Archives for category: Personal Finance

Light selection this week because I was reading the very good Atomic Habits by James Clear as well as a few articles on value traps in stock selection (more on these in the weeks to come).

books on bookshelves

Photo by Mikes Photos on Pexels.com

November Macro Update: New Employment Among Highest Since 2000 (The Fat Pitch)

A collection of statistics on the U.S. economic situation. Key points being that the U.S. economy is still going strong and therefore we can look forward to more rate hikes in the not-so-near future. The Fed didn’t raise rates in November but they are still expected to raise rates once more in December and three times next year.

Anyway, the money shot from this link is (emphasis mine):

Equity prices typically fall ahead of the next recession, but the macro indictors highlighted above weaken even earlier and help distinguish a 10% correction from an oncoming bear market. On balance, these indicators are not hinting at an imminent recession; new home sales is the only potential warning flag (its most recent peak was 11 months ago) but it has the longest lead time to the next recession of all the indicators (a recent post on this is here).

As Chuck Prince, former CEO of Citigroup famously said, ““When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

I guess the party’s still going strong in the U.S.

 

The New Three-Legged Retirement Stool: You, You, And You (Financial Samurai)

U.S. context but still very applicable to Singaporeans.

There used to be a lot more levers you could count on for retirement in Singapore. All civil servants used to have pensions (an auntie who’s in her late 60s was in the last batch that qualified for pensions).

Right now, I would say that Singaporeans have to rely a lot more on themselves. CPF is a decent system IF you have any money left in there after paying for your home.

If you have a big mortgage that is being paid off over the next 25-30 years, then you must hope for either (a) an increase in your pay and/or (b) an increase in home prices. That way, the burden of housing will decrease and there will be an option to cash in your home equity in your retirement years.

There is one more lever for some Singaporeans: hope that you inherit enough from your parents. For people in my students’ generation, this will be an increasingly attractive proposition as the demographics will be in their favour. Of course, this is provided there’s anything left after their parents spend on healthcare.

 

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried… (Early Retirement Now)

A good take on sequence risk and it’s always good to point out that most people end up retiring at the top of the cycle. Subsequent drops in the market can cause a (temporary) drop in wealth and this may affect your standard of living in retirement.

What to do about it? Go on to the link to find out.

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Last Sunday, the Straits Times ran this piece titled “CPF, cash not enough for comfortable retirement” (link here but it’s behind a paywall) and it’s written by the CEO of StashAway who makes some good points.

Of course, like any good businessperson, the CEO doesn’t say that your CPF money isn’t enough for retirement but that it’s not enough for a comfortable retirement. I won’t go into the details of the article because (a) I read it some days ago so my memory of it is hazy and (b) it’s hidden behind a paywall so I don’t have access to it as I type this.

 

CPF, as originally intended, isn’t all that bad

Furthermore, I’ve shared my thoughts on CPF before (see here and here) and over the years, I’ve come to believe that CPF in its original form is a pretty good system.

Why?

If you look at this handy retirement calculator, saving 37% of your money means that you can retire in roughly 30 years assuming a rate of return of 3.5% (this is an estimate of the blended OA and SA rate) and a withdrawal rate of 3%.

In short, if you continually save 37% of your money up until 55 years of age, you could retire with the amount of in your CPF account providing you a return to match your yearly expenses ad infinitum.

But wait! There are some issues

One issue that CPF has against it (just like that crappy endowment plan your financial advisor tries to sell you) is that those numbers are nominal. In other words, if someone earns $50,000 per year and is saving 37% of it in their CPF, he/she will be spending $31,500 per year. Unfortunately, the same $31,500 per year 30 years later is going to buy him/her a lot less stuff.

Of course, having some cash to retire on is better than not having anything at all. However, if CPF could pay inflation-indexed rate of returns, we would be in a much better place.

Of course, optimists will point out that salaries don’t remain constant over time and some people might save over and beyond the amount in their CPF accounts. Also, the official retirement age is 65. That’s a full 10 years more than the scenario above. Also, the withdrawal rate of 3% may be too conservative. If that’s the case, then the loss in purchasing power won’t be (so much of) an issue.

