The Gahmen Gives Away Money

Kids grow up real fast. It seemed like it wasn't so long ago that I witnessed the little one being pulled out from wifey, all bloody and blueish looking. I didn't faint. Guess I'm a steady father?

And now she's already 16 and done with the GCE 'O' levels. Sheesh. Time flies.

Unfortunately for wifey and me, my daughter was born long before the introduction of the Child Development Account (CDA) where the government matches contributions, up to a certain limit. Missed the boat. The newborns are so lucky.

Over time, there's also the Edusave Account. These provide various top-ups and subsidies that really help offset the cost of bringing up the kids, up through secondary (and Junior College) education.

Recently, I came to realise there's something else called Post Secondary Education Acount (PSEA). Actually, I've been receiving letters from MOE on these accounts for my kids for some time, but I had not bothered to read and thought they were the usual EduSave updates. Dah. *roll eyes*

Apparently, the CDA account gets rolled over into the PSEA, and if the top-up limit to CDA had not been met yet, parents can continue to top-up into the PSEA and receive the matching contributions by the Government.

The PSEA can be used to pay for education in local tertiary institutions (e.g. Polytechnics and Universities).

I checked with the MOE helpdesk. No luck. My kids are not entitled to CDA. So I couldn't make any voluntary contributions to increase the PSEA funds.

By the way, these accounts earn the prevailing CPF-OA interest rate.

Related:
Interest free student loan for tertiary education
Building kids education funds with Unit Trust
Endowment plans for child education
Kids education revisited

Interest free student loan for tertiary education

Interest free student loan? Wow! Sounded too good to be true. I thought it was some kind of scam when I read this: How I used my university student loan to partially pay off my university fees.

[You can read above to find out how InvestProperlyLah capitalised on the loan to make some gains at the same time! Interesting move.]

It is certainly no scam. I did a check at the DBS website and found more information: DBS Tuition Fee Loan. So indeed, you could take up an interest free loan for the duration of the course at a tertiary institute.

There are various conditions involved for sure. But it seems straightforward enough. It can fund 90% of subsidised course fees for university (or 75% for polytechnic). You just need a guarantor between the age of 21 to 60 who is an undischarged bankrupt.

It doesn't seem too difficult to take up. It's an alternative to drawing a loan from parent's CPF. By the way, you can do one or the other, but not both.

The loan can be repaid in a lump sum or in equal installments up to 20 years at a minimum of $100 per month, starting within 2 years from graduation. But if the loan is not repaid upon graduation, I think the interest will be hefty as it is pegged to the average prime rate of the 3 major banks.

[See http://www.turtleinvestor.net/cpf-and-4-room-hdb-my-true-story]

Looks like an alternative for my kids to consider, in time to come. And I can leave my CPF to continue clocking interest instead. So the education fund that I've been building up for them can remain invested until they graduate to pay off the loan.

Building the Kids Education Funds with Unit Trust

For my children's Education Funds for tertiary education, I have been injecting monthly contributions and their annual Ang Pows (Chinese New Year red packets) into their respective portfolios using Unit Trusts. Both portfolios are similar. So I shall use one of them for illustration.

Broadly, the portfolio is evenly diversified across (a) Asian small-caps, (b) Global Emerging Markets (GEM), (c) Asia Pacific, (d) Europe, (e) US, (f) Singapore, (g) Short-term bond, and (h) Cash.

This has been going on for about 10 years. Guess how have the various Unit Trusts performed over the years? The specific funds are as shown below, with annualised returns over 1, 2, 3, 5 and 10-year horizon.

