Tuesday, April 12, 2016

3 Smart Investments to Spend Your First Salary On (Guest Post)

If you’ve just gotten your first pay cheque, it’s tempting to spend it all. But if you want to have that dream vacation to Europe, or be the sort who buys a house at 25, you’d best think about savings and investments instead.

You don’t need $50,000 for a big trading portfolio either. Here’s how you can start simple but still see results:

  1. Join a Bank’s Blue Chip Investment Programme

Both DBS and OCBC now have a blue chip investment programme. This allows you to purchase shares in blue chip companies, without having to buy in lots.

A blue chip company refers to one of the 30 biggest companies (in terms of market capitalisation) on the Straits Times Index. These are companies such as DBS, Singtel, and Comfort DelGro - they are large and well established, and are make for low risk investments. Usually, buying shares in these companies can be costly, as you need to purchase in lots of 100 or 1,000 shares (e.g. DBS shares are around $15 at the time of writing, so buying a single lot of 1000 shares would cost around $15,000.)

Under the banks’ blue chip investment programmes however, you do not need to buy in lots. Instead, you set aside an amount you can afford each month (minimum of just $100), and the bank will acquire as many shares for you as possible.

So if you set aside $200 and pick DBS for example, the bank would acquire around 13 shares of DBS for you at $15 per share. If the price were to fall to $10 per share next month, you would get 20 shares, and so on.

This is a good way to start investing in reliable companies, even on a small pay cheque.

Regarding your returns, speak with the banker about the dividend pay-outs for the various blue chip companies. This typically happens every six months. You get your returns from both the dividend pay-outs of the companies, as well as money from when you sell the acquired shares.

2. Buy the Straits Times Index Fund

It can be a headache to pick which company to invest in. Even if you are financially savvy enough to read annual reports, and understand P/E and D/E ratios, you may not have the time to do it. A simple way around this is to pick a passive index fund, such as the Straits Times Index.

You can purchase ST Index funds through blue chip investment programmes as well (see point 1). When your purchase units in this fund, you are spreading your money across all 30 blue chip companies, instead of picking specific companies. This provides a degree of diversification - your assets will not be impacted by the underperformance of one specific company or industry*.

(*This being said, do note that the bulk of the ST Index Fund is tied to banks, so movements in the financial sector may carry slightly more weight than movements in sectors like healthcare, transport, etc.)

As of 2014, the ST Index fund generated annualised returns of over eight per cent per annum. This is high in comparison to many financial products, which will deliver returns of about five per cent per annum. However, note that there are no guarantees with regard to your returns, so speak to a wealth manager before making decisions.

3. Buy an Insurance Policy

It’s best to buy your insurance policy while you are still young. Premiums go up with age, and as you develop medical conditions. There are two ways you can do this. The first is to buy insurance for protection only, such as term insurance. This has a low cost and no payout, but will cover most of your medical needs.

The second is to use an insurance policy as a form of investment. Endowment policies, as well as Investment Linked Policies (ILPs), will invest your money in a fund for you. Returns are typically three to five per cent for endowment policies, and seven to nine per cent for ILPs (but these are not guaranteed.) Note, however, that the returns may be diminished by the fees charged - this can be found as the distribution cost, or Effect of Deduction, on an insurance policy.

It is generally more expensive to get an insurer to invest for you, as opposed to doing it yourself. However, if you have no interest or inclination toward finance, using a Financial Advisor is still better than leaving your money in the bank.

Seek Expert Advice Before You Buy

Seek advice from wealth managers or financial advisors before you buy. However, note that this does not mean you must buy from the person you consult. Get opinions from different qualified experts before choosing where to put your money.

As a rule of thumb, you should aim to get returns of at least five per cent, if you are aiming to build a retirement fund. This outpaces Singapore’s rate of inflation, which is historically around three per cent.

By Ryan Ong 
Ryan has been writing about finance for the last 10 years. He currently helps people save time and money at SingSaver.com.sg.

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