Tuesday, October 30, 2007
For Richer or Poorer
I have received five wedding invitations for the last quarter of 2007! Wedding is a joyous occasion and to many couples, it is one of the most significant events in their lives.
I remember fondly my own wedding more than six years ago. Despite the joy and excitement leading to the big day, preparation for the wedding was peppered with little squabbles over how the money was spent. It was then that we realized that even small differences in spending habits and money attitudes can lead to potentially major conflicts.
Through my years of working with many couples in their financial planning matters, I have come to realize several unique money habits on planets Venus and Mars:
- men invest more than women and are more aggressive in their investments
- women are more likely to listen to financial advice from their friends and family
- women tend to spend on pampering themselves and others with shopping sprees, overseas trips, gifts etcmen, on the other hand, tend to splurge on things like cars, sports, electronic gadgets etc
Another thing that I have noted is that communication and financial planning are often lacking between many couples. For example, of the many couples that I work with, the majority have neither established a budget nor planned for their retirement together. And many couples have shared with me that the main source of financial disagreements is the amount of personal spending.
To avoid having little squabbles over money issues snowball into big fights that might affect the relationship, couples should sit down and start planning for their financial future. I would definitely recommend doing it even prior to settling down. It is important for a couple to understand each other’s money attitudes, spending habits and financial commitments.
Here is how a couple can get started:
1. Discuss and prioritize goals together. Being a couple will mean that a party’s money decision will inevitability affect the other party, whether directly or indirectly. It is therefore highly recommended for financial matters to be thoroughly discussed and for decisions to be made jointly. Some couples that I know of would establish their own sets of financial rules such as ‘decision to purchase any household appliance that costs below a $100 can be made single-handedly’ or ‘decisions with regards to the financing of children’s education will be made jointly regardless of how big or small the amount’ etc. I’m not saying that such ‘rules’ will work for everyone, but it is a good start for a couple to communicate and agree on the ‘CANs’ and ‘CANNOTs’ when it comes to their joint finances.
2. Communication and honesty are critical. The lack of honest communication is often the cause of the lack of joint financial planning, which can prevent couples from achieving a brighter financial future together. Some couples avoid talking about money-related issues because they know that there would be disagreements. However, avoidance is like sweeping the dirt under the carpet. Eventually, the pile buried underneath will become so huge that it’s impossible to ignore and having to deal with it then will be much more difficult than it would have been if the problem had been addressed right at the beginning.
3. Understanding each other’s spending habits. Relationships often involve a little give-and-take sometimes. No two persons will have exactly the same money personalities. It is important to talk things through and to try to achieve some kind of a compromise if opinions greatly differ. Sometimes, being able to identify and maximize one’s strengths while reducing one’s weaknesses is the key to better financial health. For example, one party might be more meticulous and can easily work out the household budget despite the nitty-gritty details whilst the other party might be more financially-savvy and can help source for financial instruments to help grow their wealth.
4. Joint or separate accounts? There are no hard and fast rules on this one as different strokes work for different folks. I know of couples who maintain both joint and separate accounts. They would calculate and plan their household budget first and each will contribute an agreed amount into a joint account which goes towards the payment of household bills, children’s education, insurance, investments, savings etc. The excess money will then go into their individual accounts for their own personal spending without having to account to the other party or feel guilty about the occasional indulgence in a pair of stiletto or the latest mobile phone. Other couples might choose to maintain separate accounts and work out a ‘who-pays-for-what’ arrangement whereby the agreed bills that each party is to pay for will be charged to their individual accounts. A few couples that I know of have only a single joint account where all their salaries are credited into and bills debited from. Ultimately, the method selected must be agreeable to both parties involved.
So before you vow to take your spouse ‘for richer or poorer’ for as long as you both shall live, do take some time off your busy wedding preparations schedule to have a heart-to-heart conversation on your joint financial issues which I deem is far more important than the colour of the napkins on the banquet tables!
I remember fondly my own wedding more than six years ago. Despite the joy and excitement leading to the big day, preparation for the wedding was peppered with little squabbles over how the money was spent. It was then that we realized that even small differences in spending habits and money attitudes can lead to potentially major conflicts.
Through my years of working with many couples in their financial planning matters, I have come to realize several unique money habits on planets Venus and Mars:
- men invest more than women and are more aggressive in their investments
- women are more likely to listen to financial advice from their friends and family
- women tend to spend on pampering themselves and others with shopping sprees, overseas trips, gifts etcmen, on the other hand, tend to splurge on things like cars, sports, electronic gadgets etc
Another thing that I have noted is that communication and financial planning are often lacking between many couples. For example, of the many couples that I work with, the majority have neither established a budget nor planned for their retirement together. And many couples have shared with me that the main source of financial disagreements is the amount of personal spending.
To avoid having little squabbles over money issues snowball into big fights that might affect the relationship, couples should sit down and start planning for their financial future. I would definitely recommend doing it even prior to settling down. It is important for a couple to understand each other’s money attitudes, spending habits and financial commitments.
Here is how a couple can get started:
1. Discuss and prioritize goals together. Being a couple will mean that a party’s money decision will inevitability affect the other party, whether directly or indirectly. It is therefore highly recommended for financial matters to be thoroughly discussed and for decisions to be made jointly. Some couples that I know of would establish their own sets of financial rules such as ‘decision to purchase any household appliance that costs below a $100 can be made single-handedly’ or ‘decisions with regards to the financing of children’s education will be made jointly regardless of how big or small the amount’ etc. I’m not saying that such ‘rules’ will work for everyone, but it is a good start for a couple to communicate and agree on the ‘CANs’ and ‘CANNOTs’ when it comes to their joint finances.
2. Communication and honesty are critical. The lack of honest communication is often the cause of the lack of joint financial planning, which can prevent couples from achieving a brighter financial future together. Some couples avoid talking about money-related issues because they know that there would be disagreements. However, avoidance is like sweeping the dirt under the carpet. Eventually, the pile buried underneath will become so huge that it’s impossible to ignore and having to deal with it then will be much more difficult than it would have been if the problem had been addressed right at the beginning.
3. Understanding each other’s spending habits. Relationships often involve a little give-and-take sometimes. No two persons will have exactly the same money personalities. It is important to talk things through and to try to achieve some kind of a compromise if opinions greatly differ. Sometimes, being able to identify and maximize one’s strengths while reducing one’s weaknesses is the key to better financial health. For example, one party might be more meticulous and can easily work out the household budget despite the nitty-gritty details whilst the other party might be more financially-savvy and can help source for financial instruments to help grow their wealth.
4. Joint or separate accounts? There are no hard and fast rules on this one as different strokes work for different folks. I know of couples who maintain both joint and separate accounts. They would calculate and plan their household budget first and each will contribute an agreed amount into a joint account which goes towards the payment of household bills, children’s education, insurance, investments, savings etc. The excess money will then go into their individual accounts for their own personal spending without having to account to the other party or feel guilty about the occasional indulgence in a pair of stiletto or the latest mobile phone. Other couples might choose to maintain separate accounts and work out a ‘who-pays-for-what’ arrangement whereby the agreed bills that each party is to pay for will be charged to their individual accounts. A few couples that I know of have only a single joint account where all their salaries are credited into and bills debited from. Ultimately, the method selected must be agreeable to both parties involved.
So before you vow to take your spouse ‘for richer or poorer’ for as long as you both shall live, do take some time off your busy wedding preparations schedule to have a heart-to-heart conversation on your joint financial issues which I deem is far more important than the colour of the napkins on the banquet tables!
Caught in a Debt-Trap
Are you tired of making never ending debt payments and having no money left over every month?
Do you feel overwhelmed by the amount of debt you owed?
Are you at or near the limit on your credit facilities?
Are you borrowing from one credit facility to pay for another?
Do you skip payments on some bills in order to make others?
If you have answered ‘YES’ to most of the above questions, you are already waist-deep in trouble. For those who are not yet in it, do watch out for the warning signs and take steps to rectify the situation before it’s too late.With the growing number of credit facilities made available, it is no wonder that more and more people are getting themselves into the debt-trap, especially for those who are unable to manage their budget and cash-flow matters. According to MAS statistics, the credit card rollover balance has increased from S$1,712mil in year 2000 to S$2,759.8mil in year 2006.
The temptations are everywhere – one bank’s sales pitch for its overdraft facility goes like this ‘you can now have more cash to spend on yourself and your loved ones this coming Christmas (other festivals) and to treat yourself to a well-deserved holiday’. Helpful salespersons at major electrical store would never fail to point out the interest-free installment facilities that would allow consumers to purchase the items of their dreams. And not forgetting the brochures and posters at your friendly neighbourhood post offices that boast of accessible, fast and easy to repay loans up to four times of one’s monthly income.Here are some effective ways to steer clear of the debt-trap:
1. Take control of your financial situation by working out a budget. Assess how much money you earn and how much money you spend. Start by listing your income from all sources. Next, list your ‘fixed’ expenses like mortgage payment or rent, car loan payment, insurance premiums etc. Finally, list the expenses that vary – such as entertainment, recreation, clothing etc. By writing down all your expenses, you will be better able to track your spending patterns, identify necessary expenses and prioritize the rest.
2. Calculate your debt income ratio. This ratio reflects the percentage of your monthly take-home pay that goes to paying debts. A healthy debt service level is usually not more than 40% of your gross monthly income but this is also subject to individual’s financial situation (i.e. stability of income, changes in cash needs, extraordinary expenses etc.)
3. Use your credit card sensibly. Set a budget for your credit card spending and keep track of your expenditures. Do not charge more than what you can afford and to settle your outstanding balance in full every month. Rolling over of your credit card balance will incur interest charges amounting to approximately 24% per annum.
If you are already in debt, here are some possible ways to avoid sinking deeper:
1. Cut up your credit cards. The best way to reduce your credit card debt is to stop using your credit cards. If you have to keep one for emergencies, pick the one with the lowest interest rate. Constantly remind yourself that the emergency card is for true emergencies only and make a commitment that you will not use it unless absolutely critical. Or instead of a credit card, use a debit card.
2. If you have more than one credit card debt, you may want to consider transferring the debt from a card with a higher interest rate to one with a lower interest rate. This will lower the amount of money you are spending towards the interest and hence greater amount of money being channeled towards repayment of the principle.
3. Make extra payments, not just the minimum payments, on your credit cards. Even by paying just an additional $20 extra a month on a credit card can significantly cut your repayment term and interest charges.
4. List down all your credit card debts and pay off the one with the highest interest payment first. Another method is to pay as much above the minimum payment as you can afford on the card with the lowest balance. Continue until the debt is paid in full and then proceed to the next card. Systematically paying off your credit cards one by one will reduce your debts dramatically. The fastest way to eliminate credit card debts is to put every penny you can towards paying off your credit cards.
5. Debt consolidation might help to ease the management of debt payments and in most cases, at a lower rate of interest. There are many Debt Management companies that provide such a service. Under such Debt Management programmes, the consultants will contact your creditors and negotiate with them to have your monthly payments lowered and your interest rates reduced. You can then make monthly payments to the Debt Management companies to have them distribute the funds to your creditors on your behalf so that you no longer have to worry about making payments on the different due dates.
6. Filing for bankruptcy can be a last resort. However, do note that a bankruptcy will remain on your credit report until you are officially discharged, making it difficult to obtain credit, purchase insurance, buy property or even find job in the financial industry.
7. Seeking assistance from Credit Counseling Singapore (CCS) http://www.ccs.org.sg
Do you feel overwhelmed by the amount of debt you owed?
Are you at or near the limit on your credit facilities?
Are you borrowing from one credit facility to pay for another?
Do you skip payments on some bills in order to make others?
If you have answered ‘YES’ to most of the above questions, you are already waist-deep in trouble. For those who are not yet in it, do watch out for the warning signs and take steps to rectify the situation before it’s too late.With the growing number of credit facilities made available, it is no wonder that more and more people are getting themselves into the debt-trap, especially for those who are unable to manage their budget and cash-flow matters. According to MAS statistics, the credit card rollover balance has increased from S$1,712mil in year 2000 to S$2,759.8mil in year 2006.
