Is Time Really Money? The Real Cost of Excessive Spending

fundMyLife explores the opportunity cost of money

Written by Kartik Goyal, edited by Jackie Tan.  

Opportunity cost! Most of us know it, almost everyone has heard about it – that feeling of wasting money never sinks in completely. It all seems like a wild claim that an excessive spending of just $10 a month is really a $74,000 loss for your retirement fund. In this article, we find a new way to put things into perspective.

Let’s do some (simple) math!

An average person’s lifespan is 82 years in Singapore. On top of that, assume that an average person spends 22 years acquiring his/her education. Additionally, another simple assumption is that a person spends 8 hours a day sleeping, another 8 hours to themselves that do not account for working hours – meals, chores, entertainment, and other activities – and retire by the age of 65. 

After taking everything into account, we are left with just roughly 15 years’ worth of working hours in our entire lives. To put that number in perspective, it’s 5,475 days or 131,400 hours.

At this point, you are probably thinking that that’s a lot of time. Well, the answer is both yes and no. Ideally, the financial aim of an adult is to live at a similar lifestyle after retirement, if not more luxurious which unequivocally depends on your current lifestyle and the one you will adopt in the coming years. This also means you’ll require 17 years’ worth of cash and investments by the time you are 65 to live to the ripe old age of 82.

Let’s maths even more

Deriving from Singapore’s GDP per capita, 3% increment of salary per annum, and a significant promotion and salary bump every 5 years, we estimate that a person will make an average of $51 per hour throughout their career. That’s around $8 million in total (absolute value, not adjusted for inflation or interest). Reading the last sentence would have made you proud of yourself already. You are already tempted into a little celebratory splurge on yourself, with perhaps an ice-cream?

Say a tub of ice-cream tub costs $5 – that’s around 10 minutes of your working life. Now, if you estimate that you buy one such ice-cream every month throughout the course of your working life, the total would be $3,060. If you were to put all that money and its subsequent returns in savings each month, you would accumulate around $19,000 by the time you retire. To put that number in perspective, it’s almost 610 hours of your working life or around 25 days in ice-creams.

To put simply, a single $5 deposit will turn into $53 over 40 years; that’s 62 minutes worth of earnings (assuming 6% interest rate and biannual compound interval). It might not seem like a lot but, if you think about it, spending $5 might cost you 10 minutes but saving $5 dollars will salvage more than 60 minutes of your work time, by the time you retire.

mindblown

There’s more! A $30 dinner with friends each month eats roughly 3,600 hours or 153 days of your time. If you drink alcohol, especially in restaurants and spend $50 a month, you’re pouring away almost 6,000 hours (not including the hangovers). Love those $500 pair of Louboutins? Average price, ladies! Don’t shoot the messenger. That’s walking away from 36 weeks in total, assuming you’ll need a new pair of them every year.  

A graph showing the opportunity cost of buying unnecessary things

To appreciate the impact of purchases, we plotted common activities against two things: average cost of activity, and the number of working hours eaten away throughout your life. For example, if you look at the “Restaurant” example from the previous paragraph, it costs $30/meal and 3600 hours of working life.

We understand that scrimmaging expenses is tough, saving as little as a $100 a month can shave off 1.5 years of extra arduous work towards your retirement fund. By all means spend on yourself to stay motivated, happy and content, however a stitch in time saves nine.

fundMyLife is a platform that aims to empower Singaporeans to make financial decisions confidently. We also connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions.

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DBS Multiplier Account: Hare-Raising or A New Hop(e)?

DBS Multiplier Account: Is it truly as hare-raising as it sounds?

Written by Jackie Tan. Jackie is a part of fundMyLife, the platform that connects financial planning questions to the right advisers.

DBS Multiplier Account: A Closer Look

Go forth and multiply with the new DBS Multiplier Account
I wonder if those are CGI or real rabbits. Source.

No doubt you’ve been seeing ads recently by DBS, involving a well-groomed man (presumably rich) who is surrounded with lots of bunnies. In the ad, he talks about the new DBS Multiplier Account where the more one transacts on the account, the more one multiplies his/her money. Besides the “aww” factor, the rabbits double as a metaphor for multiplication.

There are three value propositions in the advertisement for the account:

  1. no minimum salary credit (hurray)
  2. no minimum credit card spending (no way)
  3. one can earn up to 3.5% (omg)

Of course, the last value proposition is seemingly the most impressive one and many blogs have extolled the benefits of the account. We here at fundMyLife are a curious bunch so we took a closer look at it and see what the fuzz is all about.

The Interest Table

Multiplier Account Interest Rate
The interest table shown on the website, with numbers added on the left side to number the various tiers. Figure adapted from DBS and modified for clarity.