Reality Sucks

In reality, we know that the CPF system has morphed into one where monies in the CPF is used (mostly) for housing. In that case, retirement becomes a much more dicey affair. After all, if a person has taken out a 25 or 30-year loan on his/her property, then there wouldn’t be much left to compound in the CPF account, would there? If the 25 or 30-year loan is so huge that it completely wipes out the monies going to the OA account, then there won’t be much to compound on either.

I haven’t looked at the numbers but based my observation of colleagues and relatives, I suspect most people have overspent on housing but they haven’t felt the effects of it because they are so far away from retirement.

 

Less house, less stress

Personally, my house is dirt-cheap because it’s a BTO in a less appreciated part of the island. This allowed my wife and I to take on a loan that’s ridiculously cheap (it gets paid off in eight years and the deductions are less than my OA contributions). The flat itself is nice because we got a good facing (pure luck here!) and we have good neighbours.

Of course, the downsides are that my commute to work is far and we’re not really near a train station. Of course, this means that we spend more dollars and time our transport and commute.

The good thing is that this allows us to sleep better at night and I definitely won’t be worrying about life at 60.

men s brown top near trees

Photo by Sadaham Yathra on Pexels.com

 

Mr. 15-Hour-Work-Week (15HWW) has a great post on being a monk versus a warrior or a farmer. His post is in response to a post over at Dr. Wealth on whether people in the FIRE community are reaching financial independence at the expense of a better life.

From the Mr. 15HWW post:

A long long time ago, there was a province named Sophistia.

The majority of the people worked as farmers, toiling from 9am to 6pm on the farms. Some of these farmers were happy. But most were not. These farmers were the subjects of regional lords.

Becoming a farmer was the default path for citizens of Sophistia after they graduated from school at 15. If a citizen did not want to be farmer, there were two alternative paths.

1. Train to be a warrior or

2. Enter a monastery to become a monk

A warrior’s main role was to fight, win and conquer new lands for the province. After a decade, a successful warrior would have conquered enough lands to warrant the title of a lord, enjoying a life of respect and luxury. Titles, lands, farmers and beauties will be bestowed to him and his descendants.

On the other hand, the monk’s role in a monastery would be to convert the scriptures, chant them and serve the gods. They would also have to live a life of relative “suffering” and “deprivation” to appease the gods. After a decade or two of service, they could then go back to life as a commoner. They would not have to farm as grains will be offered to them monthly by the lords and farmers for their religious service

Mr. 15HWW’s tale is a take on the path of an entrepreneur/corporate high-flyer versus the conventional FIRE method of accumulating huge chunks of savings in order to retire early. In the story, the idea of a ‘monk’ is to save up enough such that the returns from investment more than compensate for the expenses required to live a decent life.

In a similar vein, the Dr. Wealth article frames the choice of huge savings now as ‘suffering’ which implies that the emphasis on huge savings comes at the detriment of current consumption.

For those who have done the early retirement math, the returns on savings won’t be large enough to net you serious dough until quite a few decades later so, in a sense, the FIRE method or being a ‘monk’ means consuming at a level far below that of a Crazy Rich Asian.

 

There’s some Truth to it but…

It’s not that Mr. 15HWW and the Dr. Wealth article are wrong. Savings today does come at the expense of consumption. The problem is seeing ALL savings as a drag on consumption. Just like savings, consumption, when taken to the other extreme, can be ‘suffering’ as well.

I know this for a fact because I come from a family that consumed far more than we needed to. For pretty much most of my life, my parents always owned two cars. My dad needed one for work but the other one was pretty much unnecessary because my mom stopped working many years ago and the car was used mainly to ferry my brothers and me from school. It made life more comfortable but once again, it wasn’t necessary. Even today, my parents own two cars that both fall into the luxury category and most of the time, one’s parked at home.