The temptations are everywhere – one bank’s sales pitch for its overdraft facility goes like this ‘you can now have more cash to spend on yourself and your loved ones this coming Christmas (other festivals) and to treat yourself to a well-deserved holiday’. Helpful salespersons at major electrical store would never fail to point out the interest-free installment facilities that would allow consumers to purchase the items of their dreams. And not forgetting the brochures and posters at your friendly neighbourhood post offices that boast of accessible, fast and easy to repay loans up to four times of one’s monthly income.Here are some effective ways to steer clear of the debt-trap:
1. Take control of your financial situation by working out a budget. Assess how much money you earn and how much money you spend. Start by listing your income from all sources. Next, list your ‘fixed’ expenses like mortgage payment or rent, car loan payment, insurance premiums etc. Finally, list the expenses that vary – such as entertainment, recreation, clothing etc. By writing down all your expenses, you will be better able to track your spending patterns, identify necessary expenses and prioritize the rest.
2. Calculate your debt income ratio. This ratio reflects the percentage of your monthly take-home pay that goes to paying debts. A healthy debt service level is usually not more than 40% of your gross monthly income but this is also subject to individual’s financial situation (i.e. stability of income, changes in cash needs, extraordinary expenses etc.)
3. Use your credit card sensibly. Set a budget for your credit card spending and keep track of your expenditures. Do not charge more than what you can afford and to settle your outstanding balance in full every month. Rolling over of your credit card balance will incur interest charges amounting to approximately 24% per annum.
If you are already in debt, here are some possible ways to avoid sinking deeper:
1. Cut up your credit cards. The best way to reduce your credit card debt is to stop using your credit cards. If you have to keep one for emergencies, pick the one with the lowest interest rate. Constantly remind yourself that the emergency card is for true emergencies only and make a commitment that you will not use it unless absolutely critical. Or instead of a credit card, use a debit card.
2. If you have more than one credit card debt, you may want to consider transferring the debt from a card with a higher interest rate to one with a lower interest rate. This will lower the amount of money you are spending towards the interest and hence greater amount of money being channeled towards repayment of the principle.
3. Make extra payments, not just the minimum payments, on your credit cards. Even by paying just an additional $20 extra a month on a credit card can significantly cut your repayment term and interest charges.
4. List down all your credit card debts and pay off the one with the highest interest payment first. Another method is to pay as much above the minimum payment as you can afford on the card with the lowest balance. Continue until the debt is paid in full and then proceed to the next card. Systematically paying off your credit cards one by one will reduce your debts dramatically. The fastest way to eliminate credit card debts is to put every penny you can towards paying off your credit cards.
5. Debt consolidation might help to ease the management of debt payments and in most cases, at a lower rate of interest. There are many Debt Management companies that provide such a service. Under such Debt Management programmes, the consultants will contact your creditors and negotiate with them to have your monthly payments lowered and your interest rates reduced. You can then make monthly payments to the Debt Management companies to have them distribute the funds to your creditors on your behalf so that you no longer have to worry about making payments on the different due dates.
6. Filing for bankruptcy can be a last resort. However, do note that a bankruptcy will remain on your credit report until you are officially discharged, making it difficult to obtain credit, purchase insurance, buy property or even find job in the financial industry.
7. Seeking assistance from Credit Counseling Singapore (CCS) http://www.ccs.org.sg
Financial Life Cycle
Your financial needs will change over time. To plan successfully, you need to consider your future in some detail. By identifying what you are likely to need at different times in your life, you can prepare an effective plan to help you achieve your financial goals.
Four Stages of Financial Life
Although everyone is different, most people go through broadly four predictable stages of development in their adult lives:
20s - Just starting out
30s - Building a family
40-50s - Career peak
60s & beyond - Retirement
Your spending and needs are likely to vary dramatically at the different life stages. Therefore, it is worthwhile to examine these stages more closely so that you can plan more effectively.
20s – Just starting out
People in their 20s have just graduated and starting their careers. You are usually earning less than you will later on. You may still be living at home with your parents. Given your new found independence, you have a big appetite for life and right now, saving might seem less important than spending. You may want to have a car, travel, party, buy fashionable clothes and so on. Many people at this stage tend to spend too easily and there is a danger of getting into debt by over-using credit cards and taking loans.
Most people in their 20s have yet to insure themselves. You might not need much life insurance if you are not married or if your parents or siblings are not financially dependent on you. However, you should have some health, critical illness and disability coverage as illnesses and accidents can happen at any point of your life. For those who are in good health and are still young, the premiums will be relatively inexpensive.
The priority of those in their 20s will be to build up their emergency funds if they do not already have sufficient savings. You are likely to set aside a bigger part of your savings for more short term needs such as marriage or buying a home. However, you should not neglect saving and investing for the long-term as the effect of compounding works best the earlier you start.
Start by investing whatever excess you have after setting aside enough for your daily expenses and short term needs. It does not matter if you only have a very small amount to begin with but it is important to take that first step to start planning for your future.
30s – Building a family
If you haven’t already done so in your 20s, the 30s will be the time to lay the foundations for future wealth. You will probably be earning more as you have progressed in your career.
For those who are married and are starting a family, your expenditures would have in-creased dramatically as you may be paying for your home mortgage, car loan and planning for your children’s education.
At this stage of life, many of you will not only be caring for your young children but are also supporting elderly parents. For those with dependants, you will most certainly need more life insurance in the event of unforeseen circumstances such as death, disability or critical illness. Health and disability insurance are also necessary to help pay for medical expenses and provide income in the event of disabilities. Those with mort-gage loans should purchase mortgage insurance so that the burden of servicing the loans will not fall on your loved ones in the event of death or disability.
It is also recommended to make a will to state how your wealth should be distributed after your death and by whom. For those with children, you may need to nominate a suitable person to look after your children in the event both you and your spouse pass on together.
A larger amount of emergency fund may be needed due to the increased monthly financial commitments. It is recommend-ed to keep at least 6 months of income in the emergency fund (subject to individual circum-stances). If there are children, you will need to be saving for the children’s higher education. You can choose to save via endow-ment policies, investment-linked policies, regular investment plans or purchase bonds – all of which should produce a higher return than a bank deposit over a long period.
At this stage, you should already have began saving for your retirement. The earlier you start, the more time your money will be allowed to grow and the bigger retirement nest egg you will be able to build. Although you may be contributing to CPF which would also provide for your retirement, your CPF funds alone might not be sufficient given inflation and longer lifespan. You can choose to save for retirement through cash-value insurance, endowment plans, bonds, diversified mutual funds or stocks etc. You may also consider contributing to the Supplementary Retirement Scheme which provides special tax incentive.
40-50s – Career Peak
Middle age is the time when most people are at the peak of their careers and earning power. That’s also the time when you have more experience and the money to take a more active approach to investment. Since retirement age is approaching, now is the time to transform as much as your earnings into investment capital as possible.
If you have children, they may be in higher education by now or have already started work. If money has already been set aside for the children’s education in the past, education expenditures will no longer be coming from your income. As earnings may have increased more than expenditures, you are likely to have more money to save and invest than ever before.
Life and health insurance premiums will become more expensive because you are older. Now is the time to look into protection for long-term care in the event of disability. One such plan is the ElderShield plan. It is important to periodically update your will should your circum-stances change.
At this stage, your savings and investments portfolios are likely to be larger than before. For those who have the knowledge and experience, you may want to hold more equities and other more sophisticated and volatile investments. For those who have a low appetite for risk, you can focus more on bonds within your investment portfolio.
60s and Beyond - Retirement
Some people will continue to work and earn a high salary in their old age but many would have given up working at this point. As a retiree (or semi-retiree), your income may be lower or zero and your expenditure is likely to be lower too. If your income from pensions and support from family members are sufficient to meet your monthly expenses, you will be able to continue to work on capital growth. But for most people, they are likely to start withdrawing money from their savings and investments to pay for their monthly expenses. Once you start withdrawing money for income, your invest-ment capital will grow more slowly or even shrink over time.
Most of your big financial commitments such as paying for your home and supporting children will be over. Daily expenses are likely to drop but recreational and healthcare expenses are likely to increase. Health insurance premiums will increase dramatically as you age and you may need to draw on your savings or investments to avoid letting your coverage lapse at this point when you need it the most. You will need to constantly review your will as your family’s circumstances or tax laws may change. It is also important to look into estate planning to avoid hefty estate taxes which might burden your dependants or serve to reduce the amount of inheritance that you hope to pass down.
If you are still drawing an income from work, you can still continue to save. But for most, the challenge is to withdraw sufficient savings and investment income to live while preserving the value of their portfolio. There are many investment schemes that allow you to draw down income when you wish but you need to examine their individual pros and cons very carefully.
At this stage, protecting your capital is important. Do not take needless risks just so to try to increase your investment income. And because you have less time left to ride out the volatility in equity markets, it is probably wiser to reduce risks to the minimum and focus on capital protection instead. You may want to invest in less risky instruments such as bonds, Treasury bills, fixed deposits or certain structured products. Although some of these investments may still carry a risk of capital loss, the risks tend to be limited while offering the potential for a higher regular income than cash deposits. Some people may make the mistake of being too overly cautious by placing all their money in cash deposits which yield very minimal interests. If in a climate of high inflation, their retirement plan might be seriously compromised as the return from their savings deposits may not even match up with the inflation rate. There are also other alternative methods to generate income, such as through renting, downgrading of home or reverse mortgage.
Conclusion
This ‘life stage’ approach to financial planning is useful because when you are able to foresee what generally is to come, you will be able to plan more effectively than if you were to adopt a ‘fire in the dark’ method. And because your financial needs change over the various life stages, it is very important to review your financial portfolio with your adviser on a regular basis to ensure that the financial strategies laid out previously are still in line with your needs at any particular stage of your life.
Four Stages of Financial Life
Although everyone is different, most people go through broadly four predictable stages of development in their adult lives:
20s - Just starting out
30s - Building a family
40-50s - Career peak
60s & beyond - Retirement
Your spending and needs are likely to vary dramatically at the different life stages. Therefore, it is worthwhile to examine these stages more closely so that you can plan more effectively.
20s – Just starting out
People in their 20s have just graduated and starting their careers. You are usually earning less than you will later on. You may still be living at home with your parents. Given your new found independence, you have a big appetite for life and right now, saving might seem less important than spending. You may want to have a car, travel, party, buy fashionable clothes and so on. Many people at this stage tend to spend too easily and there is a danger of getting into debt by over-using credit cards and taking loans.
Most people in their 20s have yet to insure themselves. You might not need much life insurance if you are not married or if your parents or siblings are not financially dependent on you. However, you should have some health, critical illness and disability coverage as illnesses and accidents can happen at any point of your life. For those who are in good health and are still young, the premiums will be relatively inexpensive.
The priority of those in their 20s will be to build up their emergency funds if they do not already have sufficient savings. You are likely to set aside a bigger part of your savings for more short term needs such as marriage or buying a home. However, you should not neglect saving and investing for the long-term as the effect of compounding works best the earlier you start.
Start by investing whatever excess you have after setting aside enough for your daily expenses and short term needs. It does not matter if you only have a very small amount to begin with but it is important to take that first step to start planning for your future.
30s – Building a family
If you haven’t already done so in your 20s, the 30s will be the time to lay the foundations for future wealth. You will probably be earning more as you have progressed in your career.
For those who are married and are starting a family, your expenditures would have in-creased dramatically as you may be paying for your home mortgage, car loan and planning for your children’s education.
At this stage of life, many of you will not only be caring for your young children but are also supporting elderly parents. For those with dependants, you will most certainly need more life insurance in the event of unforeseen circumstances such as death, disability or critical illness. Health and disability insurance are also necessary to help pay for medical expenses and provide income in the event of disabilities. Those with mort-gage loans should purchase mortgage insurance so that the burden of servicing the loans will not fall on your loved ones in the event of death or disability.
