Chasing the Singapore Dream Responsibly and Wisely

[Dennis Ng]

I was asked to provide comments and views in the article below. I have highlighted my comments in blue for your easy reference:

Sunday Times Singapore, 08 Aug, 2010, Sunday
Chasing the SINGAPORE DREAM
Follow these investment rules to achieve 5Cs responsibly and wisely
By Lorna Tan, Senior Correspondent


We all know the five Cs that many Singaporeans see as signs that they have made it – cash, credit cards, condo, car and country club membership – but escalating prices are pushing the dream away from many.

But they can still be attained responsibly and wisely if you follow some sound investment rules, as The Sunday Times highlights.

1 Cash

One misconception many people have is that getting rich is primarily an outcome of investing, noted Mr Christopher Tan, chief executive of wealth management company Providend.

He believes that the road to wealth does not start from investing but from earning a good income, setting aside an amount for savings every month and keeping expenses low by living within your means so you can have a surplus for investment.

It all takes discipline.

Ask yourself: Do you spend first, then save or save first, then spend? It helps if you inculcate the habit of paying yourself first, said financial experts like Mr Ben Fok, chief executive of Grandtag Financial Consultancy, and Mr Dennis Ng, author of Mastering Your Personal Finance, http://www.MasterYourFinance.com.

One way is to arrange for automatic monthly deductions out of your pay to a special savings account.

Mr Ng believes that most people make the mistake of having all their money in one account, which makes it tempting to spend it all.

‘Have at least two bank accounts, one for common trans-actions and another just for the ‘pay yourself first’ purpose,’ he said.

It is recommended that you save at least 10 per cent of your salary each month, excluding Central Provident Fund (CPF) contributions.

Mr Tan said having a good budget will help and once you get it going, you should stick with it, even if you receive an unexpected sum like a bonus.

In addition, you should set aside an emergency fund that can take care of three to six months of your expenses.

2 Credit cards

These can be double-edged swords. You can benefit from the cash rebates and reward points they bring, but they can also make you poorer and even bankrupt in some cases.

It is prudent to use credit cards for their convenience, to earn reward points and as a tool to leverage on your cash flow because you can take advantage of the interest-free period of about 55 days. The golden rule is always to pay off your credit card bill in full every month.

And do not fall into the habit of rolling over balances, said Mr Ng.

This will attract a 2 per cent monthly interest or a 24 per cent interest per year.

‘There is no way you can get a return higher than 24 per cent by investing your money, so if you owe a credit card debt, you’re heading towards financial disaster and further and further away from financial freedom,’ he said.

Mr Patrick Lim, associate director at financial advice firm PromiseLand Independent, also warns that consumers should never allow themselves to be lulled into signing up for any interest-free instalment scheme.

This is because there is a risk that the supplier will not be able to continue delivering the services. A recent example was the closure of several spas, leaving customers stranded.

And the longer the period for the interest-free payments to be fully paid off, the higher the risk of not being able to pay the monthly instalments should you lose your job.

If you lack the discipline, a safer alternative is a debit card. It looks and works like a credit card in that you have the same convenience of cashless payment, but minus the reward points and you are not spending future money.

You can use your debit card only up to the amount you have in your account.

It can also be used as an ATM card and for Nets transactions.

3 Condos

This is a big-ticket item, so you have to be very clear on why you want one and whether you can afford it. Don’t chase the condo dream just because others are doing so, said Mr Tan.

The prudent way to buy a condo or any home, said Mr Fok, is to pay at least 20 per cent downpayment. The higher the downpayment, the better to buffer you against a decline in home prices, mortgage rates creeping up or the loss of a job.

This will prevent you going into negative equity – a situation where you owe more than the property is worth. If that happens, the bank may force you to reduce your loan by coughing up cash.

Before signing the mortgage agreement, calculate your debt service ratio. This is the percentage of your monthly income needed to service long-term liabilities and it should not exceed 35 per cent.