Cars weren’t the only thing. We went on expensive holidays, had expensive toys growing up, and on a regular occasion, ate good food at exclusive places. The lifestyle wasn’t a one-percenter kind of lifestyle but it was easily upper-middle.

The good thing about having been there and done that is that I can safely say that those things are overrated. Once you move from taking public transport to taking a car, there is hardly any difference whether the car is a Mazda (I love my Mazda 3) or a Mercs. In fact, there are some instances where public transport can triumph private transport. I had to go to SGX Centre in the middle of town the other day and it was so much easier to take the MRT than have to worry about parking and traffic.

If you think I’m an oddball, then look at other examples around the world. Warren Buffett stays in a house which he bought many years ago that cost him $35,000. He also famously drives a pretty beat-up car. Buffett isn’t the only one. For the amount of wealth he has, Bill Gates drives a considerably cheap car.

I don’t mean to say that I don’t like fancy cars, nice houses or the material trappings that this world has to offer. What I’m saying is that even among the super rich, they have recognised that these material things aren’t the most important things in life. In certain cases, being too caught up in chasing after material wealth is a form of ‘suffering’ as well.

What The Enlightened Focus On

I rather think of the ‘monk’ in the story as being a wise one. And being a wise one, a monk should be enlightened enough to see that things like cars, fancy watches, and ridiculously-priced food are NOT necessary for a good life.

Instead, what’s necessary are the relationships that one has with friends and family and being engaged in hobbies that nurtures one’s spirit. In short, you have to ask yourself what gives your life meaning.

If you’re like most people, then it’s probably one of the things on this list that Bonnie Ware wrote about. Bonnie Ware was a nurse who worked in palliative care and she compiled a list of what were the ‘Top 5 Regrets’  that people who were dying have. The list doesn’t really mention any attachment to some expensive car or watch.

 

Final Thoughts

In sum, I can’t deny that I still have a tinge of envy when I see a Porsche or Ferrari on the road but when I think about the things that matter, it’s not the meals I’ve had or the places that I’ve been to that matter. It’s the people that I had the meals with and who was with me when I visited those places that matter.

After all, if it were just the meals or the places then having the same food or visiting those places alone would bring me the same amount of joy as when I was anyone else. In reality, ask anyone what their best memories were and the answer is most likely the experience of being with someone dear that matters.

In the story of the monk vs. the warrior, the idea is that farmers should look to becoming either a monk or a warrior. Being a warrior is always tempting because the spotlight is always on the one who, despite what seems like otherworldly odds, overcomes them and triumphs. The parties and spoils from overcoming the odds capture the imagination like a bright flame. Unfortunately, what farmers do not see is that flames are attractive but dangerous. Get too close and you get burned.

Therefore, the parable Mr. 15HWW puts forth may ring true but the other addition to the story is that perhaps the monk is more enlightened than the warrior. He sees the additional risks and burden of being a warrior. He knows that the trappings of great wealth and glory are but an illusion that warriors continually chase after but never seem to be satisfied with.

There is another path to escaping the life of a farmer. One that is more peaceful, more moderate, and ultimately, provides the same sort of satisfaction.

That is the way of the monk.

bet black and white casino chance

The casino may actually provide better odds

 

Call me a traditionalist but I rather put my money where I can see the money.

When investing in equities, the money can easily be seen from the financial statements that publicly-listed companies have to provide. These records are also subject to an audit and hence, to a large extent, you can trust the numbers.

However, when the world’s filled with easy money, many people can raise money to fund what is essentially an idea. These ideas are typically moonshots and can fail for a variety of reasons. Of course, the payoff from taking these bets are huge.

Imagine being an early investor in Google, Facebook or Amazon. Now that Amazon has hit a US$1 trillion in market cap, I’ve been seeing the headline about how $1,000 invested in Amazon in 1997 would be $1,000,000 today. It’s stories like these that provide the lure of Venture Capital.

Unfortunately, as Ben Carlson highlights, even investing in Venture Capital funds that supposedly have the expertise to seek out the most promising startups can be an expensive affair. Even in the middle-of-the-road scenario, you may have been better off just investing in public equities.