It is also recommended to make a will to state how your wealth should be distributed after your death and by whom. For those with children, you may need to nominate a suitable person to look after your children in the event both you and your spouse pass on together.
A larger amount of emergency fund may be needed due to the increased monthly financial commitments. It is recommend-ed to keep at least 6 months of income in the emergency fund (subject to individual circum-stances). If there are children, you will need to be saving for the children’s higher education. You can choose to save via endow-ment policies, investment-linked policies, regular investment plans or purchase bonds – all of which should produce a higher return than a bank deposit over a long period.
At this stage, you should already have began saving for your retirement. The earlier you start, the more time your money will be allowed to grow and the bigger retirement nest egg you will be able to build. Although you may be contributing to CPF which would also provide for your retirement, your CPF funds alone might not be sufficient given inflation and longer lifespan. You can choose to save for retirement through cash-value insurance, endowment plans, bonds, diversified mutual funds or stocks etc. You may also consider contributing to the Supplementary Retirement Scheme which provides special tax incentive.
40-50s – Career Peak
Middle age is the time when most people are at the peak of their careers and earning power. That’s also the time when you have more experience and the money to take a more active approach to investment. Since retirement age is approaching, now is the time to transform as much as your earnings into investment capital as possible.
If you have children, they may be in higher education by now or have already started work. If money has already been set aside for the children’s education in the past, education expenditures will no longer be coming from your income. As earnings may have increased more than expenditures, you are likely to have more money to save and invest than ever before.
Life and health insurance premiums will become more expensive because you are older. Now is the time to look into protection for long-term care in the event of disability. One such plan is the ElderShield plan. It is important to periodically update your will should your circum-stances change.
At this stage, your savings and investments portfolios are likely to be larger than before. For those who have the knowledge and experience, you may want to hold more equities and other more sophisticated and volatile investments. For those who have a low appetite for risk, you can focus more on bonds within your investment portfolio.
60s and Beyond - Retirement
Some people will continue to work and earn a high salary in their old age but many would have given up working at this point. As a retiree (or semi-retiree), your income may be lower or zero and your expenditure is likely to be lower too. If your income from pensions and support from family members are sufficient to meet your monthly expenses, you will be able to continue to work on capital growth. But for most people, they are likely to start withdrawing money from their savings and investments to pay for their monthly expenses. Once you start withdrawing money for income, your invest-ment capital will grow more slowly or even shrink over time.
Most of your big financial commitments such as paying for your home and supporting children will be over. Daily expenses are likely to drop but recreational and healthcare expenses are likely to increase. Health insurance premiums will increase dramatically as you age and you may need to draw on your savings or investments to avoid letting your coverage lapse at this point when you need it the most. You will need to constantly review your will as your family’s circumstances or tax laws may change. It is also important to look into estate planning to avoid hefty estate taxes which might burden your dependants or serve to reduce the amount of inheritance that you hope to pass down.
If you are still drawing an income from work, you can still continue to save. But for most, the challenge is to withdraw sufficient savings and investment income to live while preserving the value of their portfolio. There are many investment schemes that allow you to draw down income when you wish but you need to examine their individual pros and cons very carefully.
At this stage, protecting your capital is important. Do not take needless risks just so to try to increase your investment income. And because you have less time left to ride out the volatility in equity markets, it is probably wiser to reduce risks to the minimum and focus on capital protection instead. You may want to invest in less risky instruments such as bonds, Treasury bills, fixed deposits or certain structured products. Although some of these investments may still carry a risk of capital loss, the risks tend to be limited while offering the potential for a higher regular income than cash deposits. Some people may make the mistake of being too overly cautious by placing all their money in cash deposits which yield very minimal interests. If in a climate of high inflation, their retirement plan might be seriously compromised as the return from their savings deposits may not even match up with the inflation rate. There are also other alternative methods to generate income, such as through renting, downgrading of home or reverse mortgage.
Conclusion
This ‘life stage’ approach to financial planning is useful because when you are able to foresee what generally is to come, you will be able to plan more effectively than if you were to adopt a ‘fire in the dark’ method. And because your financial needs change over the various life stages, it is very important to review your financial portfolio with your adviser on a regular basis to ensure that the financial strategies laid out previously are still in line with your needs at any particular stage of your life.
Thursday, September 06, 2007
The Maths of Property Ownership
As property prices continue to inch upwards in the recent years, many home shoppers have been rushed into making purchase decisions in fear of having to pay even higher prices in the near future. Or some might be drawn to the opportunity of making lucrative profits in view of a property boom by buying properties for investment purposes.
Before you commit to a property purchase and hence a hefty loan, do take time to check your financial health and needs first. You should also familiarize yourself with the CPF regulations if you are planning to finance your home purchase with your CPF money.
There are several CPF regulations that might impact your home purchase and your ability to finance the housing loan, such as the lowering of CPF salary ceiling, CPF contribution rates and the limit on voluntary CPF contributions, cash down-payment when using bank loan, CPF withdrawal limit for housing as well as the restriction on use of CPF to purchase multiple properties. Details of CPF Housing policies can be found at http://mycpf.cpf.gov.sg/Members/HSG-Site
So your dream home comes with an attractive price tag of $500,000, is that all you have to think about where financing is concerned? Definitely not!
Every property purchase comes with additional expenses such as stamp duty, legal fees, valuation fees and other less obvious costs such as agent fees, cash payment for the excess of purchase price over valuation price, mortgage/fire insurance, maintenance charges, sinking fees, property tax, penalty for early loan repayment etc. So do make sure your finances allow for these miscellaneous expenses which can all add up.
Before you commit to a property purchase and hence a hefty loan, do take time to check your financial health and needs first. You should also familiarize yourself with the CPF regulations if you are planning to finance your home purchase with your CPF money.
There are several CPF regulations that might impact your home purchase and your ability to finance the housing loan, such as the lowering of CPF salary ceiling, CPF contribution rates and the limit on voluntary CPF contributions, cash down-payment when using bank loan, CPF withdrawal limit for housing as well as the restriction on use of CPF to purchase multiple properties. Details of CPF Housing policies can be found at http://mycpf.cpf.gov.sg/Members/HSG-Site
So your dream home comes with an attractive price tag of $500,000, is that all you have to think about where financing is concerned? Definitely not!
Every property purchase comes with additional expenses such as stamp duty, legal fees, valuation fees and other less obvious costs such as agent fees, cash payment for the excess of purchase price over valuation price, mortgage/fire insurance, maintenance charges, sinking fees, property tax, penalty for early loan repayment etc. So do make sure your finances allow for these miscellaneous expenses which can all add up.
And how much of your gross monthly salary should you comfortably set aside for your housing loan installments as well as other loans? Banks typically set the limit to be 30-40% just by looking at your current financial commitments, disposable cash and earning power. However, this ‘rule of thumb’ does not take into consideration other factors such as how much one needs to set aside for current and future needs and emergencies or how secure is one’s career.
The onus is always on you, the borrower, to assess your own financial situation and how comfortably you can service your loan. Use the home loan calculators found on CPF website or on many bank websites to ascertain how much you can afford for monthly loan installments and what is a suitable loan tenure. Do engage a reliable, independent financial adviser if you do not have the discipline or expertise to be rigorous in working out the sums.
If you are planning to get a bank loan for your property purchase, do shop around for the best deal. The things that you should be looking out for are the interest rates and whether they are fixed or variable, minimum loan amounts, minimum income requirements, loan repayment period, interest computation, penalty for early repayment and other perks such as legal fee subsidy, free valuation and fire insurance etc.
The onus is always on you, the borrower, to assess your own financial situation and how comfortably you can service your loan. Use the home loan calculators found on CPF website or on many bank websites to ascertain how much you can afford for monthly loan installments and what is a suitable loan tenure. Do engage a reliable, independent financial adviser if you do not have the discipline or expertise to be rigorous in working out the sums.
If you are planning to get a bank loan for your property purchase, do shop around for the best deal. The things that you should be looking out for are the interest rates and whether they are fixed or variable, minimum loan amounts, minimum income requirements, loan repayment period, interest computation, penalty for early repayment and other perks such as legal fee subsidy, free valuation and fire insurance etc.
As banks get more aggressive, loan packages get more attractive but somewhat confusing as banks try to differentiate themselves by dangling different ‘carrots’. It will be hard to do an ‘apple to apple’ comparison but my suggestion is to always focus on the interest rates rather than the small perks because a loan with better rates will save you a lot of money. If you are planning on early partial or complete repayment, then you will need to consider if there is a penalty charge or a cap on the repayment amount.
Interest rate comparisons are not so straight forward even for similar fixed rate mortgage loans. For example, the following illustrates a hypothetical comparison between the fixed rates offered by Bank X and Bank Y:
Make a guess which bank is offering a better deal?
Interest Rate
Year 1 Year 2 Year 3 Year 4 onwards
Bank X 2.50% 3.50% 4.50% 5%
Bank Y 3% 3.25% 4.25% 5%
*For Illustration Only
For the first three years, both banks offer a 10.5% aggregate rate. However, Bank A is actually charging lower total interest for the first three years because interest savings in the first year with Bank A are more than with Bank B in the second and third years.
As less interest is payable in the first year under Bank A’s package, a greater amount of the first year’s monthly installments will go towards reducing the outstanding principal.
So, even when Bank A’s interest rates go up 25 basis points more than Bank B’s in the next two years, it is taxing a loan balance that is lower than Bank B’s. At the end of the first three years, you pay less interest to Bank A.
As the competition for mortgage loans continue to intensify among the banks, it is less necessary for borrowers to consider the long-term rates offered by the banks. This is because borrowers can always re-finance when the rates of theirexisting mortgage loans become less competitive (having taken into consideration any penalties for early repayment or claw backs of legal/valuation subsidies).
So before your commit yourself to such a huge purchase which would probably take you the next 20-30 years to repay in full, do bear in mind to do your sums first. Otherwise, that dream home might just turn into your worst financial nightmare.
Bank Y 3% 3.25% 4.25% 5%
*For Illustration Only
For the first three years, both banks offer a 10.5% aggregate rate. However, Bank A is actually charging lower total interest for the first three years because interest savings in the first year with Bank A are more than with Bank B in the second and third years.
As less interest is payable in the first year under Bank A’s package, a greater amount of the first year’s monthly installments will go towards reducing the outstanding principal.
So, even when Bank A’s interest rates go up 25 basis points more than Bank B’s in the next two years, it is taxing a loan balance that is lower than Bank B’s. At the end of the first three years, you pay less interest to Bank A.
As the competition for mortgage loans continue to intensify among the banks, it is less necessary for borrowers to consider the long-term rates offered by the banks. This is because borrowers can always re-finance when the rates of theirexisting mortgage loans become less competitive (having taken into consideration any penalties for early repayment or claw backs of legal/valuation subsidies).
So before your commit yourself to such a huge purchase which would probably take you the next 20-30 years to repay in full, do bear in mind to do your sums first. Otherwise, that dream home might just turn into your worst financial nightmare.
Insurance Demystified – Part II
In my previous posting on ‘Insurance Demystified’, I had mentioned that insurance is a form of risk management tool which aims to hedge against the risk of a loss that might have severe consequences by transferring the risk from one entity to another in exchange for a premium.
Therefore, any risk that can be quantified can potentially be insured. There are so many different types of insurance in the market that serve the varied risk management needs. The following list is not exhaustive and is intended to highlight the more common types of insurance with regards to personal financial planning.
Term Insurance
This is the most basic type of life insurance. By paying a small premium, the insured is covered against death and total permanent disability (TPD) for a specified period and for a certain amount of sum assured. Such term policy is purely for protection as the premiums are fully expended and none of it is used to build up any cash value.
Term policies can be further classified into level/straight term, decreasing term, increasing term and variable term. There might also be optional payable features such as convertible, renewable and critical illness riders that can be added to the main term plan to improve the attractiveness and coverage of a term policy.
