Lazy Saturday Afternoon

It is a lazy saturday afternoon for me. The sun seems to be pretty hot today so it is not a good idea to go out. Wanted to go cycling at first but decided against it. Perhaps I will do that in the evening if time permits.

Ate a late breakfast, had some fried rice for lunch and drank two nice glasses of WolfBlass Moscato.

It has been a habit of mine nowadays to keep a bottle of wine in the fridge to drink over the week. Other wines don't really keep well as they tend to oxidise and turn a bit sourish after some time. I have found out that Moscato wines which are really sweet, do keep for some time while still retaining their taste.

Perfect! Life is worth enjoying while it lasts.

Now all that is left for me to do is surf the net, catch up on my soccer news and then sleep.

Analysis of Asia Junior Life Policy (Part 2)

Previously, I wrote a short analysis on one of the whole life policies that I owned. It can be found over here. Today, I shall continue with my part 2 of the analysis.

In today's analysis, we will look at participating policies and bonuses.

BONUS ALLOCATION

Main feature of a participating policy is its ability to provide stable returns while participating in the performance of a Participating Fund or Par Fund. While one does not have any control over what the par fund is invested in, one can expect to participate in the performance through bonuses which are allocated to the policy holder.

Policy benefits or bonuses depend on the following factors:
1. Investment performance
2. Claims experience
3. Expenses
4. Decision of the Appointed Actuary and approval by Board of Directors

Usually, bonuses are allocated based on the surplus of the Par Fund. When bonuses are being considered, the actuary and directors take into account average performance of the par fund over a period which is longer than one year so as to minimise short term fluctuations in asset values of the par fund.

Hope this short posting explains how bonus allocation works for all you participating policy holders out there.

What Am I Saving For?

Saving money is good.

But we need to know what we are saving money for.

Is it just to see our bank accounts grow fatter? Do we have a clear purpose in our savings?

We can choose to spend our money today. Or we can save it up and spend it tomorrow. When it comes to saving, we need to know why we are not spending the money today and instead saving it up. I am writing this post to tell myself why I am not gratifying my desires NOW but instead putting money aside in a bank account.

Here are a few of my savings goal (in terms of priority) for the short term as well as long term:

Short Term Savings Goal (5 to 10 years)

1. COE for my current car when the COE expires (estimated $25K)
2. Europe holiday
3. Down deposit for 2nd property

Long Term Savings Goal (10 to 30 years)

1. Retirement
2. Child's University Education
3. 2nd Car
4. 3rd Property

This reminds me that I need to start saving for my short term goals.

Analysis of Asia Junior Life Policy (TM Asia Life)

As most of my readers will know, I have a "legacy" whole life policy that I took over from my parents after I started working. My parents bought the whole life policy from an agent in the then Asia Life which is now taken over by TM Asia.

The policy name is Asia Junior Life Plus Assurance with Escalating Reversionary Bonus.

Every now and then, I will try to analyse abit of this complicated insurance plan and try to decipher each and single statement on the policy contract as well as bonus declaration statements to see what it means.

Today, I will try to interpret what I read from the Bonus Declaration Statement in Year 2010.

BONUS DECLARATION STATEMENT IN YEAR 2010

TM Asia was kind enough to send a pretty concise booklet on the Annual Bonus Update 2010 together with my bonus declaration statement for the year 2010.

Here are some key points that I note from the Annual Bonus Update:

1. This is the 3rd published bonus update report for TM Asia Life Singapore Ltd's Participating Fund. The annual bonus update 2010 is an update on the participating fund for the year ending 31 December 2009.

2. For 2007, gross investment returns was 12.25%. For 2008, -17.13% and for 2009, 20.05%.

3. TM Asia Life has an unmatched record of never reducing bonus rates. Since they have never reduced bonuses even during the financial crisis of 2008, we can see that insurance companies typically use a bonus smoothing technique to ensure that bonuses are paid out both in good times and bad. When times are good, they might not pay out too much bonus but instead "store" this money in the par fund so that they can have money to pay out bonuses even when the funds are not doing well. In a sense, the policy owner does not get the wild fluctuations in policy value that is associated with investment linked plans. On the downside, it also means that one cannot expect big bonuses even when the market is doing well.

