consider this factor before fixing the amount to save for long term return when there are great investment opportunities available.

Saving is important to pay for any emergency.It also ensure a smooth cash flow when there is a shortage in other account. The only danger with over saving is that the real value of the money may be eroded by the inflation rate.

22 06 2009
Daryl/TJC

Besides the obvious gains from compounding interest which account for the need to invest early, one need to consider the trade off between current consumption and saving. The idea of instant gratification versus delayed gratification is a point worth considering. Whether one should enjoy what one can now since life is unpredictable and tomorrow may never come versus the sacrifice now for a better life in future. Its pretty much a matter of mindset of the individual on his outlook of life. I must admit that most people have a more optimistic view of life especially since the life expectancy of human have improved over the decades. In the pursuit of delayed gratification, the deciding factor on how much to save now is the lifestyle one wants to have in the future. In such considerations, one must also take into account inflation eroding off one’s value of saving and also unplanned events that may require extra money (such as illness). Due to the uncertainty in future, it is difficult to pinpoint how much to save now is enough. One can at best estimate how much one is to save now.

Saving is important because of obvious reasons. One cannot mantain a proper lifestyle without it, one can not take the chance of surviving on social aids, in short one cannot not live without it. Saving is also important to the society as funds for investments, the common man deposit his/her money in the bank and then the bank loans the funds for companies to tap on for invesments/ capital accumulation. Saving is important for a economy to work.

Although saving is beneficial, one should not over-save. The danger of over-saving arises when one neglect satisfaction from consumption in the short term for possible enjoyment in future. Factors such as the current income of individual also play a part in deciding how much to save now. The higher the income, the higher the possibility one can save while not overlooking the need for current consumption.

22 06 2009
Nguyen Duc Chinh/NJC/High In Demand

I just want to add 1 more point on the importance of saving. Saving money can be an important part of just enjoying life. Taking a trip to Japan or wherever you want for the holiday is a lot more enjoyable when you know that you have paid for the trip with money from savings, as opposed to using credit cards and having to pay for the trip for years to come.

About the danger of over-saving, I have to say that yes, there is. However, from my opinion, it is not so much of a danger but more of a harm, a bad habit. I mean yes, there is no thing wrong with saving money and being thrifty and all, but overdoing things is not good. If you are too concerned about saving money for those “rainy day” and forget to enjoy life and give yourself a treat every now and then, it is obviously not good for your health, physically and psychologically. After all, you can’t bring all the money you save into the grave with you.

23 06 2009
Ang Wei Sheng/VJC/VJC010

I guess you would have to consider many other factors on hand as compound interest is merely one of the many on hand. Other factors, (to put into context) include the annual inflation rates for the next 30 – 40 years, the necessity to spend at any moment, such as emergency operations that may require a lump sum, educational commitments, as in the payment of school fees when your parents are not sponsoring you for your Master’s, you are not working full time and perhaps even, you have a young family to support. Therefore, compound interest should only play a small role in determining how much you save presently.

But with that said, we can always find investment products that offer compound interest but does not tie us down to a maturity period. Saving is beneficial to the individual himself, but if collectively the whole nation saves to a large margin, i.e. the average propensity to save of the nation is high; it may lead to a downward multiplier effect of the nation’s GDP. One should consider what’s the purpose of him saving to determine how much he should save monthly. Is he saving so that he could get a Ferrari by 30, or is he saving so that he could leave happily without any financial woes when he retires at 62. Factors such as this should play a major role in determining the amount to be saved monthly and the type of investment product one should buy into so as to yield maximum interest when the investment products mature.

23 06 2009
Ninian Ho/ TJC

While compound interest would mean that one should save as much as he can afford to for as long as possible to reap the most benefits, other factors such as inflation, one’s current financial situation and the prospects of investing in other financial instruments have to be considered.

