How much of your income do you save? Where do you save it and why it matters.

A survey conducted by Jobscentral.com.sg (full article here) shows that 2 in 3 Singaporeans save no more than 20% of their income. I’m not sure if this is before or after CPF but I’m assuming it’s ‘before’ since the article says it’s a percentage of monthly income.

If the average Singaporean uses all of his CPF Ordinary Account (CPF-OA) contribution to pay for housing, then it must mean that this 20% of income is in preparation for the conventional concept of retirement. 20% on its own seems pretty ok, that was the proportion recommended in All Your Worth as well.

But the other statistic that was a little disconcerting was this one:

Of the respondents who said they do, these are the common sources of additional income:

1. Dividends from stocks/bonds (37.5%)
2. Freelance projects (28.5%)
3. Part-time jobs (25.3%)

Despite being the most common source of additional income, less than 4 in 10 respondents have income-producing stocks/bonds. This means that 6 in 10 (I’m being generous) Singaporeans should start worrying because in my recent memory, savings deposits or fixed deposits have not returned rates higher than inflation. The fact that most people don’t directly own Stocks/Bonds (also assuming that this means most people don’t have monies in an index fund) mean that there is a pretty low level of financial literacy in Singapore.

Also, we have an aging population which means that when I grow old, there will be a smaller number of working-age people which reduces the number of income-tax paying individuals. That means that social services (if any) will have to be supported in some other way. I don’t plan to count on who I vote to do that for me and neither should anyone.

If your only idea of a savings vehicle now is a savings account/fixed deposit, be prepared to eat fewer burgers in future.

 

Book Review: All Your Worth

Not enough to spend? Worried about paying off your bills? Wondering if you’ll ever have enough money to retire?

I believe most people in Singapore ask themselves these questions and what they find is themselves faced with ‘advisors’ who a) are clueless themselves or b) have a principal-agent problem (i.e. they know more than you do and it is not in their best interest to act in your interests). Cost of living issues are always a hot topic; hot enough to be included in a Post-GE 2011 survey at least (see here, slide 60).

I don’t have a magic formula. I’m still trying to work my own system out and so far, it’s worked very well for me but I suspect that most people won’t be able to live the kind of life I do so I like to introduce you to Elizabeth Warren. Or rather one of the books she wrote- All Your Worth.

The basic idea behind the book is to have enough to survive, have some fun and yet not worry about the future. The basic configuration is that your monthly salary goes towards three different accounts- ‘must-haves’ (50%), ‘wants’ (30%) and ‘savings’ (20%).

What are ‘must-haves’? The 3 guidelines used to determine that are:

1. Could you live in safety and dignity without this purchase (at least for a while)?
2. If you lost your job, would you keep spending money on this?
3. Could you live without this purchase for six months?

A few categories are: housing, medical care, transportation, insurance, food, legal obligations. By extension, other things you spend on that don’t fall into ‘must-haves’ are ‘wants’ and anything leftover is ‘savings’. That’s pretty simple to understand right?

Now, the percentages given to each category are fixed as an upper-limit rather than a lower limit. That means, you DO NOT go over that amount. If you have less than 50% for ‘must-haves’, should you beat yourself up over it? I don’t think so, that sounds pretty ridiculous to me if you do. Imagine finding out that you could afford a mortgage twice as expensive as the one you service now, you wouldn’t run out and buy another right away right? You could but you don’t have to. After all, it’s about whatever makes you happy.

What happens if you’re already over the limit for a certain category? How should I grow my savings? What if I’m already up to my eyeballs in debt?

Go read the book. While the examples are US ones, the methods might prove instructive. For those up to eyeballs in debt, I’d say it’s time to seek help from Credit Counselling Singapore.

Here’s a money-saving tip- Go borrow the book from our good ‘ol NLB. Reservation fee’s only $1.55.

Disclaimer: I’m not a professional financial advisor. Anything said here should not be construed as ‘professional’ financial advice. If the advice here works for you then I’m very happy for you. If it doesn’t, I’m pretty sure the devil’s in the details. Leave a comment because I’d like to you what went wrong.

Tan Chuan Jin on CPF: Lucky Tan’s critique

Lucky Tan has a  pretty good critque on BG (NS) Tan Chuan Jin’s take on CPF (full link here, exerpts below):

This is one of the significant responsibilities in MOM. DPM and myself spend a fair bit of time on this, and rightfully so. Sometimes, I wonder if my job would be easier if we just let people withdraw their CPF totally.