4. Participating Funds can sometimes be "black holes" of investment where we know little about the assets that are being held. In the Annual Bonus report, I can see that the Top 10 Equity holdings for the Par Fund are:

1. TM Asia Equity Fund
2. DBS
3. UOB
4. OCBC
5. Singtel
6. Capitaland
7. Keppel Corp
8. Wilmar
9. Singapore Airlines
10. Singapore Exchange

5. The bonus rate is $10 for every $1000 Sum Assured. I am insured for $160,000. That means that I am entitled to $1,600 bonus for the year. In ADDITION, there is a bonus added on accrued bonus (by a rate of 1%). As my accrued bonus is now $20,292.02, the bonus on bonus is $202.92. The total bonus I get for this year is thus $1600 + $202.92.

6. The accrued bonus is not the cash surrender value. This is a very important point which many people are often mistaken about. The cash surrender value comprises guaranteed plus non-guaranteed components. The accrued bonus makes up part of this non-guaranteed bonus and is pro-rated according to the number of years I have been servicing this policy. In other words, if I surrender the policy now, only 25% of my accrued bonus + guaranteed component will be paid out to me. (As the number of years increases, the bonus is increased in percentages. That is why it is called "Escalating Reversionary Bonus"). To find out what is this amount, it is best that you obtain a Benefit Illustration from TM Asia Life.

That is all for today's analysis. I will analyse the various components at a later date. As mentioned, what I am analysing is based on TM Asia Life's Asia Junior Life Policy. It might not be the same as other insurance policies that are out there. If you are interested in me doing an analysis for your policy, you can send the relevant documents to my email at sgfinancialfreedom@gmail.com. Your name and stuff will be kept confidential but I will analyse the policy and publish my findings on this blog.

What Happened to Goal 2010?

So world cup fever is here.

What happened to our Goal 2010 anyway? Why isn't Singapore in the World Cup yet?

Slovenia just beat Algeria like 1-0. Slovenia only has a population of 2 million and they have managed to enter the world cup twice already!

Singapore already has a population of close to 5 million but we are still nowhere closer to our dream.

I mean fine...we can be contented with being the Champions in women's ping pong and stuff but I still believe that the holy grail in sports for Singapore is the World Cup. Singaporeans are quite passionate about soccer. I can tell that from my facebook alone. I have never seen a facebook status that comments about any other sport OTHER than SOCCER. So soccer is really something that most Singaporeans are passionate about. Ping pong.....sorry....didn't cause much of a buzz on my facebook account as far as I can tell.

Why Isn't Singapore in the World Cup Yet?

I was actually lying in bed preparing to sleep when I started pondering over this question. It got me so agitated that I just had to get up and write about it (as well as catch the match between Serbia and Ghana).

Why aren't we in the world cup yet ? A small population is not an excuse...

Slovenia has been in the world cup TWICE. They only have 2 million people and since only males can play in the World Cup, I figured that they only have like 1 million males? So if Slovenia can make it to the World Cup, there is no reason why we can't do it too.

I guess the main reason is that we LACK FOCUS. We have diversified our attention to sports that have managed to reap rewards. This include table tennis and swimming. But are these sports really able to galvanise the entire nation? South Korea just reported having a few hundred thousand people gathering on the streets to cheer their nation on. If Singapore ever got into the World Cup, I am sure that will happen too. But somehow, somewhere, somebody decided that Singapore soccer was not going to make it and dropped the Goal 2010....

Let's be realistic here...counting on foreigners to help us get into the World Cup is not going to work out well. It might work for table tennis and swimming but it certainly will not work well for the World Cup. Football is a game about 11 people playing as a team. The best players in the world will never come to Singapore to play football. FULLSTOP. We need to stop relying on foreign talent and count on our local talent instead. The foreign talent strategy does not seem to be working well in football.

