Ever wondered how you could make the most money with the least effort? We’re pretty sure that’s a thought that’s run through the minds of most and because of that, here are three things that we think will help anyone who has that mindset. Save, save, save Let’s consider the case of John Tan, a 25 year-old executive who has met with decent success thus far in his work thanks to his diligent efforts. He has started to see his job not simply as an occupation but as a career, and his company not as a provider of…
Ever wondered how you could make the most money with the least effort? We’re pretty sure that’s a thought that’s run through the minds of most and because of that, here are three things that we think will help anyone who has that mindset.
Save, save, save
Let’s consider the case of John Tan, a 25 year-old executive who has met with decent success thus far in his work thanks to his diligent efforts. He has started to see his job not simply as an occupation but as a career, and his company not as a provider of paychecks but as an employer.
As he considered what the next 40 years of his life might look like, he began to think about preparing for retirement.
Our first piece of advice for him would be to make a budget and begin saving. He draws a fixed salary, so he knows what his monthly income will be. He should start by thinking of what percentage of his income he’d like to save, taking that amount off the top, and then setting out budget parameters for housing, insurance, food, a car (even though it might not be a necessity here), and other expenses.
Say, for example, that John’s making S$45,000 a year at 25 and saved 5% of his income voluntarily (outside of the compulsory CPF contributions of 20% of his monthly salary); in the first year, he would have set aside S$187.50 per month. If his salary grew at 5% per year and he worked till age 65, saving 5% each year, he would have saved more than S$280,000.
Yet if he saved just 2% more each month (S$75 per month in year one) with a savings rate of 7% over the course of his career, his savings would grow to more than S$400,000. Those small incremental savings can make a huge difference over a number of years. The following graph shows the dramatic difference one or two percent can make in John’s scenario:
To make this saving effortless, John could set up monthly transfers so his bank can move the money he has set aside automatically from his checking to his savings account. There’s also the possibility that some companies will allow their employees to have a certain percentage of their checks directly deposited into separate accounts.
The bottom line is that diligently saving is the most important step to begin making money with the least amount of effort.
Invest carefully and diligently
While S$400,000 is a lot of money, over the course of a career, any advice on savings has to be coupled with advice on investing. One key advice would be to not be swayed by one-time fads or trends.
One can easily be sucked into a belief that there’s a new hot trend that will, for example, let us double our money in six months. Just remember the adage that “if it sounds too good to be true, it probably is,” and stick to safe means for investing. It won’t be exciting, but it’ll very likely yield results down the road.
Another important thing about investing is that one shouldn’t be swayed by the commonly-held belief that investing is in a sense like gambling and is dictated primarily by luck. With a good amount of research and effort, one can find individual stocks that are likely to beat the market.
However, since the main premise here is to “make the most money with the least effort”, John could invest his savings into passive index trackers (exchange-traded funds or index funds that track any particular stock market index) or actively-managed unit trusts.
The overall expenses of funds are a very important component of investor’s returns and expenses, even when they look ‘small’, can eat into a huge chunk of returns. In that regard, index trackers will generally trump actively-managed unit trusts due to the former’s lower expenses.
For example, the SPDR Straits Times Index ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B), which are both index-trackers that mimic the returns of the Straits Times Index (SGX: ^STI), have annual expense ratios of 0.3% and 0.28% respectively.
On the other hand, according to a study by Morningstar, the average stock-based unit trust in Singapore had an annual expense ratio of 1.94%.
The STI has given compounded average annual returns of around 7% to 8% per year over the past 25 years since the start of 1988. The long-run returns of a market index are often the best gauge we have for returns going forward.
Assuming the STI can maintain its historical rate of return going forward, John’s investment into the low-cost index trackers would enable him to capture very similar returns.
A 7% return doesn’t sound like a lot. Yet thanks to the beauty of compound interest, an investment that gains 7% per year will double roughly every 10 years. By never touching your money and simply patiently waiting until the day you retire, you can rack up an incredible return at the end of the road.
Coming back to 25-year old John with his annual salary of S$45,000, let’s say that John decides to save 6% per year and that he had every dollar of his savings placed into a STI index tracker over the course of his career. Let’s then say he did that every week until age 65 and never touched his retirement account until he retired. Do you know how much he would have at the end of that time with a 7% return?
Get ready: S$1,165,152.
Yes, that’s correct. Nearly S$1.2m that does not include funds in John’s CPF, whatever the amount may be. Here’s what that growth looks like at age 30, 40, 50, 60, and 65.
Foolish Bottom Line
Though it looks small at first, through diligent, patient saving over the course of a career, one can make an incredible amount of money without a whole lot of effort.