The Crucial Role Of Time In Personal Finances

After discussing about how I perceive mini-Retirements in my previous post, and looking at my current circumstances and regrets in my financial journey, I find that time is actually one of the most critical factor in personal finance.  The way one manages financial decisions early in life can significantly impact financial security in later years.  Whether it is leveraging the power of compounding interest, tackling debt before it spirals out of control, or making smart investments, time can either be an ally or an adversary.  Below are some key examples of personal experiences of how time plays a crucial role in financial well-being.

1)     Early Central Provident Fund (CPF) Contributions: The Power Of Compounding Interest

One of the best financial moves a young working adult in Singapore can make is to aggressively contribute to their CPF accounts, particularly the Special Account (SA), as early as possible.  I came to realize this only recently because after I decided to take a closer look at my CPF account, I find that the numerical value of Full Retirement Sum (FRS) seems to move further and further from me yearly, as I personally try to move towards Barista FIRE.

Looking back, if I have done things a little differently in my younger days, by contributing a little more aggressively towards my SA, pay my mortgage completely via cash, accumulate and transfer my monies from Ordinary Account (OA) to SA (which earns an attractive interest rate of 4% per annum for at least the entirety of my working life) and try to attain Full Retirement Sum (FRS) earlier, my financial journey may become smoother and easier now as the power of compounding works in one’s favor.  The FRS is adjusted upwards yearly, but if an individual can max out their SA early and hit the FRS sooner, the compounding effect allows the sum to grow significantly without requiring further contributions, as the 4% compounding interest in SA generally outpace the yearly increase in the FRS value.  The lesson learnt here is the significance of time in the building of the CPF account.  Once the lower numerical value of FRS is reached in the early years, compounding will do its own job and FRS will no longer be an area of concern for one's retirement planning journey.

For my current situation, I am rather far from FRS.  However, I am still pleased that I have managed to reach Basic Retirement Sum (BRS), which is halved of the value of FRS.  This ensures that minimally I have the very basic safety net available for myself.  Hopefully I can continue to contribute towards, and compound my CPF account so that I can achieve 1.5x BRS when I decide to FIRE.

2)     Property Purchase Timing: Locking In Lower Prices

In Singapore, timing plays a significant role in property investment, whether for homeownership or rental income.  This is because of the unique circumstances in land-scarce Singapore, where real estate prices generally seem to trend upwards over time (unlike the usual property up and down cycles that are more commonly seen in other countries) more often than other countries.  Those who enter the market earlier can benefit from lower prices and build equity faster.  Waiting too long might mean paying significantly more for the same property.

One consolation (or excuse) I have for myself for the low amount in my CPF account is due to my early purchase of property in Singapore.  First and foremost, I would like to highlight that if I am allowed to purchase HDB flat in Singapore, I would.  However due to policy restrictions as I am a single Singapore Permanent Residence, I am only able to buy private property.  As such, with the help of my dad (yes I am a poor brat and my dad helped me with a large part of the down-payment, while I will be solely responsible for the monthly mortgage on my own), I bought my first property at 2011.  Back in the days, additional buyer stamp duty (ABSD) has yet been implemented, hence that helped me save quite a bit of cash.  In 2011, the property cost around $800 psf, but nowadays, new launch in the same neighbourhood cost at least a staggering $1500 psf on average, an alarming 88% increase.  

88% increment may seem low when the timeline is 14 years, but if you consider the absolute amount in property purchase, coupled with the implementation of ABSD and the increase in GST which impacts all administrative fees like lawyer fees and agent fees, the increase in absolute amount will be significant.  The lesson learnt here is to get a property soonest possible once the finances allow before prices of properties move higher till it is totally out of reach, especially in the context of Singapore, and especially so if one is Singapore citizen who is able to get into the Build-to-Order (BTO) race, which thus far, has proved to be highly profitable with time.

Looking back, I am quite contented that I have acted early, especially just a couple of months after I made the purchase, ABSD was implemented.  