What Billionaires Do Don’t Apply to You (Unless you are one)

This also brings us to the point about taking the advice of people who already have tons of money.

You can’t unless your income and wealth profile is like them.

In a separate post, Carlson also shares how J.P Morgan’s Jamie Dimon is against holding bonds and how personal finance guru Suze Orman holds very little of her wealth in equities.

The point is that what they do may not necessarily be suitable for other people? After all, how many of us can earn the income that Dimon or Orman do from work? In addition to their work, the amount of capital that they can put to work is so huge that the risk-free return from that is something most people would die to have.

It’s like what a friend told me before. If you have a $100 million, just parking that in the bank to earn 2-3% per year is going to net you a cool $2-3 million dollars to spend every year. Unless you plan to be like Johnny Depp, you don’t really need anywhere near that amount to survive each year. Therefore, you can easily take on more bets on moonshots that the average person.

The Role of Financial/Investment Advisors

This is where financial advisors need to really be kept in check so that they don’t recommend funds or products that their clients can ill-afford to invest in. In general, I think the regulators have some basic protection by specifying certain products as Specified Investment Products (SIP) and Excluded Investment Products (EIP) although the whole idea was probably a delayed response to the whole minibonds issue.

However, the list applies quite generally and the example that comes to mind is when the relationship manager from a local bank tried to advise my mother to go into gold mining stocks as a way to take advantage of the potential returns from rising gold prices. This was some years ago but fortunately, my mother checked with me and I basically told her that the guy was an idiot.

Obviously, the guy was just trying to earn his commissions and he probably wouldn’t have given that same advice to any normal retail banking client but still, it’s not like my mother’s account is at a level that would have allowed her to take moonshot bets.

Final Thoughts

At the end of the day, the more money you see being poured into businesses that have no profits or positive cashflow, the more you should be worried. If your account allows you to take bets on these moonshots, then, by all means, go ahead.

However, if you have neither the temperament for frequent losses and the account for it, then please don’t bet the farm on things that may not happen. If anything, the crypto-boom last should serve as a cautionary tale for everyone.

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Is your housing expenditure detriment to your retirement?

 

Alternatively, this could have been titled, “An Ode to my CPF”.

I know I’ve given lots of shit to CPF (for example, “CPF monies: to depend on it for retirement is a pipe-dream“, the footnote in “Early retirement: some math“, or more recently, “What’s the economic logic behind CPF’s accrued interest policy?“) but think about it:

What if you had regular contributions to your CPF and you let it compound?

There is a group of people in Singapore that has spent so much on housing that they have barely any contributions to their CPF each month. Those that even have to fork cash out of their pockets to pay the mortgage are in truly dire straits. If you happen to find yourself in this situation, read on below.

A Very Personal Example

I happen to belong to the camp that has regular CPF contributions because my housing loan is so low that my monthly CPF contributions more than covers the monthly mortgage. Also, I will finish paying off my loan in another 4 years or so (background here).

So I decided to run the numbers on the following scenarios to see how much I would have when I turn 55 (the age that we can finally take some of the money out of our CPF accounts):

A: If I work for another 20 years
B: If I work for another 10 years
C: If I work for another 5 years

The assumptions I’ve made are as follows:

#1: Current contributions increase by $10,000 per year after our housing loan is paid off.

#2: Contributions remain constant over time. i.e. No increases in salary.

This is for easy math and anyway, I don’t expect my salary to increase drastically beyond the inflation rate so the contributions can be viewed in ‘real’ terms.

#3: CPF returns 3% across all accounts.

I’m assuming this despite having more monies in my Special Account (SA) at this point in time. I know the SA earns a higher rate of interest and combined sums (subject to a cap of $60,000) in your accounts earn an extra 1% but once again, this is for easy math and to set a floor.

#4: I’m starting with roughly $130,000 in both my OA and SA.

