Published May 19, 2007

Is your money working hard for you?

The reality today is that capital trumps labour in terms of growth in returns


MAKE your money work hard for you. The wisdom of that statement could not have been more evident in the last year or so. Those who have stayed invested in the last couple of years, be it in stocks or in property, have seen their relative wealth catapulted up by a few notches. And those who hung on to their cash are now significantly poorer relative to their invested peers.

It's literally a case of money getting smaller by the day. Last year, $1 million could still buy a decent apartment in district 9, 10 or 11. Today, one would have to set aside at least $1.3 million. And those who have been out hunting for a property in the last few months will tell you that sellers' asking prices have been changing by the week.

With globalisation and the prevalence of information technology, there is mounting evidence that for one's 'wealth' being, an employee should pay as much attention to his own financial affairs as to his day job.

Shares of the pie

The reality in this world where national borders are increasingly irrelevant is that bargaining power has tilted in favour of capital at the expense of labour.

This is evident everywhere. In Singapore, as recently as 2002, employees' compensation accounted for 46 per cent of the total gross domestic product of $157.7 billion. By last year, employees' share of the economy had fallen to 40.9 per cent.

Meanwhile, the share of companies' profits, which was on a par with employees' share at 46.2 per cent in 2002, had by last year risen to 51.1 per cent.

Over the last four years, compensation for employees as a whole grew by 4.3 per cent a year. Companies' profits, on the other hand, rose at a faster clip of 10.2 per cent a year. For 2006, the combined net profits of all the companies listed on the Singapore Exchange jumped 28 per cent from a year ago.

The picture on the individual employee's front is even less rosy than the 4.3 per cent increase a year, since the aggregate number includes compensation for new employees entering the market.

According to the Central Provident Fund (CPF) Board, the average monthly nominal earnings of full-time and part-time employees who contribute to the CPF grew by 5.9 per cent a year between 1995 and 1997, by 4.6 per cent between 1998 and 2001, and by only 3 per cent between 2002 and 2006. In real terms, the total wage increase between 2002 and 2006 was 1.8 per cent a year.

This is despite productivity gains. Value-added per hour worked by employees in Singapore improved by an average 3.9 per cent in the last five years.

It's a similar story in the US. As Jared Bernstein, an official in former US president Bill Clinton's administration and now at the Economic Policy Institute, puts it: 'Workers are working harder and smarter, baking a bigger pie more efficiently, but ending up with smaller slices.'

But even the modest average annual wage increase could be an exaggeration for most employees. As the joke goes: Bill Gates walks into a bar, and on average, everyone becomes a millionaire. But the median does not change.

We all know that it is the top echelons of corporations that have chalked up the highest rates of increase in salaries. And this has the effect of pulling up the averages.

There are a few reasons for the widening income gap. Glenn Hubbard, dean of Columbia business school and former chairman of President George Bush's council of economic advisers, says increased global competition has eaten away the economic 'rents', or excess returns, earned by manufacturing workers.

Meanwhile, the growth of global corporations and markets allows 'superstars' - whether in business, finance, sports, law or entertainment - to apply their talents across a much bigger base, increasing the economic returns for their skills.

But the more potent force may be technology, rather than globalisation. Larry Katz, a Harvard professor who worked in the Clinton administration, says information technology is essentially 'complementary to workers at the top, a substitute for workers in the middle', and of minimal relevance to those at the bottom of the income scale.

Financial skills

That brings me to my point, which is that salaried workers should make their money work hard. Let's take someone who is 35 years old today and earns $80,000 a year. Assume that he has investable funds of $80,000 today as well.

Let's say his salary will increase by 3 per cent a year, and he contributes 20 per cent of his earnings to his investable funds every year. If he is able to obtain a return of 8 per cent a year on his funds, by the time he retires at 60, the money he will make from his investments will amount to $2.1 million - equivalent to two-thirds of the salary he earned in the last 26 years.

And if he is lucky and savvy at the same time, and makes a 10 per cent return a year, by the time he is 54 years old, his annual investment returns will exceed his annual pay package.

So in this day and age, financial skills are just as important as any job skills. And the longer a headstart one has, the better off one will be.

But of course, the great equaliser will be a market crash. In which case, those who over-extended themselves with leverage will be sent to the back of the pack and those with cash will have the currency to move ahead - but only if they know how to utilise their funds wisely. So whatever the case may be, financial skills are a must-have.

The writer is a CFA charterholder. She can be reached at [email protected]