In the unpredictable lives we all lead, we will definitely need to prepare for rainy days that may come when we least expect it, be it for medical expenses, lawsuits or retrenchment. Saving allows us to continue with our lifestyles at least for a period of time if our main source of income is lost. In addition, saving allows us to enjoy better lifestyles in future, lifestyles which may not be possible instantly with an average salary.

The minute one finds that he still has money left after caring for his basic needs, the question would be whether to save it or to spend it on his other wants to improve his lifestyle instantly. Deciding on the appropriate amount would be making that balance between forgoing the luxuries that one could have owned and putting it aside for possible future emergencies or gains. This in turn varies with the individual, but personally the occasional splurge while constantly saving would be the best way one can use his money.

Spending on luxuries occasionally will improve our lifestyles, but we should be careful not to overspend and compromise on our future wealth. Such spending is beneficial on the nation-wide level when it comes to stimulating the economy and improving the standard of living in a country by allowing a more diverse economy with more types of industries.

True, some may say that the economy would suffer and stagnate with everyone having this mindset, but we cannot do without thrifty people. Having such people to save their money may actually allow more economic growth instead of causing stagnation in the economy. If we have more of such people choosing to save in fixed deposit accounts, government bonds and securities, banks gain capital to invest in areas they deem profitable. This paves the way for a higher standard of living as everyone progresses. Thus, in this way, a country gains physical capital. Ultimately, a good mix of both consumption and saving is needed. Consumption to boost aggregate demand, and savings to encourage investment and allow potential growth.

23 06 2009
Guan Jie / SRJC / M4

Besides the effect of compound interest, what other factors would you consider when deciding how much to save now?

Initially, it was really a torture to think of factors one might want to consider when deciding how much to save. Simply because, whatever that is left after spending on the necessities should be encouraged to be saved. However, one thing that makes us ponder over how much to save is the ‘greed’ that we all humans have. We hope that the money which goes into the saving can be better used to earn more money; and as such, it brings us to ponder over whether should we save less and engage in investment instead. In total, one factor that one might consider when deciding how much to save is the opportunity cost of saving.

I believe the concept of opportunity cost is clear to everyone. If the opportunity cost of saving is greater than the monetary gain from savings, then one should save less and invest more.

After browsing through the factors mentioned by others, I am astounded to the many factors to consider when deciding how much to save. But perhaps many have missed out the word ‘now’. Thus, to exactly answer the question, the factor we would consider should be under the situation of an economic downturn as it is for now.

So, what factors to consider when deciding how much to save during an economic downturn? It is the world economy. During an economic downturn, investments are risky and thus future returns are unpromising. Thus it would more preferably to save more than to engage in investment or spending now, assuming that individuals do not care about the adverse effects on macroeconomics due to their actions.

On the other hand, for those who have capital may want to invest in stock exchange rather than to save. This is because, during economic recession, many stocks are generally at their lowest points. Thus, investing in those potential stocks that could eventually rise can actually bring back higher returns than otherwise if saved. However, I must re-emphasize that such strategy is only for those who have capital or in another words, high risk tolerance.

As of to why saving is important, I believe that it can’t be more obvious that the reason is for preparation of emergencies. *touchwood* Nobody knows he/she might need a large sum of money for operation the next day. Certainly, there are more reasons why saving is important, such as retrenchment and etc as mentioned by others, but the most significant reason could only be for preparation of emergencies.

The appropriate amount to save is to save at least the amount planned to spend when retire. As confusing as the statement is, I simply mean that, if my retirement plan is to lead a normal life, then the appropriate amount to save should be at least equal to the amount required to lead that normal life plus some medical cost.
Last but not least, I believe everyone knows of the adverse effect of saving to the economy, as actual economic growth may be impeded due to the fall in aggregate demand due to the fall in consumer expenditure which is one of the determinants of aggregate demand. However, at an individual level, what harm is there to save more?

