tzlee.com/blog

Category: Finance & Property

  • Ushering in 2014

    2013 has been yet another crazy year, although much better than 2012. A summary of what I have learnt in 2013: –

    • Patience is a virtue, especially when driving. (Easier said than done.)
    • If you ask, you shall receive.
    • Expectation is a bitch. Expect less and you may be happier.
    • In order to grow yourself you need to grow those around you.
    • Regrets are meaningless. Instead take them as lessons learnt and make the best of it.
    • Money is a tool. Use it to buy more experiences, not things.
    • Stock markets are dominated by computer bots. Be weary. Do not trust reports from trading firms.
    • It’s never too early to plan your finances. Track income & expenses in detail. Document your net worth monthly.
    • Healthy food costs more, unfortunately. If you can afford it, eat healthier instead of getting a $60 haircut. I went to QB house for the entire of 2013.

    Plans for 2014: –

    • New house — hopefully to regain some sanity.
    • New member of the family (fingers crossed).
    • Continue growing myself and people around me.
    • Learn to be more focused.
    • Learn to be more positive.
    • Make more friends.

  • Buying insurance

    Most of us would have purchased some insurance policies by now. If you haven’t, you need to start looking!

    Basic healthcare insurance in Singapore is relatively inexpensive and can even be paid with CPF money, but some of us may end up buying endowment or investment-linked policies as insurance agents would put it — to “beat inflation”.

    Well, it’s not all that bad to start saving up early, but the fact is most people do not really understand what they are buying into, myself included. Insurance policies are extremely complicated and every company and policy is different.

    However there’s some things that I’d like to caution you about.

    Endowment maturity and break-even

    Endowment policies typically have a maturity date that is relatively long, e.g. 15 years. The break even point is usually quite far ahead, say at the 12th year.

    Consider this: A person purchased an endowment policy with a premium of $100 per month. If he loses his job before the break-even point and fails to pay up his monthly premium, he would be at a financial loss. To break-even, he/she would have to pay up at least $100 x 12 x 12 = $14,400 before realizing any form of financial gains without even factoring inflation.

    It is OK to buy some of such products, especially if the interests are guaranteed, but do consider the long payment tenure. One should set aside funds to keep the policy rolling. Don’t ever let a policy lapse!

    Investment-linked policies

    Investment-linked insurance policies are no different. Every dollar placed into investment-linked insurance policies have an overhead of around 5-10%. This is used for a basic life insurance coverage and of course your agent’s commission! That’s how they earn your money!

    Besides the risks that investments carry, the overheads would mean that every dollar you “invest” on a monthly basis would take at least 1-2 years to see any gains assuming the investments return 3-5%. And if you are making monthly payments this is taking 5% from you every month, effectively rolling your break-even point forward!

    In addition, the management of these fund baskets aren’t exactly transparent. I never knew what exactly was invested and it changes over time. Every year they send me a thick booklet with all the funds and fanciful charts, but who the hell reads that stuff?

    Switching funds

    If you already have investment-linked policies meant to hedge against inflation, right now the best bet is probably to switch to bond funds as interest rates have been historically low. Buy into a bond fund that has less probability of default, e.g. Singapore.

    Why do I recommend bonds? Because bonds are secured, less volatile than equity, and to buy a bond requires typically in excess of $50,000 so I see it as a form of positive leverage.

    The non-savvy investor

    In my opinion, endowment and investment-linked insurance policies are for the uninformed or non-savvy investors looking for an easy way out. After all, insurance companies are a business; they need to make money.

    I would actually consider outstanding endowment payments to the date of maturity as a debt! If you have read my article on net worth, this means lower or even negative net worth!

    For most of us, some basic healthcare and life insurance coverage is enough.

    Know and manage what you invest

    Many people think that these insurance-linked investments are long term “invest-and-forget”. After putting my hard earned money into these products, I can only say with a great amount of certainty that every investment requires time and attention and that never let somebody else manage your money for you.

    Explore stocks, start a business, or just save up

    Spend some time to understand stock/equity trading and the returns may potentially be higher. In addition, you will have control of what you want to invest in, and you will also learn from it especially when it comes to human behavior. Somethings in life you really need to put money into before learning 😉

    Otherwise, start a business or just save the money. Sometimes your time is more worthwhile than staring at stock counters all day long.

    So if an agent comes up to you again to tell you that you need to beat inflation, beat the agent instead. 😉

    P.S. Sorry, Loy if you are reading this! This is like an article out of “Hard Truths”, but being a naive investor I do not blame anyone. You have been a good agent!

