Five Cents Ten Cents

Tuesday, November 27, 2007

Year-end bonuses are here!

What are you going to do with your year-end bonus?
November and December are the months when the school holidays start, people clear their annual leave and dream about what they are going to do with their bonuses.

Different organisations pay different amounts for the year-end bonuses. Tight-fisted employers may pay nothing. Generous employers may pay the 13th month (i.e. 1 month) plus something extra. Other employers may benchmark year-end bonuses to performance and pay handsomely to their rainmakers or those who make a lot of money for the organisations or exceeded their key performance indicators. No matter the quantum of the year-end bonus, if you are fortunate enough to receive this windfall, you have to decide what to do with it?

Spend or save?
The key issue facing all of those who are receiving some form of year-end bonus is... SPEND or SAVE? How much to spend/save and how not to feel guilty about our decisions. If you have been following my blog, you will realise that it is not about what decision you make, but it is about how that decision brings you closer or further away from your financial goals.

If your goal is to live life to the fullest and have $0 to your name when you die, then you will probably consider spending ALL of your bonus because that is how you want to live your life.

If you goal is to retire BEFORE the CPF withdrawal age of 62 or 67 or whatever the gahmen decides after the next general elections, then you have to set aside SOME or even ALL of your year-end bonus towards savings, paying off debt or investment.

There is no magic formula on how much you should save or spend. It is entirely up to you to determine from 0% to 100% in either direction.

Panzergrenadier's year-end bonus decision for 2007
Ordinarily, my own rule of thumb is to spend 10%-20% of windfalls and save the remainder for investment. This year, I have decided to tweak my rule in the opposite direction because my own life circumstances will be changing. A new addition to the family will be coming early next year and I need to plan for my revised transportation needs and wants. I have been using the public transport system since the day I started work until now. However, given that I want to transport my family in better comfort next year, I have earmarked a lot of my year-end bonus towards financing a vehicle.

Some of you who have read my posts about not driving would be horrified! What heresy! Wasting your retirement fund on a car! Horror or horrors! :-)

Whilst I would have loved to continue to retire earlier based on my current rate of savings, I realise that I would probably need to shift my plans to retire earlier than 67 but later than what I wanted to. This is because I have decided that I WANT to drive to give my family a better way to get from point A to point B. No excuses. It is a WANT and I am not ashamed to say so.

Life is about balancing between the wants of today with the needs of tomorrow. I have decided that I have used the public transport system long enough and should live life a little better by paying (through my nose! haha) for a car and subjecting myself to the joys or ERP, COE, road tax, insurance, parking etc. So, for once in my life, Panzergrenadier is choosing to give himself a bit of luxury in transportation.

The rest of my frugal lifestyle remains. I still own only 3 pairs of watches of which 1 is sponsored by Mindef being the token of appreciation for my 10 years of reservist service while 1 was a gift for my birthday. The other watch that I bought costs all of $35. I hardly buy new clothes except during Chinese New Year and the Great Singapore Sale. I am happy to consume vegetarian food for lunch that costs only $3.00 and I go jogging in my Mindef sponsored New Balance running shoes for recreation and to destress while keeping fit.


What will your year-end bonus be doing for you?
There is no right or wrong answer. You alone determine how your year-end bonus is to be used. Making capital repayment of your outstanding mortgage loan. Going for a trip to Japan for a holiday. Buying the latest iTouch from Apple. Having your home renovated to look like the latest IKEA catalogue.

Your bonus.
Your rules.
You decide.

Be well and prosper.

Monday, November 26, 2007

Investing in your health by cooking

Cooking is one of the most under-rated ways in which you can save money in the long-term for your family!

How does cooking save you money?
If you have a family and are cooking for 3-4 persons, it makes both economic cents (sense! - pun intended!) as well provides a way to practice healthy living habits. While you can have a plate of economical rice for the low cost of $2.50 at some hawker centres or coffee shops, if you are cooking for a family of 3-4, using a budget of $10.00 per meal for 4 persons, you can buy wholesome ingredients that can be whipped out quickly for a healthy and nutritious meal.

A basic meal should comprise of the basic food groups:

1) Carbohydrates
Rice or noodles are relatively cheap when you buy in bulk. You can also use potatoes that if cooked via baking, steaming or boiling is both healthy and energy giving. Bee hoon is also relatively low cost at $1.00 for a pack that serves 4-6.

2) Protein
Protein can come from eggs ($0.20 ea), lean pork ($3.00 serving for 4), tofu based protein is relatively cheap and nutritious. For those who have bigger budgets, fish also comes in a variety of prices and provide good sources of omega 3 (e.g. salmon).