23 06 2009
Lu Tianshu/ACJC/Team2

Some people may not study economics systematically, but everybody has an economic sense. One may choose to save the extra money in the bank or make some investments if he has already had sufficient money for current consumption. A large percentage of people choose to save rather than invest because it is safer and more beneficial. As long as the compound interest is a positive figure, there will be ‘new’ money generated in one’s bank account, whereas investment encounters risk. One may lose all the money invested if he makes a faulty investment. Futhermore, compare to saving money in the bank, making investments requires one to take effort in manipulating information, perceiving the potential profit and loss and also decision making.

At a mere age of 17, if I choose to save $600 per year, and stop to have any input of cash into account until 20 years old, most likely I will have more than $200,000 in my bank account until I am 63. Besides the effect of compound interest, I also need to examine carefully about the type of account I should open in the bank. There are mainly 2 types of bank saving account. The first type is Demand Deposit Accounts. This type enable people to deposit and withdraw money freely from the bank account but with a very low interest rate. The other type is Time Deposit Accounts.It is a method of bank deposit with a definite date of maturity, made for one time or by many times on schedule(during the appointed deposit term),or withdrawn together with the interest in a lump sum or by installment. The interest rate is much higher. One may judge between the time and demand for money. I may open up a Demand Deposit Account if I use the money saved for emergency causes. I may open up a Time Deposit Account if I consider to use the money for some definite causes, such as university school fees, marriage cost and even retirement payment.

Saving is important as it provides a way better than locking money in the wordrobe and safer than investing if you are not a risk-taker. To individual, the benefit may only limit to having more and more money in the bank account without even do anything. However, what you have saved is of great significance to the bank as it use your money to make investment. Generally, the bank land these massive amount of money to companies, of which will return the loan with a loan interest. Then, the bank will distribute this loan interest to the money savers. So actually, we save money in the bank and bank lend money to people’s industries. This create a ‘win-win’ situation whereas the bank has a profit (money earned from loan interest – money extracted from bank accounts due to compound interest) and people’s and the government’s projects are upgraded.

23 06 2009
Pranav Lakherwal/NJC/F-3

Before answering the first part I would mention that an economic cycle is made of recession, recovery and boom periods. Before saving one’s assets one should carefully consider the present economic scenario and its future effects. This I believe is one of the most important factors to be considered before saving.
Personal goals for the future of family and retirement should also be kept in mind.
Finally before saving one should consider the types of accounts available and how their saving packages will benefit the customer.
While most type of savings accounts have been mentioned above, I would like to mention the great value and importance of a buying gold as a type of saving. Gold purchasing has been prevalent in the society for centuries, this makes it the most trusted and reliable form of saving(also because most of nations assets are stored in the form of gold bars) When saving in the form of gold you can buy gold bars(for upper middle/high class population), gold bullion coins-legal tender accepted worldwide(savings for the lower middle class),gold certificates which have no expiry dates and can be exchanged for physical gold or cash. For long term savings you may also consider the gold savings account which can be used for gold transactions. Smaller investors and lower income groups may also seek saving their money in the silver savings account. Why is such saving important in today’s market? For a simple reason that the successive increases in the inflationary pressure deteriorates the power of money ,especially the one being saved at a simple interest rates annually in fixed deposits and savings account. Since 1990 – 2007 Singapore’s inflation was rated between 3.4% to 2.1%.While most of today’s banks provide interest rates under 5%(compound interest rates being even lower most individuals stand a chance to lose the value of their money. However gold solves this problem. As mentioned above gold doesn’t lose its price, also the worldwide demand of gold is much more than the worldwide consumption so it is definitely expected to rise in future. Also the rising prices of gold solve the problem of earning premium (form 38$ in 1970s to 924$ in 2009-there has been a significant rise in the gold prices).However it must be mentioned that it carries a certain degree of risk which depending on the market forces can be higher or lower than the common savings account in the banking industry.
In the end saving helps to meet the future contingent requirements of an individual as well as the state/country and also to restrict any future mismatch of expenditure and income. The gross domestic savings in China and India have been tipped to be 40% and 30% respectively. Compare this with the USA where household savings were less than 5% and even went down to negative. This is one of the major reasons why it suffered so badly during the recession and why the Chinese and the Indian economies have survived the onslaught. On a moral note savings help to curb unnecessary wants which may affect the monthly budget of a household.
Over-saving which has been adequately defined above can disrupt the economic cycle of an individual as well as the nation. The individual might consume less leading to a fall in satisfaction and welfare levels of the society as a whole.(allocative efficiency is not achieved).For the nation as a whole one must consider the fact that savings are considered as a leakage from the circular flow of income, it also diminishes the size of multiplier of the economy. An avid example would be that of Singapore where the high marginal propensity to save has diminished the size of multiplier of Singapore. Another example would be that of Japan which was suffering from severe recession in the early 90’s.The exuberant fiscal stimulus by the government and a huge tax cut did little to influence the pessimistic mood of the industry and consumers. This resulted in people saving the excess money which was originally meant to increase the consumption levels of the society. This further shocked the Japanese economy. Thus we see how saving can be beneficial and how overdoing it can result in severe losses.