Fund Name	1 YR	2 YR	3 YR	5 YR	10 YR
Aberdeen Asian Smaller Cos	-5.74%	-0.23%	6.34%	6.26%	-
Aberdeen Global Emerging Markets	-5.73%	0.37%	1.34%	2.36%	6.50%
Aberdeen Pacific Equity	-3.45%	1.05%	4.41%	4.61%	6.55%
Cash Fund	0.37%	0.24%	0.19%	0.18%	-
Deutsche Singapore Eqty Fd	-6.60%	-1.57%	2.58%	3.46%	5.79%
Infinity European Stock Index	9.74%	9.15%	14.46%	7.85%	1.98%
Infinity US 500 Stock Index	20.63%	17.14%	19.19%	15.26%	4.26%
Nikko AM Shenton ShortTerm Bond(S$)	1.78%	2.11%	2.27%	2.50%	2.39%

[Source: Fundsupermart.com]

Taking a 1-year view, US and Europe are the top performers at 20.63% and 9.74%. Singapore, Asian small-caps and GEM are the worst performing and are in fact in the red.

Stretching out to a 10-year horizon, Asia Pacific and GEM are actually the top performing at above 6% each. Whereas, Europe and Bonds were the weakest. Even then, they still turned in returns of 1.98% to 2.39%. As the Asian Small-Cap and Cash Fund have less than 10 years of history, their 10-year annualised returns are not available.

What can we observe from the above? While by no means definitive, it does illustrate some points that are often talked about:

1. Markets will have their ups and downs. Diversification across markets make sense as they tend to perform differently from each other, except where there is a massive global crisis. No single fund is going to be the best performer forever. There is no magic bullet.

2. Equities will usually outperform Bonds in the long run but will be more volatile. From above, we see that Bonds and Cash Funds (money market funds) remained positive throughout, but do not vary much over time. Higher risk, higher returns (you can go into the red). Lower risk, lower returns.

3. Over a 10-year horizon, it is unlikely to make losses. Despite the events of the Global Financial Crisis (2008), European crisis (2011) and the recent China meltdown (2014), equities still turned in respectable 1.98% to 6.55% over the 10-year horizon. Unlikely does not mean never though! Time in the market matters.

4. Investing (but know what you are doing!), even with the expenses involved for Unit Trusts, will do better than leaving money in the bank. The banks have been offering less than 2% interest for the last decade (risk free of course, especially the first $50,000).

It is now only a few years away from needing the money for the kids' tertiary education. Time to apply the brakes and exercise caution. There is no longer room for "time in the market". In the years ahead, I will be shifting more of the equities into cash funds, towards a 20:80 ratio. There is no need to adopt a high-risk, high-return profile anymore. To be precise, can't afford to.

Related:
Kids education revisited - back to the future
Endowment plans for child education
Misadventure of the education savings funds

What Do You Do If You Get Laid Off?

Last weekend, wifey and I were at a neighbourhood coffeeshop for a cuppa. This coffeeshop is always crowded on the weekends. Families having a weekend breakfast, gatherings of elderly folks having a coffee and a smoke, and the occasional individuals and couples. As it was crowded, we shared a table with another gentleman. The gentleman was enjoying his own cuppa and welcome us to join him.

It turned out to be quite an unexpected morning as he had quite an interesting story to share. He used to work as a technician at a telco earning $2,000 per month. Unfortunately, his work was outsourced and to his great disappointment, he was laid off. For months, he could not secure another decent paying job. With a family of five to feed, this was a very serious problem for his family.

He decided that some income was better than no income. So, he finally took up a job as a bus driver, earning an income of $1,200 per month (early 2000). It was tough work. He had to wake up at 3 am in the morning to get to work, where he then drove a bus for 9 to 10 hours each day. It took quite awhile for him to get used to it. Eventually he did. The pay sucked.

But that was then. Today, he said that the pay has improved dramatically, especially in recent years. Now he earns well over $3,600 a month after deducting CPF. That kind of explains the increasing cost of operations for public transportation companies.

He has a few daughters who are still at school going age. So long as he has good CPF savings, he felt he could afford to use his CPF to pay for his daughters education. So having a job that also contributed to his CPF was important for him. He was very appreciative of the safety net that CPF has provided him.