3) Vegetables and fruits
Vegetables and fruits provide you with much needed dietary fibre as well as minerals and vitamins. Vegetables are generally cheap with one bunch costing $0.45 to $1.20 depending on the type of leafy vegetables you choose. More high-class vegetables such as broccoli and cauliflower costs more as well as green/yellow/red peppers. Tomatoes also provide a good source of antioxidants to help combat free radicals. ;-)

Piped gas is a reasonably cost-effective way of cooking if your main approach is to stir-fry as well as boil. Deep frying requires more gas to heat and is very unhealthy!

Water is also a relatively low cost item
While utilities costs are going up, you will realise that the major culprit is actually electricity. Water, a fundamental component required for washing, preparing, cooking and cleaning is relatively cheap. Cooking for 3-4 can provide for more economical use of water as the preparation, cooking and washing up is divided among 3-4 persons.

Health is wealth
Arguably the most powerful case for cooking at home is health. When you cook your own meals for your family, you control the amount of salt, oil, sugar, spices that goes into your food. Also, you can add fresh ingredients and condiments such as fresh garlic, ginger, onions to flavour your food as well as to provide the healthy goodness from such items. Fresh garlic and onions have been known for their anti-bacterial properties and are great additions to your arsenal in combating germs and bacteria!

I have been cooking meals over the weekends for the past 2 years and have started to reap the benefits of it. I have lost weight, partly through eating rolled oats for breakfast on weekdays and avoiding oily fried noodles/beehoon combos while controlling what I eat during weekends through cooking at least 1 if not 2 meals to make sure I consume nutritious foods. I have also upped my intake of fresh fruits and vegetables to 2 portions daily as far as possible and cut down on animal protein.

The results have been positive as I have lost 2 kg over 1 year and feel much leaner than I ever have in the last 5 years of my life.

If I can cook, you can too!

What you need is sufficient motivation, willpower and an interest in the well-being of yourself and your family!

Be well and prosper.

Sunday, November 25, 2007

Balancing today's gratification for tomorrow's needs

I am reading the book "The Millionaire in You" by Micheal LeBoeuf, PH.D. and his concepts about financial freedom also touch on the need to save, invest and grow your wealth using the power of compound interest to help you achieve your objectives.

LeBoeuf also takes about how delaying instant gratification and saving for tomorrow's needs is one of the ways that we can achieve financial freedom. But he also makes the point that money is earned to be enjoyed.

The recent tragedy involving the five Singaporean dragon boaters who lost their lives in Cambodia reminds us of the fragility of life! We are sad for the five men taken in the prime of their lives and our prayers go out to the family of those who were lost to the river.

Living today vs saving for tomorrow
The fundamental question that we face each time we decide to save or spend is what to forgo for today so that we can have more for tomorrow. But what if tomorrow never comes? That is the key argument proponents of "live today for we do not know if tomorrow will ever come" approach to life. They believe that living hedonistically, spending to enjoy what life can offer is the way to go because life is FRAGILE!

Life is not a PSLE examination. There are no RIGHT or WRONG answers. You decide what answers to write down to the question of life: how do you want to live your life?

My own approach is to strike a balance between savings and spending. I try to live a simple life where my expenses do not exceed my monthly income allowing me savings to be channeled into investments to grow my capital. However, I also start to realise that money is to be enjoyed while one is able to appreciate some of what it can buy. Thus, while my fundamental philosophy has not changed, I am becoming less of a tightwad if the money spent is for my family to enjoy themselves a little.


Buying a car - what heresy!
I am now inclined towards buying a car to provide for a slightly more "luxury" mode of travel for my family especially now that a new addition is on the way. I have never owned a car since I started working and have relied on the public transport system for my travelling needs supplemented by the occasional taxi. However, with the numbers in my household increasing soon, I realise that, hey, I have been as prudent as I should by clearing off my housing loan and thus I can enjoy life a little by getting a small car. :-)

I also feel less guilty towards car ownership as I can use my family as the excuse! hahahah.... :-)

Financial Security
I was also paranoid about financial security since the dot.com days when I saw colleagues being retrenched without retrenchment benefits, i.e. being counseled to resign. Now, I realise financial security can only do so much if one does not take care of one's mental and physical health.

The road towards financial freedom changes now and then because your circumstances may change. A new addition to the family. A spouse who stops working. A promotion, an increment or a windfall are all things that can happen in life. The key principles that will help you navigate through the challenges of life are a positive attitude, flexibility and a love for life.

Life is the greatest gift of all and if we have a meaningful life anchored in health, we can overcome all obstacles and challenges put in front of us.

Remember to live according to your principles and if financial freedom is your ultimate objective, stay engaged in how best to navigate the journey towards your final destination!

Be well and prosper.




