It's easy to come up with a dozen reasons on why one can't save money. Like dieting or quitting smoking, saving money is a habit that needs to be built.
But many reasons for why you can't save are invalid, and it comes down to two things: the environment you're immersed in, and simple willpower. Once you learn to discount these, you'll find it easier to set more of your income aside.
For now, take a look at these common excuses, and why they're not true:
1. "I Make Too Little Money to Save."
Making a small sum is not an excuse to stop saving. In fact the opposite is true – it's precisely because your income in limited that you need to be thrifty.
A multi-millionaire with S$10 million in her bank account can get away without saving for 10 years if she wanted to; but if you're pulling S$900 a month at an entry level job, attempting to do the same is hazardous.
Save 20 per cent of your income, even if it seems trivial to you. If you make S$750 a month, for example, you may think that saving S$150 is irrelevant. It's not – over 10 years (although we hope your salary rises much sooner than that!), it's S$18,000.
Now we've used some extreme examples here. The fact is median income in Singapore is around S$3,700 per annum. So most of you reading this are quite capable of saving at least S$500 a month, even if you can't make the 20 per cent.
2. "I Don't Have the Willpower to Save."
We don't blame you. It's not "weak" at all. There are plenty of reasons why saving can be tough, and it relates to the way willpower works.
Consider how willpower functions when you are studying, or exercising: you may be tempted to stop three, four, or five times before you give in. But you are still rewarded for the times when you kept going – you still got more work done, and you burned off more calories. With money, it's different.
You can resist the urge to buy a new pair of shoes three, four, or even 20 times. But the moment you give up and buy, the money is gone, and the resulting failure is complete. All your previous, successful attempts at resistance mean nothing. And that's why most people are bad at saving.
But there are simple ways to help yourself. The easiest way is to lock your savings somewhere you can't get access – put it in a separate bank account, and place the bank card out of sight. Automate the process (use GIRO) so you don't need to consciously make the transfer each time.
And come to a compromise with yourself: agree to let yourself buy expensive things if you manage to find extra cash to do it (e.g. get a part-time job). This is a positive way to indulge – it will drive you to work harder, rather than create a constant battle against temptation.
3. "I'd Rather Invest it All."
We commend your initiative, and you're right. Investing is important. The problem is, having no savings really gets in the way of investing.
Let's say you religiously set aside 20 per cent of your savings every month, and by now you've put S$15,000 into various stocks. Good move. But something goes wrong – whether it's divorce, litigation, medical emergency, etc., you urgently need a large sum of money. You're going to have to sell your stocks.
But what happens if – at this exact moment when you need cash – the stock market is down? Your S$15,000, when liquidated, would only yield S$12,000? That's a loss that you're going to have to absorb, because you have no savings. You have to sell even at a bad time, to cover your needs.
And if you constantly interrupt your long term financial plans with these sorts of last-ditch sales, you can forget about the planned seven or nine per cent returns. That happens if your portfolio remains untouched, with nothing but formulaic and calendar based rebalancing. It's a lot like baking a cake: if you keep opening the oven to poke your finger in it, you're going to end up ruining it.
So always save even while you invest. Aim to accumulate six months of your income as emergency savings, before you even contemplate pouring all your excess cash into investments. Check out our article on how to save an emergency fund in Singapore to get started.
4. "I Can Handle the Consequences of Not Saving Money."
Of course you can. The question is, can your family?
You may be willing to live pay cheque to pay cheque, and suffer the consequences yourself. But what about the hardships that happen to people you love? What if your elderly parents need life-saving surgery? What if your spouse loses his or her job? Your savings are critical in those situations too.
Also consider what happens if you do end up needing help. In the event of disability or illness, where does the bill end up if you can't pay it? With few exceptions, it often comes down to family and friends providing the financial support you neglected to build. Not saving makes you a burden on the people you care about.
If you are civic-minded, you may want to consider the impact of your actions on a wide scale. When people don't save for their own needs, it ramps up the cost of social provisions such as healthcare, or employment support. In effect, people who mismanage their finances contribute to higher tax rates, because the country as a whole needs to intervene on their behalf.
So think of saving money as more than just a safety net for yourself. It's a way to provide for the people you love, and a form of social responsibility.
5. "I Will Start Saving Money Later."
The point of saving is to have money on hand, when an emergency happens. Deciding to save later is like deciding to go rafting first, while yelling that you'll put on the life vest later. Every moment you delay saving is a moment when you risk financial disaster.
You may also have heard that the sooner you start to plan for retirement, the more likely you are to succeed. This is true, and you can see some of our previous articles on retirement planning to get started. We're not covering it here because this is about saving, which should be considered different from investing.
6. "I Have Assets Other Than Cash."
This is an acceptable excuse if the asset can be quickly liquidated, with no significant loss. A Singapore Savings Bond (SSB) is viable for this, since you can cash it in any month without losing the accrued interest.
Gold or silver are a little more questionable. While easy to liquidate, there is a chance that prices will be low at the time, resulting in a loss. This is doubly true with stocks (see point 3.)
The greatest complication comes from assets that are difficult to liquidate on short notice, or have an unstable value.
You may own a blogshop that generates S$900 a month in side-income, and that would be an asset; but it's hardly something you can sell at the drop of a hat. Nor can you be confident of the exact dollar value you will get from selling it.
Likewise, owning your house is commendable, and that too is an asset. But it could be useless for emergencies, given that selling it means you have nowhere to stay. It could also take a long time to sell a house at a good price.
If you want to consider your assets as savings, speak to a qualified wealth manager. They can give you a rundown on whether your assets are acceptable as a form of savings.
This article first appeared on SingSaver.com.sg.