Essential Financial Planning

Personal financial management is a subject that is not taught in many schools, but is something that nearly everyone has to deal with in their lives later on. Here are some statistics: Almost two-thirds of retirees say they do not expect their savings to last till the end of their life, according to a Nielsen survey commissioned by NTUC Income. One in three working Singapore adults are not planning for their retirement, according to a survey by Nielsen on Monday Feb 15 2016. How they will manage their finances when they get old? Of this group, 40 per cent say they have not done so due to a lack of understanding of the available options. Another 25 per cent say they do not know how much is needed and when to start planning, according to the survey commissioned by NTUC Income. On the other hand, one in three respondents aged between 25 and 59 who have not retired say they have started financial planning for their retirement, with 55 per cent of those aged between 25 and 35 years old saying they have started saving and planning actively for their future. Almost two-thirds - 64 per cent - believe that retirement investment is a way to ensure adequate savings for their future needs, according to the survey.

Of those in the 25 to 35 age group, 86 per cent are willing to set aside S$300 a month to accumulate S$1 million by the time they retire at 65, Nielsen found.

If these facts are alarming to you, and you want to reverse the trend, read on for specific, targeted advice geared towards giving you a better future.

All examples and stocks quoted here in this article are for learning purposes; it does NOT constitute financial advice or a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence and take into their own financial situation. If in any doubt about the investment action you should take, you should consult a professional certified financial advisor.

1.       Make a Budget

For one month, keep track of all your expenses.

You do not have to limit yourself; just get an idea of what you spend money on during any given month. Save all your receipts, make note of how much cash you need versus how much you expense to credit cards, and figure out how much money you have left over when the calendar turns.

After the first month, take stock of what you spent.

Do not write down what you wished you had spent; write down what you actually spent. Categorize your purchases in a way that makes sense to you. A simple list of your monthly expenses might look something like this:

Monthly income: $3,000

Expenses:

Rent/mortgage: $800

Household bills (utilities/electric/cable): $125

Groceries: $300

Dining out: $125

Gas: $100

Emergency medical: $200

Discretionary: $400

Savings: $900

Now, write down your actual budget.

Based on the month of actual expenses — and your own knowledge of your spending history — budget out how much of your income you want to allocate to each category every month. If desired, use an online budgeting platform, such as Mint.com, to help you manage your budget.

In your budget, make separate columns for projected budget and actual budget. Your projected budget is how much you intend to spend on a category; this should stay the same from month to month and be calculated at the beginning of the month. Your actual budget is how much you end up spending; it fluctuates from month to month and is calculated at the end of the month.

Many people leave significant room in their budget for savings. You do not have to structure your budget to include savings, but it's generally thought of as a smart idea. Professional financial planners advise their clients to set aside at least 10% to 15% of their total earnings for savings.

Be honest with yourself about your budget.

It is your money — there is really no sense in lying to yourself about how much you are going to spend when making a budget. The only person you hurt when doing this is yourself. On the other hand, if you have no idea how you spend your money, your budget may take a few months to solidify. In the meantime, do not put down any hard numbers until you can get realistic with yourself.

For example, if you have $500 allocated to savings every month, but know that it will consistently be a stretch in order to meet that goal, do not put it down. Put down a number that is realistic. Then, go back to your budget and see if you can tweak it to loosen up cash somewhere else, and then funnel it into your savings.

Keep track of your budget over time.

The hard part of a budget is that your expenses may change from month to month. The great part of a budget is that you will have kept track of those changes, giving you an accurate idea of where your money went during the year.

Setting a budget will open your eyes to how much money you spend, if they havenot been opened already. Many people, after setting a budget, realize that they spend money on pretty petty things. This knowledge allows them to adjust their spending habits and put the money towards more meaningful areas.

Plan for the unexpected.

Setting a budget will also teach you that you never know when you will have to pay for something unexpected — but that the unexpected will come to be expected. You obviously do not plan on your car breaking down, or your child needing medical attention, but it pays to expect these contingencies to happen, and to be prepared for them financially when they come.

2.       Spend Your Money Successfully

When you can borrow/rent, don't buy.

How often have you bought a DVD only to have let it collect dust for years, without using it? Books, magazines, DVDs, tools, party supplies, and athletic equipment can all be rented for smaller amounts of money. Renting often saves you the hassle of upkeep, keeps room in your storage, and generally causes you to treat items better.

Do not just rent blindly. If you use an item for long enough, it may be best to buy. Perform a simple cost analysis to see whether renting or buying is in your best interests.

If you have the money, pay a high down payment on your mortgage.