Friday, November 23, 2007

Financial freedom is a journey and not a destination

Life is about processes and journeys rather than a destination
Some of my readers may know that I am an avid toastmaster. You get to learn many things at toastmasters meetings and one of them is that life is about processes and journeys rather than destinations.

The toastmasters experience too has been described by many toastmasters both old and new that it is a journey. In the spirt of lifelong learning, the old adage in mandarin, "活到老学到老" (as we grow older, we continue to learn), rings true in any worthwhile human endeavour.

And so it is with financial freedom. Many of us see the end point or the destination of this process of financial freedom as being able to quit our jobs and do what we REALLY want in life instead of our work and business. The absurdity of it all of being in a rat-race is that we trade our time for money and use the money to buy back time, all the while forgetting that it is the experiences we gather through the journey that is life, that is living.

That is not to say that intermediate milestones are not useful in allowing us to consider how far we have moved along this journey for financial freedom. Setting targets and destinations focusses the mind and the will. But it is equally important to enjoy the process that leads us towards financial freedom.


The journey is preceded by what we first see in our minds
I see this journey towards financial freedom as a continuous process. I do not think there will ever be a time that I will say, I have "made it". In my journey, I have managed to reach some intermediate goals which become the stepping stones for even more exciting journeys in allowing me to have a measure of my finances.

One of the critical intermediate goals I have set and achieved is to own my home by fully paying off the mortgage. The satisfaction that I get from achieving this is starting to permeate through my consciousness. My debt-free status allows me to have a quiet sense of confidence about my financial situation. To know that for once in my life, I have one firm hand on the steering wheel of my financial life. I can now truly say that I work for my family and for myself and am not an employee who works for the bank. I can truly say that every dollar that I earn now goes towards accumulating my retirement fund and not towards paying off interest and debt. I can truly say that I am not a slave to my job.

Can I quit my job now and live off my accumulated capital? Of course not. Not at this point in time. I still need to work a good 10-15 years more as my living expenses will increase with a new addition to the family. However, I now can say that whatever I invest in my family is for them. It goes into building up their financial assets for their future prosperity and not to repay the consumption that I have taken up today.


Liberation and release is part of my journey
Just as my full-time national service run-out-date was one of the most liberating moments in my life. My release from long-term debt ranks up there along with my completion of 10 years of reservist service in the Singapore Armed Forces (SAF) resulting in me being transferred to Mindef-Reserve (MR) status.

While your day-to-day life may not change, it is really the knowledge that you are rid of a BURDEN that stays with you in your heart. When I relaxing at home in my place, I can finally say that is is MINE instead of being subject to all the legal claims by the banks, CPF etc. if you cannot service your loan. Just like my status as a civilian in Singapore, the SAF cannot touch me short of wartime operations and the feeling is priceless. No amount of money can replace that feeling of having done my duty and not be bothered by the State's incessant meddling with my life!


Liberation and release is within your grasp too
I encourage you to continue to be disciplined, to continue to save, invest and pare down your debt even as you maintain your standard of living. Invest in your health too as our quality of life is strongly influenced by good health.

Live and enjoy life.

Save and invest, but also spend on the things that matter to you.

Ultimately, we choose how we want to travel on this journey. Aggressively, conservatively or passively. Choose based on your own values and principles.

Be well and prosper.

Wednesday, November 21, 2007

Your choice of home impacts your financial freedom

Singapore has one of the highest rates of home ownership in the world. Most Singaporeans, including myself, own our own homes.

Your home is your single biggest investment you will make and has a fundamental impact on your lifestyle and your retirement because our retirement fund -- the central provident fund (CPF) ordinary account savings can be used to pay for the home. Thus, your choice of home will determine the amount you can save, invest and ultimately your financial freedom.

Choice of Home
During the times of rising property prices and overall economic growth of Singapore in the 60s to 80s (prior to recession in 1985), the conventional wisdom was to buy the biggest home you could afford because rising affluence, economic and population growth coupled with our small land area meant that property prices for both Housing and Development Board (HDB) flats / apartments as well as private residential property (landed and apartments) only went up one direction. UP!

However, the 1985 recession made some aware that property prices could go UP and it could also go DOWN. But those whose jobs were secure and had extra cash who bought in 1985-86 period made a bundle as property prices continued their onward march upwards until the Asian crisis hit in 1997.

I still remember the time when people talked about the windfalls they could make by upgrading their HDB apartments from 3-room to 4-room to 5-room to executive apartments etc. Many thought that property was the way to financial freedom and wealth for the ordinary working class.