How to Get into the World Cup

What you are about to read from here onwards is going to sound ludicrous. It might even sound crazy. But this is coming at the height of football fever, so no suggestion should ever be treated as crazy.

We need to SEND OUR PLAYERS ABROAD for exposure and experience. That is what the South Koreans have been doing. And I think their strategy will pay off as many of their players are playing in European clubs now giving them the necessary exposure. They no longer "fear" their European counterparts as they have experience playing with them And we all know that this kind of exposure is very important especially on the big stage.

Here comes the tricky part. Big European clubs will not be willing to accept our Nor Alam Shahs and what nots...

Well, the answer is actually quite simple. We get GIC and Temasek to buy these clubs. (See, now you know that I am crazy. But just humour me for a while =) Since these clubs are treated like businesses, it will not be difficult to liquidate these holdings in the future. Who knows? We might even make a profit from selling these clubs in the future.

Based on my "pluck from the air" estimates, I figured that our reserves should be able to buy us a couple of good clubs in England, Italy, Spain, Germany, France and whatever league there may be in Europe. We can also buy a few lower league clubs if they are cheaper.

The next thing will then be to sponsor teenage boys (12 years old onwards) to go on attachments to these clubs for exposure. Food, lodging, pay, etc will be sponsored by these clubs so it is a win-win situation for us. My estimate is 2-3 Singaporeans per club due to the foreigner limit that is usually in place. My guess is that we will need a good 30 to 40 players to be exposed (at any one time) to European kind level of competition to ever make it for the World Cup. Based on that figures, we might need to buy 13 to 15 clubs (with perhaps 5 clubs in the championship level kind of leagues).

There will also have to be a major revamp in the Singapore sports scene. Focus will have to be given to soccer.

This might involve eliminating sports from CCAs in schools. Let boys concentrate only on soccer. This will have to be nation wide sacrifice. These boys can join 2nd or 3rd CCAs that are not soccer if they want to. But all boys in all schools will have compulsory soccer lessons and CCA. Only if they are really bad will they be kicked out of the sport.

To incentivise it, a program can be developed such that boys who make it to the very top will be exempted from National Service, given the chance to be attached to the major clubs (that are now owned by Temasek and GIC), etc, etc. In other words, we must make it really attractive monetarily for them to want to represent Singapore at the highest level.

The S-League will also need to be revamped to ensure that the "local soccer scholars" do not lose out because of the lack of international exposure. More foreign teams should be invited to join the S-League. A super league should be created with tempting prize money. Perhaps only 2 All-Singaporean teams will be allowed while the rest will be foreign teams. This will help to ensure that the S-League is also able to churn out good players who might be late bloomers compared to the "overseas soccer scholars" who have already secured their places in the Singapore owned European clubs.

Once we do this, I am sure we are set for World Cup glory in maybe 10 years time. Goal 2020 perhaps?

Am I crazy? Perhaps.. But this idea doesn't stop me from dreaming....

Notes:

1. Our small size in population does not mean we need to rely on foreign talent in the strategy outlined above. We could have 1 or 2 foreign talent if we need to but this could be best reserved for the coaching staff.

2. We might be small in physical size. But if the Koreans and Japanese can make it, I am sure Singaporean males can do it too. Football is not really ALL about size. The Spanish footballers are also quite small in size too (1.7m tall).

All About Expenditure

This post is a continuation of my previous 2 postings:

1. Financial Planning - Simplified to 4 Variables

2. All About Income

The 2nd posting (All About Income) has also been published at CPF's IM$avvy site.

As the title of this posting suggests, I will now try to give my thoughts on expenditure and how it affects your financial plan. In the first posting, I gave a simplified model that I have always used when I think about financial planning. It basically involves just 4 simple variables of income, expenditure, savings and returns on savings/investments.