Numbers

Thanks to the magic of Excel:

Scenario        Final Amt at 55 ($)

    A                  $1,180,000

B                  $772,000

C                  $495,000

Final Thoughts

Obviously, the numbers above are not going to be representative of what another Singaporean might end up with. I’m making above the median salary although NOT much more than the Median Household Income. Of course, a major factor is that my wife also works and our household size is smaller than the average*.

I still believe that the CPF system needs a revamp. Way too many people are spending what should be their retirement savings on a property, either as an investment (which is still somewhat excusable) or on housing (gasp!). That’s probably one of the main reasons why only about half of CPF members can meet the retirement sum despite pledging their property.**

Also, one big sore point for many people is the Retirement Sum*** going up. There’s a good article on what the retirement sum may be like for younger people today when they reach 55 later on. Just eyeballing the table, it seems that based on my calculations above, meeting the retirement sum shouldn’t be a problem.

Very often, people forget that compounding needs time to work its magic but for compounding to work, there’s needs to be something to compound in the first place. If you spending all your money on housing, there won’t be anything left to compound. And if you want to turbo-charge compounding then you need both time and regular contributions.

 

Notes:

*I believe the average household size is 2.1 in Singapore. No, us having a cat doesn’t count.

**There are also other factors at play. I suspect that the labour force participation rate should explain quite a bit. Some (especially mothers) may have only worked very few years of their lives and hence have little in their CPF accounts. For example, my own mother practically stopped working full-time after she had me and my brother. By the time my youngest brother came along, she had already stopped working for some years.

***The Retirement Sum is the minimum you need to have in your CPF accounts so that the CPF can slow-drip the money back to you in old age so that you have enough money to meet your basic spending needs.

Been busy this week. I wish I had more commitment to code more. I’m trying to work on a property index data page for the local markets. This is based on my posts (here, and here) from some time back.

Anyway, here are the best things I’ve read all week.

 

 700 more days to FI (Minimalist in the city)

I chanced upon this blog from my google recommendations (thanks google!) and it’s nice to know how other Singaporeans are trying to achieve Financial Independence. I like how they’ve tracked and categorised every single expenditure (not something I would ever do because I’m just not that sort) and that’s given them a timer that they can countdown to.

The only flaw I see in their plan so far is this:

The objective is to have enough dividends generated from our stock portfolio to cover our annual expenses in 10 years time so that we could get out of the rat race and live on our own terms.

While dividends are much more stable than earnings, dividends are by no means constant. Companies can be forced to cut dividends or the tax code may change such that companies reduce the dividends paid. On the other hand, especially when you’ve already pared down to the bare minimum, expenses are pretty much fixed in the short-run.

We basically will be drawing on our savings account for our annual expenses and will get yearly top up from our stock portfolio returns dependent on the market returns and dividends for that particular year. The longest bear market for S&P 500 as illustrated below lasted about 2.8 years and the average bear market lasted between 3 months to 2 years. That’s the reason why we kept almost 3 years of expenses in savings and bonds to ride through any future bear market. This is to mitigate the possibility of force selling any of our stocks.

At the same time, most of our stocks are mainly in REITs and strong dividend paying blue chips which provides us with dividends even in a bear market like the one we personally experience during the 2008 financial crisis.

We could easily scale down our expenses with our minimalist lifestyle should there be prolonged bear market.

Lastly, we did not rule out going back to the workforce as we are highly employable working professionals. (I doubt we will reach this stage but just in case)

While I don’t dispute how long bear markets can last, I question the wisdom of depending solely on distributions from REITs and dividends from Blue-Chip stocks. Remember, distributions can get diluted and dividends can get cut.

No comment about point 2 but I suspect point 3 is a tad optimistic. Mid-career professionals who have been out of work for a while tend to find it hard to get re-employed. There’s always the choice of joining the gig economy (like being a Grab/Uber driver or a freelancer if their former professions allow for it.)

But otherwise, I think this couple is doing great! I hope the day will come when I share my own story as well. I’m not ready to share it yet but let’s hope that day will come sooner rather than later.

 

The Peter Principle is a joke taken seriously. Is it true? (Tim Harford)

What started out as a joke seems to have become truth in the business community.