Paradigm Shift - 1997 Asian Crisis
The key takeaway for me during the 1997 crisis was the fragility of this entire cycle of prosperity. Job security became a novel concept because globalisation meant that jobs and sometimes entire industries could be outsourced and lost to lower cost competitors. Along with the evaporation of liquidity and speculative fervour that propped up properties prices, the collapse was dramatic and drastic. Those who could not hold on to their jobs or businesses had to downsize their homes or worse, lose their homes when they couldn't pay their mortgages.

A new paradigm emerged to challenge the long-held view that buying the biggest property you could afford and upgrading was the way to financial freedom. Instead, it became buy what is sufficient for your family size taking consideration your financial capacity as well as security of your job because if you lose the roof over your head and also a lot of your equity.


Property as a home as a hedge against inflation
The reality check brought on my the asian crisis in 1997 hammered home the realities of life in modern Singapore. Job security is an illusion. Your home being the single largest liability in your life has the ability to virtually bankrupt you if you fall behind your mortgage payments. Because if your source of income ceases, the mortgage payments do not and the bank can foreclose on your property if you fall behind your payments.

Those who bought HDB apartments direct from HDB were somewhat shielded in that whilst the loans were from the HDB, the statutory board was not as quick on the draw to repossess homes should lessees default on their loans. This changed dramatically when policies were put in place to restrict the number of times one could get subsidied HDB homes. Hence, some had to finance their homes using commercial loans where banks were not as forgiving compared to the HDB is enforcing their interests should the borrowers default on their loan payments.

If you learn not to over-extend yourself in buying your home, it can be a good hedge against inflation while allowing you to save on rental expenses. Singapore's tight supply of residential homes means that rentals have recently shot up very quickly. Even HDB apartments are renting for $2-$3k per mth in choice locations. Under increasing immigration, the real demand for residential homes will be here. Hence, buying your own home allows you to have your own roof over your head. In addition, because you save on rental expenses, your instalments to pay your mortage can be released back to you in the future should you need to sell your home. If you rent, rental expenses cannot come back to you.

At the current rates of immigration, demand for homes will still be robust. Thus, owning the roof over your head gives you a place to stay and also helps to maintain some value in your property. Whilst property gains can be cyclical, overtime, if you can control when you wish to sell your property, you are able to reap some returns. Your CPF monies will have to go back to your CPF account subject to prevailing minimum withdrawal age and minimum sum requirements but the cash you used to pay for your home can come back to you. For those of you who are facing the empty nest syndrome in your retirement years, you can opt to downgrade and buy a smaller home or rent.


Paying off your loans as fast as your circumstances allow
I realise while managing my own investments is that beating the market and getting returns higher than mortage loan rates are not that straightforward. Some investment gurus claim that beating 4-5% mortage loan rates are easy and run down my approach towards using my spare cash and CPF to pay off my mortgage early. One guru claims that mortgage loans are good debt and should be used to free up cash for investment opportunities. Individual skills, abilities and financial circumstances vary and I know my own lack of expertise in being able to time the markets well most of the time. Thus, I chose the conservative strategy of paying off my mortgage fully whilst my financial means allows me to do so while I am still not near retirement age.

I do this because my experience during the Asian financial crisis in 1997 opened up my eyes to the relative insecurity of the modern job market. This coupled with the knowledge that job security has an inverse relationship with age made me more aggressive in pursuing a pay off your loan as soon as possible (ASAP ) strategy.

I would not recommend my strategy to all because each of your financial circumstances is unique. You have your own ways of approaching financial freedom and how to achieve it. For me, my assumption was that as I grow older, our Singaporean ageist employer mindset would be a risk that I would have to manage. My way of managing it was to rid myself of the single largest liability in my life - my housing loan. By clearing my loan during the relative peak of my earning years, I have created myself a buffer for the next 15-20 years of working life to use my income to support my living expenses as well as to save for my retirement over and above the mandatory CPF contributions.

In addition, I have the backup to downsize my home should I really need to unlock cash from my home as this provides me with the security to know that I have an asset that can be monetised IF I need to. This assurance gives me a lot of confidence in my day-to-day working knowing that I am not a SLAVE to my job as I do not worry about the roof over my family's head. :-)

Each of us have different ways of deciding the type of home we want to live, how we go about financing it, and how we go about paying it off early or late.

Your choice is yours to make, the consequences of your choice are also yours to accept. There are no right or wrong answers as the paths to financial freedom are many and the ways to get there plentiful.

Be well and prosper in whatever decision you make.

Sunday, November 18, 2007

When the market drops, you want to cry...



The market can go up and it can go down

The risks of investing in stocks and shares (equities) is that the price of your individual stock and consequently, your portfolio or basket of equities you own can go up and can go down!

Nobody questions why the stock portfolio goes up. But when the stock portfolio goes down, everybody wants to know WHY!!!

