You'll never be able to outrun money: why chasing a salary alone won't get you rich or wealthy

Sue-Ann Tan (0:04)

Is it better to keep your money in cash or invest it?

See Kai Wen (0:06)

Let's discuss.

Sue-Ann Tan (0:07)

Hi, I'm Sue-Ann.

See Kai Wen (0:08)

And I'm Kai Wen, and you're listening to Headstart On Record. Join us as we figure a doubting out so you don't have to do it alone.

Sue-Ann Tan (0:13)

In the studio with us today is Brian Loh from investment firm KGI. Hi Brian. Hi Brian, welcome to the show. Hi Sue-Ann.

See Kai Wen (0:19)

Hi Kai Wen. Thanks for having me.

Sue-Ann Tan (0:21)

Okay yeah, so I think a lot of people have this question right? Like when I want to invest, how much do I keep in cash for my daily living and emergency savings and how much do I actually invest? So I guess the question is liquidity, right? So what does liquidity actually mean?

See Kai Wen (0:36)

So I think there are three things that I want to square away first. So number one is cash.

Sue-Ann Tan (0:42)

Yeah.

See Kai Wen (0:43)

Cash is an asset, right? And there's liquidity. Liquidity is a capability, right? The ability to convert a asset that you want to cash quickly. So it's a capability. And then the last part, we have emergency reserves. And that is a purpose. So we need to be clear.

So that's how we kind of frame it before we start. So how much cash do we really need then?

Well, it depends on what kind of job you take, right? So assuming you are, say you are perhaps working for the government, then really all you need to cite for is one to two months of your essential expenses. Because your life is fairly predictable. Oh, you're saying it's very stable, that's why. I'm saying that your role may not be as affected by economic wins as, for example, say that of a remisier or a property agent.

Sue-Ann Tan (1:40)

Okay, yeah, that's a good point.

See Kai Wen (1:41)

So I think it differs, right, how much cash you want to keep.

But I would say three to six months of your essential expenses would be quite enough. Not salary, right? So essential expenses like spending, how much you spend a month. I think that's perhaps that's the biggest misconception.

Sue-Ann Tan (2:02)

Yeah, yeah.

See Kai Wen (2:02)

You say three to six months of a salary. So I think the first thing squared away is you keep your expenses, right? So to kind of buffer for unforeseen circumstances, whatever that might be. Be it what is unforeseen, for example, a job loss.

Unforeseen maybe could be, I don't know, you need a plumber and so on and so forth. So that's quite different from an emergency fund. An emergency fund if you have is for an emergency that you can foresee happening to your life, right? So I assume if I am a, I don't know, man, maybe suddenly I have a girlfriend. That's an emergency. Emergency. Suddenly no girlfriend.

No, but my point is emergency to people in a different nature can mean many different things, right? If you have an aging parent, then a health cost could be an emergency. So it differs from people to people. So I want to stress that emergency funds, whatever it might be, is for a purpose. And everyone foresee or have different kind of preparation for emergency. So we're all different. For example, if you are well covered, if your parents are well covered, then your definition of emergency may be very, very short.

But there's no hard and fast rule about how many months. Are we depending on our salary or is it our spending for the emergency fund? It's how much I want to give, I will give. How do we then define an emergency? I think person to person is different. But the kind of emergency that I can think about that is a real emergency, is usually some kind of household emergency. And is usually health related.

So I would kind of associate emergency with risk, right? Whatever risk that you can think of. So how have you mitigated it, for example? So if you have done it fairly well, then I can't imagine an emergency purpose fund will be too large. Yeah, because if you have insurance, then if your parents are covered, I am covered, your partner is also covered, then the emergency funds really doesn't serve any other purpose, right? Exactly. So if you are prepared for emergencies, then the cost is already factored in.

Sue-Ann Tan (4:30)

Okay, so there's no real need to be like, oh I need like 10k for example, like for an emergency, right?