23 06 2009
Nicholas Toh / VJC / VJC011

Of course, it would be ideal to utilise the power of compound interests to be as financially independent as possible. But several factors run counter to saving a large sum of money in one’s early years. For one, the average pay of a 20-year-old is typically small (even for a graduate, say around $2.5k?). Saving $2000 monthly comes with an extremely high opportunity cost of consumption. In terms of income, younger people would also be more stretched financially compared to older people. Forgive me if I’m wrong, but the % debt incurred during this time would also be higher. The interest rates for fixed deposits are also not as high as mentioned in the article, creating another disincentive for saving a high amount of money.

Financial stability may also come about when one considers housing to be a form of long-term investment. What good is saving $2000 monthly to incur high interest when one needs to rent housing, which offsets the interest gained? We all know that saving now leads to a potential increase in our ability to consume in later years, at the expense of current consumption. Besides this, there are also external risks to saving such as inflation rates (which erode the gains in interest) and the very small risk of currency deflation. Decisions made now might not turn out to be beneficial in the long run, especially with long-term investments with fixed maturity periods.

23 06 2009
Lu Tianshu/ACJC/Team 2

Some people may not study economics systematically, but everybody has an economic sense. One may choose to save the extra money in the bank or make some investments if he has already had sufficient money for current consumption. A large percentage of people choose to save rather than invest because it is safer and more beneficial. As long as the compound interest is a positive figure, there will be ‘new’ money generated in one’s bank account, whereas investment encounters risk. One may lose all the money invested if he makes a faulty investment. Futhermore, compare to saving money in the bank, making investments requires one to take effort in manipulating information, perceiving the potential profit and loss and also decision making.

At a mere age of 17, if I choose to save $600 per year, and stop to have any input of cash into account until 20 years old, most likely I will have more than $200,000 in my bank account until I am 63. Besides the effect of compound interest, I also need to examine carefully about the type of account I should open in the bank. There are mainly 2 types of bank saving account. The first type is Demand Deposit Accounts. This type enable people to deposit and withdraw money freely from the bank account but with a very low interest rate. The other type is Time Deposit Accounts.It is a method of bank deposit with a definite date of maturity, made for one time or by many times on schedule(during the appointed deposit term),or withdrawn together with the interest in a lump sum or by installment. The interest rate is much higher. One may judge between the time and demand for money. I may open up a Demand Deposit Account if I use the money saved for emergency causes. I may open up a Time Deposit Account if I consider to use the money for some definite causes, such as university school fees, marriage cost and even retirement payment.