With reference to the table above, we see six different tiers of interest rates, with two separate sets of interest rates depending on how many components of your money are transacted (thereon known as 1-cat and 2-cat for transactions involving 1 and 2 categories respectively).

fundMyLife Does the Maths

Obviously, the more you transact the higher the interest rate is. At the lowest, it’s 0.05% for both sets. However, as you transact higher amounts, the difference between 1-cat and 2-cat becomes more apparent. Obviously, the purpose is to encourage you to perform 2 or more categories of transactions with DBS.

An interest-ing (geddit?) point to note is that the jumps in rates are quite uneven. More specifically, the jumps between Tier 1 and Tier 2 and between Tier 5 and Tier 6 are very dramatic.

A chart that shows the increase in interest rates between one tier and the next tier. Black bars show the tiers in 1-cat and red bars show the tiers in 2-cat.

To illustrate this point, we calculate the difference in interest rates between tiers. Not surprisingly, the difference between the first two tiers is staggering – by transacting between $2,000 to $2,499/month (Tier 2), you enjoy 1.5 and 1.75% more interest rate for 1-cat and 2-cat respectively than if you had transacted $1,999/month and below (Tier 1).

As mentioned, the 3.50% is the last tier (Tier 6) and it is only when you transact a total of $30,000/month across 2 categories. It’s also a huge jump from Tier 5 for 2-cat, where it’s a 1.2% increase. On the other hand, if you transacted $30,000/month across only one category, i.e. 1-cat, the maximum interest rate you’d get is 2.08% and is only a 0.08% increase from the previous tier.

$30,000/month transaction to reach the 3.5%!

What if you transacted between $15,000 to $29,999/month with 3 categories (Tier 5)? You’d get 2.3%, which is only a 0.1% increase from the previous tier (Tier 4). The difference between tiers for both 1-cat and 2-cat seems to be very little in between.

Difference between 1-cat and 3-cat Interest Rates of Same Tier
A chart that illustrates the difference between 1-cat and 2-cat for each tier. As mentioned, there is no difference between the two sets in Tier-1.

We also looked at the difference in interest rates between 1-cat and 2-cat for each tier, and it is the largest for Tier 6. On the other hand, the consumer does not benefit too much from making the switch from 1-cat to 2-cat in most tiers.

Transaction Amount to Cross Tiers

We also observed something interesting as well in the table. If you haven’t noticed it yet, the range in the amount of transaction increases across tiers as well.

Transaction Range in Each Tier
A chart that illustrates the transaction range for each tier. Tier 1 has no range because it has no minimum whereas Tier 6 is not shown because it has no maximum.

Simply put, the transaction gap increases as you move from the first tier to the last. It also means it’s relatively challenging to cross over to the next tier from your current tier.

Fur real? What does it mean?

Given the irregular distribution of interest rate increase, we think that it’s meant to capture two very specific demographics – the ones in the first two tiers and the ones in the last tier. One very good thing that we note is that there is no minimum amount required in the account which means students, fresh graduates, and young working professionals will benefit from a decent interest rate, i.e. 2% for 2-cat. The account also rewards consistency so those who with low risk appetites can benefit from this. Those who do not mind transacting everything under DBS, e.g., loans, credit cards, insurance, should give it a go as well.

The DBS Multiplier Account will also benefit big ballers who can afford to transact $30,000/month and yet still have enough savings in the account to reap the benefits of the increased interest rate.

That said, for someone who can afford to transact $30,000/month, we think that person can afford better financial instruments to grow his wealth anyways. 3.5% as a form of interest rate is nothing to scoff at…if one doesn’t mind committing all that money with one financial institution. Moreover, it’s for the first $50,000 in the account.

We don’t love it, but we don’t hate it either. Its low requirements and flexibility to combine different categories are refreshing additions to their competitors’ tiered interest rate type of savings accounts (we’re looking at you guys, OCBC 360).

Our Verdict

Pros:

  1. no minimum amount in account
  2. no minimum credit card spending
  3. flexible combinations

Cons:

  1. interest rates apply only to the first $50,000 in the account
  2. challenging to reach the 3.50% interest rate as advertised
  3. once you’re stuck in one tier it’s challenging to move to the next one

Conclusion: You need to commit your money with DBS Multiplier Account to reap the most reasonably tiered benefit. Also, you’ll need to transact >$2000/month to obtain a meaningful interest rate.

That’s All Folks!

We hop this article helped you make an informed choice before leaping into signing up for the DBS Multiplier Account. If you want to know more about personal finance and would like to ask questions, head on over to our main site and ask away!

 

fundMyLife is a platform that aims to empower the average Singaporean to make financial decisions confidently. We intelligently connect consumers to the right financial planners in a private and anonymous manner, based on their financial planning questions. Follow us on our Facebook page to get exciting updates and your dose of finance knowledge! Let us know what you want to know about finances or something that you wish your friends knew!