Another yardstick is your debt-to-asset ratio, which should be less than 50 per cent.

Mr Ng said that if not for status or security reasons, buying an HDB flat might help one become richer because of the lower costs compared with living in a condo.

And you get more square feet of space for every dollar you pay. For the same size, condos could be 30 per cent to over 200 per cent more expensive than HDB flats, depending on the location.

‘It is not exactly ‘upgrading’ one’s lifestyle if one sells a five-room HDB flat that is 1,100 sq ft to move to an 800 sq ft condo,’ said Mr Ng.

4 Cars

Cars depreciate in value over time, so they should not be considered an asset. Mr Tan noted that on average, you need to set aside $1,000 to $1,500 per month just to pay off the loan of a car, pay for petrol, parking, maintenance and so on. This may not leave enough surplus cash to invest towards your future.

If you really want to own a car, buy one that is reliable enough and that you will continue to like for about five years.

‘This is because the first few years of a car’s life experience the highest depreciation. So if you sell a car just one to two years into your purchase, the depreciation and the bank loan repayment will cost you quite a bit,’ said Mr Tan.

Bear in mind that the effective interest rate of a car loan is about 5 per cent, said Mr Ng.

So if you take a car loan, you suffer both ways in terms of a falling asset value and paying higher interest over time.

In fact, some financial experts question if you really need a car given Singapore’s efficient public transport system.

Taking public transport is definitely cheaper if you live near your workplace. For instance, Mr Ng travels by taxi 90 per cent of the time and spends about $800 a month on transport.

This is a saving of $700 a month assuming the cost of owning a car is $1,500. Grow this at 5 per cent and at the end of 10 years, you will have $109,150.

5 Country club membership

Before signing up, ask yourself how likely you are to use the club facilities.

Mr Tan recalled buying his first country club membership when he was in his 20s just because he wanted to make a good impression on his friends.

The club’s car decal looked impressive on his car windscreen but he is not a golfer, prefers running outdoors than in a gym, and the club was far from his home. He ended up not visiting it and sold his membership a few years later, $15,000 poorer from his decision.

Mr Fok advises people to be mindful of the other costs associated with clubs, such as paying a service fee every month and a transfer fee when you sell.

‘I don’t see country club membership as an investment and I do not advocate borrowing money to buy the membership. In fact, this is my last priority out of the 5Cs,’ he added.

But if you do need the facilities, there are more affordable club memberships, like the NUS/NTU Alumni Club, where membership costs less than $10,000 and comes with low monthly fees of around $50.

lorna

[Dennis Ng]

actually, I also shared with Sunday Times another 5 Cs when you plan your finances, but it was not published. Here are the 5Cs when planning one’s finances.

5 Cs to Planning Your Finances by Dennis Ng, http://www.HousingLoanSG.com

Consistency - it is important to have consistency eg. in saving. Most people save money on ad-hoc basis, and save irregular amount at irregular time interval. Change it to a consistent amount eg. S$500 per month and regular time interval (per month).

Compounding – most people have savings but failed to let their money work for them through Compounding. If your money does not give you more than 4% returns, basically, you might be running “on the spot”. Eg. if inflation is 3% and your money grow at 3% per year, basically, your money is NOT growing as net returns is 0%.

Compassion – we don’t live for ourselves and our family only. Have some Compassion for others, for those less fortunate for us. For eg. each year I donate about 5% of my income to charity.

Core – most people spend more time planning their annual vacations than their finances. We should make planning our finances a “Core” part, an important thing to do, not an after thought. For example, each year company prepare annual financial reports, individual should also prepare their own annual financial reports, annual income and expenditure report and Balance Sheet to keep track of their Finances.

Change – the only thing constant in the world is Change. After you plan your finances, there might be changes eg. you got married, then you have kids. Everytime a major change happen in your life, review your finances and be prepared to make changes.

Review your finances once a year and be prepared to make changes to your investments if you find that some investments are not doing well. You might want to “rebalance” your portfolio in view of the changes in the global market conditions and trends.