For many people, buying a home is the most costly and significant payment they will ever make in their lives. For this reason, it helps to be in the know how to spend your mortgage money wisely. Your goal in paying off your mortgage should be to minimize interest payments and fees while balancing out the rest of your budget.

Prepay early up front. The first five to seven years of a mortgage are generally when your interest payments are going to be the highest. Paying off early will help increase your equity fast by lowering your interest payments.

Talk with your lender about refinancing. If you can refinance your loan down from 6.7% to 5.7%, for example, while still making the same payments, go for it. You could knock off years on your mortgage.

Spend what you have, not what you hope to make.

You may think of yourself as a high earner, but if your money does not back up that statement, you are shooting yourself in the foot acting like you are. The first and greatest rule of spending money is this: Unless it is an emergency, only spend money that you have, not money that you expect to make. This should keep you out of debt and planning well for the future.

3.       Make Smart Investments

Familiarize yourself with different investment options.

As we grow up, we realize that the financial world out there is so much more complicated than we envisioned as children. There are literally options to trade imaginary items; there are futures to bet on things that have not yet happened; there are sophisticated bundles of stock. The more you know about financial instruments and possibilities, the better off you will be when it comes to investing your money, even if that wisdom consists only of knowing when to back away.

Take advantage of any retirement plans that your employers offer (CPF).

AIA Asset Builder: Investment-Linked Plan that help you grow your CPF savings further. Designed to work alongside the CPF investment scheme. However, your Ordinary Account balance must not be below S$20,000.00 and your Special Account balance must not be below S$40,000.00. A Lump sum investment.

AIA Achiever: Investment-Linked Plan that coverage sum assured normally death benefit. A Single monthly premium or yearly premium.

If you are going to put money into the stock market, don't gamble with it.

Many people try to day trade in the stock market, betting on small gains and losses in individual stocks every day. While this can be an effective way of making money for the seasoned individual, it is extremely risky, and more like gambling than investing. If you want to make a safe investment in the stock market, invest for the long term.That means leaving your money invested for 10, 20, 30 years or more.

Look at company fundamentals (how much cash they have on hand, what their product history is, how they value their employees, and what their strategic alliances are) when choosing which stocks to invest in. You are essentially making a bet that the current stock price is undervalued and will rise in the future.

For safer bets, look at mutual funds when buying stocks. Mutual funds are bundles of stocks collected together to minimize risk. Think about it like this: if you have invested all of your money in a single stock and the stock price plummets, you are screwed; if you have invested all your money equally in 100 different stocks, many stocks can completely fail without affecting your bottom line. This is basically how mutual funds mitigate risk.

The Straits Times Index, Exchange Traded Fund (STI ETF) was designed for passive investors who are just getting started. This is one of the first products you should consider for this very reason – diversity at low cost.

The STI basically tracks the top 30 companies in the Singapore market which are traded

These include DBS, OCBC, Singtel, Capitaland etc. (from a mix of industry verticals, you can find the full list below)

Fun Fact: The STI is actually used as the ‘benchmark index’ for other funds to peg themselves to. For example, you are a better fund if you ‘outperform the index' or a poorly managed fund who ‘underperformed the index’

An ETF is a passively managed investment fund which is traded on the stock market

Passively managed because it just tracks the index (for example, buys the top 30 companies based on a certain allocation) hence lower fees

Traded on stock market indicates that it has high liquidity of buyers and sellers, which is a good thing for investors

Why should you consider the STI ETF?

Reason 1: These are local companies you see every day

The best investments to make are ideally in companies you know well or preferably interact with their goods and services. Here are 3 simple examples.

DBS bank who happens to be the largest home loan providers and savings deposits in Singapore

CapitaLand who owns a large majority of land and malls in Singapore we visit every day

Singapore Telecommunications (SingTel) who happens to own a huge share of mobile data plans and broadband in Singapore

Reason 2: These companies have a regional presence

One big benefit of investing in these companies is that you are actually not only buying into Singapore’s economy. A ton of these companies are actually doing business outside of Singapore and are drivers in the growth stories in neighbouring countries like Indonesia and Malaysia. In the example above, CapitaLand has overseas investments and properties which are also contributing back to the HQ back here in Singapore.

Reason 3: Diversified across many industry verticals

No doubt, some people may argue that it is heavily focused on banking and finance (as with the Singapore economy) but at the same time, there are industries like Entertainment, Telcos and Real Estate also based in Singapore serving the region.

How To Buy The STI ETF?