Whole Life InsuranceSuch a policy offers protection against death and TPD to the insured for his/her entire life or up to the age of 100, whichever is earlier. Unlike a term plan, a whole life policy has a cash value as part of the premium is invested to reap returns.
Whole life plans can also be further classified into participating, non-participating, fixed premium, limited premium or continuous premium payment plans. There are also optional payable features such as critical illness, hospitalisation benefit, accidental benefit, payer benefit and other benefits that can be added to the main plan to enhance the policy coverage.
Endowment Insurance
The main purpose of an endowment policy is for savings rather than protection. There will be some amount of coverage albeit it being quite minimal, as the bulk of the premiums is invested for returns.
Such a policy will have a maturity date and the maturity value, which is the total of the guaranteed plus non-guaranteed returns which will be paid to the insured when the policy expires. Endowment policies are most commonly used for retirement and children’s education planning.
As with other term and whole life plans, endowment policies also offer optional payable features such as critical illness premium waiver, payer benefit and other riders to be added to the main plan. There are single premium, regular premium, participating as well as non-participating endowment policies.
Investment-linked Policies (ILP)Such policies offer a combination of protection and investment with part of the premiums (less all charges) being Invested into various investment funds of the insured’s choice.
As the investment funds are being chosen by the policy owner, the risk is being borne entirely by the policy owner. ILPs are more flexible as compared to traditional policies as premiums can be reduced or stopped temporarily as long as there is sufficient cash value. It is also possible to increase (subject to insurability) or decrease the sum assured, top up the premium so that more monies can be invested without having to purchase another policy or do partial withdrawals of the cash value.
Annuities
Such an instrument offers life-long regular payouts to annuitants for as long as they are alive. Premiums are to be paid before the first payout commences so as to allow the insurer sufficient time to build up enough funds to service the lifetime payouts.
Annuities are used for retirement planning to hedge against the retiree from outliving his/her resources. As capital preservation is of utmost importance, the premiums are mostly invested in lower risk instruments such as government securities and investment-grade bonds. There are many different forms of annuities such as single life immediate, term certain, guaranteed, reversionary, joint-life and joint-life & survivor annuity.
Health Insurance
Therefore, any risk that can be quantified can potentially be insured. There are so many different types of insurance in the market that serve the varied risk management needs. The following list is not exhaustive and is intended to highlight the more common types of insurance with regards to personal financial planning.
Term Insurance
This is the most basic type of life insurance. By paying a small premium, the insured is covered against death and total permanent disability (TPD) for a specified period and for a certain amount of sum assured. Such term policy is purely for protection as the premiums are fully expended and none of it is used to build up any cash value.
Term policies can be further classified into level/straight term, decreasing term, increasing term and variable term. There might also be optional payable features such as convertible, renewable and critical illness riders that can be added to the main term plan to improve the attractiveness and coverage of a term policy.
Whole Life InsuranceSuch a policy offers protection against death and TPD to the insured for his/her entire life or up to the age of 100, whichever is earlier. Unlike a term plan, a whole life policy has a cash value as part of the premium is invested to reap returns.
Whole life plans can also be further classified into participating, non-participating, fixed premium, limited premium or continuous premium payment plans. There are also optional payable features such as critical illness, hospitalisation benefit, accidental benefit, payer benefit and other benefits that can be added to the main plan to enhance the policy coverage.
Endowment Insurance
The main purpose of an endowment policy is for savings rather than protection. There will be some amount of coverage albeit it being quite minimal, as the bulk of the premiums is invested for returns.
Such a policy will have a maturity date and the maturity value, which is the total of the guaranteed plus non-guaranteed returns which will be paid to the insured when the policy expires. Endowment policies are most commonly used for retirement and children’s education planning.
As with other term and whole life plans, endowment policies also offer optional payable features such as critical illness premium waiver, payer benefit and other riders to be added to the main plan. There are single premium, regular premium, participating as well as non-participating endowment policies.
Investment-linked Policies (ILP)Such policies offer a combination of protection and investment with part of the premiums (less all charges) being Invested into various investment funds of the insured’s choice.
As the investment funds are being chosen by the policy owner, the risk is being borne entirely by the policy owner. ILPs are more flexible as compared to traditional policies as premiums can be reduced or stopped temporarily as long as there is sufficient cash value. It is also possible to increase (subject to insurability) or decrease the sum assured, top up the premium so that more monies can be invested without having to purchase another policy or do partial withdrawals of the cash value.
Annuities
Such an instrument offers life-long regular payouts to annuitants for as long as they are alive. Premiums are to be paid before the first payout commences so as to allow the insurer sufficient time to build up enough funds to service the lifetime payouts.
Annuities are used for retirement planning to hedge against the retiree from outliving his/her resources. As capital preservation is of utmost importance, the premiums are mostly invested in lower risk instruments such as government securities and investment-grade bonds. There are many different forms of annuities such as single life immediate, term certain, guaranteed, reversionary, joint-life and joint-life & survivor annuity.
Health Insurance
Medical costs are rising and health insurance provides some protection against financial hardship in the event of costly hospitalization bills and treatments arising from an accident or illness. In Singapore, the government has implemented programs such as Medisave, MediShield and Medifund to make health care affordable.
Despite that, the Medisave and MediShield schemes might not be adequate or comprehensive enough due to certain restrictions and limits on use as well as the deductibles and co-insurance features within the schemes.
Hence there are many private health insurance plans that are available to enhance one’s coverage and provide for hospital and surgical benefits, hospital cash, dental, out-patient, overseas medical coverage and other benefits not included in the government plans.
For employee-benefit health care plans, the introduction of Portable Medical Benefits Scheme (PMBS) and Transferable Medical Insurance Scheme (TMIS) have improved the mode of coverage such that employees can continue to enjoy health coverage even after the termination of employment (up to 12 months) and when they are in between jobs.
Such continuation in coverage will limit the risks of un-insurability or exclusion of pre-existing medical conditions that could exist if employees have to reapply for new plans when they change employment.
Critical Illness Insurance
This type of plan will pay out the sum assured upon the insured contracting or suffering certain critical illnesses specified in the policy.
In Singapore, most policies cover at least 30 forms of critical illnesses such as heart attack, stroke, cancer, coronary heart disease, kidney disease, major organ transplant and others (subject to specific terms in the policy document that define what constitute the critical illnesses that are being covered).
Such critical illness coverage can be offered as a standalone plan or it is often added to a life policy as a payable rider.
Disability Income Insurance
Such a policy is designed to pay the insured a regular income in the event of disability. From a financial perspective, the effects of total and permanent disability may be worse than death because not only will the person be unable to support the family, he/she will require financial support which might exacerbate the financial burden already imposed on the family.
Disability income insurance is different from total and permanent disability (TPD) benefit as the latter’s sum assured is normally equivalent to the death benefit and upon TPD occurring, the proceeds are either paid in a lump sum or in installments. TPD is commonly defined as being unable to perform any occupation or if the insured loses his/her hearing or sight or both feet or hands etc.
As for disability income insurance, the monthly benefits are subject to a maximum of 60-80% of the pre-disability income. And the commonly adopted definitions for disability income insurance are (1) if the insured cannot work at any occupation; (2) if the insured cannot work in any occupation for which he or she is or might be qualified for, in which event, factors like the insured’s training, education and experience will be taken into account; or (3) if the insured cannot work in his or her own occupation.
These are the common types of life and health insurance that provide useful and economical solutions to potential problems in the risk management process of personal financial planning.
There are also general insurance products that are related to assets and liability protection – such as motor, home, travel, professional indemnity insurance etc which I will touch upon subsequently
Despite that, the Medisave and MediShield schemes might not be adequate or comprehensive enough due to certain restrictions and limits on use as well as the deductibles and co-insurance features within the schemes.
Hence there are many private health insurance plans that are available to enhance one’s coverage and provide for hospital and surgical benefits, hospital cash, dental, out-patient, overseas medical coverage and other benefits not included in the government plans.
For employee-benefit health care plans, the introduction of Portable Medical Benefits Scheme (PMBS) and Transferable Medical Insurance Scheme (TMIS) have improved the mode of coverage such that employees can continue to enjoy health coverage even after the termination of employment (up to 12 months) and when they are in between jobs.
Such continuation in coverage will limit the risks of un-insurability or exclusion of pre-existing medical conditions that could exist if employees have to reapply for new plans when they change employment.
Critical Illness Insurance
This type of plan will pay out the sum assured upon the insured contracting or suffering certain critical illnesses specified in the policy.
In Singapore, most policies cover at least 30 forms of critical illnesses such as heart attack, stroke, cancer, coronary heart disease, kidney disease, major organ transplant and others (subject to specific terms in the policy document that define what constitute the critical illnesses that are being covered).
Such critical illness coverage can be offered as a standalone plan or it is often added to a life policy as a payable rider.
Disability Income Insurance
Such a policy is designed to pay the insured a regular income in the event of disability. From a financial perspective, the effects of total and permanent disability may be worse than death because not only will the person be unable to support the family, he/she will require financial support which might exacerbate the financial burden already imposed on the family.
Disability income insurance is different from total and permanent disability (TPD) benefit as the latter’s sum assured is normally equivalent to the death benefit and upon TPD occurring, the proceeds are either paid in a lump sum or in installments. TPD is commonly defined as being unable to perform any occupation or if the insured loses his/her hearing or sight or both feet or hands etc.
As for disability income insurance, the monthly benefits are subject to a maximum of 60-80% of the pre-disability income. And the commonly adopted definitions for disability income insurance are (1) if the insured cannot work at any occupation; (2) if the insured cannot work in any occupation for which he or she is or might be qualified for, in which event, factors like the insured’s training, education and experience will be taken into account; or (3) if the insured cannot work in his or her own occupation.
These are the common types of life and health insurance that provide useful and economical solutions to potential problems in the risk management process of personal financial planning.
There are also general insurance products that are related to assets and liability protection – such as motor, home, travel, professional indemnity insurance etc which I will touch upon subsequently
Funding for your Children’s Education
Every parent wants to provide the best for their children to help them realize their aspirations - and this undoubtedly will include providing for the best education. However, quality education often does not come cheap and the cost of education continues to increase rapidly each year.
When the freeze on tuition fees was lifted in 2006 as part of the government’s plan to grant greater autonomy to the local tertiary institutions in setting fee structures, tuition fees at the five polytechnics went up by 8%, NUS and NTU both raised the fees of non-medical courses by 5% while the SMU increased its fee by 15%.
According to the National University of Singapore (NUS), the tuition fee for Academic Year 2006/07 is S$6,110 p.a. for the non-Medical courses and S$17,520 p.a. for medical courses. If we are to factor in the inflation rate for the number of years till your child goes to university, the cost can be quite astounding. A projected inflation rate of 5% will mean that in 19 years time, the tuition fee alone is going to be $15,440 p.a.
Overseas tertiary education will cost even more. For example, the U.S. College Board reported that the average 20005/06 tuition fee was US$21,235. All the above mentioned figures have not yet taken into account the living expenses which would also increase over the years as the cost of living continue to rise.
Education is being heavily subsidized by the government currently. However the government has planned to reduce the amount of subsidy given. There are numerous assistance schemes available to help fund for tertiary education and one of the most widely subscribed is the CPF Education Scheme. Under this scheme, CPF members can pay for their own or their children’s full-time local tertiary education at approved institutions by utilizing up to 40% of the Ordinary Account balance which includes amounts withdrawn for education and investments. There are also other schemes such as study loans from commercial banks, bursaries and scholarships from both public and private sectors.
However, with the rising costs of living and education, your CPF or other assistance schemes may not be sufficient to provide for all of your children's education needs, especially when your CPF is also to be used to fund your retirement. Therefore, you will need to start planning for your child’s education as early as possible. The first thing to do is to establish how much is actually required. Next is to consider how much time you have to save for the amount required so as to determine the amount that you need to set aside now. The less time you have, the larger the amount you must put away each month. Hence it definitely pays to plan well ahead, especially if you have more than one child.