Saving is important as it provides a way better than locking money in the wordrobe and safer than investing if you are not a risk-taker. To individual, the benefit may only limit to having more and more money in the bank account without even do anything. However, what you have saved is of great significance to the bank as it use your money to make investment. Generally, the bank land these massive amount of money to companies, of which will return the loan with a loan interest. Then, the bank will distribute this loan interest to the money savers. So actually, we save money in the bank and bank lend money to people’s industries. This create a ‘win-win’ situation whereas the bank has a profit (money earned from loan interest – money extracted from bank accounts due to compound interest) and people’s and the government’s projects are upgraded.

23 06 2009
The Three Stooges

Of course, we need to save for the rainy days. The recent crisis has shown us the importance of saving. Conventional wisdom tells us that we need to have saving at least 3 to 6 months of our monthly salary. Saving allows people to have a sense of psychological security in the future. Of course there are a lot of ways to save money. First, it will be saving deposit which compensates savers 0.25% per annual interest. This is one of the safest ways to save as the probability for the bank to go belly up is very low. But as we know that low risk comes with low return. This low return might not able to cover the high inflation and it will erode the value of your saving.
Second, it will be fixed deposit which pays higher interest than saving deposit but of course you will not be able to withdraw the money anytime you like. It must be over a certain period of time before you can withdraw the money.
Third, it will be bond. There are different types of bonds ranging from government bonds, corporate bonds to junk bonds. They pay higher interest in the form of higher coupon. Investors have to look at the yield to maturity to arrive the rate of return for that instrument. Bonds of course got a certain risk which is when the government or a issuing corporate default the payment when it matures. But the same wisdom apply in every investments which is the famous “high risk high return, low risk low return” also savers must be mindful to the fact that inflation will also exceed the yield to maturity rate.
Third, it will be in equity. Savers who save money through investing in the stock market generally will generate higher return but of course higher risk. The potential gain comes from capital appreciation and dividend payout. The share price and dividend payout will most likely go up when the company gets bigger and bigger.
Fourth, it will be in property. Usually, retirees love to buy property because they are tangible asset and one of the tools to fight inflation. They can either stay there or use it as a form of investment. They can rent it out and collect monthly rental fee. This will ensure constant cash inflow. However, savers might take note of any economy crisis.
Fifth, it will be insurance. Just phone your insurance agent and tell them the specific amount you want to save over the specific period, your agent will calculate for you the premium you will be paying monthly to reach the targeted amount. Insurance firms will invest your premium for higher rate of return and they will pay you a certain interest whether it is fixed or floating rate pegged against the performance of their investment.
There are many ways to save. Above are some of the simple examples. Most importantly, savers must know and understand how their saving instrument works and do not assume that banks are safe as we can see from the fall of Lehman brothers. We must save in different baskets to balance it out.

23 06 2009
Chen Wenjie / JJC / SPECTRUM

Besides the effect of compound interest, what other factors would you consider when deciding how much to save now?
Also, why is saving important? Is there an appropriate amount to save/danger of over-saving?

Besides the effect of compound interest, other factors to consider when deciding how much to save may be the benefit of investment as compared to savings. After all, the profit that can be made from investments in shares and unit trusts is evidently much more than that of the interest that is earned from savings. Also, sense of security should be considered too. Interest that is earned from saving will not and cannot in any way reduce after being put into the bank. On the other hand, failure of investment can lead to loss even as severe as bankruptcy.

Savings is important as we can turn to them in event of emergencies or incidents that requires cash. In those times of need of cash, savings is the best solution available that has the least opportunity cost as compared to other choices like borrowing from banks or in the worse care scenario, borrowing from loan sharks. Therefore, savings is important to us in rainy days.

Sure, over-saving can result in opportunity loss in terms of how much one could have earned instead through other forms of investment. Yet, it is better to have more savings due to the fact that life is unpredictable and we have no idea when incidents may occur.

14 04 2016
Design Inspiration

Great blog very inspiring . interesting text

Design Inspiration

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