Hits and Misses - Did I make the right financial choices?

Thinking back to the financial decisions that I had made over a span of 20 years, I wonder if I had made the right financial choices?

My very first home was a 5-room flat bought off the resale market. House hunting was quite an effort of visiting house after house. It's a pretty exhausting exercise. And by the seventh attempt, we pretty much reached a point of fatigue. It was at what would be deemed a ulu (out of the way) area known at Yishun. Whenever I mentioned that I lived in Yishun, the look from friends was one of "kampong" in a far far away land. There were actually goats along the roadside then! And to add to the kick, you get lots of helicopters flying around for novelty. The novelty wore off soon enough, and gets rejuvenated each year before National Day when the chopper with the National flag flew past. It wasn't much of a financial burden as the monthly installment payment was well within the means of a pair of newly weds. I was barely three years into the working market and didn't have much of an income for anything more anyway. So I guess this wasn't a bad decision as I did not overly burdened myself with a high level of debt.

I rate this a "hit" (right choice).

It was more than 12 years later that I decided to "upgrade" to a condominium. When I upgraded to an e-condo, it was another "ulu" out of the way kind of place - Yew Tee. "Where's that?" friends would say with an extreme look of puzzlement. It wasn't an expensive place given it's "ulu"-ness. In addition, I took whatever cash and CPF we had to pay down the principal. Now here's where I have some doubts today. While it certainly reduced the loan capital rapidly to below $100K within a year, I wonder if I should have just lived with the higher level of loan, and use that cash to invest into the market instead? Returns of 6-8% annualised would certainly have outstripped the loan interest of 3%. Plus, I could have refinanced the loan after a few years. But because I had paid down the principal to below $100K, it seems the banks weren't keen to offer refinancing.

I think this was a "miss" (bad choice).

I started investing innocently being a noob in investment. And the very first means was via insurance related means. Compared to not having any form of investment at all, it was a good start. I could rate this a "hit" compared to having no investment whatsoever. But being a bit more tuned in to options today, I would certainly say this has been a "miss". It wasn't the best of returns, though it has given positive returns. Could have done better!

Overall, a "miss".

We stayed off owning a car for several years and relied on public transportation to get around. Thank you LTA! Considering that the car is a depreciating expense, this was probably wise.

I rate this a "hit".

When my second kid was born, my wife and I decided that it was time to get a car. With a maid in tow, five person just wasn't going to fit into a taxi. Our very first car was a second hand Suzuki Swift. It was quite low cost. But you get what you pay for! The car gave us quite of bit of angst when the aircon started to behave like a heater. And one fine day, we started getting steam coming out of the bonnet. Looked like we had bought ourselves a train. Stung by this experience, we went on to buy a brand new Nissan Sunny. On hindsight, I really cannot explain why, but we changed from one Nissan Sunny to another once every three years for the next ten years. Were we crazy or what!? I guess we should plead insanity.

Definitely a "miss".

Our latest car is a Toyota Wish. A family car for a growing family. It has lasted more than six years this time. And with the price of COE in stratospheric levels, it looks like we will continue to operate it for more years to come. It has been a substantively more fuel efficient car than the Nissan Sunnys we owned previously. It has been reliable, with a few incidents of deflated tyres to spice things up. It didn't take too kindly to running over nails I guess? Notwithstanding that it is a depreciating asset, I think overall it has contributed to a certain quality of life.

So I would rate this a "hit".

Housing and cars, two VERY big cost items for Singaporeans. At $12,000 per year for car ownership, that's $184,000 that has gone to Neverland. Seems like a few hits and a few misses for me. How's yours?

A Different Singapore for Financial Liberation without the Lure of Pension

Came across an article which talked about introducing some kind of pension system for the low income earners who have little in the way of CPF. It was suggested that this would only cost 1% of the government budget. I think this is a most slippery slope. 1% for pension is 1% less to spend elsewhere to build the nation. Would this truly help the low income or introduce the undesirable dysfunctional effect of social dependency we observe in some other countries? Personally, I am doubtful this is a good trajectory to take.