There are two main funds that you can buy:

Method 1: Lump-Sum Investment

You can do this by using your brokerage account. It’s usually between $10 to $25)

Step 1: Have a Bank account with either DBS/POSB, OCBC, UOB or FSM/POEMS and a CDP (central depository) securities account (Free to set up)

Step 2: Apply for a brokerage account with any of the providers as above, such as DBS Vickers or OCBC Securities.

Step 3: Enter the amount that you are interested to buy for that counter and submit it

Step 4: A few days later, your stock will be allocated to your CDP account which will be tracked on whichever platform you chose

Example: With DBS Vickers as the brokerage account ($25 per transaction)

Method 2: Monthly Investment

This option is actually simpler to setup compared the above method, primarily due to the idea that you won’t need a CDP account. The bank holds these funds on your behalf.

Step 1: Have a Bank account with either DBS/POSB, OCBC, Maybank or POEMS

Step 2: Apply through iBanking, the money that you invest will be deducted from your linked bank account

Step 3: Towards the 15th of month, you will automatically buy the STI ETF based on your preference amount

Step 4: Receive a monthly updated report on your investments and dividends quarterly

Example: With POSB Invest-Saver buying the NIKKO AM STI ETF

If we periodically put in $1000 per month, what are the kind of returns we will get?

My friend put in $1000 per month, plus $25 in buy commission. This works out to be a high 2.5% in cost.

His IRR would be 5.17%

What 5.17% means is that imagine the STI ETF as a fixed deposit that you put for 10.6 years.

When your capital is 100% intact, every year this STI ETF “Fixed Deposit” earns you 5.17% per year. Now you can compare it against how much your fixed deposit earns.

Fixed Deposits. The fixed deposit rates is currently 0.25%. However, if you deposit more money, for example $20,000 as a minimum you can get 1.15%.

Singapore Savings Bonds. Like the Singapore Government Bonds, the Singapore Savings Bonds are debts issued by Singapore Government with a wrapper that guarantees that your capital is intact. The yield to maturity currently hovers around 2%

Insurance Savings Endowment. Many wealth builders like to be forced to periodically put money into something that they cannot touch for a long time.

So they like insurance savings plans. From the past results, the returns range from 2.5% to 4.0%.

Real Estate Investment Trusts (REITs). There is a group of stocks that focus on the buy and rent property sector. Wealth builders find them easy to understand and suits their wealth building needs. The IRR are rather good, 5.17%

internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

Have good insurance coverage.

They say that smart people expect the unexpected, and have a plan for what they will do just in case. You never know when you will need a large sum of money during an emergency. Having good insurance coverage can really help tide you over through a crisis. Talk with your family about different kinds of insurance that you can purchase to help you in the event of an emergency:

Comprehensive coverage for 104 critical illness conditions. AIA Triple Critical Cover Value plan provides you with critical illness coverage up to age 75, AIA Triple Critical Cover life Plan cover you up to age 100.

AIA Pink of Health Insurance, get fresh protection with cash for hospital stays.

Homeowner's insurance (if something unexpected harms or destroys your home)

 Life insurance (if you or a spouse unexpectedly dies)

4.       Build Your Savings

Start by putting away as much of your expendable (excess) income as possible.

Make savings a priority in your life. Even if your budget is small, tweak your finances so that you save greater than 10% of your total earnings.

Think of it like this: If you manage to save $10,000 per year — which is less than $1,000 per month — in 15 years, you'll have $150,000 plus interest. That's enough money to put a kid through college today, but not tomorrow if that child has just been born. So, start saving and you may have a significant down payment for that child or for a wonderful house.

Start saving young. Even if you are still in school, saving is still important. People who save well treat it more as an ethic than necessity. If you save early, and then invest that savings wisely, a small initial contribution can snowball (compound) into a significant sum. It literally pays to be forward-thinking.

Start an emergency fund.

Saving is all about frittering away expendable income. Having expendable income means not having debt. Not having debt means being prepared for emergencies. Therefore, a rainy-day fund can really help you out when it comes to saving money.

Think about it like this: your car breaks down and you suddenly have $2,000 in extra payments. You didn't plan on this happening, so you have to take out a loan. Credit is tightening up, so your interest rates might be pretty high. Pretty soon, you're paying 6 or 7 percent interest on a loan, which cuts into your ability to save for the next half-year.

If you had an emergency fund, you could have avoided bringing on the debt, and the associated interest rates, in the first place. Being prepared really pays.

When youhave started saving for retirement and put money in your emergency fund, put away three to six months' worth of expenses.

Again, saving is all about being prepared for the uncertainty of it all. If you are unexpectedly laid off work, or your company reduces your commission, you do not want to take on debt in order to finance your life. Setting aside three, six, or even nine months' worth of expenses will help ensure that you are in the clear, even if disaster strikes.