Unlike robots who have no feelings or emotions, you are a human being filled with flesh and blood. Emotions run through your heart when you perceive positive or negative news. When you see the Straits Times Index (STI) go up and your portfolio is full of index stocks, you are as happy as a lark! But when you see the STI go down dragging your portfolio from a +8% return to a -2% return, you curse and swear at high global oil prices, US sub-prime problem and Adam Cheng for his TV series being aired as all these appear to have caused your portfolio to melt in value.


I want to cry, too
The recent correction has also hit me (again!). For those of you who have been reading this blog, you will know by now that I am as expert as a chimpanze in picking stock winners. Most of my winners were due to the overall good economic growth from the low points in 2003 due to SARS up to the recent dizzying GDP 3rd quarter growth of 4.3%. The amount of liquidity and investments that Singapore has attracted in this upturn has helped many index stocks do well because their underlying business in oil and gas, financial services and property have done well these last few years. Fundamentally, the economy is still going strong.

However, I cannot time the market perfectly. Hence, when the correction hit in August 2007, I was able to mitigate some of its effect but cutting losses on losers and riding a winner. Fast forward to November 2007. Again, there has been a correction and even after factoring in my winner, my portfolio is down to the "fantastic" performance of 0.6%.

I too want to cry when I look at my portfolio because if I had put all the monies in treasury bills, I would have earned a risk-free 2% plus for the whole of 2007. But that is the fundamental risk of holding stocks and shares, the variability of the share price affects your portfolio performance. That is why for myself, I do not invest ALL my investible savings in equities. Currently, it is about 78% which is relatively high because I still believe that the Singapore economy is still robust enough up to middle of 2008 given our GDP and CPI numbers.

However, I do keep 22% in cash and cash equivalents to buffer me and to allow me sufficient cash to meet living expenses and emergencies.


Tips on making yourself cry less during market downturns
So how do you take measures to reduce the risk of the market downturns making you feel like crying when you review your personal net worth statement? Here are some of the simple principles I follow to make me cry less:

1) Invest less than 100% in equities (or major asset class)
The all-or-nothing strategy in investing is very risky, hence, I do not risk ALL my investments in one asset class. I minimally have at least 2 asset classes at any one point in time. For now, it is in savings deposits as well as foreign currency fixed deposits besides equities.

2) Have sufficient cash reserves
Some financial planners advocate have 3-6 mths of income or expenses as cash reserves for emergency living expenses. Assuming that you are working and drawing an income from your job or business, this reserves which should be in liquid form e.g. savings in bank accounts, funds supermart cashfund or even treasury bills (3 mths) or short-term fixed deposits. This provides you firstly with a relatively low risk asset class to balance the risk of your other investments and also provides liquidity in case there is some unforseen expense that needs to be met.

3) Live a simple life
You will be surprised on how simple a life you can live if you so desire. One of my heroes when I was young was the ex-Governor of Bangkok Chamlong Srimuang who lives a very ascetic life. While I am not advocating his brand of asceticism, we can learn to live with the little we have because at the end of the day, we cannot bring our life's riches to heaven.

A simple life stripped from the unceasing chase for materialism could be one way to counteract our ceaseless human desires. I realise that it is healthier too compared to the consumerist materialism we are all so accustomed to in Singapore.



Investing reflects our approach to life

At the end of the day, whether you choose to put 100% of your investible savings in one asset class, diversify it everywhere or do nothing and leave your money in POSB earning 0.25% reflects your approach to life.

No-one can make you do what you do not want to do. However, many of us who share similar financial goals of being financially free where our passive income from portfolio investments exceed our living expenses realise we have to adopt a disciplined approach to investing, to save and to take some risks by investing in asset classes providing for higher potential returns and higher risks mitigated by some holdings of risk-free assets.

In the meantime, enjoy the journey and learn to cry less when the market drops because we cannot all 100% time the market and if you have the power to hold, in the longer term, the market will tend to reward those who invest in fundamentally sound businesses that grow with the general economy.

Be well and prosper.

Thursday, November 15, 2007

Many roads lead to financial freedom

There are many roads that lead to financial freedom. As I traverse through the various different approaches in my blog, I realise that there are many small things we can do that eventually add up to help fuel our journey on this path towards financial freedom.

Different strokes for different folks
There are as many views on how you can achieve financial freedom as there are stars in the sky. Some ways may take a huge dose of chance, for example, in the buying of lotteries such as TOTO, 4D etc. However, most of us understand that the probability of being financially free from such approaches is so infinitesimal that we just buy TOTO for fun and not seriously with the realistic expectation of hitting a $600,000 jackpot or even the Hong Bao multi-million dollar draw.