Here are some possible strategies ways in which you can fund your children's tertiary education:
Monthly Investment Plan
A fixed amount of money will be invested into unit trust on a monthly basis. Such a plan aims to leverage on the Dollar Cost Averaging effect. By investing fixed amounts at regular intervals, you are buying more units when the price is low & fewer units when the price is high, allowing you to reduce your average cost (versus average price) in a volatile market. There are as many as 300 unit trusts for you to choose from, depending on your investment horizon, goal and risk appetite.
Investment-linked Policy
This is a regular-premium investment-linked plan which life protection with investment opportunities. Typically, such a plan will offer you the control and flexibility to vary the allocation of your premium protection or investment at different points in your life to match your life needs.
Endowment Policy
A long term regular-premium endowment plan will help you to save in a systematic and disciplined way for your children’s education. It also offers insurance protection as well as other payer’s benefits to ensure that even in the event of death, critical illness or permanent disability of the payer (typically the parents), the child will still receive the funds required for his/her education.
The cost of university education looks set to increase further. Save/Invest early to avoid a situation where you cannot afford to pay for a course that your child qualifies for. By planning well ahead, you can try to ensure that your children will be educated in the areas that they desire and have opportunities to pursue the careers in their chosen fields.
When the freeze on tuition fees was lifted in 2006 as part of the government’s plan to grant greater autonomy to the local tertiary institutions in setting fee structures, tuition fees at the five polytechnics went up by 8%, NUS and NTU both raised the fees of non-medical courses by 5% while the SMU increased its fee by 15%.
According to the National University of Singapore (NUS), the tuition fee for Academic Year 2006/07 is S$6,110 p.a. for the non-Medical courses and S$17,520 p.a. for medical courses. If we are to factor in the inflation rate for the number of years till your child goes to university, the cost can be quite astounding. A projected inflation rate of 5% will mean that in 19 years time, the tuition fee alone is going to be $15,440 p.a.
Overseas tertiary education will cost even more. For example, the U.S. College Board reported that the average 20005/06 tuition fee was US$21,235. All the above mentioned figures have not yet taken into account the living expenses which would also increase over the years as the cost of living continue to rise.
Education is being heavily subsidized by the government currently. However the government has planned to reduce the amount of subsidy given. There are numerous assistance schemes available to help fund for tertiary education and one of the most widely subscribed is the CPF Education Scheme. Under this scheme, CPF members can pay for their own or their children’s full-time local tertiary education at approved institutions by utilizing up to 40% of the Ordinary Account balance which includes amounts withdrawn for education and investments. There are also other schemes such as study loans from commercial banks, bursaries and scholarships from both public and private sectors.
However, with the rising costs of living and education, your CPF or other assistance schemes may not be sufficient to provide for all of your children's education needs, especially when your CPF is also to be used to fund your retirement. Therefore, you will need to start planning for your child’s education as early as possible. The first thing to do is to establish how much is actually required. Next is to consider how much time you have to save for the amount required so as to determine the amount that you need to set aside now. The less time you have, the larger the amount you must put away each month. Hence it definitely pays to plan well ahead, especially if you have more than one child.
Here are some possible strategies ways in which you can fund your children's tertiary education:
Monthly Investment Plan
A fixed amount of money will be invested into unit trust on a monthly basis. Such a plan aims to leverage on the Dollar Cost Averaging effect. By investing fixed amounts at regular intervals, you are buying more units when the price is low & fewer units when the price is high, allowing you to reduce your average cost (versus average price) in a volatile market. There are as many as 300 unit trusts for you to choose from, depending on your investment horizon, goal and risk appetite.
Investment-linked Policy
This is a regular-premium investment-linked plan which life protection with investment opportunities. Typically, such a plan will offer you the control and flexibility to vary the allocation of your premium protection or investment at different points in your life to match your life needs.
Endowment Policy
A long term regular-premium endowment plan will help you to save in a systematic and disciplined way for your children’s education. It also offers insurance protection as well as other payer’s benefits to ensure that even in the event of death, critical illness or permanent disability of the payer (typically the parents), the child will still receive the funds required for his/her education.
The cost of university education looks set to increase further. Save/Invest early to avoid a situation where you cannot afford to pay for a course that your child qualifies for. By planning well ahead, you can try to ensure that your children will be educated in the areas that they desire and have opportunities to pursue the careers in their chosen fields.
The Makings of a Great Financial Plan
How do you know if your financial plan will help lay a solid foundation to a bright financial future as well as can cater for every unforeseen circumstance that might potentially throw you off course?
Here we provide an insight to the makings of a great financial plan.
An accurate fact find
As the saying goes ‘garbage in, garbage out’! The more accurate the data provided by you, the better your adviser will be able to assess your financial position and to recommend suitable solutions to address your needs and wants. Do rely on source documents whenever possible rather than on memory. Our minds can play tricks on us sometimes. If you have chosen to withhold some information from your adviser for whatever reasons, do acknowledge that the omissions might result in certain limitations in your financial plan.
Your adviser – the facilitator
Some advisers treat fact-finding as a purely quantitative process where they extract numerical data from you. However, a great financial plan requires the incorporation of both quantitative and qualitative data such as your money values, family relationships and other ‘soft’ data. It is easy to obtain quantitative data but only a good financial adviser will be able to tease out the relevant qualitative data through his ability to ask the right questions.
The most valued financial advisers are not only competent in their field but also possess good listening skills, the ability to empathize and not make assumptions based on their own experiences.
Another important factor is how comfortable are you with him? No matter how great he is as an adviser, you might want to reconsider the adviser-client relationship if you find that you cannot be yourself or be completely honest with him.
Getting your priorities right
Not many of us can afford to indulge in our every whim and fancy due to limited financial resources. So, your financial plan should take care of your needs first before satisfying your wants. However, it is not always easy to distinguish the needs from the wants.
It is a human tendency to avoid unpleasant things and seek immediate gratifications. One of the reasons why many people are under-insured is because issues such as death, disability or illnesses are avoided because they are unpleasant and tend to create discomfort and insecurities in people. It is also extremely difficult to convince people to put off their current consumption so as to meet future consumption because whereas the negative effect of delayed gratification will be immediately felt, the positive effect of the action will only be apparent much later.
Shifting societal norms have also blurred the line separating a need from a want. Is it a ‘need’ or a ‘want’ to own a roof over your head or to start a family or to own a car?
Matching your needs to the solutions
There have been much negative media publicity lately in the newspapers about the problems associated with investment-linked policies, endowment policies and bank structured deposits. Fingers are often pointed at the financial products for being flawed. However, the real problem is the inappropriate matching of needs to products and this often arises from inadequate fact find, the lack of disclosure and understanding of the pros and cons of the products. Although advisers are required by law to ensure proper disclosures, not every adviser will spell out everything to the most minute detail. As a consumer, do seek clarifications when in doubt.
Do yourself a favour by going through your financial portfolio today to see if the plans that you have gotten many years ago really cater to your financial needs. When in doubt, do take a proactive approach in raising your concerns with the financial experts.
Diversify, diversify, diversify
Do not to put all our eggs in one basket! This rule of thumb applies to many aspects of a financial plan. In this very complex financial marketplace, experts have established that the performances of different financial instruments often do not move in tandem. By mixing-and-matching different instruments, product types, product durations, product vendors, we can in effect spread out and hence reduce the risks and increase our chances of achieving better outcomes. Diversification is an intricate strategy that requires careful planning and proper asset allocation. There may be a need to evaluate the different financial instruments offered by the different providers to ascertain the ‘optimal solution’. This is likely to be a combination of products that are different yet complimentary to one another. And this ‘optimal solution’ should be sufficiently diversified yet not too arduous to comprehend or maintain.
Keeping track and keeping up
A financial plan is not something that you draw up and execute at age 25, shelf it and then relook at it again only at age 55. It is to be an ongoing process that requires regular monitoring to ensure that everything is going on as planned. When financial planning is carried out at an early age, the initial blueprint tends to be a scanty one due perhaps to the lack of resources or the lack of commitments. However, as one grows older and assumes bigger responsibilities, the needs and wants will change and the financial portfolio should ‘grow’ to reflect the lifestyle and lifecycle changes.
Ideal scenario can be far from the actual situation. There will be changes to personal circumstances, government laws, general economic environment and products/services offerings along the way. It is important for you & your adviser to constantly monitor and review the soundness of the recommendations to identify potential problems or shortfalls. This is to ensure that timely modifications can be made to address changing circumstances which might affect your progress towards your financial goals – and you do not want to realize this only too late. Financial planning is a long term process so your financial adviser will be the one growing old with you!
Discipline, hard work and financial literacy
I always stress to my clients the importance of financial literacy which is the key factor why I started this newsletter. The financial services industry has grown more complex than ever with more sophisticated products and financial transactions. Someone once told me that a financially ignorant person is like an inexperienced swimmer trying to swim in shark-infested choppy waters - sooner or later, he either drowns or gets eaten up!
Clearly then, financial know-how is your immunity for survivor in this complex financial marketplace. Financial literacy is also about knowing oneself. As a practitioner, I have over the years come across many bright and successful executives who are clueless when it comes to managing their own finances.
If you are the DIY kind of person who prefers to handle your own finances, just make sure you have done proper research on the possible options available so that you do not shortchange yourself. The more you know about your own financial needs and the options available to you, the more fruitful the discussions will be between you and your adviser.
To me, the more knowledgeable my clients become, the more I will seek to further improve myself so that I can continue to value-add my clients. This way, my clients and I will grow together and become more financially-savvy each and every single day.
So remember, in the financial world, ignorance is definitely not bliss – it can be very costly!
Here we provide an insight to the makings of a great financial plan.
An accurate fact find
As the saying goes ‘garbage in, garbage out’! The more accurate the data provided by you, the better your adviser will be able to assess your financial position and to recommend suitable solutions to address your needs and wants. Do rely on source documents whenever possible rather than on memory. Our minds can play tricks on us sometimes. If you have chosen to withhold some information from your adviser for whatever reasons, do acknowledge that the omissions might result in certain limitations in your financial plan.
Your adviser – the facilitator
Some advisers treat fact-finding as a purely quantitative process where they extract numerical data from you. However, a great financial plan requires the incorporation of both quantitative and qualitative data such as your money values, family relationships and other ‘soft’ data. It is easy to obtain quantitative data but only a good financial adviser will be able to tease out the relevant qualitative data through his ability to ask the right questions.
The most valued financial advisers are not only competent in their field but also possess good listening skills, the ability to empathize and not make assumptions based on their own experiences.
Another important factor is how comfortable are you with him? No matter how great he is as an adviser, you might want to reconsider the adviser-client relationship if you find that you cannot be yourself or be completely honest with him.
Getting your priorities right
Not many of us can afford to indulge in our every whim and fancy due to limited financial resources. So, your financial plan should take care of your needs first before satisfying your wants. However, it is not always easy to distinguish the needs from the wants.
It is a human tendency to avoid unpleasant things and seek immediate gratifications. One of the reasons why many people are under-insured is because issues such as death, disability or illnesses are avoided because they are unpleasant and tend to create discomfort and insecurities in people. It is also extremely difficult to convince people to put off their current consumption so as to meet future consumption because whereas the negative effect of delayed gratification will be immediately felt, the positive effect of the action will only be apparent much later.
Shifting societal norms have also blurred the line separating a need from a want. Is it a ‘need’ or a ‘want’ to own a roof over your head or to start a family or to own a car?
Matching your needs to the solutions
There have been much negative media publicity lately in the newspapers about the problems associated with investment-linked policies, endowment policies and bank structured deposits. Fingers are often pointed at the financial products for being flawed. However, the real problem is the inappropriate matching of needs to products and this often arises from inadequate fact find, the lack of disclosure and understanding of the pros and cons of the products. Although advisers are required by law to ensure proper disclosures, not every adviser will spell out everything to the most minute detail. As a consumer, do seek clarifications when in doubt.
Do yourself a favour by going through your financial portfolio today to see if the plans that you have gotten many years ago really cater to your financial needs. When in doubt, do take a proactive approach in raising your concerns with the financial experts.