Begin paying off your debt once you're established.

Whether it is credit card debt or debt left on your mortgage, having debt can seriously cut into your ability to save. Start with debt that has the highest interest rate. (If it is your mortgage, try paying off larger chunks of it, but focus on non-mortgage payments first.) Then, move onto your second-highest rate loan, and begin paying that off. Move down the line, in decreasing order, until you have paid off your entire debt load.

The CPF Housing Grant has been increased to $50,000 for couples who purchase four-room flats or smaller from the resale market, and to $40,000 for those who buy HDB flats that are five-room or bigger. Together with the Additional Housing Grant (AHG) for lower income families and the Proximity Housing Grant (PHG), first-timer families may claim up to a shockingly high $110,000 in grants, and for first-timer singles, up to $55,000.

But are these grants really FREE money? Or is there a catch somewhere? We examine some implications of getting these grants.

1. The Grants are Not In Cash

First, these grants are not given as cash, but rather disbursed into your CPF account. Hence, a buyer will still need to fork out that minimum 5% in cash for that resale flat (if taking a bank loan), and the rest as a combination of CPF and cash.

2. You Need to Return All the Grants Plus Accrued Interest

Most important to know, you need to return the grants back into your CPF account when you sell the HDB flat, PLUS ACCRUED INTEREST (at CPF rate currently 2.5%) over the duration of your occupation in the flat. This is on top of ALL the CPF monies used for your flat purchase (PLUS accrued interest). Hence, even if your HDB flat has appreciated in value, don’t be surprised when you are left with little or no cash proceeds when you sell your flat. This may pose an issue if you need the cash to pay for your next property, or if you need cash urgently by selling your flat.

3. CPF Charges You More Than the Bank Does

CPF charges you 2.6% currently for the grant amounts. If you are eligible to borrow from the banks instead, they are actually charging you way less – currently around 1.3 – 1.7% for most banks. That’s why some buyers would rather borrow from the bank than take the CPF grants. They pay less interest and get back higher cash proceeds when they sell their HDB flat.

4. You Cannot Use the Grants for Monthly Repayment

For those smart alecks out there who think they could outsmart the government by having the grants sit in their CPF accounts and earn interest on them – sorry to disappoint, but the government is smarter than that! You are only allowed to use the grant monies to offset the cost of the property right at the start. This also means that the interest on the entire grant monies start to accrue from day one. Obviously, one cannot use the grants for monthly mortgage repayments.

5. You May Face a Hefty Resale Levy When You Buy a New Flat

If you sell your subsidised flat in future to buy a BTO, Sales of Balance Flat (SOBF) or Executive Condo (EC), you may be slapped with a resale levy of up to $50,000. So if you are planning to upgrade in future, do keep this in mind. But of course, do note regulations change all the time in Singapore, so you never know.

6. You May Tie Down Your Parents/Married Child Too

If you take up the Proximity Housing Grant for buying an HDB flat near your parents’/married child’s home, your parents/married child must remain in the same town or within 2km of your flat for the next 5 years. This might cause them to miss opportunities for upgrading or downsizing to another property, effectively tying down your parents/married child for the next 5 years as well. All for just $20,000 of CPF money, which you need to pay back including accrued interest, by the way.

While the headline figure of the $110,000 grant looks super generous and sexy, it may well come with a price tag. At 2.6% per annum, these low income families may need to fork out an additional $33,000 in accrued interest after just 10 years, on top of the $110,000 grants that they need to return to CPF when they sell their homes.

Just to make it absolutely clear, we are NOT complaining about the grants at all. After all, who doesn’t like free money? Neither are we saying that one should not take up the grants. Some advocate that one should always take the money first, talk later – but it should really depend on your own unique situation.

In short, we should be aware of the fine print before we take up any grants. If unsure, we should talk to our trusted banker or property agent!

Begin really ramping up for retirement.

If you are getting to be that age (45 or 50), and you have not started saving for retirement, itis really important to start ramping up right away.

Put a high priority on saving money for retirement — even higher priority than saving for your children's college education. Whereas you can always borrow money to help pay for college, you cannot borrow money to help fund retirement.

If you are totally in the dark about how much money you should be saving, use an online retirement-savings calculator — Kiplinger's has a good one— to aid you.

Consult a financial planner or advisor. If you want to maximize your retirement savings because you have no clue how to start, talk with a licensed professional planner. Planners are trained to invest your money wisely, and usually have a track record of return on investment (ROI). On the one hand, you will have to pay for their services; on the other hand, you are paying them to make you money. Not a bad deal.