Two Ideas That Will Change Your View About Investing Forever

One day, when I was taking a shower (now readers know where all my inspiration comes from!!), I reflected on my years of working, investing, conversations with friends/family/colleague and tried to distill what were the two most important ideas or messages that I should tell anyone who was getting started on investing/retirement planning/personal finance.

You see, in Asia or in Singapore, personal finance is still pretty much a taboo topic.  It isn't the best lunch conversation topic (unless one is talking about the latest stock picks and how who and who made a million bucks from some investment).  But people in general tend not to reveal their own investments, savings, etc, etc. Money is almost like a taboo topic that is not discussed.

I have heard and read about so many ideas but I think these are the two most revolutionary ideas that will perhaps change the perception or philosophy of investors:

Idea #1 - Investing is for Income

I don't really recall when this idea struck me or came into my head.  It might have been a book I read or when I was just thinking about retirement planning in general.  But the key idea to investing is not to "earn a million dollars" or to "buy a big house", etc.  Well, those are the material things that people want and I guess it is easier for people to relate to some kind of physical possession or numerical value to determine that they have reached financial freedom.  However, this is probably misguided.

For most people, becoming a millionaire seems to be the ultimate goal.  However, if you dig deeper and ask them why they want to be a millionaire, it is probably due to the pre-conceived idea that with a million dollars, they no longer have to work and can retire in peace.  That probably explains why many people buy the lottery. The idea of having a big house is also related to the very simplistic idea that "if I own a big house, I must be rich, just like people on TV/movies.  If that is the case, I no longer need to work".  While these physical possessions gives many people a financial goal to strive for, at the end of the day, if you drill down deeper, you know that reaching these arbitrarily set goals probably does not put one in a better stead to achieve financial freedom.

At the end of the day, it boils down to cashflow.  Give a big spender a million dollars and let him retire at age 30.  It is possible that the million dollars can be spent even before his lifetime and he will have to return to work.  And that probably explains why many lottery ticket winners end up becoming bankrupt or broke again.  So the idea is cashflow.  And the idea is that all that you are investing for is not for a big house or for a million dollars, but it is for the sole purpose of income.  It is the common Chinese saying : " qian sheng qian" or "using money to grow more money".

When one invests, the million dollar goal (or two million dollar goal) is actually so that you can start drawing down on that sum of money during your retirement years.  That is how most financial planners will actually work out how much you need for your retirement.  They take the age you intend to retire, and the expected life expectancy, and calculate your monthly expenditure to indicate what is the $X dollar value that you need in retirement funds.  But so many people forget that the $X dollar value is meant to provide them with income when they stop working and stop drawing an income.

So at the end of the day, all investing is for the sake of income.  Nothing more and nothing less.  That is the sole goal of investing.  You are basically trying to build up a stockpile of cash that you can tap upon when you are not drawing any money.  If you have $10million dollars invested in an instrument that gives you a 10% per annum yield, you will have $1million in income to spend every year.  That is as simple as it gets.  If you put that $10million in a bank with 0% interest, what you draw down on that bank account every month is basically income while the original value of your bank account just gets depleted month after month.

This idea is "revolutionary" because not many people I know of think or speak of investing in that sort of way.  They always speak of investing as some sort of arbitrary goal or just about making more money from the stock market.  If you realise that investing is about income, you will realise that building up that income is just one side of the story.  What you as an individual will also need to manage is your monthly expenditure so that it does not exceed your monthly income.  And isn't that all there is to personal finance.  No wonder we hear the frequent maxim: "Spend less than you earn".  Because even when you retire, you also need to spend less that you get in income.

Once this idea is firmly implanted in your head, it will then help you better strategise how you want to go about building up that income stream for your retirement years.  For some people, it could be just a bank account.  For others, it might be bonds or dividend yielding stocks/REITs or businesses or even rental income from property.

Here is where the 2nd idea then comes in a little much easier....

