The old saying ‘A penny saved is a penny earned’ holds for savers in Singapore. At the end of each year, you get to keep your entire year’s worth of savings when you choose to save in Singapore.
However, if you are among those who say that saving is not enough and that you need to invest, then this article may be essential. Let us examine whether or not investing your money can help one become financially free faster than just saving alone.
To begin with, what does it mean to invest? Investing involves putting your money in an investment vehicle so that it can grow over time instead of being left in the bank. The most common investments here are stocks and properties, but other options include currency trading, art, and collectables.
Using an example, we will compare investing in a stock market with saving your money in a regular savings plan.
Let’s assume that our friend Jane decided to invest $10,000 from her savings into stocks five years ago at the age of 25. She continued to invest $11,000 each year for three more years so that she would have invested a total of $45,000 over eight years. We will also assume that Jane is single and has no dependents, so she spends about $2,500 per month on necessities like food and bills.
Now let us look at Jane’s situation today after eight years:
- On her first day as a 25-year-old, Jane invested $10,000 in a stock portfolio. After eight years, her portfolio is worth $41,500, which means the value increased by 23%. Therefore her investment only grew by 23% over eight years even though she annually invested an extra 10% of her initial investment.
- The bank account Jane used to store her savings has the same balance as when she started after five years. However, it would have grown to $69,200 if she had not withdrawn anything from it because of inflation and interest rates. In other words, Jane’s capital would have been eroded by 26% due to inflation and 3% due to interest rate charges over five years if she did not withdraw any money from her saving account.
- Jane had to pay income tax on the dividends earned from her stock portfolio. Assuming she is taxed at 20%, Jane has to pay $9,300 in income tax over eight years. This means that of the initial $45,000 invested by Jane, only about $35,700 ended up being used for purchasing shares while the rest was eaten up by inflation and taxes.
Conclusion: Investing your money seems better than saving it when you look at the end value after five years, but if you factor in inflation and taxation, then it’s a tie. Also, note that investing money may expose your capital to risks, so it would be wise not to invest every cent you have because no guarantee returns will always be positive.
Investment and saving both have their advantages and disadvantages. In Singapore, many people would instead save up to buy a house or pay off their home loan as they consider it more advantageous. Is it better to invest in the market or keep cash in your bank account?
Some people recommend you start investing as early as possible because time is on your side when you’re young! Warren Buffett was once quoted saying, “The money will come to you eventually – unless you plan to fund your retirement by winning the lottery – so it’s better off in the financial markets where it can grow.” This means a small amount of capital can become a considerable sum over time with good investment returns – if this is true, why not invest?
What’s the conclusion? Investing in the stock market is a better option compared to saving. This is because you can earn higher returns and accumulate more significant sums of wealth over time. Therefore if you’re thinking about investing, it might be a better idea than putting your money in a bank account.