Diversify, diversify, diversify
Do not to put all our eggs in one basket! This rule of thumb applies to many aspects of a financial plan. In this very complex financial marketplace, experts have established that the performances of different financial instruments often do not move in tandem. By mixing-and-matching different instruments, product types, product durations, product vendors, we can in effect spread out and hence reduce the risks and increase our chances of achieving better outcomes. Diversification is an intricate strategy that requires careful planning and proper asset allocation. There may be a need to evaluate the different financial instruments offered by the different providers to ascertain the ‘optimal solution’. This is likely to be a combination of products that are different yet complimentary to one another. And this ‘optimal solution’ should be sufficiently diversified yet not too arduous to comprehend or maintain.
Keeping track and keeping up
A financial plan is not something that you draw up and execute at age 25, shelf it and then relook at it again only at age 55. It is to be an ongoing process that requires regular monitoring to ensure that everything is going on as planned. When financial planning is carried out at an early age, the initial blueprint tends to be a scanty one due perhaps to the lack of resources or the lack of commitments. However, as one grows older and assumes bigger responsibilities, the needs and wants will change and the financial portfolio should ‘grow’ to reflect the lifestyle and lifecycle changes.
Ideal scenario can be far from the actual situation. There will be changes to personal circumstances, government laws, general economic environment and products/services offerings along the way. It is important for you & your adviser to constantly monitor and review the soundness of the recommendations to identify potential problems or shortfalls. This is to ensure that timely modifications can be made to address changing circumstances which might affect your progress towards your financial goals – and you do not want to realize this only too late. Financial planning is a long term process so your financial adviser will be the one growing old with you!
Discipline, hard work and financial literacy
I always stress to my clients the importance of financial literacy which is the key factor why I started this newsletter. The financial services industry has grown more complex than ever with more sophisticated products and financial transactions. Someone once told me that a financially ignorant person is like an inexperienced swimmer trying to swim in shark-infested choppy waters - sooner or later, he either drowns or gets eaten up!
Clearly then, financial know-how is your immunity for survivor in this complex financial marketplace. Financial literacy is also about knowing oneself. As a practitioner, I have over the years come across many bright and successful executives who are clueless when it comes to managing their own finances.
If you are the DIY kind of person who prefers to handle your own finances, just make sure you have done proper research on the possible options available so that you do not shortchange yourself. The more you know about your own financial needs and the options available to you, the more fruitful the discussions will be between you and your adviser.
To me, the more knowledgeable my clients become, the more I will seek to further improve myself so that I can continue to value-add my clients. This way, my clients and I will grow together and become more financially-savvy each and every single day.
So remember, in the financial world, ignorance is definitely not bliss – it can be very costly!
Insurance Demystified
I can imagine insurance to be the pet peeve of many people. Just think insurance, and the first things that usually come to mind would be aggressive sales tactics, stories of mis-selling or misrepresentation by unethical advisers. And because of these negative connotations associated with insurance, advisers and consumers tend to avoid it like plague or try their darndest to thread around it very carefully in fear of waking the sleeping angry giant! It is a great pity really because insurance is the most misunderstood of all financial instruments in my opinion and it is one of the most important (if not the most important) aspects of financial planning. Without which even the best financial plan, with all its high yielding investments and other sophisticated instruments, will fall through when an unforeseen situation arises. Here, I’ll like to address a few misconceptions of insurance and hopefully through this, to provide you with a better understanding of what insurance is all about.
First of all, it is not about whether you can afford insurance but whether you can afford not to have insurance! The rationale behind insurance planning is not to risk more than you can afford to lose. If a particular loss has severe consequences for you, then you should not retain the risk but to transfer it to another party, in this case the insurer, who will bear the consequences of the risk in return for a specified amount of premium. Some examples of such risks with severe consequences are death of a breadwinner, having to suffer from a long-drawn serious illness or disability, loss of property, facing litigation etc. In a way, insurance helps to optimize the usage of capital or to provide the necessary capital when there is none. If there were no insurance, individuals and companies would be required to hold substantial amounts of funds in their reserves to offset any significant losses arising from the risks. And in the event that such huge reserves are not available, the individuals and companies will have to bear the full brunt of the very significant financial losses if there were no insurance in place.
Another misconception is that insurance is for the rich. But if you were to think about it carefully, who do you think is more likely to afford a medical bill of a few hundred thousand of dollars – a millionaire or someone who has only a few thousand dollars in his/her bank account? So who do you think needs insurance more? The only reason that I can think of which explains why many believe that insurance is only for the rich is because the rich have long been the popular target of hungry advisers and they are often sold more insurance on the basis that they can afford it and not so much because they need it.
Some people think that they are already very well-insured because they are paying a whole load of money each month on insurance premiums. Needless to say, this is not the case. You can spend a whole lot of money on insurance policies but if you haven’t got the right policies to cover the right risks for the right amounts, you are just wasting your money! And you may be surprise to know that getting adequate coverage doesn’t necessarily come at an exorbitant price.
First of all, it is not about whether you can afford insurance but whether you can afford not to have insurance! The rationale behind insurance planning is not to risk more than you can afford to lose. If a particular loss has severe consequences for you, then you should not retain the risk but to transfer it to another party, in this case the insurer, who will bear the consequences of the risk in return for a specified amount of premium. Some examples of such risks with severe consequences are death of a breadwinner, having to suffer from a long-drawn serious illness or disability, loss of property, facing litigation etc. In a way, insurance helps to optimize the usage of capital or to provide the necessary capital when there is none. If there were no insurance, individuals and companies would be required to hold substantial amounts of funds in their reserves to offset any significant losses arising from the risks. And in the event that such huge reserves are not available, the individuals and companies will have to bear the full brunt of the very significant financial losses if there were no insurance in place.
Another misconception is that insurance is for the rich. But if you were to think about it carefully, who do you think is more likely to afford a medical bill of a few hundred thousand of dollars – a millionaire or someone who has only a few thousand dollars in his/her bank account? So who do you think needs insurance more? The only reason that I can think of which explains why many believe that insurance is only for the rich is because the rich have long been the popular target of hungry advisers and they are often sold more insurance on the basis that they can afford it and not so much because they need it.
Some people think that they are already very well-insured because they are paying a whole load of money each month on insurance premiums. Needless to say, this is not the case. You can spend a whole lot of money on insurance policies but if you haven’t got the right policies to cover the right risks for the right amounts, you are just wasting your money! And you may be surprise to know that getting adequate coverage doesn’t necessarily come at an exorbitant price.
Fineprint
There have been increasing numbers of complaints made by the public against financial institutions with regards to misleading advertisements, inadequate disclosures or the lack of transparency in the calculation of home loan rates or fixed deposit rates.
A quick check in the newspapers and on the websites of financial institution yields numerous advertisements with grabbing lines such as “x% p.a. return on your S$ fixed deposit”, “enjoy potential regular income of x% p.a. with investment”, “potential returns in both bullish and bearish stock market conditions” etc.
These statements are made not without the fine print, which often makes up a quarter page of the advertisements. Such exaggerated financial advertisements can also be found on posters, flyers, and brochures which mostly highlight the good points whilst the risks are often mentioned in smaller than font size-8 fineprint.
While I believe most of the advertisements have been scrutinised and approved by the financial institutions prior to publication, there is still a very fine line between what is acceptable and what is a potentially misleading advertisement.
While financially savvy people will examine the small print carefully before making any financial commitment, those who are not could misconstrue some of the advertisements, which may lead to expensive mistakes.
It irks me to see elderly people (my own parents included) being approached in the bank branches to buy sophisticated financial products such as structured deposits, unit trusts and equity-linked notes promoted by the banks. It is not hard to imagine that many of them will be attracted with statements such as "100% principal protected" and "potential yield of xx% per annum". And often, many elderly people and the non-financially savvy get committed without having a full understanding of the risks involved.
It is hard to fault the financial institutions because legally they have proper disclosure (in the fine print filled with jargon) of the products they sell, and there is the caveat emptor. So, despite repeated appeals to the financial institutions not to abuse the use of the fine print in their advertisements, I’m not sure how much has been accomplished in that area to date.
Consumers will still have to exercise great care when committing their money to any financial products. Do make an effort today to educate and warn your parents/grandparents/children against placing blind faith in the financial institutions before someone unknowingly commits to some financial products during his/her next visit to the bank or to the MRT station (where some financial institutions have set up roadshows to peddle their products).
For the financial consumers, a word of caution: When it sounds too good to be true, it probably is!
Disclaimer
Any resemblance to any advertisement taglines and publicity strategies of any financial institutions is purely coincidental.
Wednesday, May 24, 2006
Up your Financial Quotient
The financial services industry has grown more complex than ever with the introductions of more and more sophisticated products and finance transactions. Someone once told me that a financially ignorant person is like an inexperienced swimmer trying to swim in shark-infested choppy waters - sooner or later, he/she either drowns or gets eaten up or both!
Speaking at the Congress on 23 May 2006, Federal Reserve Chairman Ben Bernanke also highlighted the importance of how financial literacy is crucial to consumers' ability to make smart money choices and is also good for the overall economy.
Clearly then, financial know-how is your immunity for survivor in this very complex financial marketplace serving an endless buffet of confusing products, services and financial jargons that will kill even the biggest appetite!
Just talking about personal insurance alone, you will be bombarded by a wide array of products such as whole life, term, critical illness, disability income, personal accident, long term care, medical shield, hospitalization and surgical and others. Most people cannot even differentiate one product type from another, let alone understand the differences between the same products offered by the many different insurers!
Investments are even more mind-boggling! We have got stocks, bonds, T-bills, money-market funds, unit trusts, hedge funds, options, exchange-traded funds, property, commodities, structured deposits…and the list is growing everyday. And just within stocks, we can further classify them into small/mid/large caps, growth or value stocks. Whereas for unit trusts, there are equity, fixed income, balanced, asset allocation, global, sector, fund and funds and many others.
To make things worse, there have been so many scandals involving product mis-selling, churning, misconduct of advisers and it’s almost impossible to go to the bank without being recommended yet another flavour-of-the-month bank product. It’s like the same inexperienced swimmer swimming in shark-infested choppy waters…but now, with a broken arm that is bleeding profusely!
Products and services aside, financial literacy is also about knowing ourselves. You’ll be surprised to know that as a practicing financial adviser representative, I have over the years come across so many bright, successful and highly-driven executives who are absolutely clueless when it comes to managing their own finances. Despite their knowledge and ability to make lots of money, they have no idea how to manage the money! And one of the keys to successful financial planning is to have your money work for you instead of you working so hard for the money all your life.
The Ministry of Education, albeit being a little late, has introduced financial literacy into the school curriculum to educate young Singaporeans the importance of managing one’s finances. Also commendable are the MoneySENSE initiatives by the Monetary Authority of Singapore to raise financial awareness through publications, activities and events. As individuals, we should also take initiatives to improve our financial literacy through the reading of financial publications and having discussions with likeminded financial savvy people.
It is not an easy task having to plough through the tonnes of reading materials available both online and in hardcopy publications. For a start, you might want to check out some of the official websites (which will ensure more impartial and accurate information) such as that of the Central Provident Fund Board (http://www.cpf.gov.sg/), Monetary Authority of Singapore (http://www.mas.gov.sg/), Life Insurance Association of Singapore (http://www.lia.org.sg/) and Investment Management Association of Singapore (http://www.imas.org.sg/). With the great abundance of online financial publications (every Tom, Dick and Harry has an online article or blog!), it is very important to always verify the validity and accuracy of the information as well as to look out for potential conflicts of interests by vested parties that might skew or distort the information being presented.