Idea #2 - If You Intend to Work for the Rest of Your Life, You Don't Really Need to Invest

I know that this idea will probably draw a lot of flak from some readers who will still think that it is important to invest.  What I am alluding to is the hypothetical situation of a person who has no intention to retire and whose life expectancy is say at age 80.  Effectively, a financial planner who does his calculation will realise that there is no investment product he can offer this person especially if the person is willing to live within his means.


If one is able to work till death and still draw an income, then you literally will not have the need to set up a retirement fund.  However, there is of course all the unexpected events that life can throw at us.  Illness, retrenchment, disabilities, etc, etc can all potentially strike us even if we intend to work for life.  So at the end of the day, one will still need to prepare for such unforeseen scenarios either through investing/savings/insurance.


I don't intend to retire, but I still invest.  And the reason I invest is just in case there comes a day when I am forced to retire.

Absolute Cost of My House

I did a quick calculation of the actual cost of my HDB flat today. While I bought the flat from HDB at a low $300K, when I add up interests at 2.6% for a 30 year repayment period of the mortgage loan, it actually adds up to cost in absolute dollars of over $400K.

That is simply quite amazing!

That is an additional $100K more than the mental figure I had in my head.

It happens all the time when people ask me how much I bought my flat for, I simply give them the price at which I bought it from HDB.

But today, after doing a real calculation of how much in absolute dollars and cents I am paying, I realise that the figure I ought to be quoting them is actually $100K more. That is of course if I do not make any early repayment of the mortgage loan and if I do not sell my house within the 30 year timeframe.

This sorts of shifts my thinking abit about whether I ought to repay a part of my loan earlier with cash sitting in the bank that is earning an interest rate lower than 2.6%. Food for thought...

Mortgage Financing Made Easy: The ABCs of Taking a Housing Loan

By Property Buyer

We understand that comprehending the terms and contents of a loan contract, and finding the right mortgage that fits our lifestyle and financial capacity can be a challenge for borrowers, especially for first-timers. Thus this article attempts to shed some light about the process - from mortgage  selection, determining which interest rate serves you best, to meeting the requirements for the loan. The goal is to help you become aware of some of the advantages and disadvantages in selecting a particular loan package as well as to safeguard your pockets.

Establishing a good credit history

First of all, a loan can never be granted if you have a bad credit standing. The Credit Bureau in Singapore collects certain credit-related data, like all the credit  facilities a borrower has with the various financiers (but not the outstanding amount owed), and then makes the information accessible to credit providers on its membership list. The best way to obtain a good credit score is to pay your loan or credit cards on time. Late payments and defaulting on loan payments to any financial institution is bad because this will adversely impact your credit score. Having a low credit score will lock you out of loans with the best interest rates because the banks or lending institutions will decline your loan application. If you are planning to take a loan, then you should start creating a good credit history. The Bureau collects records of residents with a rolling 12-month credit facility. For closed accounts, the Bureau still shows the last 12 months history of the account before it was closed. On time payments normally gain a credit score of 12 'A'.

Owning multiple credit cards reflects weaker financial status

Most people think having many credit cards is an advantage. However, owning multiple credit cards can weaken your financial health as these plastics provide a false sense of financial strength, which is spending on borrowed money. Owning multiple credit cards in the absence of discipline usually ends up being highly indebted to banks. This means you should own fewer cards.

In addition, having excessive cards creates another disadvantage. This reduces the overall loan borrowing quantum of the borrower. Remember, that banks always compute your loan value based on your availed credit facilities against your monthly earnings. This means that even if you are not using the credit card, it has already reduced the amount of the loan you are allowed to avail for buying a new home.

Checking your credit score

You may personally request for a credit report from the Credit Bureau of Singapore. Find out if your credit facility and credit standing were correctly stated.