The Peter principle states that “every employee tends to rise to his level of incompetence”. If someone is good at her job, she’ll be promoted into a job that demands different skills. If she’s good at the new job too, she’ll be promoted again, requiring yet another set of skills. One day, she will arrive at a job for which she is wholly unsuited, and there she will stick. Since when did a manager ever get sacked for anything?

Sadly, the Peter Principle seems to be born out by the research:

The authors of the paper discovered that the best salespeople were more likely to be promoted, and that they were then terrible managers. The better they had been in sales, the worse their teams performed once they arrived in a managerial role.

It’s pretty funny but real life seems to present lots of examples of this. My wife has been complaining about the management of her company and the Peter Principle seems to ring true for many of them. They may have been great at their previous roles but they certainly suck at their current ones.

Maybe the same’s true for the former SAF people at SMRT? =D

 

This Is How To Make Your Life Awesome: 6 Secrets From Research (Barking Up The Wrong Tree)

I’m pretty sure these findings are from same TED talk that I’ve seen before.

Anyway, a short summary of the 6 tips:

Avoid smoking and alcohol: Duh.

Years of education = good: Education seems to increase good habits (and being surrounded by smart, ambitious people never hurts).

Have a happy childhood: It’s huge. And surrounding yourself later in life with people who love you can help repair a difficult youth.

Relationships are everything: “Happiness is love. Full stop.”

Mature coping skills: Stop projecting and stop being passive-aggressive. Use mature defenses like humor when life gets hard. (Yes, immature humor is still mature coping. You’re welcome.)

Generativity: Build a good life, a well-rounded self and then give back.

Goh_Chok_Tong

ESM Goh. In his 70s and still grabbing headlines.

I write about personal finance and investing matters because I think that the common person in Singapore really needs to have a certain level of knowledge on how to organise their financial affairs. It’s also for my own learning purposes because it’s good to reflect on what I read and solicit the wisdom of the internet for views that may be contrary to my own. But I digress.

Being able to organise one’s financial affairs is important especially if you make somewhere above or around the average salary in Singapore but it seems like even the rich are not immune from the problem of not having enough money.

Enter ESM Goh Chok Tong

Apparently, during a grassroots event, ESM Goh said this (full transcript) during a Q&A with a resident:

To anyone of us here, $1 million is a lot of money. So where do you want to get your Ministers from? From people who earn only $500,000 a year, whose capacity is $500,000 a year? So (when) I look for Ministers, anybody who wants to be paid more than half a million, I won’t take him. You are going to end up with very very mediocre people, who can’t even earn a million dollars outside to be our Minister. Think about that. Is it good for you, or is it worse for us in the end?

My first problem with this response is how he equates earnings ability to general ability. We’ve already seen from the financial crisis that asset prices can be artificially inflated and therefore, people who can earn astronomical sums in one year may not necessarily earn this amount due to their abilities.

The second problem is how it equates the ability to be a high-income earner with the ability to lead. Granted, ESM Goh later clarified (see below) that a high current income is not the only criteria but I find it disheartening to know that high income has to be a necessary criterion in the first place. After all, I fail to see how high income as a surgeon or a lawyer translates into the ability to lead an organisation like a ministry. After all, a surgeon or a lawyer’s work does not really require one to manage large numbers of people.

The second problem leads to the third which is how ESM’s argument would automatically exclude people from sectors that don’t pay well. These people would be discounted from his radar when searching for ministerial candidates.* But I don’t see why people who head non-profits or non-governmental organisations can’t be in charge of ministries. In fact, having people from different backgrounds probably bode well for any government as it ensures that all stakeholders’ interests are accounted for.

Rich People Problems – when millions a year may not be enough

But the kicker of his whole response is how he basically used Edwin Tong as an example and I think the example basically backfired.