There are also many personal financial planning books on the shelves that you can obtain information from although a majority has been written in non-local contexts. For Singapore-based books, I will like to recommend the following:
§ Personal Financial Planning, by Fong Wai Mun, Koh Seng Kee
§ Managing your Money, by Fong Wai Mun, Koh Seng Kee
§ Financial Services in Singapore by Tan Chwee Huat
§ Personal Finance in Singapore by Tan Chwee Huat
§ Know Your Interest: A Guide to Loans and Investment, by Tse Yiu Kuen
Lastly, it is also worthwhile to find a trusted financial adviser who can help guide you through the highly complex financial maze (filled with dangerous traps!). For some tips on how to choose a good Financial Adviser, you may want to refer to the article at http://www.imas.org.sg/imas/investoreducation/adviceandadvisers.do
Hence, before you make any costly mistakes in investments or fret over the purchase of some unsuitable financial products, do yourself a big favour by starting to learn more about personal financial planning TODAY.
Speaking at the Congress on 23 May 2006, Federal Reserve Chairman Ben Bernanke also highlighted the importance of how financial literacy is crucial to consumers' ability to make smart money choices and is also good for the overall economy.
Clearly then, financial know-how is your immunity for survivor in this very complex financial marketplace serving an endless buffet of confusing products, services and financial jargons that will kill even the biggest appetite!
Just talking about personal insurance alone, you will be bombarded by a wide array of products such as whole life, term, critical illness, disability income, personal accident, long term care, medical shield, hospitalization and surgical and others. Most people cannot even differentiate one product type from another, let alone understand the differences between the same products offered by the many different insurers!
Investments are even more mind-boggling! We have got stocks, bonds, T-bills, money-market funds, unit trusts, hedge funds, options, exchange-traded funds, property, commodities, structured deposits…and the list is growing everyday. And just within stocks, we can further classify them into small/mid/large caps, growth or value stocks. Whereas for unit trusts, there are equity, fixed income, balanced, asset allocation, global, sector, fund and funds and many others.
To make things worse, there have been so many scandals involving product mis-selling, churning, misconduct of advisers and it’s almost impossible to go to the bank without being recommended yet another flavour-of-the-month bank product. It’s like the same inexperienced swimmer swimming in shark-infested choppy waters…but now, with a broken arm that is bleeding profusely!
Products and services aside, financial literacy is also about knowing ourselves. You’ll be surprised to know that as a practicing financial adviser representative, I have over the years come across so many bright, successful and highly-driven executives who are absolutely clueless when it comes to managing their own finances. Despite their knowledge and ability to make lots of money, they have no idea how to manage the money! And one of the keys to successful financial planning is to have your money work for you instead of you working so hard for the money all your life.
The Ministry of Education, albeit being a little late, has introduced financial literacy into the school curriculum to educate young Singaporeans the importance of managing one’s finances. Also commendable are the MoneySENSE initiatives by the Monetary Authority of Singapore to raise financial awareness through publications, activities and events. As individuals, we should also take initiatives to improve our financial literacy through the reading of financial publications and having discussions with likeminded financial savvy people.
It is not an easy task having to plough through the tonnes of reading materials available both online and in hardcopy publications. For a start, you might want to check out some of the official websites (which will ensure more impartial and accurate information) such as that of the Central Provident Fund Board (http://www.cpf.gov.sg/), Monetary Authority of Singapore (http://www.mas.gov.sg/), Life Insurance Association of Singapore (http://www.lia.org.sg/) and Investment Management Association of Singapore (http://www.imas.org.sg/). With the great abundance of online financial publications (every Tom, Dick and Harry has an online article or blog!), it is very important to always verify the validity and accuracy of the information as well as to look out for potential conflicts of interests by vested parties that might skew or distort the information being presented.
There are also many personal financial planning books on the shelves that you can obtain information from although a majority has been written in non-local contexts. For Singapore-based books, I will like to recommend the following:
§ Personal Financial Planning, by Fong Wai Mun, Koh Seng Kee
§ Managing your Money, by Fong Wai Mun, Koh Seng Kee
§ Financial Services in Singapore by Tan Chwee Huat
§ Personal Finance in Singapore by Tan Chwee Huat
§ Know Your Interest: A Guide to Loans and Investment, by Tse Yiu Kuen
Lastly, it is also worthwhile to find a trusted financial adviser who can help guide you through the highly complex financial maze (filled with dangerous traps!). For some tips on how to choose a good Financial Adviser, you may want to refer to the article at http://www.imas.org.sg/imas/investoreducation/adviceandadvisers.do
Hence, before you make any costly mistakes in investments or fret over the purchase of some unsuitable financial products, do yourself a big favour by starting to learn more about personal financial planning TODAY.
Sunday, May 21, 2006
Your investment profile
Before we discuss some of the strategies to mitigate investment risks...it's also very important, prior to making any investments, to determine one's investment profile which relates to risk tolerance, resources, time horizon and goals.
Risk tolerance
It's a measure of your comfort level with regards to the ups and downs a particular investment. Sometimes, in determining risk tolerance, the amount of risk one's financial condition will allow one to take, and how much risk one is willing to take might differ. Ask yourself, how would you react if you were to lose 1-15%, 15-30%, 30-45% or even >45% of your investment portfolio, even if you knew it would probably grow back in the long run? Often, investors are not fully aware of their risk tolerance until an actual market event takes place to 'test' their investment resolve...which sometimes can be too devastating for some investors. It's very important that you know where you stand before any investment loss occurs.
I'd also like to highlight that risks and gains are directly correlated - as you must have heard this umpteen times 'high risks, high returns..low risks, low returns'. Those investors who aren't willing to take risks will have to make do with lower returns.
Resources
Draw up a personal financial inventory and budget listing all your assets, liabilities, income and expenses. Do you have a large excess each month after deducting all of your expenses from your income? Do you have an emergency fund (at least enough money to cover 6-mths of expenses) to provide for some liquidity in times of unforeseen circumstances? Do you have a large amount of savings (in excess of emergency fund) in the bank which is yielding very low returns? Do you have large amount of funds in CPF (which you do not need for housing/education in the near future) that are left idling in the CPF-OA/SA?
If you've already set up an emergency fund and still have a lot of money left over from your monthly income (less expenses), personal savings as well as funds in your CPF that you don't see yourself needing in the mid-long term...you can then invest the money and perhaps take on a bit more risk as your financial condition allows for it.
Time horizon
Your investment time horizon is a measure of how much time you have until you will need the money. Generally, the longer the investment time horizon, the more risk one can afford to take, since over time, high short-term volatility tends to lead to strong long-term gains.
Sometimes, some of my clients can get quite anxious about short term volatility even though their investment horizon might be 20-30years! Volatility is nothing but a detail (or 'noise')...short term volatility does not matter if your financial objective is for the long term. Even if your portfolio were to drop 30 per cent today, you are fine as long as you do not sell when prices are low.
Goals
Your investment profile is shaped by your goals. Are they long-term or short-term? Are they 'needs' or 'wants'? Do the goals affect only you or do they impact others (i.e. children, family) as well?
Based on your goals, you can then determine the amount of risk you have/are willing to take as well as the amount of resources that you'll have to commit (& forgo other needs/wants) to increase the probability of realising your goals.
In conclusion, your investment profile is determined by a kaleidoscope of factors such as your tolerance for volatility, attitude towards investing, resources, time horizon and goals. Once you have identified where you stand based on the numerous attributes, you will then have a clearer picture of your investment profile - which will dictate how you'd go about setting up a personal investment portfolio subsequently.
Risk tolerance
It's a measure of your comfort level with regards to the ups and downs a particular investment. Sometimes, in determining risk tolerance, the amount of risk one's financial condition will allow one to take, and how much risk one is willing to take might differ. Ask yourself, how would you react if you were to lose 1-15%, 15-30%, 30-45% or even >45% of your investment portfolio, even if you knew it would probably grow back in the long run? Often, investors are not fully aware of their risk tolerance until an actual market event takes place to 'test' their investment resolve...which sometimes can be too devastating for some investors. It's very important that you know where you stand before any investment loss occurs.
I'd also like to highlight that risks and gains are directly correlated - as you must have heard this umpteen times 'high risks, high returns..low risks, low returns'. Those investors who aren't willing to take risks will have to make do with lower returns.
Resources
Draw up a personal financial inventory and budget listing all your assets, liabilities, income and expenses. Do you have a large excess each month after deducting all of your expenses from your income? Do you have an emergency fund (at least enough money to cover 6-mths of expenses) to provide for some liquidity in times of unforeseen circumstances? Do you have a large amount of savings (in excess of emergency fund) in the bank which is yielding very low returns? Do you have large amount of funds in CPF (which you do not need for housing/education in the near future) that are left idling in the CPF-OA/SA?
If you've already set up an emergency fund and still have a lot of money left over from your monthly income (less expenses), personal savings as well as funds in your CPF that you don't see yourself needing in the mid-long term...you can then invest the money and perhaps take on a bit more risk as your financial condition allows for it.
Time horizon
Your investment time horizon is a measure of how much time you have until you will need the money. Generally, the longer the investment time horizon, the more risk one can afford to take, since over time, high short-term volatility tends to lead to strong long-term gains.
Sometimes, some of my clients can get quite anxious about short term volatility even though their investment horizon might be 20-30years! Volatility is nothing but a detail (or 'noise')...short term volatility does not matter if your financial objective is for the long term. Even if your portfolio were to drop 30 per cent today, you are fine as long as you do not sell when prices are low.
Goals
Your investment profile is shaped by your goals. Are they long-term or short-term? Are they 'needs' or 'wants'? Do the goals affect only you or do they impact others (i.e. children, family) as well?
Based on your goals, you can then determine the amount of risk you have/are willing to take as well as the amount of resources that you'll have to commit (& forgo other needs/wants) to increase the probability of realising your goals.
In conclusion, your investment profile is determined by a kaleidoscope of factors such as your tolerance for volatility, attitude towards investing, resources, time horizon and goals. Once you have identified where you stand based on the numerous attributes, you will then have a clearer picture of your investment profile - which will dictate how you'd go about setting up a personal investment portfolio subsequently.
Wednesday, May 17, 2006
No risk no gain?
All investments involve some form of risk. Be very doubtful if someone tells you that a certain investment is no risk and yet will yield a decent return!!
Here, we'll talk about some of the risks:
Market risk
Stock/fund markets are highly unpredictable because there are so many factors influencing the ups and downs. Some of the factors might be (actual or predicted) company earnings, interest rates, unemployment, politics etc. There is absolutely NO WAY to predict market movements (not even for the experts!). Market risk also creates another risk of investors selling at market lows and buying at market highs.
Inflation risk
Inflation is a fall in the purchasing power of money due to a rise in the price of goods and services. Say for example, a packet of fried kway teow costs $3 now. If inflation rate is 2%, the same packet of fried kway teow will cost $3.06 a year later. Inflation is also a problem if prices of goods and services rise quicker than one's income. Hence, it's important to ensure that your investment/savings earnings will keep up with or be in excess of the inflation rate.
Interest rate risk
Here, we'll talk about some of the risks:
Market risk
Stock/fund markets are highly unpredictable because there are so many factors influencing the ups and downs. Some of the factors might be (actual or predicted) company earnings, interest rates, unemployment, politics etc. There is absolutely NO WAY to predict market movements (not even for the experts!). Market risk also creates another risk of investors selling at market lows and buying at market highs.
Inflation risk
Inflation is a fall in the purchasing power of money due to a rise in the price of goods and services. Say for example, a packet of fried kway teow costs $3 now. If inflation rate is 2%, the same packet of fried kway teow will cost $3.06 a year later. Inflation is also a problem if prices of goods and services rise quicker than one's income. Hence, it's important to ensure that your investment/savings earnings will keep up with or be in excess of the inflation rate.
Interest rate risk
Interest rate movements will affect both equity investments (stocks and equity funds) as well as fixed-income investments (bonds).
Changes in interest rate will affect the value of bonds more directly than equities and it is a risk to bondholders. As interest rates rise, bond prices will fall and the reverse is also true. This is because, as interest rates rise, bondholders are likely to switch to other investments that reflect the higher interest rate than to hold bonds.