Start With the Young

Perhaps the journey has to move further back to the young. Can investment and financial awareness be introduced at an earlier age where it can be taught and introduced in a more compelling manner? Could it be weaved in into classroom Maths for instance?

Games could be another avenue. Are there any good ones to do so (see Wongamania)? The many popular ones are perhaps too cheesy or simplistic (Monopoly, Life). Robert Kiyosaki's Cashflow game is too tuned toward positive cash flow from property investment and perhaps too narrow. Not to mention expensive as heck! There are localised mobile apps like WhyMoolah. But I didn't find it particularly fun as it lacks a staying appeal.

As it is, it seems that more younger people are opening up trading accounts. A sign of greater interest and awareness? But chances are many may well be doing so to tikam tikam, looking for a quick "rush" and a quick buck. The likelihood that some will crash and burn is equally good. Hopefully, more will learn and shift towards a sustainable approach to stock investing.

Options for the Old: Housing and Tourism

Perhaps housing could also be structured a bit differently. If only our flats could be built with a lock-out unit that can be separately rented out? There were some attempts to do so but it doesn't seem to have proliferated. Every young family wants to buy their first home with the aim of expanding their humble home with children (and the provision for a maid?). But as the kids grow up, get married and move out, the home starts to get emptier and hollow. Instead of downgrading to a smaller home, wouldn't it be nice if a part of it could be locked off as a separate unit for rental, and hence provide a decent income stream for retirement to complement their CPF? It would also keep the older folks engaged. The possibility of social interaction with their guest is also a possibility.

The regulatory regime has to catch up to allow vacation rentals, a la AirBnB (see AirBnB - Sharing a Home for Rental Income). Legalise it so that the older folks can gain a rental income from vacationers. Would this have the dual effect of promoting affordable tourism in Singapore as well? Accommodation with a different touch, an option away from the sterile hotels. Of course, the concern is over the introduction of sleaze and crime if this is not managed well. Some form of inspection and regulatory requirements could well provide the mitigation.

Journey through the ages - is 20% good?

It has been a fascinating, and at times exciting, journey. Initially, I had only invested in insurance-based schemes. Be it whole-life endowment plans or investment-linked policies (ILP). Work, work, work was otherwise all I focused on. Making ends meet from the salary I earned and saving money into the bank were pretty much the game plan otherwise. Marriage, housing, post-graduate studies and kids pretty much took up everything else I had.

Had it not been for the early years buying into the various ILPs, I wouldn't have much of an investment to speak of. Interestingly, I had the fortune of having taken up ILPs in the era post Asian Financial Crisis and it had generated quite a tidy sum. It came in handy when I needed the money to complement my CPF to buy my first home.

Then I discovered Fundsupermart. A small sum in its cash fund gave me confidence to take the next step - i.e. to invest into various unit trusts funds. As I read more and gained a better understanding of the concept of diversification, stocks and bonds, the unit trust funds I invested into became more systematically managed.
Then I discovered the tax benefits of the Supplementary Retirement Scheme (SRS). Voila! Max'ed out my SRS, minimise the tax I have to pay, and invest the SRS into unit trust funds at Fundsupermart. It's all too easy!

At the depth of the Global Financial meltdown, I saw my unit trust funds sink miserably. And I mean miserably. But I stayed faithful to the diversification plan with the confidence that the market will generally recover in the long run.  It has not disappointed.

In 2009, I assessed that there were many opportunities to pick up stocks. I must say I had a confirmation bias when I saw a video interview with Warren Buffet where he suggested that he was on the look out for things to buy. So started my stock picking journey.

After 5 years investing into the stock market, I did an analysis recently to see how I've faired. Turned out, not bad. Not bad at all. Using Excel's XIRR function, the internal rate of return showed 20.6% over the 5 year period investing in stocks. The stock portfolio, both from valuation uptick and from cash additions to the investment fund, has grown in leaps and bounds, from zero to hundreds of thousands in that 5 years.