I am telling you the Ministers are not paid enough, and down the road, we are going to get a problem with getting people to join the government, because civil servants now earn more than Ministers. Are you aware of that? And where do we get our future office holders from? From the private sector? I have tried for the last election. Two of them, earning $5 million per month, $10 million per month (sic – ESM meant per year). To be a Minister for $1 million? No, no, my family is not happy with (unclear). Those approached say money is not the issue. But if you earn $5 million, $10 million, and you pay at least $1 million, many people would come, but not from the private sector. But maybe some you can get. Edwin Tong, he is a Senior Counsel, he earns more than $2 million. PM asked him to be a Minister of State – one quarter (salary). He came to see me. He said, at this stage of his life, he has got a house, he has got a mother-in-law to support, a father-in-law to support, his own parents and so on, what should he do?

With this example, ESM Goh basically gave everyone the impression that Edwin Tong has problems getting by on less than S$2m a year. Now, if someone who earns S$2m a year has to worry about a mortgage and how to support his family, what does it mean for the rest of us? If you were the common person, would you trust such a guy to understand your problems?

The funny part is also how Edwin Tong had to approach ESM Goh for advice on this. Does this mean a middle-aged guy who really wants to be a politician had to ask a senior politician why he should be in politics rather than discussing it with his family? It gives me the impression that Edwin Tong might worry more about his wallet rather than his role as a politician.

I pity Edwin Tong. ESM Goh could have easily said that Edwin Tong was conflicted between his passion and duty for public service versus him wanting to give his family the highest standard of living that he could.

Of course, I don’t mean that Edwin Tong isn’t in politics in the spirit of public service but unfortunately, that’s exactly the perception that ESM Goh’s comments have given — that of a guy who had to be reminded by a senior that his service was more important than his wallet.

Damage Control

You would think that ESM Goh would have learned to be more tactful on the topic of money ever since his wife said that “$500,000 is peanuts” during the National Kidney Foundation debacle but it looks like to him, these sums are still nuts in the grand scheme of things.

Of course, he then clarified that the government doesn’t use earnings ability as a starting point for their search.

“Salaries is not our starting point in looking for Ministers. Character, motivation, commitment, selflessness, practical abilities, competence and proven performance are the main attributes we look for…”

But I think the damage has been done.

 

Notes:

*By the way, I’m curious. Do ESM’s Goh’s remarks mean that our former army generals were all paid multi-million dollar salaries in the SAF? Anyway, it seems that many of the ministers are former public servants (particularly the SAF) so it’s not like paying ministers well is helping the government get a lot more candidates from other sectors.

Almost mid-August!

Highlights of my week include watching ‘Christopher Robin’ last week and it was National Day here in Singapore so there was a public holiday in the middle of the week. Sadly, there was no new issue of Shonen Jump due to it being Obon in Japan.

How was your week?

books on bookshelves

Reads of the week

How this 28-year-old built up $250,000 in savings and plans to retire by 37 (CNBC)

You may disagree with the specifics (like using the 4% rule) but you can’t deny that this guy’s getting the big picture right. I shared this article with my younger brother who’s only 19. Only time will tell if my younger brother will turn out like this guy.

 

Why Do Some Brilliant Students Suck At Making Money? (LIFT: Limpeh Is Foreign Talent)

Alex, a former Singaporean turned British Citizen, is someone I follow. He goes through a lot of examples in his post but I think the observation is best summed up with Warren Buffett’s quote on investing.

Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential.” – Warren Buffett

The downside to being brilliant is that it doesn’t prepare you for things when life doesn’t go your way. After all, life isn’t something where doing A always gets you B. Sometimes, doing the right thing can still get you bad results because of chance.

The quality that is more essential for making money is grit. Grit enables you to stick with the training or the plan even when things don’t go your way. Grit also enables you to find the strength to get back up and do an honest self-assessment on where the plan went wrong so that you know what to do when similar situations arise.

This is the sad part about what many parents believe about education — education will get you somewhere. Sorry to burst their bubble but that’s where they’re totally WRONG. In this day and age, education is so prevalent that almost everyone in the working class is a university graduate. Education is no more a differentiating factor and the sooner we realise that, the better.

