Thinking of Investing? Make Your Foundations Strong First.

I strong believe that before one even starts to consider spending time and money on the equity markets, there should be at least 3 things that he/she must do.

These are things which I feel will help to ensure that the investment journey, once started, will be a long-term endeavour. It would not be wise if, shortly after buying shares, something bad happens and you’ll need to liquidate your holdings. It would most definitely mean a loss, especially since you’ve to pay twice the processing fee + not giving enough time for your equities to grow.

Foundation #1 – Emergency Fund The first piece in the puzzle are the emergency funds.

If you’re familiar with the concept of socking away money for rainy day, that’s basically what emergency funds are about. It’s essentially money that you don’t touch, ever, unless for an emergency.

The rule of thumb is to save at least 6 months of expenses (or if you’re kiasu, gross income). Some people advocate building your emergency fund to be at least 12 – 24 months.

So how much should you save up?

Obviously, it’s up to the individual, and how much of a safety net you want to have.

To help you process this, here are a few questions you can ponder on in deciding how large your emergency funds should be:

1. Is your job an iron-rice bowl? Will you suddenly find yourself without a job?

2. Do you have any dependents relying on your salary?

3. Do you foresee yourself having any illnesses?

4. In the event where you do lose your job, how confident are you of finding a job? Give a conservative estimate.

5. Do you have large debt/loans?

Primarily, the emergency fund is for you to rely on when you lose all other income streams, either by way of a paycheck or dividends. 

Whatever gives you a peace of mind, you do that. It should give you a peace of mind knowing that whatever happens the next day, you’ll be temporarily sheltered by your emergency fund. 

Further Reading: http://www.investopedia.com/terms/e/emergency_fund.asp

Insurance policies are the second piece in your foundation that will help tide you over any issues that are primarily medical related.

The common types of insurance policies you’ll find on the street are:

1. Whole Life / Term Policy

2. Hospitalisation and Surgical (+ rider)

3. Critical Illness

Each of them covers a different aspect of your life. If you’re not familiar with them, I do encourage you to read up more online about it. It may just be me, but I feel that engaging in soliciting advice from agents if you’re still in the knowledge accumulation stage may somewhat feel pressuring. I tend to DIY and research first, before indicating my interest to an agent to get a more comprehensive conversation. Pro tip: If you have pre-existing illnesses, you may find yourself being not eligible for some policies, especially the ones that cover critical illness. As such, it is best that you consider getting insurance coverage as early as possible. If you’re not able to get approval for critical illness, then consider increasing the size of your emergency fund by 6 – 12 months to compensate. I would advise for you to avoid ILP-related policies as they have an active investments portion which you’d probably want to skip since you’ll be eventually handling your own investments anyway.

So basically, the idea is to get a few high-yielding bank savings account, and split your money according to the following categories:

1. For Savings

2. For Spending

3. For Investments

Different banks offer different rates, but the trend now is for banks to offer accounts that give you a higher yield if you perform X, Y, Z tasks.

I personally have 3 different banks accounts:

1. UOB ONE (for high yield savings up to $75,000)

2. DBS Multiplier (for high yield savings up to $50,000)

3. OCBC 360 (for high yield savings)

4. POSB Savings (my spending account)

My salary gets credited into one of the high yield accounts, and I have set up a standing order to transfer a set amount of ‘spending’ money into the POSB Savings account. I only use my ATM card for the POSB Savings account. The ATM cards for the other accounts are under lock-and-key in my cupboard, to only be used for emergency purposes.

For a comparison of bank accounts, see here: http://www.moneysmart.sg/savings-account