It would make things easier…for awhile. But it would be wrong.

Life expectancy is going up to 82 and beyond. One is likely to live for a good 20 years after retirement. There is a strong likelihood that many may not have saved enough. CPF pay outs would help to ensure some form of regular income stream for individuals. With an ageing population, this becomes more critical because the burden on our children’s generation will be significant if older Singaporeans are not providing for themselves.

As a citizen, I did not really bother too much trying to understand the CPF construct. Like many, I wondered if the returns made sense, especially a number of years ago (seems like a long time ago actually!) when bank interest rates were high. Why can’t I withdraw my OWN money when I retire?

Things look quite different now that I am on the other side of the fence. CPF is an important part of retirement provision for our people. For an almost risk free profile, the returns are reasonable. This is worth reading to understand how your CPF returns have fared given inflation rates over the recent years.

http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_9Oct2011_MF3.htm

Higher returns would always be nice but it would entail greater risks. The challenge of any portfolio that includes equities is volatility. At point of withdrawal, you may be right in the throes of a downturn. To provide for some balance, we had opened up the space for individuals to invest part of their CPF monies via the CPF Investment Scheme should they wish to do so. Hence, one should therefore treat the ‘untouchable’ part of the CPF monies as the very stable and low risk component of your portfolio.

The problem with Tan Chuan Jin’s whole post is that it’s like every other motherhood reply that comes from the government. It tells you their point of view without apologising where they could have done better and with CPF, there’s plenty of areas they could have done better.

For starters,

- if CPF was for retirement purposes, then why on earth is it being used for property investments?

- Why does CPF not deliver returns that are pegged to inflation?

I agree with CPF’s use for medical insurance.

Singaporeans are by and large not a financially literate lot. It’s not acceptable to force people to save for their retirement but yet not deliver returns that can, at minimum beat inflation and also reap some of the upside when things are performed.

Tan Chuan Jin can argue that with greater reward comes greater risk but that’s precisely why professionals are paid so much! They’re there to do their job to ensure that there is sufficient for yearly withdrawals. Unless, gasp, the good BG is saying that GIC and Temasek can’t do better than 5% after fees on a CAGR basis. If so, someone ought to be fired since whoever is managing CPF funds have the added advantage of managing funds that are locked in till the withdrawal age, these do not face the kind of redemption risk that mutual funds or hedge funds face.

Oh, and the best bit from Tan Chuan Jin’s post?

As a citizen, I did not really bother too much trying to understand the CPF construct.

Me thinks paper generals earn way too much if they do not have to be bothered about whether they have enough monies in their CPF for retirement.

PS: Tan Kin Lian weighs in on CPF too. (link here)

Comparative Advantage: Tan Kin Lian edition

It’s nice to see TKL doing what he’s good at (in relative terms at least) doing. (example 1 and example 2)

Book Review: The Millionaire Next Door

Have you ever wondered what being a millionaire is like?

When asked that question, most people who aren’t in that grouping probably think of fast cars, high-society life and the likes. And if asked to make a guess of how they got there, these same people would probably go blank. Therefore, there’s nothing better than a good dose of reality and that’s exactly what ‘The Millionaire Next Door‘ (henceforth TMND) brings to the table.

TMND was the product of interviews conducted with 1000 persons belonging to the much sought-after status; and provides a good insight into how these people got there and what their lives are really like. The biggest take-aways from the book would be:

“Wealth is what you accumulate, not what you spend”

The authors, Thomas J Stanley and WilliamD Danko,  also identify seven factors that separate millionaires from non-millionaires which are:

1. They live well below their means.

2. They allocate their time, energy and money efficiently, in ways conducive to building wealth.

3 . They believe that financial independence is more important than displaying high social status.

4. Their parents did not provide economic outpatient care.

5. Their adult children are economically self-sufficient.

6. They are proficient in targeting market opportunities.

7. They chose the right occupation.

I’d highly recommend anyone who harbours thoughts of financial freedom (btw, just to burst your bubble, financial freedom is no longer having a million bucks, that’s hardly enough) to read this book along with The Richest Man in Town. Both books provide insights on what kinds of life the rich truly live and how to get there.