Credit risk
This is related to the financial stability of a company for stocks or bonds. Typically, greater risks are associated with higher rates of return on the investment. For example, in the case of bonds, a company with very strong financial standing will pay low interest rates whereas a smaller company with much less financial stability will have to pay very high interest rate on the bond to compensate bond purchasers for the risk that they are taking.
Currency risk
If the currency in which the investment is denominated depreciates against your home currency, then there's a risk of loss of value in the investment. Such risk is cause by fluctuating worldwide exchange rates. If you invest in foreign stocks or in a mutual fund company that invests in overseas companies, then you'd face a certain level of currency risk.
Political risk
Real, perceived or anticipated political instability can affect the economy which might also affect share prices. During times of war, many investors would prefer to invest in fixed-income investments such as bonds.
Portfolio risk
This risk happens when the investor fails to diversify. A portfolio is exposed to such risk if all the investments are concentrated among certain companies, industries or geographical regions and also if the investments perform similarly during different economic cycles (correlated).
Greed/Impulsiveness
When investors let their emotions get the better of them! For example, mass selling at low prices when the market starts to dip or continue to buy in at high prices when market is peaking due to greed or fear.
Well, here you go...all (if not most) of the risks associated with investments. How then can you avoid these risks? We'll discuss the remedies in my next posting.
Tuesday, May 16, 2006
Investment 101 - 3 Basic Concepts
There are 3 main investment concepts that'll roll off, ever so easily, from the tongues of financial advisers and investment bankers:
- Compounding Growth
- The Rule of 72
- Dollar Cost Averaging
Now let's try to explain each of this concept in very simple words.
Compounding Growth
You've seen this in cartoons - of how a small snowball picks up more and more snow as it rolls down the snow-covered hill and becoming bigger and bigger in size the further it rolls?
Well, that's essentially what 'compounding growth' is all about!
By investing your money over a long period of time, you can let your money make money.
Say for example, if you have $10,000 invested, earning 10 percent each year, after the first year, you would have $11,000. Therefore, if you add that $1,000 to your principal, theoretically the next year, you'd have an $1,100 return (10% of $11,000 = $1,100). And the next year, you'll have $1,210 return...and it'll keep on compounding. This phenomenon is referred to as compounding growth. This is how you let your money work for you!
Of course, to enjoy the fruits of compounding growth, one must have patience and some tolerence for risks. The stock and mutual fund markets can be quite volatile at times or they can be so stagnate. However, if you stay invested over a longer period of time, the pluses and minuses should all work out in the end.
Let's put this to better perspective with the following example. Say if, at age 20, you make a single investment of $10,000 in a mutual fund and continue to stay invested till you reach age 65 (for retirement). Assuming that the fund returns an average rate of 10%, by the time you reach 65, you'd have accumulated $728,905. If you had delayed the investment by another 10years, your amount at age 65 would only be $281,024!
Starting Age Investment return at age 65 ($ rounded off to nearest dollar)
20 $728,905
30 $281,024
40 $108,347
50 $41,772
Well, if this is NOT compelling enough for you to want to take control of your finances while you are much younger...I'm not sure what else will motivate you!
Rule of 72
Ok, this is an easy one which you'll learn in a few seconds!
It is a rule of thumb that allows you to calculate how long it'll take for your money to double at a given interest rate. And the reason it's called rule of 72 is because, at 10%, the money will double every 7.2 years.
To use this simple rule, just divide 72 by the annual interest rate. And of course, like any other rules of thumb, this is only good for approximations.
- Compounding Growth
- The Rule of 72
- Dollar Cost Averaging
Now let's try to explain each of this concept in very simple words.
Compounding Growth
You've seen this in cartoons - of how a small snowball picks up more and more snow as it rolls down the snow-covered hill and becoming bigger and bigger in size the further it rolls?
Well, that's essentially what 'compounding growth' is all about!
By investing your money over a long period of time, you can let your money make money.
Say for example, if you have $10,000 invested, earning 10 percent each year, after the first year, you would have $11,000. Therefore, if you add that $1,000 to your principal, theoretically the next year, you'd have an $1,100 return (10% of $11,000 = $1,100). And the next year, you'll have $1,210 return...and it'll keep on compounding. This phenomenon is referred to as compounding growth. This is how you let your money work for you!
Of course, to enjoy the fruits of compounding growth, one must have patience and some tolerence for risks. The stock and mutual fund markets can be quite volatile at times or they can be so stagnate. However, if you stay invested over a longer period of time, the pluses and minuses should all work out in the end.
Let's put this to better perspective with the following example. Say if, at age 20, you make a single investment of $10,000 in a mutual fund and continue to stay invested till you reach age 65 (for retirement). Assuming that the fund returns an average rate of 10%, by the time you reach 65, you'd have accumulated $728,905. If you had delayed the investment by another 10years, your amount at age 65 would only be $281,024!
Starting Age Investment return at age 65 ($ rounded off to nearest dollar)
20 $728,905
30 $281,024
40 $108,347
50 $41,772
Well, if this is NOT compelling enough for you to want to take control of your finances while you are much younger...I'm not sure what else will motivate you!
Rule of 72
Ok, this is an easy one which you'll learn in a few seconds!
It is a rule of thumb that allows you to calculate how long it'll take for your money to double at a given interest rate. And the reason it's called rule of 72 is because, at 10%, the money will double every 7.2 years.
To use this simple rule, just divide 72 by the annual interest rate. And of course, like any other rules of thumb, this is only good for approximations.
To give you an example, if you have $10,000 in your CPF-OA account right now which is earning an annual interest rate of 2.5%, it'll take 72/2.5 = 28.8yrs for your $10,000 to become $20,000. However, if you were to invest in a mutual fund that can yield an average of 5% return, then it'd only take 14.4yrs to double your $10,000.
This rule is commonly used to explain compounding growth.
Dollar Cost Averaging (DCA)
DCA is a strategy of investing routinely to take out the worry of bad marketing timing. When you dollar cost average, you buy more shares/fund units when prices are low and fewer shares/fund units when prices are high. This gives you a cost basis that reflects the fund's average net asset value (NAV) or share price.
What's good about DCA is that it increases your chances for a better return over time as compared to if you were to try to time the market and invest lump sums. For the latter case, although you may, from time to time, hit the jack pot, but more often than not, you'll end up a loser. (I mean, even the investment expert have problems predicting market movements...so who's to say that he/she can effectively time the market every single time?)
In the case of DCA, you'll end up buying at highs and lows, as well as everywhere in between. And because the market historically has risen, you'd typically end up ahead.
MONEY, MONEY, MONEY
Jack Neo's record-smashing 'Money No Enough' was not just a stroke of luck but because it struck a resonance cord in so many of us!
Many have said 'Money is the root of all evil' - we can argue till the cows come home but I doubt we'll ever reach a conclusion that's acceptable to all.
We know that money can't buy us everything, yet so many of us are obsessed with filling our lives with material stuff - be it the latest season of fashion, electronic gadgets, the newest car model. We spend as much as we make each month...and even worse for some who'd spend beyond their means by way of credit/loans.
Have you ever asked yourself this- am I working just to pay the bills? Well if that's true to a large extent..then it's no wonder working feels more of a chore than an enjoyment or fulfilment.
If you think about it...even the latest fashion/electronic gadgets will go out of style or become obsolete sooner or later..and your 6-digit figure car gets all scratched and dented, costs a whole lot of money to maintain and will eventually depreciates till it becomes a worthless pile of metal. So what's left in the end is just our empty bank accounts and debts?
Of course, I'm not suggesting that we should all live like Ebenezer Scrooge and don't enjoy our money at all. But perhaps we can put some of our money to better use - such that the money will work for us rather than have us work so hard for it. Just by saving a few dollars a week and investing them slowly over time, taking advantage of the compounding effect of growth, will make us wealthy.
It's good that the Ministry of Education has introduced financial literacy in schools. During my time, education is about finding a good job..and having a good job will provide good source of income to fund expenses. Throughout my more than 16yrs in school (up till university), it was all about 'how to make money'...and NOT 'how to deal with the money'! As such, many of us don't know how to save money, invest it, or set up a budget nor do we realise the importance of doing so.
Sure we can live paycheck to paycheck, during good times, everything seems fine....but what if we are face with retrenchment or a major crisis such as an illness or disability? If we don't save now, what's going to happen when we retire? Do we still want to be working at MacDonald's even when we are in our 60s and 70s?
Perhaps owning fancy clothes, cars and houses can 'buy' some self-esteem and envy from others...but to me, having money set aside gives me a sense of empowerment and security that I value more than anything else in the world.
Many have said 'Money is the root of all evil' - we can argue till the cows come home but I doubt we'll ever reach a conclusion that's acceptable to all.
We know that money can't buy us everything, yet so many of us are obsessed with filling our lives with material stuff - be it the latest season of fashion, electronic gadgets, the newest car model. We spend as much as we make each month...and even worse for some who'd spend beyond their means by way of credit/loans.
Have you ever asked yourself this- am I working just to pay the bills? Well if that's true to a large extent..then it's no wonder working feels more of a chore than an enjoyment or fulfilment.
If you think about it...even the latest fashion/electronic gadgets will go out of style or become obsolete sooner or later..and your 6-digit figure car gets all scratched and dented, costs a whole lot of money to maintain and will eventually depreciates till it becomes a worthless pile of metal. So what's left in the end is just our empty bank accounts and debts?
Of course, I'm not suggesting that we should all live like Ebenezer Scrooge and don't enjoy our money at all. But perhaps we can put some of our money to better use - such that the money will work for us rather than have us work so hard for it. Just by saving a few dollars a week and investing them slowly over time, taking advantage of the compounding effect of growth, will make us wealthy.
It's good that the Ministry of Education has introduced financial literacy in schools. During my time, education is about finding a good job..and having a good job will provide good source of income to fund expenses. Throughout my more than 16yrs in school (up till university), it was all about 'how to make money'...and NOT 'how to deal with the money'! As such, many of us don't know how to save money, invest it, or set up a budget nor do we realise the importance of doing so.
Sure we can live paycheck to paycheck, during good times, everything seems fine....but what if we are face with retrenchment or a major crisis such as an illness or disability? If we don't save now, what's going to happen when we retire? Do we still want to be working at MacDonald's even when we are in our 60s and 70s?
Perhaps owning fancy clothes, cars and houses can 'buy' some self-esteem and envy from others...but to me, having money set aside gives me a sense of empowerment and security that I value more than anything else in the world.
About the author
It's a SHE!
Of course, judging by the title of the blog...you'd have guessed that already!
SHE has been a financial adviser since 2004 and is currently representing one of the biggest financial advisory company in Singapore.
Apart from providing comprehensive financial planning services to individuals and corporations, SHE is also a very active contributor in financial forums.
Having been in the financial planning industry for years, SHE hates financial jargons as much as you do. That is what motivates her to start this blog - to put big words and seemingly abstract financial concepts in lay(wo)man's terms as well as to provide the inside scoop to everything that is taking place within the financial industry.
Her hope is to educate via her blog postings. And she holds this quote close to her heart:
'Knowledge is like money: to be of value it must circulate and in circulating it can increase in quantity and, hopefully, in value.'
- Louis L'Amour, author of Education of a Wandering Man
She can be reached at siewko.tan@gmail.com
Of course, judging by the title of the blog...you'd have guessed that already!
SHE has been a financial adviser since 2004 and is currently representing one of the biggest financial advisory company in Singapore.
Apart from providing comprehensive financial planning services to individuals and corporations, SHE is also a very active contributor in financial forums.
Having been in the financial planning industry for years, SHE hates financial jargons as much as you do. That is what motivates her to start this blog - to put big words and seemingly abstract financial concepts in lay(wo)man's terms as well as to provide the inside scoop to everything that is taking place within the financial industry.
Her hope is to educate via her blog postings. And she holds this quote close to her heart:
'Knowledge is like money: to be of value it must circulate and in circulating it can increase in quantity and, hopefully, in value.'
- Louis L'Amour, author of Education of a Wandering Man
She can be reached at siewko.tan@gmail.com