3)     Investing Early: The Magic Of Time In The Market

Another crucial way time influences finances is in investing.  The longer an individual stays invested, the greater the potential for capital appreciation and dividend accumulation.  Investing early means allowing money to grow through market cycles.  Long-term investments, particularly in index funds, blue-chip stocks or REITs, benefit from Singapore’s stable and growing economy.

Personally I started dabbling in the stock market in 2010.  It was a great time to invest because markets were at near term lows due to the Great Financial Crisis.  However I was 'playing' with the market with no concrete plan in mind, just trying to trade via buy low sell high without knowledge in technical or fundamental analysis, but often ending up buying high selling low.  I only set up a concrete plan in late 2017, and since then my portfolio has steadily grown over the years through capital injection, dividend reinvesting and compounding.  

Looking back, if I had put the current strategy in place earlier by a couple of years, I could possibly FIRE earlier, probably before I turn 40.  Unfortunately, time waits for no one, and time lost cannot be retrieved.  I can only push back my Barista FIRE and FIRE timeline to ensure my portfolio can compound adequately for me to eventually live off the dividends generated by my portfolio, with a plan in place.  

4)     The Perils Of Debt: When Interest Works Against You

On the flip side, compounding interest can be a financial nightmare if one is in debt.  High-interest loans, especially credit card debt, can snowball rapidly and trap individuals in a cycle of financial distress.

When one fails to pay off debt, particularly high-interest debt, the interest compounds and increases the outstanding balance exponentially.  I have read from articles that if any debt is left unpaid for just 3 months, it can quickly spiral out of control, making repayment extremely difficult.  Therefore it is important to pay off all credit card expenses in full before due date.

Thankfully I have never put myself in such a position where I was trapped in credit card or personal loan debts.  The closest encounter I had was during the Covid-19 pandemic period, where Bank Negara Malaysia was trying to assist Malaysians facing financial difficulties to tide through the difficult times, by allowing individuals to pause their payment towards the monthly mortgage payments to their housing loans, for a period of 6 months.  As it was an automatic deferment nationwide, I was too lazy to submit the application to continue my mortgage payments (as I was luckily not badly impacted financially during the pandemic period), and I just deferred the payment as well.  However, as interest continue to compound, I got a rude shock 6 months later to realize how much the interest has compounded in just 6 months, causing my outstanding principal amount to grown to amount where I will need more than 6 months worth of mortgage payments to pay down the principal back to the amount prior the deferment.  Therefore if possible, it is not advisable to defer any form of payment unless one ran out of options.

5)     Retirement Planning: The Sooner, The Better

Many individuals underestimate how much they need for retirement.  Starting retirement planning too late often leads to inadequate savings, requiring individuals to work longer or compromise their lifestyle.  On the flip side, starting early allows for smaller, more manageable savings contributions rather than needing to scramble for large sums later.

In this old post, I have already shared how the 3 important factors, namely time/ duration, yield and capital impacts the return.  As such, it is important for one to start planning for retirement as soon as possible, so that one would only require saving and investing a reasonable amount monthly, coupled with a reasonable returns rate, one can accumulate a comfortable amount for retirement when given sufficient time for the portfolio to compound.  For instance, with a reasonable 6% annual returns, with SGD 500 squirreled away monthly for investment for 30 years, the retirement portfolio would grow to approximately SGD 503K.  If the monthly capital doubles to SGD 1K, the retirement portfolio would grow to approximately SGD 1.006M.  Therefore the best time to start planning for retirement is none other than now. 

All in all, time is a powerful force in personal finance, either working for you or against you.  Whether it is leveraging CPF compounding, timing property purchases, investing early, avoiding debt traps, or planning for retirement, the earlier one takes action, the greater the financial benefits.  Making time an ally rather than an enemy is definitely one of the main key to financial security and peace of mind.  If you are still young, then start planning your financial journey and get into action now.  If you are in your midlife like me, improve as much as you can and delay no further as regrets will bring you nowhere.  Wait no further, let time work in your favour now.  Barista FIRE, here I come...!