Seems like a tremendously hardworking gentleman. Somebody who embodies the spirit of earning his keeps, living within his means, responsibly bringing up and supporting his family, and an emphasis on providing for his children's education.

I like him. A nice conversation to start the morning. Great to have made his acquaintance.

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.

Rule of 72 Revisited - The Maths Behind

As we read about investment, we will eventually come across the "Rule of 72" (see previous post on this: Rule of 72 and Rue of 72). Kind of nifty as a rule of thumb to estimate the effect of compounding.

But what is the maths behind the Rule of 72? Business Insider explains in Why the Rule of 72 Works. This should really be used to bring maths alive in school (A-levels?)!

So in fact, we discover that it ought to have been the "Rule of 69". Hah!

Aside from the reason explained in the article for shifting to 72 (i.e. ease of divisibility by a greater range from 1-10%), I guess 69 isn't preferred either for its own reason!?

As an approximation, we could use 72 for dividing 2, 3, 4, 6, 8 or 9%; and 70 for 5, 7 or 10%.

Have fun!

Money as You Grow - Financial Education Resources

Resources on Financial Education are just plentiful on the Internet. Here are several:

Many blogs on the subject of Personal Finance and Investment provide wonderful introductory explanations of these topics.  Investopedia is probably the most comprehensive, the ultimate Wiki for the investment peons.

Orcam Group Educational Resources does a decent job of extending the educational materials further.  You may want to give it a go.

For a kids friendly version, you may want to try the Secret Millionaires Club for a cartoon web series hosted by Warren Buffet.  Warren shares a piece of wisdom in each episode.  Guess he gave up on the adults and decided to start working on the kids instead!

Money as You Grow is a financial education package for children. It is for the US market, with different activities for children at different ages from 3 to 18+.

For Singaporeans, a very good source is the serious of talks organised by SIAS MyMoney series to educate Singaporean investors.

CPF has also been publishing periodically their In Touch magazine to better explain the CPF system and all its intricacies, as well as articles on health and financial education:

SGX is generating a suite of SGX E-Videos to educate the investment public at large. They appear to be in the midst of production, with more videos planned. The clips are actually published on YouTube.

Happy surfing!

Gaining Investor Knowledge through E-Videos at SGX Academy

Looks like SGX is generating a suite of SGX E-Videos to educate the investment public at large. They appear to be in the midst of production, with more videos planned. The clips are actually published on YouTube.

For other sources of education materials, you may want to also refer to other resources mentioned at: Investopedia, the Secret Millionaires Club and MyMoney

Financial education resources are plentiful on the Internet. All one needs is access, time and willingness to learn.

Endowment Plans for Child Education

DIYInsurance published an article recently comparing several Child Education Endowment Plans (see 4 Endowment Plans Specially Designed for Your Child's Education). Plans seem logical and helpful to provide the financial support for education at different points of a child's typical education profile. The scheme from NTUC offer additional supplements upon entering the first year of each level progressed. Good plans I think for those who prefer to completely outsource their financial needs (a.k.a. financially challenged?).

But the one thing that struck me was that all the plans are projected at internal rates of return of below 4%. I have also recently examined all my existing insurance plans and came to a similar conclusion as well (see Can Insurance Policies Return Better Than 4%?).

4% is also the current interest rate for CPF-SA/MA.

4% seems to be a magic number - i.e. a risk free rate.

Hard to appreciate why I would want to place my money giving return of <4% when I would probably be better of buying say the STI ETF?  For that matter, a good soccer team of SGX stocks would probably do as well (My World Cup Team (of Dividend Value Stocks). Of course, these do come with risks.

Views on Youngsters Not Having Enough Savings

On the radio this morning, the DJ was talking about our youngsters not having much savings and invited callers to share their views. The comments that came in include:

• CPF is good enough.
• I'll save, if only my boss is prepared to pay me more!
• I love online shopping, how to save?