Significantly, as I analysed the individual stock's performance, it is also clear that the dividends have been significant. Soon, the dividends alone would generate $1,000 per month of income. Of late, as companies try to preserve their capital, several have started offering Scrip Dividends (also known as Dividend Reinvestment) options which I have opted to subscribe to, and thereby increasing the number of shares that I owned of those companies.  I'm doing so with the assessment that these stocks are not going the way of the dodo bird over the next 5-10 years.

In many cases, the dividend yields have gone way beyond 4% compared to the original cost of the shares as many of these companies have consistently raised their dividends year on year. It sure feels *shiok* to see a stock that cost $1,000 generating an annual dividend of $100 per year and growing. Must say though, that there aren't as many SGX companies that behave like that compared to US stocks on the NYSE. The later have many more companies with a long history and consistent track records. Unfortunately, that also comes along with the 30% withholding tax.

Happy investing!

Related:
Where Lies the Portal to Wealth?
Pattern of Behaviour - A review of 2013

Cost of Car Ownership

Here's an interesting website that offers a calculator to compute the cost of owning a car in Singapore: Cost of Car Ownership.

With the price of a Certificate of Entitlement outstripping the base value of a car, it has become one of two major cost of living topic that is a regular conversational piece for taxi drivers. 

The other is of course housing.

Ultimate bubble in Singapore

All these talk about bubbles, and we have one ultimate one right here in Singapore.  And it's just a piece of paper!  Imagine, would you pay $72,000 for a piece of paper?  It seems many people are doing that right now to secure the Certificate of Entitlement (COE) for the right to buy a car.  *sheesh*  That's the price I paid to buy make car, COE included, just over a year ago!

This craze has reached a point where of the Top 3 selling cars in Singapores, two of them are luxury cars.

I think that money is better spent investing for better returns.  Meanwhile, go take public transport and live with it.  Wait for this bubble to burst.  If only there was a way to "short" this market. 

I suppose this is one bubble the 'gahmen would have little motivation to prick.

From timeshare to wine investment - A tale

A single lady I know of once bought a timeshare.  It was all the craze at one stage, and perhaps still is.  Heck, even I bought one.  The difference was that I've a family of four, and given that I do travel for holidays, timeshare does offer a lot of interesting opportunities, and potentially 'savings'.  I did a guesstimate and figured that a couple would not likely breakeven in most cases.  What more a single?

A couple of years after paying annual maintenance fees, which had been escalating year on year, the lady realised that it was beginning to be a financial drain, and sought to minimise the pain.  So she went back to the timeshare company and had it downgraded to an alternate year ownership (i.e. own a week on alternate year).  That reduced her maintenance fees by half.

Along the way, she was solicited by some other companies that offered to help her sell off her timeshare.  However, in order to do so, she would have to pay $500 for an administrative fee to advertise and market her timeshare for sale.  You can pretty much figured out what happened.  More money went the way of the void of infinite emptiness.  She was still stuck with the timeshare, and $500 poorer.

Alas, this coming from a lady who actually asked if an e-mail she received from UK could be true?  The e-mail said that she had won a million pounds and asked her to deposit a fee so that her winnings could be sent to her.  *sigh*

Soon after, she was invited to a free talk on wine investment.  Free food, no commitments and all that. So why not? After all, she was a lonely single who had nothing better to do on her weekends anyway.  Interestingly, it turned out that the wine investment company was prepared to offer her a most attractive package.  She could convert her timeshare ownership into a wine investment package!  Wow wee!  What a joy.  Get rid of a money sucking thing and turn it into a money making opportunity that offered wonderful returns.  Even Robert Kiyosaki ("Rich Dad, Poor Dad") might have been proud. 

But, and a big one at that, the lady doesn't know anything about wine!  She doesn't even drink, let alone trying to understand how wine investment would actually reap any returns. 

We can probably guess how this went.  The wine investment company disappeared one day (it was in the press), along with the tens of thousands that she had paid for her timeshare ownership previously, which she had turned over to them. 