Other ways provide for a higher probability of being financially free, but tend to require discipline, hardwork and a longer time horizon to achieve. For instance, the simple approach of:

  1. Live within your means
  2. Pay off debt
  3. Save and invest prudently
  4. Go back to 1
can help bring us closer to our goal of financial freedom, perhaps to retire by the age of 50 instead of 67. To semi-retire and turn our hobby into a small business that can sustain our lifestyles. To continue to work until 67 if we so choose but to feel unburdened by financial pressures of life.

Some people advocate using good leverage, i.e. to delay paying off housing loan and to build up investible cash for an opportunity to punt during times of crisis when stock and property prices are at their lowest.

Whatever gets you going
The route that we each choose to take towards financial freedom will be as varied as the tapestry of life. The threads of each of our individual styles, approaches and idiosyncracies come together in a riot of different colours, textures and lengths. Some of us will go all out and punt virtually 100% of investible savings into equities, hoping to make $100k into $500k within a few years through picking the correct stock on SGX. This is not unrealistic. During 2007, if you had bought SGX itself when it was $10 and ridden it to $15, you would have achieved a 50% return in a few months. However, such an approach is equally fraught with risks of sharp corrections in the equities market making that same $100k lose its value to $50k or worse.

Some people take a conservative approach, to invest 100% in treasury bills and fixed deposits. This helps you avoid losing money in the equities or other markets, but at 2%+ returns, the projected 2008 inflation of 5% will result in $100k being worth $97k, i.e. a net loss of $3,000 per annum due to the CPI eroding away the returns from such safe deposits.

Thus, your money loses real value due to cost of living, as measured by CPI, rising above the rate of return on your investments.

So how, brown cow?
What do we do then? Doing nothing is the worst case scenario. Leaving your money and savings in the 0.25% interest bearing savings account in your local bank is totally unacceptable. Transferring that amount to higher interest bearing savings such as Maybank iSavvy at 1.68% for $5,000 and above or treasury bills at 2.1-2.4% yields helps but still does not beat inflation.

To beat inflation, we have to seriously consider taking some risks. Depending on your own expertise and experience, you may need to start on the road towards investing in equities, bonds and other instruments.

What to invest in is really the question you need to answer for yourself AFTER you have done some homework, read about investments. Talk to people about investments. Visit blogs, websites, internet resources about personal investments. Sometimes pay some tuition fees through losing small money on investments to realise how challenging it is to consistently beat inflation over the long-run.

In short, we need to step beyond our comfort zones and get our hands dirty in being our own financial planners. Understanding the basics of personal finance, about managing our cash flows, about calculating our own net worth, in trying to establish what are our investment goals and how do we get ourselves geared up to attain those goals.

We need to take positive action and it starts with us.

No-one can nag us to do it.
No-one can make us do it.
You have to JUST DO IT.

Be well and prosper.

Wednesday, November 14, 2007

What is your personal net worth?

Singaporeans are busy people. We are busy with work; we are busy with our families; and we are busy with our personal lives. Are we too busy to take a step back from our work, family and personal life to reflect on our own personal net worth?

Why should you be concerned about your personal net worth?
We live in a material world that requires money to fund our lifestyle. So living in Singapore comes with it certain financial requirements depending on how you want to live. If you are frugal, you can make your money stretch a long way. If you are spendthrift, money flows faster than water plunging down a waterfall.

Do you know how long you can last financially if you were retrenched?
Do you know how much your savings can provide for you if you were too sick to work?
Do you know how much you need to have to be able to retire yourself from you job?

In order for you to be able to have some kind of answer to the questions above, calculating your personal net worth would help. (We deliberately do not touch on insurance as that is a whole other issue.)

Why should you be concerned about your personal net worth?
Your personal net worth gives you a snapshot at a point in time how much you are worth taking into consideration your assets and liabilities. A simple personal net worth statement can be as follows:

ASSETS
Cash at Bank
Money Market Instruments
Time deposit
Investment Securities (stocks and shares)
Central Provident Fund
Insurance (Non-Guarantee Cash Value)
Property (owner-occupied) at valuation
Property investment

LIABILITIES
Housing Loan outstanding
Car Loan outstanding
Credit car debt outstanding
Personal unsecured credit outstanding

Total net worth = Assets less Liabilities
[Tip: A POSITIVE net worth is GOOD. A NEGATIVE net worth means you owe others more money than what you possess. In the short-term, while you are starting out a career and home, that is okay, but in the long-term you must move towards a POSITIVE net worth by consistent savings and investing!]


So what do I do with the personal net worth statement?
The whole idea of doing this snapshot is to know if your net worth is growing over time. If you want to be able to retire earlier than mandatory retirement age, you need to grow your net worth to a point where the passive income from this net worth is more than your living expenses.