CPF is Good Enough

Oh dear, oh dear. CPF, where got enough? It's only enough for the lower income groups. They don't demand as much and so they can get by with the little income stream post retirement. Alternatively, you better have a lot of kids who are good to you. These youngsters might want to read (1) CPF as an asset that generates income (by SGYI), and (2) my past musings on CPF.

Ignorance.

I'll Save, if my Boss is Prepared to Pay Me More!

If he/she does pay you more, you think you'll save? The more you get, the more you spend. That's lifestyle inflation. It's the discipline to always set aside a sum for investment or savings that's going to make it work. Pay yourself first. Take a pay cut - i.e. slice a portion away from the monthly salary to park into savings or investments.

Lack of ownership.

I Love Online Shopping, How to Save?

I don't know how much online shopping one needs. Are those wants or needs? Beyond a certain point, it's just an addiction. Piles of junk and untouched items taking up space and collecting dust thereafter. The pack rat in a modern form.

Indulgence.

Concluding Remarks

It seems the young can't see the need to save and invest. Retirement needs is a future that is still far away.

It is really hard to ask the young to think so far ahead. Living by the day is pretty normal isn't it? Each eve to the next paycheck, the bank account tends towards zero.

We learn so much maths in school, but we never taught our kids to apply the same maths towards financial planning. Wouldn't it be so much more interesting?

Chapter 1 - Algebra, zzz.
Chapter 2 - Calculus, zzz.
Chapter 3 - Graphs, zzz.
:
Chapter 10 - Financial Planning - how it all comes together!?

Education.

Kids Education Revisited - Back to the Future

Kids education - it's such an important part of the early pangs for parents. I had previously shared about my own misadventures on this (Misadventures of the Education Savings Fund). I thought I might do a theoretic study of this and rewind the clock. Were I to start this journey from the birth of my child, how would it have looked like instead?

Below table illustrates the whole plan. Assuming birth in 1999, I would place $2,000 per year for the first 4 years. That gives me 8 blocks of $1,000 which I could invest into a diversified portfolio of unit trust in various regional markets. In particular, equity unit trusts covering (1) US, (2) Europe, (3) Asia Pacific ex-Japan, (4) Global Emerging Markets, (5) Singapore, (6) Asia Pacific Small Caps, as well as (7) Global Bonds and (8) Money Market Fund. That would have given a good diversification.

In subsequent years, I would then top up annually with $500. Basically, the 'ang pow' money. And then top this up with a monthly RSP of $200 per month. Assuming an annualised investment return (ROI) of 6.5%, we should have a tidy sum of well over $100,000 for the varsity funds, assuming $25,000 needed per year for 4-years at a local university.  Rebalance the unit trusts with equal amount in each.

Below profile is based my girl's. Guys would have a further two years to work with. Even if on the eve of year 19, the market were to collapse by (no more than) 30%, the portfolio would still suffice.

Age	Year	Ad-hoc	RSP (mthly)	ROI	Extracted	Portfolio
1	1999	$2,000	$ 200	6.5%		$    4,400
2	2000	$2,000	$ 200	6.5%		$    9,086
3	2001	$2,000	$ 200	6.5%		$  14,077
4	2002	$2,000	$ 200	6.5%		$  19,392
5	2003	$   500	$ 200	6.5%		$  23,552
6	2004	$   500	$ 200	6.5%		$  27,983
7	2005	$   500	$ 200	6.5%		$  32,702
8	2006	$   500	$ 200	6.5%		$  37,727
9	2007	$   500	$ 200	6.5%		$  43,080
10	2008	$   500	$ 200	6.5%		$  48,780
11	2009	$   500	$ 200	6.5%		$  54,851
12	2010	$   500	$ 200	6.5%		$  61,316
13	2011	$   500	$ 200	6.5%		$  68,201
14	2012	$   500	$ 200	6.5%		$  75,534
15	2013	$   500	$ 200	6.5%		$  83,344
16	2014	$   500	$ 200	6.5%		$  91,662
17	2015	$   500	$ 200	6.5%		$100,520
18	2016	$   500	$ 200	6.5%		$109,953
19	2017	$   500	$ 200	6.5%	$  25,000	$  95,000
20	2018	$   500	$ 200	6.5%	$  25,000	$  79,075
21	2019	$   500	$ 200	6.5%	$  25,000	$  62,115
22	2020	$   500	$ 200	6.5%	$  20,000	$  49,053

