The tingkat approach to a healthy financial diet
By Krystalle Teh, 23 January 2018 884
When it comes to money management, one common approach you must have heard of is to always spend wisely and squirrel away a portion of your monthly salary in a savings account for rainy days.
But these days, with modest bank interest rates ranging from 0.10% to about 3%, putting your money in a savings account will barely cover the rising cost of inflation, which averaged 1% to 2% in 2017. This means that the value of your savings might be reduced over the years or you might end up with a lower purchasing power as the inflation rate rises.
Instead, to ensure that you can keep up with the cost of living in the long run, you may want to consider putting your money in a savings plan or investment product that could help to grow your money over time.
One way to decide how and where to allocate your money is to look towards a model like the Three-Bucket System and think of your personal finance in terms of time.
But before we lose ourselves in complex financial jargon, let's give this model a catchier name and call it the Tingkat Approach instead.
Introduction to the Tingkat Approach
The humble tingkat needs no introduction.
With its multiple tiers and compartments used to transport a variety of food, the tingkat is a fitting symbol for everything the Three-Bucket System stands for: basic, uncomplicated, and highly versatile.
The truth is that a healthy approach to personal finance works just like a wholesome tingkat meal, which you can apply to any portfolio you might have. It should contain three key components, which make up the three "buckets" in this simple framework:
· Living expenses, which we liken to the rice tier in the tingkat as a basic staple;
· Savings, which is modest and indispensable like the vegetable dish; and
· Investments, the "meat" of your financial diet.
Depending on which stage of life you're at, you get to decide the composition of your “personal financial tingkat” to suit your needs. For example, a person in his/her 40s might want to start planning for retirement and hence, put more money into savings or investments buckets to meet their retirement goals.
The whole point of this approach is so that when the time for retirement comes, you'll want all those years of maintaining a financial diet to pay off - literally - so you'll have a comfortable income and be able to sit back and enjoy your golden years.
So, let's makan!
The Rice Bowl: Living Expenses
Think of the most basic tier of the tingkat as the rice bowl which will cover your daily living expenses for a basic standard of living. This should be filled with very safe asset classes that are unlikely to fluctuate significantly in value. Ideally, this should be cash or assets that can easily be converted to cash such as certain types of bonds or fixed deposits.
To know how much rice you require, you’ll need to diligently monitor your expenditure. According to a study published by Singstat, the average spending for a middle-income household is estimated to be $4,699. Of course, spending habits are highly dependent on your lifestyle and financial ability. You will need to track your expenditure over a few months to derive an accurate estimate of yyour average spending.
After working out your expenditure, it is recommended to have enough cash in your rice bowl to last you for a minimum period of 6 months. Any money that you put into this tier is money that you plan to spend in the immediate future without affecting your other savings and investments. This means that regular refills will be needed to replenish whatever has been spent so that you are able to pay your bills or cover any emergency expenses. You might also want to save a little bit more than what you currently spend to cover potential inflation costs. This way, keeping a watchful eye on your “carb intake” ensures that you will always have money when you need it.
The Vegetable Dish: Savings
Bite your teeth into this useful savings nugget: After subtracting your living expenses, you should plan your savings in the next tier for a medium-term time frame of 3 to 10 years.
This tier is where your money will go towards paying for larger-ticket items such as down payment for a future upgrade of your residential property or your child’s future university fees. It is also where the modest virtue of the vegetable can be applied.
As the money in this tier will eventually be spent for foreseeable purchases, you should opt to be prudent with your savings and avoid taking significant risks on where you choose to put your money.
Instead, the goal should be to safeguard the real value of your money and cover any inflation costs so that it will still be worth what it is when you need to use it. What you’re looking for then is to earn a return that is modest and secure to maintain good financial health—just like how vegetables are essential for a healthy diet.
This can mean digging into a spread of financial instruments such as bonds or savings plans. With Income's savings plan RevoEase, easily available online, you only need to pay premiums for 3 years with RevoEase Privilege to enjoy a maturity benefit in 10 years as well as coverage for death and total and permanent disability (TPD before age 70). You will also receive extra protection in the event of death or TPD before age 70 due to an accident. Remember, safeguarding your money also means protecting yourself against unforeseen circumstances that could erode your wealth!
The Meat Platter: Investments
Finally, the "meat" of your financial diet should go towards long-term investments that you can expect to hold beyond 10 years, depending on when you plan to retire.
This tier is where you can grow your wealth to yield the bulk of your money. Here is where you should carve up your portfolio into dividend-paying stocks, high-yield bonds, and other investments such as investment-linked insurance plans (ILPs) that will maximise your wealth over a period of time. For example, Income's VivaLink is an investment-linked policy (ILP) which allows you to invest in a wide range of funds, continuously monitored by a team of experienced investment professionals. VivaLink allows you to make unlimited fund switches at no cost and perform top-ups or withdrawals, while still enjoying protection even as you grow your wealth over time. When you reach the age of 55, you have the option to reduce your insurance coverage to zero (after the 10th policy year) and divert this money to maximise your wealth accumulation.
So remember to top up your financial diet with healthy sources of proteins to give it that extra boost!
Lastly, take cues from the tingkat's portability: The key to managing your money well is to ensure that you are able to take on the weight of your personal finance instead of feeling burdened by it. Don't worry if it takes you time to figure out the right balance between the three tiers. A good starting point is with assets that can be more easily converted to cash, such as bonds, which will give you the flexibility to change your mind and reallocate your money while you are still learning to manage your wealth.
When you move on to choosing longer-term savings or investment plans, it would be wise to consider the ones that grow and protect your money at the same time in order to lessen your burden of risk. After all, a lack of protection can seriously erode your wealth should any unexpected events occurs. If you’re not sure on what protection or savings plans are best for your goals, try consulting our digital adviser, askSage, for personalized advice. Choose wisely, easily purchase what you need online and you'll be all set for what lies ahead!
This advertisement has not been reviewed by the Monetary Authority of Singapore.