Finding the best house and location

We need to understand that finding the best house and location should be a house that meets our budget. Please do not avail a loan and buy a house that would make things difficult in the future. Live the kind of lifestyle your pockets can afford. Purchase a house with the amount of mortgage you find comfortable financing. The ideal way to select a loan and a house is to evaluate whether you still have the capacity to pay the monthly amortization when your financial situation becomes worse. To help you gauge if you can afford the rate and the monthly dues, you may want to use the debt-to-service ratio (DSR) formula based on a 30% affordability estimate as follows

DSR = Monthly Debt Service for Mortgage / Monthly Gross Household Income

In some aspects, some users of the DSR criticised it as a short-term measure of the borrower’s housing affordability. The discussion of other short- and long-term indicators of housing affordability, however, is beyond the scope of this article.

But you can still use the DSR formula for a variety of economic scenarios because in the course of the mortgage life, factors such as the rise or fall of the household income and the debt service normally take place. A good situation that could make use of the DSR is when you or one of your family members become unemployed, which means loss in earnings. You may also use the DSR when you see a pattern of increasing financial liability or debt service, which usually occur when there is a change or an increase in the financial market interest rates.

Overall financial liabilities

This is most important. You need to understand the impact of having too many loans or credit cards. You need to take into consideration the sum value of your total liabilities besides the DSR. One item to consider is the educational and medical expenses of the children or the entire family. Are you sending your children to school? Do you have any member of the family needing special medical attention? Yes or No, the answer directly affects your ability to pay the additional loan and the existing debts. In case of any future contingencies, you need to make sure you still have the capacity to finance the additional loan and pay the existing debts. The goal here is to avoid future contingencies forcing you to sell the house even at a very low price.

Searching for the right lending institution to finance your mortgage

It is the borrower’s duty and responsibility to perform some research about the market interest rates, and loan packages being offered by different banks or lending institutions. Market rates are constantly changing resulting in financing institutions constantly innovating their loan packages and products to meet the needs of borrowers. Find the best loan features that would fit your lifestyle and pocket.

The features of any mortgage package or product usually varies in terms of the rate. It could be offering a fixed rate, floating, or a combination. The combination of the fixed and floating rate is known as the hybrid loan. Some banks also offer interest-offset loans. To find out more about the various loan types, go here.

Selecting loan interest rates

The answer for this is really very simple. Find the rate you can afford to pay even in the presence of financial contingencies. Select a rate that would more or less provide affordable monthly payment throughout the life of the loan. It is best to think about this before committing to any loan because we should not be too confident or assume we always get the chance to refinance or reprice the loan during the course of the loan.

1. New regulations from MAS directly affects borrowers

We need to admit that the Monetary Authority of Singapore (MAS) regulation factor is uncontrollable. We are not in control here. MAS has the right to change and implement new regulations that may or may not directly affect our loan. New rules may make the borrowing terms and conditions tighter or more relaxed. A good way to explain this was the October 6 2012 mandate of loan refinancing. MAS implemented a 35-year cap on loan tenures for new and refinanced loan packages.

2. Change in interest rates

As we all know, banks change the interest rates of their loans. Sometimes, we may find ourselves facing higher interest rates when we wish to refinance/reprice.

To help you understand the impact of the interest rate and the timing, please read the clearer explanation/ example below

Loan Package X has an interest rate of 1.5% for the first three years, and 1.7% thereafter.

Loan Package Y has an interest rate of 1.3% for the first three years, and 2.0% thereafter.

For example, if you decide to commit or take Loan Package Y now because it has a 1.3% rate, which is lower than the Loan Package X of 1.5%,  because you expect to reprice or refinance the loan after 3 years (if you can see the 1.3% is only good for the first 3 years), then you might be disappointed if you discover that after 3 years, the cheapest rate available is only 1.9%.

It is better to start with the Loan Package X with a 1.5% interest rate for the first 3 years, and then 1.7% thereafter. Even if you have the option to wait for a lower interest rate after the first 3 years, you still would be paying a higher interest rate during the wait.