I guess one adjustment to the above plan would be to keep the contributions from year 16 onwards in bonds and money market funds to mitigate the risk further. And with each passing year thereafter, to shift the contributions to cash-only in preparation for the annual draw down for the 4 years.

If the market does well, there would still be a tidy balance for my little one to get started on her journey to retirement as well.

Investopedia, the Secret Millionaires Club and MyMoney

Many blogs on the subject of Personal Finance and Investment provide wonderful introductory explanations of these topics.  Investopedia is probably the most comprehensive, the ultimate Wiki for the investment peons.

I just came across another website which does a decent job of extending the educational materials further.  You may want to give it a go: Orcam Group Educational Resources.

For a kids friendly version, you may want to try the Secret Millionaires Club for a cartoon web series hosted by Warren Buffet.  Warren shares a piece of wisdom in each episode.  Guess he gave up on the adults and decided to start working on the kids instead!

For Singaporeans, the best available source is probably the serious of talks organised by SIAS MyMoney series to educate Singaporean investors:

Happy reading.




Related:
Investopedia
Orcam Group Educational Resources [Orcam Group]
Secret Millionaires Club
MyMoney [SIAS]

Nest Eggs for Education Funds

Years ago, my wife set up a savings account for each of our child.  Contributing $50 a month for several (many!) years, these eventually reach a few thousand dollars.  But with the rapidly depleting interest rates at the banks, we finally decided that it wasn't the most optimal approach.

Reviewing the longer term plans, we decided to build these towards their respective tertiary education funds, should they succeed academically.  We then revised the monthly contributing to $500 a month by investing in a basket for unit trust funds (aggressive portfolio diversified across several regional funds - US, Europe, GEM, Asia ex-Pac).  With the increased earning power, this was viable and sustainable in recent years.  Through this, the respective funds have rapidly built up to $50,000 each through a combination of monthly contributions and growth in valuation.

Looking forward, I have shifted towards $600 a month contribution towards a portfolio of conservative money market and short duration bond funds.  Coupled with additional top-ups following each Chinese New Year and other miscellenous, it should lead to a nett contribution of about $8,000 a year.  In 4 years, when they would be of age for university, the respective nest eggs would have reached $80,000, an average of $20,000 for each of the 4 years at the university.  A sum that wouldn't be enough for an overseas education, though it would be a big leg up regardless.  More importantly, it should be adequate for local studies.

Looks like they are set.

Savings is all relative

I've been giving my two school-going kids their weekly allowances.  My older boy who is in secondary school is given $20 a week.  My younger daughter who has reached the end of primary school is given $3 a week. Yet, the boy has practically no savings, every cent is spent.  My girl on the other hand has a net savings of more than $500 (inclusive rewards, and birthday ang pows).  Interesting isn't it?

One could argue that a secondary school student needs to spend more money than a primary school.  Perhaps the canteen food is more expensive.  Perhaps there is greater peer pressure to hang out and chill out.  Perhaps there are more CCA activities in the afternoons and hence the corresponding expenses.  But I suspect it's a question of being a "saver" versus a "spender"?

One interesting indicator is that whenever my son gets his allowance, he tends to spend big on the first few days of the week.  Instant gratification, and consequences be damned!  He can rapidly run out of cash before the end of the work and struggles to live on the balance for the rest of the week.

My daughter on the other hand has yet to exhibit these same behaviour.  So there is hope yet.  We shall see how things pan out next year when she is also in a secondary school.