PS: I wrote this much much earlier but left it as a draft and totally forgot about publishing it! Luckily posts like this are timeless.

Does being young mean you should be struggling financially?

I recently read a friend’s facebook status that went something along the lines like:

“Car, Check. House, Check. Happy family, check. But little cash… I suppose this is what the life of a young couple is like.”

That got me thinking. Should a young person’s life really be like that? After all, it’s highly likely that most young people’s life would be like that. After all, most graduates fresh out of school earn something in the range of 2.5K-3K. Those that get married and start a family immediately incur out-of-pocket expenses such as renovation of a new home, care and support of young children etc. This would be on top of wedding and honeymoon expenses (which may or may not be covered by the gifts received) and the likes in the not-too-recent past. Add to that a car (which really adds much more to travel expenses in exchange for time savings and comfort) and it’s no wonder young couples find it hard to save at all.

However, should things really be like that?

I won’t go into posturing whether a car is a necessary or unnecessary expense- most people should be mature enough to know that by buying a car, you are incurring much higher transport expense compared to taking public transport. In exchange, you get comfort (rather than time savings in my opinion).

What I’ll do is link you to this calculator! It calculates your Net Worth and benchmarks it by using a formula that was described in The Millionaire Next Door. The good thing about the formula is that it factors one’s age and current income to get a benchmark Net Worth figure. Anything below that and you have under-accumulated wealth, anything over and you’re a Prodigious Accumulator of Wealth (PAW).

What buffets taught me about value

I’m having a bout of indigestion as I write this. A time, not so long ago, I remember telling myself once that I’d never, never ever pay for a buffet again; This was after a round at an international buffet when I was still serving NS.

Anyway, buffet tonight was at the Bar and Billiard Room at The Raffles Hotel. The spread was pretty decent, pretty gd ingredients used- I loved the freshness of the tomatoes and the prawns. The cuts of meat may not have been the best but still decent enough. Anyway, the food was good but it wasn’t great. I definitely enjoyed the furnishings and the decor much more than the meal. And for the retail price of $72++, it’s not cheap. So why pay all that money to suffer an indigestion?

On the other hand, I had some really good Fish N Chips in a coffeeshop in Toa Payoh the other day- not greasy, perfect layer of batter, light, fresh fish and all for less than $6. I really enjoyed that meal much more.

Always remember- Price is what you pay, Value is what you get!

PS: I didn’t have to pay for my meal at Bar and Billiard Room tonight so technically, I’ve not broken my own rules.

Checklists

Thinking of adding a financial and health rules/checklist to my life.
Will add details as they come.

Health

• Run my usual route (at present approx. 3km) twice a week
• Gym (usual circuit) twice a week
• No more than 1 pint of beer in one day, no more than two such days a week.

Wealth

• Quick-review portfolio every quarter
• Full portfolio review every year (including business trends, allocation, macro environment outlook, goal target)

Making more money. But are you better off?

Please tell me. How many burgers can I buy today?

Nope. Although it sounds like it but this isn’t a post about being poor and happy or self-contentment and all the hokey-sounding stuff. It’s not that those aren’t important but today, I want to write about a topic that is equally important but also grossly misunderstood; and of course, it fits within my realm of knowledge. (Self-contentment is, unfortunately, something I have to work harder at.)

What I want to write about today can be summarised (as Warren Buffett famously did) in one sentence: It’s the number of burgers you can buy today that matters.

The official name, as economists and financial experts call it is ‘Purchasing Power’. For example, let’s say you were earning $100 dollars a week 50 years ago and then the price of a hamburger was $1, are you better off today if you are earning $1000 dollars a week but the price of hamburgers is $10? The answer obviously is no. You should be equally satisfied unless your hamburger preferences change (econo-geek speak: marginal utility).

Economists and Statisticians try to capture this effect of rising prices in a concept called Inflation (the measure is Core Price Inflation or CPI) but the measure of course cannot be applied to individuals since none of us consume exactly the same basket of goods with the exact weights used in the measure. Take the chart below for example:

Table 3. Nominal and Real average monthly household income series

Although real household income has risen by 0.3% from 2009 t0 2010, why do some people feel worse off? That’s because the CPI deflator does not capture the full effect of the price increase for every single individual. Lower income residents feel the impact of rising transport and food prices greater but the weights in the CPI basket of goods do not reflect as such. A simple look at the difference in CPI for different income brackets will suffice (here).