What message are we trying to drive home here? We need to understand that choosing the best loan package require good understanding of the system, loan regulations, market, and the movements of  interest rates. Thus if you are confused aboutchoosing the ideal loan, then you should speak to a professional mortgage consultant, who will offer free advice. Contact one here.  The consultants at iCompareLoan also use free reports from Singapore's most advanced cloud-based home loan analysis system (exclusive to them) to help you select the most suitable loan.

Reputable lending institution

Make sure you choose a reliable lending or financial institution. There are times when some lenders implement the right for a margin call when valuations fall.

Legal help in understanding the loan packages

The bank sends a Letter of Offer to successful applicants. Therefore, we need to understand the content of the letter especially the attached terms and conditions of the loan package before signing on the dotted line. In case you do not understand some terms, please ask the bank to send you a document that explains the Letter of Offer in simple language. If it is still vague and you still have questions, please consult a lawyer.

Are you planning to make a loan in the midst of changing jobs?

It is highly recommended that you wait for the loan procedure to be completed before you change jobs because lending institutions have a minimum employment period requirement in your current job before granting loan approval.

Additional credit card or new loan

You need to understand that additional credit cards or taking new loans add to your total liability, which affects your borrowing eligibility and amount. It is recommended that you do not make any other loan or credit commitments before loan disbursement.

For example, you are applying for a housing loan but want to have a new car too. A week after you have received your approved in principle home loan notification, you finance a new car using a separate car loan. After you had taken home your new car, the lender or bank discovered you financed your car with a car loan. The only option left for the bank is to reduce the loan quantum because of the additional loan you just took for the car. The reduction of the housing loan amount makes it impossible for you to afford the house you want. The deal goes off and the 1% deposit you made would be forfeited. You lose more than you gain by taking both loans. It is important to patiently wait and understand how certain decisions about loans and other related services could affect your housing loan. If in doubt, turn to a Singapore home loan consultancy.

About Property Buyer
http://www.PropertyBuyer.com.sg/mortgage

We are a research-focused Singapore mortgage consultancy which helps you compare Singapore home loans either for new loans or refinancing. We use loan reports from Singapore's best loan analysis system (exclusive to us) athttp://www.icompareloan.com/consultant/ to serve our customers.

Our services are completely FREE to you as the banks pay us a referral fee upon loan disbursement.

SMS: (65) 9782 8606
Email: loans@PropertyBuyer.com.sg

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Cash Out Home Equity Loans or HDB Flat as Collateral? Nope.

I learnt something new today.  That it is actually possible to take a cash out or credit facility on your home by refinancing it.  People can use this additional leverage when they have largely paid up property and wish to make use of the lower home mortgage rates to pay off either existing loans or even invest in other instruments (e.g. REITs) which might give a higher returns. '

These are quite common overseas, here is a typical example
https://www.hsbc.com.au/1/2/home-loans/products/equity

But also realised that one is also not allowed to take a credit loan out of your HDB flat.  Basically:

"HDB flats can only be mortgaged to banks or financial institutions to finance the purchase. HDB owners are not allowed to use their HDB flat, which has been fully paid for, as collateral to raise credit facilities."

So unless you own a private property, you most probably cannot take a cash out home loan to tap on the low mortgage rates now.

Ways to Save Money for A Downpayment

[Guest Post By Erin Vaughan]

Saving for the downpayment on your first home can really seem intimidating. After all, to get a good interest rate on a loan, you probably need to sock away somewhere between forty to fifty thousand dollars. That’s a lot of dough!

Over at Modernize, we know that saving money is all about the little things. A few dollars here, a few dollars there—it can really start to add up. Plus, there are some psychological tricks you can use to make the process less painful. Here’s some tips to bulk up that savings account!

Via Modernize

Make a Budget

The majority of your savings is going to come from your salary, so it makes sense to start analyzing what items your purchase regularly and what you can cut out. In a spreadsheet, list out your monthly salary, minus taxes and deductions for health care and retirement. Then list all your bills. Use your bank statement from the last month as you make this list—you don’t want to forget about smaller bills like that Netflix charge, or your gym membership. Then, analyze what you spent on everything else. You may think that you’re not spending any extra money—until you see it listed out, and you realize that you are buying that extra nail polish all too often or spending too much on coffee. If you think about it, there are probably at least one or two regular expenses that you can cut that won’t drastically lower your quality of life.