So, from timeshare, to 'half-share', to wine investment, and finally to nothing to share.  Now that's what I call a zero return investment with zero capital protection.  Or, as Buzz Lightyear said, "To infinity, and beyond!"

The morale of this story?  There are plenty that comes to mind from the above.  I leave it as an exercise and an open invitation for readers to post comments here on this.  8)

Property - An Asset, Liability or Cashflow?

Conventional wisdom has it that we compute our Net Worth by deducting "Assets" from "Liabilities".  Robert Kiyosaki in his seminal "Rich Dad, Poor Dad", came up with the notion of "Cashflow" as being key.

Is a property therefore an asset or a liability?  Suppose the property cost $500,000, for which a loan of 80% was taken.  It would therefore be an Asset worth $500,000, and at the same time a Liability of $400,000; the Net Worth is therefore only $100,000.  What is the Cashflow then?  If you're living in the property (i.e. home), then the Cashflow is $0 since it earns no income. 

On the other hand, if it was rented out and generating a revenue of $20,000 a year (4% yield - i.e. 4% of $500,000 = $20,000), then it gives a Cashflow of $20,000.  If the monthly rental income is equal to the monthly loan instalment, then we could imagine that the rentee is paying for you to own the property!  How nice.

In truth, there are further costs involved that would have reduced Cashflow generated.  A property that is not the residence incurs a 10% property tax, rather than 4%.  There are also other fees due to maintenance, tax on the revenue, and other upkeeping/maintenance costs involved.  This would be offset by some deductibles against the taxable income of course; deductibles that are associated with rental properties.

In Singapore, rental yields are typically in the 3-6% range.  Given this, I am doubtful if a positive Cashflow could be achieved, unless the upfront payment for the property was very high in the first place.  Certainly 20% down isn't likely to cut it.

There is a counter argument about the property as a home.  That is, to consider the opportunity cost; which would have meant renting a property for a home.  I believe, that in the long run, paying for a home would always beat the notion of renting a property to live in.  At the end of paying all the instalments, one gets to own a property.  But a rental remains a rental - there is nothing owned at the end of the day.  Given this, the solution appears apparent - own a property.  The problem is of course the lengthy lock-in of a sizeable portion of one's wealth.

I recall somebody told me that wealth is generated in 3 ways:
- Work for your money;
- Make your money work for you; or
- Get other's money to work for you.

So, we could work to pay for a property.  Or, we could do so and rent it out, and get others to pay for your property!  The recourse therefore: buy a property, collect rent, stay with thy parents!  Be Cashflow positive!

Owning a car

Well if we figure that taking care of a child till they're of age to earn their own income is going to cost $1 million, what about owning a car?  Some people blindly refer to their car as an asset.  It almost certainly is not.  Have you ever heard of anyone making money from buying and selling their cars?  Since it does not, it cannot be an asset, nevermind whatever the accountant friend of yours may say.

Let's exercise this further by enumerating the cost items involved:

- Purchase price of car, inclusive COE
- Interest on car loan
- Annual road tax
- Annual car insurance
- Fuel
- Routine preventive maintenance
- Car wash
(and less the eventual scrap value)

And finally, how long would you actually use that car before you get itchy for an upgrade?  3 years?  5 years? 10 years till scrap?

Go figure.  I've guesstimated that a car is an expense that's beyond $1,000 per month.  Would it therefore be cheaper to just take a cab?  25 days of taxi rides at a cost of $40 per day would work out to $1,000.  Looks like a break even point.

The babies, the maid, and the car

For a typical working couple living on their own, what are the difficult choices that have to be made to raise a family?  Someone estimated that it would cost $1 million in a couple's lifetime.  That sounds like quite a disincentive. 

When our first baby came our way, the immediate question was how to look after the baby given that both of us were working?  We decided then that we could tolerate having an outsider living in our home, and so a maid it was.  Aside from the obvious costs of hiring a maid (and the associated levies), it would seem that expenses build up very quickly.  For example, water and electrical consumption jump quite significantly.  Food/meals was another.  It all adds up.  I would estimate that it actually cost about $1000 a month as a result.

