Importance of Financial Literacy

Hei Tung Sam, Assistant Manager, Dealing | Contract for Differences

Sam graduated from National University of Singapore with a Master of Science in Finance. He personally manages his own investment portfolio and does equity and economic research in his free time. Sam believes that education and information is essential to making good financial decisions.

The average person spends approximately 45 years in the workforce, accumulating wealth over time. Regardless of what the profession, education level or even social economic status is, it is essential for everyone to attain financial literacy and the skills to manage money[1]. Without proper financial knowledge and discipline, it is easy to fall into spending traps driven by frequent publicised sales, unlimited consumer desires and ever-changing market trends. The rise of financial technology and payment systems like Buy Now, Pay Later (BNPL) from providers such as Atome, Grab, and FavPay has further simplified spending, making it more crucial than ever for individuals to balance consumption with savings and retirement planning.

On 4 March 2025, Donald Trump threatened to impose additional tariffs, 25%  on imports, from Canada and Mexico and an additional 10% on imports from China [2]. This move has the potential to trigger retaliatory tariffs, increase global inflation and worst case, start a trade war, all of which would further complicate financial planning.

In Singapore, the average inflation rate over the past 30 years (1993 to 2023) has been 1.73% [3]. The Monetary Authority of Singapore (MAS) has forecasted a potential economic slowdown in 2025 with MAS Core Inflation expected to remain below 2% [4]. Additionally, interest rates on bank deposits are expected to decrease with the 3-month Singapore Overnight Rate Average (3M SORA) projected to drop from 3.3% in 2024 to around 2.5% by the end of 2025 [5]. Given these factors, the need for investment strategies to outpace inflation and preserve wealth has never been more critical.

To navigate these financial uncertainties, individuals must adopt structured financial habits that prioritise disciplined saving and smart investment choices.

A commonly recommended budgeting strategy by financial institutions and banks in Singapore is the 50/30/20 rule. The rule suggests spending 50% of income on needs such as bills, rent payment, utility expenses, 30% on wants such as shopping, entertainment, vacation expenses and 20% on savings such as emergency fund, investments and long-term goals [6].

Source: Annual Wage Changes – Survey on Annual Wage Changes, Manpower Research & Statistics Department, MOM

The table shown above is taken from the Ministry of Manpower Singapore; it highlights the annual wage change % from 2013 to 2023 in both nominal and Real. The Real rate takes in to account of the Consumer Price Index (CPI) a proxy for inflation of the respective years.  It can be observed that between 2020 to 2023, the real annual wage change is below the 10-year average of 2.5% with 2022 experiencing a  -1% real wage change despite a nominal wage increase of 5.1% [7]. This underscores the importance of investing to counteract inflation’s erosive impact on purchasing power.

Consider an individual earning an average starting salary of S$4,000, with yearly wage increment of 2.5%, a promotion every three years resulting in a 10% salary increase every 3 years (for 15 years) and a career spanning 45 years. and assuming he saves 20% of his  salary annually and earns a ~2.75% rate of return (equivalent to the 30-year Singapore government bond yield and commonly used as a benchmark risk free rate) [8], this would be his accumulated savings:

Financial outcomes vary based on saving rates and returns, which differ based on different individual needs, spending habits and financial instruments. Considering the above-mentioned scenario as the base case, how will varying saving rates and rate of return affect the total savings?

With reference to the table, even with lower saving rates of 10-15%, it can still result in savings higher than our base scenario when paired with a 5-7% rate of return. Notice how for every % rate of return increase, the end value increases exponentially? This emphasises the power of compounding over time and highlights the importance of asset allocation.

In finance, there is a common saying of “No Risk, No Return” which applies to investing. A 2.75% rate of return assumes investments solely in 30 Year SG Government Bond, which are among the “safest” assets. However, higher returns can be achieved through incorporating other financial instruments such as stocks and Equity Traded Funds (ETFs) for a diversified portfolio.

For instance, the S&P500 delivered an average annual return of 13.31% between 2013 to 2023 [9]. ETFs such as VOO and SPX offer cost-effective exposure to the S&P 500 without requiring substantial capital or incurring high fees. Though past performance does not guarantee future results, the S&P 500’s track record and the ETF’s constant rebalancing make it a compelling investment option.[10]. The above table demonstrates how an individual can optimise their returns while managing risk based on their portfolio allocation to a S&P500 ETF and 30 Year SG Government bond.

There is no one-size-fits-all approach to how much risk an investor should take for higher returns, as it depends on factors such as investment horizon (the estimated duration of the investment), investment objectives (capital appreciation, generating income, preserving wealth, etc.), and the ability to withstand market volatility.

Based on historical S&P500 performance, there were periods of economic downturn such as 2000 – 2009 when total return was -6% [11]. However, over a longer time horizon, 94 years, the S&P500 averaged an annual return of 9%. This illustrates that time in the market tends to be more rewarding than attempting to time market fluctuations. Market cycles of booms and recessions are inevitable, and investors should build strategies that account for these fluctuations rather than reacting emotionally to short-term volatility.

Lastly, the ability to endure market fluctuations is crucial. Even seasoned investors may struggle with emotional biases, such as selling assets prematurely in a downturn or taking excessive profits during early market upswings. Observations of investor behaviour have revealed a common pattern of premature profit taking in bull markets and panic selling during bear markets. A well-structured allocation strategy rewards patience and long-term discipline over reactionary decision-making.

In conclusion, with potential trade wars and economic uncertainties affecting inflation and interest rates, strategic financial planning is more important than ever. A well-structured approach including disciplined savings, balanced asset allocation, and a focus on long-term growth, can help individuals safeguard their wealth and achieve financial independence. By tailoring their investment strategies based on risk parameters, objectives and personal profile, investors can optimise their savings and confidently navigate the ever-changing financial landscape.

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[1] https://www.forbes.com/sites/truetamplin/2023/09/21/financial-literacy–meaning-components-benefits–strategies/

[2] https://www.bbc.com/news/articles/c89ye749nxvo

[3] https://smartwealth.sg/average-inflation-rate-singapore/

[4] https://www.mas.gov.sg/news/monetary-policy-statements/2025/mas-monetary-policy-statement-24jan25

[5] https://dollarbackmortgage.com/blog/when-will-mortgage-rates-go-down-singapore/#:~:text=Following%20this%20policy%20shift%2C%20analysts,by%20the%20end%20of%202025.

[6] https://www.sc.com/sg/stories/financial-tips/why-savvy-singaporeans-are-using-the-50-30-20-rule-for-budgeting/

[7] https://stats.mom.gov.sg/Pages/Income-Summary-Table.aspx

[8] https://tradingeconomics.com/singapore/30-year-bond-yield

[9] https://www.investing.com/indices/us-spx-500-historical-data

[10] https://www.investopedia.com/terms/s/sp500.asp

[11] https://www.forbes.com/councils/forbesfinancecouncil/2023/08/04/the-ups-and-downs-of-the-sp-500/

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