  • Know your Net Worth

    I’m probably having what you may call the “mid-life crisis”. Screw that, probably this really is it — it is when you often sit down at the coffee shop with a cup of Kopi-O and think about all the things in life like family, kids, parents, property, car, debt, money… MONEY! The bane of human existence.

    Anyway, I’ve been thinking long and hard about money (I’m sure most of us do) and it really isn’t an easy topic to get my head around. I’m willing to bet even billionaires have problem with money. Well, not knowing where to spend it is a problem.

    Tracked your expenses yet?

    Most people start off with basic financial management by tracking their income and expenses, i.e. cash flow. That’s a good start, and if you haven’t done so I’d urge you to start right away! Ever since the proliferation of smart phones this has never been easier.

    I use a relatively simple app on the iPhone to accomplish this. It doesn’t have to be too complicated – I’d stay away from those double-entry type apps because they take quite some work to set up (unless you are familiar with accounting).

    Now that we have started to track our expenses and subsequently started to see some savings, i.e. positive cash flow, it is not uncommon for us to wonder what we want to do with that money in our bank. Should we place them in a fixed deposit, or buy some insurance policies, or buy some shares, or simply just spend some of it?

    I may not be entirely correct, but I’d like to share what I think: the next step is to know and track our net worth.

    What is net worth?

    A person’s net worth is the sum of all his assets less his liabilities. In layman speak it is all his money and things that are worth selling for money (e.g. property, car, jewelery) minus loans.

    Why is net worth important?

    I think net worth is extremely important because it takes into account of debts! It is almost impossible to escape debt in our (1st world) society. Most of us are in debt the moment we step out into the workforce with an education loan, thus it is normal for fresh graduates to start with a negative net worth.

    How to calculate net worth?

    There are lots of articles for this. Here’s one article I found useful.

    Exclude your residential property from the calculation

    If you purchased a property several years ago, you’d probably end up with a really big net worth figure. However, I suggest that the primary residential property be removed from the calculation because a residence is a basic need. Otherwise my kidneys in the black market would add a million dollars to my net worth. You get the drift.

    Be careful with fixed assets

    Don’t be overzealous with pricing out fixed assets. They are usually worth less than we think. When we need to liquidate them it would usually be in times of crisis where these assets may be literally worthless. One good example is not to take the list prices off sgCarMart for your vehicle! Discount at least 20% off that list price.

    Tracking net worth over time

    Knowing our net worth today is not enough because there are assets, investments and debts involved. Even if no new assets, investments or debts were acquired, these numbers may be affected by fluctuating interests rates or other market forces. We should aim for a positive net worth growth over time and weed out any bad assets or investments.

    In times of war, wouldn’t I be pauper?

    Duh! Even money becomes “banana money“. But worry not, if there is a next world war, Bill Gates’s net worth would have fallen too. It’s all relative.

    Debt free vs positive net worth

    While some people may advocate being debt-free, I do think that some debts are healthy because without leverage most of us would be sleeping on the streets (unfortunately). The big difference between having no debt and a positive net worth is that a positive net worth encourages leveraging with a positive advantage.

    However net worth is not to be used as the only measure of our financial situation. Cash flow must also be taken into account! A negative cash flow leads to a declining net worth! One example is buying a property with a monthly repayment that we are unable to fulfill.

    So I know my net worth, now what?

    The figure tells a lot about how you should make your next financial decision.

    For example, a person with negative net worth will need to cut down on spending or increase her income. A person with a $3K net worth should not buy a brand new Prada handbag on a credit card.

    In summary, one who is financially sound should have positive cash flow and positive net worth.

    But don’t be overly obsessed with saving up piles of cash. The old saying goes — you can’t bring money with you to the grave. If you have to spend, go ahead and spend some money. Spending is actually one way to beat inflation. But if you have to spend, spend on healthcare and life experiences, not on things.

  • BMW Buyer vs Public Transport Fan?

    I read this article and couldn’t resist my urge to bang wall.

    http://ride.asiaone.com/features/opinion/story/bmw-buyer-versus-public-transport-fan

    Comparison of extremes

    First, the example of an expensive $220K BMW 3-series is a little way off the charts as a basis for comparison against public transport. The author could have used a cheaper car, for example, a Kia Forte (which is a very decent family sedan, by the way.) He also failed to mention that a secondhand car market actually exists. Willful omission?

    And for a $2,000/month installment, assuming this is over 10 years, then $240K is the full amount including, not excluding, interests. The author seems to be clueless about the tax structure and rebates. (Business Times article, really?)