The amount a person saves is largely dependent on his income and expenditure. While a person with high income and high expenditure might have low savings, a person with low income and low expenditure might actually have higher savings in absolute dollars and cents!

Take for example a person who earns $1000 per month and spends $950 per month. His savings rate is only $50 per month. On the other hand, a person who earns only $500 per month but spends $400 per month saves $100 per month. That is twice the amount of the supposedly "richer" person.

Expenditure - What Works and What Doesn't

I applaud people who are able to stick by their budgets when it comes to spending money. For me, it is close to impossible. I find it difficult to stick to any sort of budget and also find it too time consuming to calculate every single cent or dollar that I spend.

So how do I control my expenditure? The answer is I don't!

Budgeting doesn't work for me. What works for me is first determining how much I want to save. Experts call this the "Pay Yourself First" technique. After determining how much you want to save each month, you simply set aside that money (be it in a savings plan or separate bank account) whenever you receive your salary.

In this manner, whenever your salary arrives, the amount that you want to save is immediately deducted and goes into a saving plan or another savings account. All that is left in your bank account is the money that you have to spend. Hooray!

Isn't that a better way to view expenditure compared to boring budgeting? (Pardon me if you still use the budgeting method).

So by paying yourself first, you literally get to spend all the remaining money. Of course, the onus is on you to set aside the correct amount of savings that you will like to achieve each month. How much you should save depends on a wide variety of factors and it is too simplistic to give a general rule of thumb.

Current Expenditure versus Future Expenditure

I just coined the two terms above to differentiate between one's current versus future expenditure.

Current expenditure is the monthly expenses one needs to survive each month.

Future expenditure is the expected future expenses that one expects to incur.

As you can see, it is actually quite easy to forecast or predict current expenditure but really difficult to predict future expenditure.

For current expenditure, what you can do is simply add up all the money that flows out of your pocket each month. This would include things like food, grocery, loans, bills, etc, etc. Add all this together and it should give you a rough gauge of your current expenditure.

Future expenditure is a little more tricky especially if you are trying to predict expenditure many years down the road. A simple case of future expenditure could be the case of motor insurance. One usually pays motor or car insurance in one lump sum each year. This might vary from year to year (depending on whether you get into accidents and stuff). If you do not cater enough money for this future expenditure, you might be surprised to see a big drop in your bank account whenever the motor insurance is due.

A more complex case of future expenditure would be your monthly expenditure during your retirement years. As some of us are probably still very far from retirement, it might be difficult for us to gauge how much we might really need. Sometimes, unexpected events like illnesses can occur and might increase our future expenditure. On the whole, experts believe that people need roughly 50 to 60 percent of their last drawn salary during their retirement years. Again, that is hard to predict for the younger folks who just started working as we have no idea what our last drawn salary will be when we retire!

Anyway, to make things really simple, what I do is just make sure that my monthly current expenditure remains roughly the same each year. In this way, I am better able to predict my future expenditure and thus determine the savings rate that I hope to achieve. Savings and expenditure are actually closely linked. If you are not saving much, it is most probably because you are spending too much.

If you can't remember a word that you have just read, just remember this simple message:

Pay Yourself First and Spend the REST!

Why Interest Rates Rise

Interest rates of bonds are rising in the bond market. That means that people are more confident in the economy. Why is there this correlation?

The Federal Reserve Chairman Ben Bernake says he does not expect the US economy to fall back into another recession.

This boosts people's confidence in stocks and thus reduces the demand for safer investment instruments like bonds and treasury notes. In order to attract investors to bonds, the issuers of bonds thus need to raise the interest rate or coupon rate to make it competitive and lucrative enough for investors to invest in them. Otherwise, these investors would rather invest their money in the stock market.

Hope this provides a simple explanation on why interest rates rise when the economy is doing well.

Question:
As interest rates rise, can we also expect the interest rates or deposit rates in our banks to rise?