Pay Yourself for Not Spending

One trick that my friend has for saving money works like this: every day she goes without spending any money outside her budget, she “pays” herself five dollars. It may seem like just a little bit, but it really adds up! Or try using this 52-week savings plan, where you pay yourself a different amount each week of the year. A little bit at a time can really add up!

Via Pinterest

Resist the Urge to Spend

Spending is largely psychological. So if you feel like you’re depriving yourself for too long you’ll likely eventually break, go on a spending tear, and undo all your efforts. But you can resist! Science tells us that the pleasure of planning something is often rated more enjoyable than actually getting that thing. So next time you feel that itch for a shopping spree looming large, use that energy to plan for your dream home. Create a Pinterest board of ideas for what you want in your house, and don’t limit yourself to what is realistic. Go window shopping online for your perfect sofa, window treatments, or washer, and add them to your wish list instead of buying. You’ll get the same thrill of shopping without the expense! But if you just can’t stop yourself, buy yourself something small and move on. Spending energy beating yourself up for one slip-up is self-defeating.

Negotiate for a Lower Credit Card Interest Rate

If you want to buy a home, you’re probably already paying your full credit card payments on time regularly. (If not, stop what you’re doing, and go make a payment!) Having a great credit score makes it easier for you to play hard to get and argue for a lower interest rate with your financial institution when sealing the deal for a loan. But if you’ve been good with your credit card payments, you may be able to convince them to give you a better rate as well. Try it! Call them up and tell them you want a lower interest rate. They may just give it to you.

Via Pinterest

Consider Borrowing from Your IRA

This should be considered somewhat of a last ditch attempt if you just can’t find the funds any other way, but the government does allow you a one-time, penalty-free deduction from your IRA for up to $10,000 towards the purchase of a home. You’re going to want to think about this carefully—it is, after all, money you’re taking from your retirement fund, so it could make things hard later on. So consult with a financial advisor before making your choice. Also, keep in mind, what kind of IRA you have should also play a part when weighing this decision: deductions from Roth IRAs are tax-free, whereas you’ll have to pay income tax on the money you borrow from a traditional IRA.

No matter how you decide to save the money, make sure to save about roughly 20 percent of the total amount of the home you want to buy. This will give you lots more leverage when you go to get your loan.

Now congratulate yourself! By reading this article, you just made the very first step in your journey to owning your own home.

Learn from a Fool: Investment Mistakes

I have made many investment mistakes in my life.  And the stock market is definitely an expensive to pay "tuition fees" with your hard earned money.  But it is inevitable.  Most investors will tell you that they lose money from time to time.  Even the best investors make mistakes.  Here I share some of my mistakes and perhaps you can learn from them and not repeat any of these mistakes I made.

Right up there on my greatest investment losses is perhaps investing in S-Chips or Chinese companies that are listed on the Singapore Stock Exchange.  Two of the shares that I own are still in the deep red with perhaps no end in sight.  Let me give you the story of one of these "darling" stocks.

There used to be an old forum called WallStraits where all the people who stand by Fundamental Analysis used to hang out.  Perhaps some of you remember that forum.  During those days, S-Chips were new and they all had such good financial records, P/E, NAV, etc that some stocks were being rated as BUY by nearly every member in the forum.  There were the darling stocks that were well-rated by all.

I read posting after posting during my spare time.  And when I finally made the decision to invest, I threw in a whole lot of money (in fact all of my spare cash) into one stock.  As the mantra went:  "Put all your eggs into one basket and watch that basket closely".  What could go wrong?  There were people who had lots more of experience then me and who had also put their money where their mouth was.  The stock was supposed to be one of those stocks that Warren Buffet would buy (if he lived in Singapore).