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

Singapore Household Balance Sheet

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?

flight technology tools astronaut

Where do you see yourself in the future?

 

I just attended a symposium on how Behavioural Insights and Big Data can influence public policy. The interesting thing is that at the symposium, A/P Hal Hershfield talked about how people tend to view the future version of themselves as another person instead of part of themselves. And because they view their future self as someone distinct from their present self, the decisions made in the present could be less than desirable for their future.

A/P Hershfield provided not just philosophical views but a neurological view that supports the view that people then to view their future self as another person and the studies he presented were in the context of how much people were likely to save as well as how likely they were to enroll in an automatic savings programme.

This is really interesting because I find it a mystery how other people seem to find it difficult to save money when it’s always been very easy for me to sacrifice consumption in the present for my future self. If A/P Hershfield’s theory is true, then it makes sense that some people find it harder to save money for their future because they view their future self as someone else and if you view your future as distinct from yourself, then your future self’s interest may not align with your own.

Solutions

If you find it hard to save for your future then maybe you may find some of the following useful. The presenters at the symposium presented some solutions that have shown to work in experimental settings.

One solution was to have participants view a version of their future self by digitally altering their photo. Being able to visualise how their future might be automatically led to people feeling a deeper connection with their future self.

So, what you can try is to visualise yourself, 20 or 30 years in the future and leading the kind of life that you want. If you’re able to make an emotional connection with that mental image, then it may be possible that you’ll find it easier to take concrete steps today to help you reach that goal.

Another solution was to have people feel that their future is closer than they think and the test that they did was to frame the question from ‘future to present’ rather than from ‘present to future’. For example, they asked test subjects to think about from ’20XX to 2018′ rather than from ‘2018 to 20XX’. There’s some psychological explanation involved but somehow there is a difference in how we view the future from the present versus thinking about the future back to the present day.

The behavioural economics solutions are also powerful — having a pre-commitment device or default settings (which I’ll elaborate on in the next section) means less mental cost for us to take the action required. For example, it’s easier to commit to saving a portion of a pay raise before you actually get it. This is an example of a pre-commitment strategy i.e. you tie your decision in advance to avoid you making bad decisions later on.

I really like this idea of auto-escalation. Nobel prize winner Richard Thaler, together with Shlomo Benartzi came up with the idea of having people pre-commit to saving a certain amount of their pay raise and this results in an increase in savings over time. You may say that our good old CPF is doing the same thing by making it compulsory for us to save a certain percentage of our income each month and to be honest, it helps provided you haven’t spent it all on housing.

Framing was another solution that was presented. Whether participants were given a choice of saving ‘$150/month’ or ‘$5/day’ affected the enrolment rates in a savings program. In case you are wondering, the ‘$5/day’ case got much more sign-ups in the programme. So, one way to get yourself to save more may be simply to target saving ‘$X/day’. If you have problems saving, I suggest you start small like “S$1 or S$2/day” and bring that number up by another dollar or so once you’ve got through a whole month of doing so.

What worked for me

In a sense, saving more is one of those problems where there is a conflict between the present and the future — the present self would love to consume as much as possible today but this comes at the expense of the future self. However, this idea can also be used to tackle other issues of a similar nature like losing weight, smoking less or drinking less alcohol.

What really worked for me (even though I’m far from the best investor) was the idea of having default behaviours. Saving money has never been an issue for me because I set up my bank accounts so that a certain portion of my pay gets transferred automatically each month from one account to another account. And the money in that account is used solely for investments.* What I’m working on is having default behaviours for investing because I tend to take too little risk when I, of all people, can afford to take on more risk.

But that’s another story for another time.

Conclusion

If you find yourself struggling to save for your future, it could be because you don’t feel a connection to your future. If that’s the case, it may help to set up default behaviours and/or imagining what your future would be like if you didn’t have to worry or think about money.

 

Notes:

*In standard economics, this is nonsense because money is fungible. There should be no reason why we have separate accounts for different uses of money. However, what I find is that having separate accounts for money that you spend versus what you invest restricts one from using the money freely.