The bigger point to note is that Inflation is a very real phenomenon and its impact on our financial health should be at the forefront of our minds. For example, Mr Andy Lim is a regular office worker, earning a decent salary. He doesn’t know much about investing and is looking to preserve his wealth. Interest on Savings Accounts offered by Singapore banks are at a measly 0.25% but hey, these accounts are covered by deposit insurance so even in the event the Bank goes bust (unlikely due to quite stringent financial regulations but that’s another issue) so Andy Lim decides to park his savings there. Is he getting a good deal?

Unfortunately, with the historical rate and likely future path of the rate of inflation, the answer is  no. In fact, savers like him are being penalised because the dollar value on his savings are being eroded due to the low-interest rate on his savings. A negative real return due to the effects of inflation means that Andy Lim is actually better off spending the money since he can buy more hamburgers today than in the future.

The prices of goods is merely illusionary; If your plate of chicken rice goes up from $2.50 to $3.00, but you can actually afford to buy twice as many plates of chicken rice today as compared to 10 years ago, you are actually better of. Think in terms of burgers or Chicken rice.

The mini lesson to be learnt is Saving is not always a smart thing. You have to account for the after inflation rate of return.

Key principle to take away from this? Inflation matters.

More views on the property market: Largest BTO launch ever

HDB’s largest launch of Build-To-Order (BTO) flats at a go. (full story here)

As speculated in a previous posting (Singapore’s public housing sector: what to expect), the new Minister in charge of housing is making an attempt to make his presence felt. In fact, he’s going into overdrive by ramping up supply from the previously projected figure of 22,000 to 25,000 BTO flats this year.

The first immediate concern is oversupply. Of course the people at MND and HDB are no fools. They have a fair idea of what the projected demand is and the amount of supply that’s likely to come onto the housing market in the near future so they definitely have a plan in place to pull back the supply once the bottleneck has been met. Minister Khaw Boon Wan says so himself in his blog (post here):

I have told HDB to do more.

First, to tender as soon as architectural drawings and tender documents are ready. Currently, a tender is called only after 70% of orders have been confirmed; hence “build to order”. Given robust demand, I told them to proceed to build, knowing that the orders will definitely come. In other words, build ahead of demand, during this period of demand backlog. We can return to normal BTO approach, after we have stabilised the situation.

Now, what do I make of all this?

While I don’t doubt the ability of MND and HDB and the good Minister himself, the whole reaction smells of a manager trying to meet near-term earnings (and we know how that mostly turns out- short-term happiness, long term pain for the property market). Why do I say this? Simply because the ramping of oversupply and counting on a pull-back at the appropriate time leaves very little room for margin of error.

In fact, my thesis is that the 25,000 units this year will fall short of continued demand which will prompt MND and HDB to continue with the Build-Ahead-of-Order a little longer and the overcapacity will cause pain when all these supply comes to the market.

Of course, raising the income ceiling will invite more demand for BTO flats as new couples who barely cross the current $8,000 income ceiling will flock back to the BTO market given the cheaper prices in the BTO market as compared to the DBSS and especially the Executive Condo (EC) market.

The lower income residents need not fear of course as there are income caps (which I do not think should be raised) on the 2 and 3 room flats. The ones to be worried are those in the resale, DBSS, EC and basically the rest of the mass residential market. Prices there will definitely come down. If Cash-Over-Valuation (COV) ever comes close to zero, property buyers rejoice.

When would there be such a scenario?

My best guess is a confluence of 3 factors: 1) after the bulk of the private supply of housing stock comes into the market in 2013, 2) when the bulk of the new generation of BTOs, DBSS and ECs are after the Minimum Occupation Period (MOP) and 3) a cyclical downturn in the business environment.

Oh yes, one more thing. Given the current ramp up in supply of flats and private property as well as the projected construction of the new MRT lines, I’d say 6.5 million people, here we come.

(For the mathematically inclined, that’s a 30% increase from the 5 million people we have on this island so far, or a compounded growth rate of 2.65% over the next 10 years which is more or less in line with the resident population growth rate we’ve had over the last 5 years. However, the housing stock is expected to increase a lot more. How much more? According to this report, table 4, 300% more in 2014 as compared to this year.)