Well, the stock price went up a little and then it went downhill from then.  I averaged down my position thinking that it was undervalued.  Everyone was crying out that it was undervalued and that they were targeting it to hit a two or three fold return in a few months time when the stock market recovered.

To cut a long story short.  The stock market recovered.  Almost every stock rose back to their original price or even higher.  This stock however languished and truly became a penny stock.  I won't reveal how much I lost on that stock but it made me a lot more skeptical about the wisdom of crowds. Just because everyone is shouting that a stock is a "BUY" does not mean that it is one.  Everyone could be sincerely wrong.

My failure to cut my losses when I should also worsened the situation and I was so stuck into the stock that I  could not bring myself to sell it.  Today, that stock still sits in my portfolio.  It is the first stock that I bought and it sits in my portfolio worth a lot less than what I bought it for.  It is there as a reminder to myself that hours of research and being very certain about something does not mean it is a SURE BUY.

One of the lessons I learnt through this was also about asset allocation (Read about Yale Endowment Asset Allocation here).  Putting all your eggs into one basket is really risky risky business.  I was so certain that the stock was undervalued.  But it turned out the other way.  I hope people will learn from my mistakes.

Singapore Civil Service Pay Scale

Trying to compile the salary pay scale for the Singapore civil service.  Somehow, I only managed to find the figures for 2011.  There are probably updated figures for 2015 so I will post it in due time.  Do bookmark this post. Or if anyone has the latest figures, do drop a comment and let me know.


These are the figures for 2011 Civil Service Salary Range

Job grade: MX9 (Superscale)
Job title: Deputy Director, Director
Pay scale: S$10,580 – S$14,550 / S$14,551 – S$16,540

Job grade: MX10
Job title: Assistant Director, Deputy Director
Pay scale: S$6,350 – S$9,050 / S$9,051 – S$10,400

Job grade: MX11
Job title: Manager, Assistant Director
Pay scale: S$4,100 – S$6,160 / S$6,161 – S$7,190

Job grade: MX12
Job title: Assistant Manager, Manager
Pay scale: S$2,550 – S$5,130

Job grade: MX13
Job title: Management Executive
Pay scale: up to S$2,800 for fresh graduates

The salary ranges indicate the basic monthly wages that a civil servant may earn, and the figures exclude the potential value of civil service bonuses. Based on past newspaper reports, bonuses for an average civil servant could range from more than 2 months to 4 months inclusive of AWS (annual wage supplement), depending on the performance of the economy and individual performance.

In 2012, there was a pay revision of around 10% for MX12 and MX13, and 5% for MX10 and MX11.

In August 2014, it was announced that most civil servants would get a pay raise of around 5%.

In 2015 (Singapore's jubilee year), civil servants also received a once off SG50 bonus of $500.

Mid-Year Bonus as announced by PSD
2016 - 0.45 months
2015 - 0.5 months
2014 - 0.5 months

Career Progression (non-scholars)
Promotion is based on both performance as well as potential. During every annual appraisal, supervisors would grade their employees based on both performance as well as potential. Word on the street is that performance ranking is according to certain bands and one would usually need two "Bs" to get promoted.  Performance grade also determines the performance bonus one gets.  A higher performance grade gives you a higher performance bonus.

A fresh graduate usually enters in at MX13 pay scale.

Promotion from a MX13 to MX12 is usually after one year of service. A typical officer can then be expected to be promoted to MX11 after two years (though some might take a little longer).

There are usually no managerial responsibilities for a MX11 officer. Promotion to MX10 is slightly more difficult and is dependent on performance as well as potential.  A MX10 officer will usually have managerial responsibilities.

Most non-scholar civil servants can expect to end their careers at the MX10 or even MX9 pay scale.

Video below by Lim Swee Say on why Civil Servants need not be ashamed of drawing a high salary:

 

Check out other posts related to the civil service:

1. Civil Service Bonus for 2020

2. Civil Service Declaration of Indebtedness