[jeffreychua]

actually, I also shared with Sunday Times another 5 Cs when you plan your finances, but it was not published. Here are the 5Cs when planning one’s finances.

5 Cs to Planning Your Finances by Dennis Ng, http://www.HousingLoanSG.com

Consistency - it is important to have consistency eg. in saving. Most people save money on ad-hoc basis, and save irregular amount at irregular time interval. Change it to a consistent amount eg. S$500 per month and regular time interval (per month).

Compounding – most people have savings but failed to let their money work for them through Compounding. If your money does not give you more than 4% returns, basically, you might be running “on the spot”. Eg. if inflation is 3% and your money grow at 3% per year, basically, your money is NOT growing as net returns is 0%.

Compassion – we don’t live for ourselves and our family only. Have some Compassion for others, for those less fortunate for us. For eg. each year I donate about 5% of my income to charity.

Core – most people spend more time planning their annual vacations than their finances. We should make planning our finances a “Core” part, an important thing to do, not an after thought. For example, each year company prepare annual financial reports, individual should also prepare their own annual financial reports, annual income and expenditure report and Balance Sheet to keep track of their Finances.

Change – the only thing constant in the world is Change. After you plan your finances, there might be changes eg. you got married, then you have kids. Everytime a major change happen in your life, review your finances and be prepared to make changes.

Review your finances once a year and be prepared to make changes to your investments if you find that some investments are not doing well. You might want to “rebalance” your portfolio in view of the changes in the global market conditions and trends.

Hi Dennis,

Thanks for sharing the above. I am putting more focus on the Compassion and Core from this year onwards. For a start, I have decided to support those organizations who are providing free medical service locally. I have already identified a few of them. I hope to increase my donation as i better my financial status.

I agree with you on the Core. I am one of those who spent more time planning on vacation than my finances. This too must Change.

Regards,

Jeffrey

[Dennis Ng]

actually, I also shared with Sunday Times another 5 Cs when you plan your finances, but it was not published. Here are the 5Cs when planning one’s finances.

5 Cs to Planning Your Finances by Dennis Ng, http://www.HousingLoanSG.com

Consistency - it is important to have consistency eg. in saving. Most people save money on ad-hoc basis, and save irregular amount at irregular time interval. Change it to a consistent amount eg. S$500 per month and regular time interval (per month).

Compounding – most people have savings but failed to let their money work for them through Compounding. If your money does not give you more than 4% returns, basically, you might be running “on the spot”. Eg. if inflation is 3% and your money grow at 3% per year, basically, your money is NOT growing as net returns is 0%.

Compassion – we don’t live for ourselves and our family only. Have some Compassion for others, for those less fortunate for us. For eg. each year I donate about 5% of my income to charity.

Core – most people spend more time planning their annual vacations than their finances. We should make planning our finances a “Core” part, an important thing to do, not an after thought. For example, each year company prepare annual financial reports, individual should also prepare their own annual financial reports, annual income and expenditure report and Balance Sheet to keep track of their Finances.

Change – the only thing constant in the world is Change. After you plan your finances, there might be changes eg. you got married, then you have kids. Everytime a major change happen in your life, review your finances and be prepared to make changes.

Review your finances once a year and be prepared to make changes to your investments if you find that some investments are not doing well. You might want to “rebalance” your portfolio in view of the changes in the global market conditions and trends.

Hi Dennis,

Thanks for sharing the above. I am putting more focus on the Compassion and Core from this year onwards. For a start, I have decided to support those organizations who are providing free medical service locally. I have already identified a few of them. I hope to increase my donation as i better my financial status.

I agree with you on the Core. I am one of those who spent more time planning on vacation than my finances. This too must Change.

Regards,

Jeffrey

Hi Jeffrey,

you're welcome. Yes, one of my things I hope to is that if more of my seminar graduates improve their financial lives, they can do more for the less fortunate in the society, be it making monetary donations or contributing time and effort as volunteers.