However, for many of us, our homes while contributing to our net worths, does nothing for us in terms of passive income or cash flows because while you are staying in it, you cannot receive cash flows unless you rent out a room or the entire home. If you rent it out, you still need to find a place to stay. Hence, only your net worth less the value of your home can be invested to generate returns for you.

Knowing your net worth is just one step towards being more financially aware of your own situation. Instead of relying on a financial planner to tell you what you are worth, go compute your own personal net worth statement using the categories above or create your own categories.

When you realise that you daily spending / savings habits have an impact on your net worth, it will help you decide if that dollar you earn goes towards spending or savings or to pay off your debt. All your actions financially affect your personal net worth.

Know your net worth, self-awareness is the beginning of true knowledge.

Be well and prosper.

Tuesday, November 13, 2007

Being debt free

Paying off your housing loans
A colleague once consulted me on whether she should use her CPF to pay off her housing loans above and beyond her monthly mortgage instalments deducted from her CPF ordinary account. Whether you should pay off your housing loans depends on many factors. Some of these factors include:

1) Type of loan -- HDB vs. Commercial Bank
2) Interest rates
3) Financial planning


1) Type of loan -- HDB vs. Commercial Bank

a) Assumption: Loan quantum is the same amount as CPF savings

The type of loan you have taken makes a difference in terms of whether you should consider paying off your loans as quickly as possible vs delaying it. If you are on the concessionary HDB loan rate of 2.6%, your current CPF ordinary account savings pays you an interest of 2.5%. This means that your loan interest rate is higher than your CPF ordinary account by 0.1%. Now assuming your loan quantum is the same as your CPF ordinary account balance, then you incur a net expense of 0.1% by not paying off your housing loan using your excess CPF ordinary account monies.

Verdict:
Hence, if you cannot get any better return than 2.6%, you should use your CPF ordinary account monies to pay off your loan.

b) Assumptions:
Loan quantum is the same amount as CPF savings +
You can get a better return than HDB loan rate of 2.6%

If you are able to get a better return from investing your CPF ordinary account monies into stocks and shares or other investments and your loan quantum is the same as your CPF ordinary account savings, then you can consider paying off your loan slowly and getting a better return. For those of you who are familiar with investing, you will know that to consistently obtain a return higher than 2.6% without risk is rather difficult. Prices of stocks and shares can go up and down and sometimes to the tune of 5-20% within months, weeks or even days! Hence, this volatility makes it tough. If your investment knowledge does not go beyond fixed deposits and you cannot tell the difference between a treasury bill and a time deposit, I would suggest that you consider paying off your loan with spare CPF ordinary account monies as it would be even more difficult for you to get a risk-free return exceeding 2.6%.

Verdict:
Hence, if you can get a better return than 2.6%, you can consider investing your CPF monies in investments that yield higher than 2.6% risk-free.

c) Assumptions:
Loan quantum is more than CPF savings +
You can get a better return than HDB loan rate of 2.6%

In this scenario, things get a bit tricky. To decide whether you should pay off your loan with excess CPF monies depends on whether the total returns from investing your CPF ordinary account exceeds the total interest expenses you have to pay on your outstanding loan quantum.

Let's say loan quantum = $150,000
Loan interest is 2.6% (HDB concessionary rates)
Investment returns = 5%
CPF ordinary account balance = $100,000.

Total interest paid for the year (using simple interest) = $3,900
Total investment returns = $5,000.

Hence, if you can get a return of 5% on a CPF ordinary account balance of $100,000, then it makes sense. However, if let's say the investment returns is = 2.4% (treasury bill risk free rate), then

Total investment returns = $2,400 < style="font-style: italic;">Verdict:
You need to calculate expected returns from investing vs expected interest costs to decide if you should use CPF ordinary account monies to pay off your loan.

Note:
The Government has announced that the CPF ordinary account balances for the first $20,000 will be paid a higher interest rate of 1% above the statutory minimum of 2.5% currently. In addition, the SMRA (special, medisave and retirement accounts) on the next $40,000 will also attract a higher interest rate of 1% above the long-term bond rate which will be pegged at the 10 year Singapore Government Securities (bond). This should be factored in for your own calculations whether you should pay off your loans using your CPF ordinary account monies.


2) Interest rates
Generally commercial banks rates of interest are much higher than the concessionary HDB loan rate of 2.6%. Prime is around 4-5% and the above illustrations also apply except that you would need to get a better return than 4-5% to leave your CPF ordinary account monies in your CPF. that is what I did for my own loan. I used my excess CPF monies in the ordinary account to make partial capital payments of my loan because the interest on my tloan at one stage was at 4%. Hence, unless I could obtain a risk-free investment using my CPF ordinary account monies that exceeded 4%, I saved on the loan interest by making capital repayments.