    The author also seems to have conveniently forgotten about all the recent complaints about queueing, waiting, squeezing, breakdowns, smelling people’s armpits, getting drenched in the rain, having people rub you all over, getting scolded by random aunties and having uncles with a laptop watch porn withbeside you.

    Where the hell are the taxis when you needed them most?

    Has anybody also forgotten about SARS?

    Can you or do you really want to bring a family of 5 onto a crowded bus with bags of groceries?

    What about the time and opportunity losses of the aforementioned Public Transport Fan (“PTF”)?

    There is indeed “a huge price to pay for convenience.”

    Anyway, let’s just take that as that, and that the BMW driver has a $340K hole in the bank as the author of the above article described.

    Invest, invest, invest!

    The author brought up investing! Why am I not so damn surprised?

    I haven’t seen my investments yield as much as the author has described. The truth is there are risks associated. The markets have been very volatile for the past four years, and I do not see it correcting anytime soon. All I can say is, invest with care.

    And for a regular investment of $2,000/month, a 3-4% dividend yield would return $720 every year. That is per year! Or about $60 per month.

    Condo… in Pulau Ubin?

    And as described by the author, if these dividends have been reinvested, i.e. with the effect of compound interest, the eventual sum of $999K would buy the PTF a piece of “suburban condominium” in 25 years. Really? With all the talk about investments, what ever happened to inflation?

    Anyway, I will put this theory to the test. I am investing fixed monthly sums into dividend yielding stocks starting this year. My portfolio should be growing as quickly, or even more quickly than my car installments. Unlike some book or article writers, I walk the talk.

    Will you really save that $2,000 a month if you didn’t drive a car?

    Sometimes money that goes around comes around. If you don’t spend on one thing, you end up spending on another — food, clubs, branded goods, gadgets, etc. Sure, maybe you won’t spend all of that 2 grands, but some of that is going to be spent somewhere, somehow.

    Public transport (and Taxi for that matter) will always be cheaper. Private transport is a lifestyle choice. If you are single, maybe it’s still OK. For those with a family, sometimes a car can really be of much help.

    And for those looking for a girlfriend… need I say more? 😉

    Just for laughs:

    Just for Laughs - Where's your F***ing Ferrari?

  • On car loans again

    I just read this article.

    I found this statement by Tan Huey Min, general manager of Credit Counselling Singapore a little misleading:

    Over the long run, if you pay off the loan in eight years, the amount you have paid is much more than if you had paid the loan off in five years.

    First off, back when 100% 10-year loans were allowed, the interest rate was 1.88-2.8%. EIR 3-4%.

    Now that MAS capped loans to 50% 5-year, banks raised interest rates to 3.25%, or EIR 6-7%.

    Given an arbitrary amount of $100,000. This is how it works out:

    10 years, 100% loan @ 1.88% = $18,800 in interests
    5 years, 50% loan @ 3.25% = $8,125 in interests

    Sure, the interests would have reduced by over $10k+ but these have not taken into account the time value of money, i.e. inflation.

    Singapore’s inflation rate averaged around 4% over the last 5 years. Given that the old EIR was 3-4%, it was actually cheaper to take the loan.

    Note also when you stretch a car loan, the real EIR decreases.

    Here’s what $50K (the down payment amount) if hedged against inflation would work out over 5 years at 4%:

    $50,000 (P) x 4% compounded (r) x 5 years (Y)
    Future value = P(1 + r)^Y = 50000 x (1.04)^5 = $60,832.65

    Amused? No. It is exactly that. The interest rates have risen taken into account the reduction in banks profits.

    So to the cash-rich savvy investor, down paying 50% may not make sense with the revised interest rates then.

    However, if one does not invest wisely, sure… avoiding the debt would be good.

    Now with this blog post I did not say to go right now and take a full loan on a car while you still can. Taking on loan with leverage need to be weighed against risks. The most important risk to manage is the ability to bail out at any time.

  • The truth about offsetting loans with investments

    I’ve often heard people say it is easy to overcome the low car loan interest rates. While it may be 1.88%, the effective interest rate is much higher than that, about 4%.

    And people will tell me that it is easy to find something with an interest yield of 4%.

    I tell them their maths fail. Why?

    Disregarding all risks and investment yield fluctuations, simple arithmetic says that one must invest the same amount over the same period of time as the loan quantum to yield the same returns.

    This means if you took a $100K loan for 8 years, you need to plonk $100K into an investment yielding the same interest rates for 8 years.