Then there were the risks of a stranger in the home.  How much trust can we emplace on this person whom we know nothing about except the few pages of resume?  It's all blind faith and hope for the best! 

By the time our second kid came along, the problem had significantly compounded.  How would we move around in a family of five without a car?  Our maid had already long gone, having decided to return to her homeland.  But raising two kids without the maid was not viable.  Plan A, wife stops work and become a housewife.  We decided that was no go, and Plan B was needed.

Taxi would no longer be a viable option (back then, there were no 5-seaters).  This quickly drove us to the conclusion that a car had become a necessity. 

Fortunately, with the older one already two years old, he was old enough to attend the full-day day-care centre.  The younger one, was left with the in-laws who were most helpful in helping to look after her on weekdays, and we brought her home only on weekends.  It was a compromise.  A compromise that was viable only because of facility and family support.

One side note though, the cost of having an extra person in the house (i.e. maid) was traded off against the ownership of a car, and childcare charges.  The later being discounted due to a government incentive for working mothers.

A property, a home

Thinking back, the Yishun 5-room HDB wasn't too bad.  There were some hits, and some misses.

The Hits

1.  Access to public transport. Yishun MRT was just 7-8 mins away.  There was also a feeder bus by the next block.

2.  Food.  Coffee shop was at the next block.  A short walk away was the Chong Pang Market and more coffee shops.

3.  Market.  For a wet market, there was the Chong Pang Market, and for supermarket, Cold Storage at Northpoint Shopping Centre.

4.  Sunlight.  Cloth line was facing a generally east-west direction.

5.  Minimum renovation.  Did not need much renovation.

6.  Schools.  There was a primary, secondary school and a Junior College nearby.  Near, but not too near that the noise carried across.  There were also several child care centres within short walking distances.

7.  The Air Force.  Nearby was a military airbase.  So it was quite a thrill each year seeing the helicopters doing their practice runs for National Day.

The Misses

1.  Old.  The unit was more than 10 years old.  After some time, started to suffer from electrical breaks whenever there was a thunderstorm.  This posed a big problem for my refrigerator when we travelled overseas!

2.  Wildlife.  Being a topmost unit, lizards and cockroaches appeared to be the norm.

3.  The Air Force.  Noisy as hell whenever they were flying.  But we did get used to it after awhile.  Possibly this was the cause for dustiness too.

4.  Aircon.  As with most old aircon units, they were in need of some major retrofitting.  They were probably operating at low efficiency.  On some days, we needed the fan to complement the aircon.

The first property - housing loan, parents and CPF

[Continuation of Misadventures of a 27 year old ...]

And that, was how I ended up with my first piece of property.  But being a 27 year old with barely 3 years on the job, it was a difficult challenge.  We found a 5-room HDB on the resale market going for $230,000 at Yishun.  While an 80% loan could be taken, the fact was, we still needed the 20% down-payment.  We didn't have enough in our CPF-OA accounts to fully fund it and had to top up with substantive cash to make up the shortfall.  That decision had to be backed by a further loan of $30,000 from my parents. 

The monthly installment payment for the 80% part of the loan from HDB was manageable.  We could foot that, deducting from our combined CPF-OA account.  Our combined salaries then were in the region of ~$4,000. 

But the loan from the parents was a long journey to pay off.  My parents only expected me to repay without interest.  At $500 a month, it took me 5 years to do so.  This was on top of a monthly allowance which I had pegged to 10% of my take-home pay.

Actually, it took longer!  If you recall, buying the house was an excuse for getting married?  We were of course dead broke after buying the house, let alone doing the renovation, equipping the house to a livable condition, holding a wedding, and funding a honeymoon (no delayed gratification here!).  That involved a further loan from my wonderful parents, on top of the $30,000 that I had already borrowed.

Eventually, I took almost 8 years to fully pay back my parents.  But it was such a joy when I eventually did.  Finally, debt free.  Almost.

Related:
My Retirement Planning Project - My Retirement Home [LadyYouCanBeFree]