Some people have feedback to me that their CPF monies are used as a buffer in case anything happens to them. In addition, those who buy HDB have the dependents protection scheme where the HDB apartment loan will be paid off should anything untoward happen to them.

Verdict:
In general, commercial bank loans after the 1st few years of concessionary rates tend to be much higher than your CPF ordinary account savings rate. Hence, in most cases, if you have a commercial bank loan, it is better to pay off your loans faster as banks can raise their interest rates unilterally after the lock-in period especially if your loan is a floating rate type.


3) Financial planning
In this article, I have not even touched on using cash in addition to CPF ordinary account monies to pay off housing loans early. The argument for using cash is similar, i.e. cash yields only 0.25% in savings account, up to 2.7% for longer term fixed deposits (2 years). Treasury bills yield around 2.4%. Thus, to find a return that is higher and at a risk-free rate above your loan rate is challenging especially when it is a commercial loan.

My strategy that has paid off was to channel virtually all my CPF ordinary account monies that was not already going towards paying off my monthly mortgage instalment into periodic year-end partial capital redemptions of my outstanding loan. I also channeled spare cash from year-end bonuses, windfalls etc into paying off my loan early. Whatever present consumption I could defer I deferred. E.g. not buying a car and using public transport. Keeping my living expenses low and living way below my means. But doing this consistently over 12 years, I have managed to pay off my mortgage and am debt free!

Some people might find my approach to life and living somewhat austere. Some feel it is existing but not living. I guess the key that differentiates myself from others in this regard are my views on present vs. future consumption. I grew up in a frugal family and inherited this approach to spending and saving. Thus, it was obvious to me early on in my career to take a lower loan quantum and to defer much of present consumption to the future by utilising cash and CPF ordinary account monies into paying off my housing loans.

This strategy works for me because I live a relatively simple lifestyle. Thus, I value financial freedom and that ability not to worry about my job because I have prioritised first paying off the largest debt -- housing loan first before consumption. I am fortunate that my spouse also shares this philosophy and we make do with the simple things in life.

My home is the biggest investment in my life as it provides me with a roof over my head and it also stores us part of my wealth given Singapore's growing inflation rate. Staying in my owner-occupied home helps me to save on rental expense while paying off my loan quickly helps me develop a positive net worth position quickly and makes me financially less stressed.

At the end of the day, each of us has to decide how we manage our debt. Like fire, debt is a good slave but a bad master.

Be well and prosper.

Monday, November 12, 2007

B is for Busy

Last week had been a hectic whirlwind in terms of work and assignments which has left me so exhausted at the end of the day that I have hardly had the energy to blog about financial matters.

Busy as a Bee: The Silver Lining in the Cloud
How does being busy help you manage your investments? I realised that this hectic period made me realise one thing... That in investing for the long-term, sometimes doing nothing is the best strategy. This recent correction due to the write-downs of billions by US financial institutions has also affected my portfolio as I didn't have the time to monitor my investments closely. Hence, on paper, my paper gains have been severly trimmed leaving me with only a miniscle 0.78% return if I were to liquidate my entire share portfolio right here right now.

But I do not intend to do so as I am holding on to my portfolio for the longer term. And it made me realise that I was getting into the trading trap where I felt the urge to buy or sell something as the market moved up and down during the days, weeks and months. I cannot time the market, hence, my approach in selecting blue-chips based on their fundamentals and dividend yields has helped me. But my few speculative punts have turned sour.

My ability to hold allows me to be cool enough not to liquidate or sell my shares when sentiment is bad. Hence, I can ride out the storm for the time being. However, this episode again makes me re-examine my approach to investment, in that I should concentrate on my game plan, to invest in quality blue-chips for the longer-term capital appreciation and regular dividend income.

Investing for the long-term
The other thing that has happened to me is that there will be a new addition to my family soon next year. Hence, my investments now can really be benchmarked to what I will bequeath my child who will be born next year. :-)

This really makes me think longer term as I have a real-life investment horizon of about 19-20 years which will be the age when my child goes to University. I hope she will make it to the best of her ability and that I will be able to fund it well when the time comes.

Also, my shares can be bequeathed to her and really reap the benefits of long-term capital appreciation but staying vested for the long-term.

Changing perspectives
A long-term horizon sometimes doesn't sink in until one is able to visualise it clearly. For me, my daughter's coming will herald a new age in my investment philosophy, that is to create value by investing in blue-chips that will be part of her university tuition fund or her coming of age present. In the meantime, I look forward to teaching her to be financially literate and to equip her with the skills to survive in our modern world and beyond.

What type of financial legacy do you wish to leave behind?

Who and what are you investing for?

Be well and prosper!