Passive Income Update

HAPPY NEW YEAR

Happy New Year everyone! 2016 seemed to have flown by don't you think? It's true that as one grow older, time seems to speed up. It's rather scary because a year can just pass us by while we are playing Candy Crush or Pokemon Go. It is timely, on the first day of 2017, to remind myself that time is a precious limited resource, and I should be more deliberate and intentional in the way I use it.

As a continuation to the update on my networth, and before I start living out my 2017, I shall take stock of the passive income I received in 2016.

In 2016, I received passive income from the following sources:

1. Rental Income from my DBSS flat.
2. Interest Income on my Cash Holding.
3. Dividends from my Investment Portfolio.

Let's go through each of them in turn.

RENTAL INCOME FROM DBSS FLAT

For the uninitiated, after the arrival of our daughter, we had to seek waiver from HDB to allow us to rent out our newly-acquired DBSS flat (read more about it here). It is unlikely to be a long term arrangement as we still have to move back to serve our MOP. Nonetheless, the passive income from rental really helped boost our monthly cashflow. We have been saving up the entire amount to pay down our huge mortgage.

Rental Income: $25,000 after deducting all the associated fees (I assumed expenses are 2 months worth of rental).

This works out to be $2083.33 per month.

INTEREST INCOME ON CASH HOLDING

Throughout the year, I earned interest from a combination of (1) OCBC 360 account, (2) UOB ONE account, (3) BOC SmartSaver account, (4) Standard Chartered eSaver account, and (5) CIMB Fastsaver account, depending on the promotion available and what suited me more.

BOC SmartSaver Account.

Out of the list of accounts above, I think BOC SmartSaver is the least raved about one. I don't know why, but it offers one of the best rates when it first started out. Take a look at their interest rates:

Bonus interest rates for BOC SmartSaver account.

Prevailing savings interest rates for BOC SmartSaver account.

I rushed to open an account after reading a blogpost by scg8866t. Basically, to earn 3.55% interest, you have to fulfill the same 3 conditions as what's required of OCBC 360 account. But there was a hack. the $500 card spend can be fulfilled using their debit card. So.....this means that I could use AXS mobile and pay for my UOB ONE credit card bill using my BOC debit card. That's killing 2 birds with 1 stone! The Spend Bonus is a whopping 1.55%, and combine that with 3 Bill Payments of $5 each, and the base savings interest rates for balances of $50,000 and above, I could get an effective interest rates of 2.55% p.a. even without qualifying for the Salary Credit Bonus. This was awesome, until recently they closed the loophole and made a whole host of other changes. It's still worth checking it out though (here), because they made some attractive improvements to their Family Card.

Oops, sorry for digressing.

Here is my Interest Income for 2016: $3433.

This works out to be $286.08 per month.

DIVIDEND INCOME FROM INVESTMENT PORTFOLIO

I am looking for an elegant way to share my portfolio on this blog, but that's still work in progress. It's a small portfolio with a few legacy holdings from the times when I simply anyhow buy. But I've since learnt my lesson and am now trying to build up a quality, income generating portfolio.

Dividend Income: $745.73.

This works out to be $62.14 per month.

SUMMARY

Total Passive Income for 2016: $29,178.73

But if I were to remove rental income, total passive income will become: $4,178.33

This works out to be $348.22 per month.

8 Money Saving Tips in Raising a Child

Is your budget baby-proof?

 My parents, rather unabashedly, once told me this:

If you don't plan to have children, then don't even get married. Get married for what? Just stay together can already.

My gut feel tells me many others think this way as well. I mean, why else would one wants to get married right? Especially for the men. Matrimonial contracts have "anti-men" written all over it. Nothing in the contract benefits us. I mean, that's the plain truth if I am absolutely objective and clinical about it.

The moment you sign on the contract, what's yours is hers, what's hers remains hers.

But anyhow, despite all the terms that are set up against me, I got married at 24. Going by the logic of my parents', I have to start a family eventually. Both my wife and I weren't sure about it, but we weren't against it either, so we simply not choose and let nature takes its course. About a year later, tadah! My wife got pregnant. To be honest, I didn't know what to feel when I first heard the news. I wasn't over the moon; I wasn't scared; I wasn't feeling anything. It was just that: I am becoming a father soon, and that didn't mean anything to me at that point.

Shortly after though, the financial commitment associated with raising a child began to dawn on me. It was anxiety-inducing to say the least, as I wasn't quite prepared to give up (or at least delay) my dream of achieving financial freedom. But it was no longer an option.

To set the record straight, I wasn't regretting. I was just feeling uncertain and anxious.

16 months on, I am glad my wife and I had chosen not to choose. I mean, sure, we now have to be a little more careful with our money, but it has not yet turn into something that keeps me awake at night. Just like what my parents told me (again), raising a child can be relatively affordable, or extremely expensive, it all depends on your expectations as parents. So to everyone out there who needs this last bit of encouragement to start a family, go ahead and take that leap of faith! It's not half as scary as you imagine.

After being a parent for slightly over a year, I'm proud to say that I've mostly been able to keep to my prudent lifestyle. Sure, expenses will increase, but as with every other situation, there are always ways to limit the scale of it. It all depends on our expectations, right?

So here are some money saving habits that I have to share:

1. Ask for Used Baby Clothing from Friends/Relatives/Colleagues. Before my daughter was born, my wife's colleagues handed over many bags of baby clothing and a few old but functional toys. Another colleague of mine passed me his baby car seat which he got from another colleague of ours. These items are not new, but with a little cleaning, they are good enough. I told my wife that it's better to use old stuff because they are likely to be rid of all the nasty chemicals used in production. She agreed, and so we not only saved tons of money, but also helped conserve the environment a little. The Earth needs all the help it can get.
2. Carousell for the Win! Well, not everything comes free, and there are times when you simply need to spend that hard earned dollar. But why not stretch that dollar? There are many good deals on carousell. I managed to buy a used baby high chair for less than half the retail price, a new booster seat at a great discount, and many others! The seller of the booster seat received the item as a gift, but has no use for it. His loss, my gain =)
3. Explore Free Places. My daughter is 16 months old now. She is able to walk and do random baby things, but I doubt she will be able to appreciate places like Universal Studio. I've always insisted that we bring her to free-to-enter places like Singapore Discovery Centre. There are enough spaces for her to explore, and even if the exhibits are not world-class, they are good enough to keep the baby's senses occupied. We've mainly kept to this practice, but my wife had this nagging urge to bring our baby to the zoo to look at real animals. When I finally relented to her repeated requests though, she was disappointed as my daughter could not yet appreciate what she saw.
4. Borrow Books from the Library. My wife was initially concerned that books from public library, especially children's books, will be rather filthy. That didn't stop me from dragging her to take an actual look before we make any conclusions. She is now appreciative of the variety of books she can borrow for our daughter, and since 1-year-old has an attention span of like 3 minutes, the benefits of being able to constantly refresh the titles we have available at home came up more starkly.
5. Make Your Own Toys. I am repeatedly surprised by the stuffs my daughter finds interesting. I brought home an empty paper cup from Burger King, washed it clean and shouted into it like how one would use a loud hailer, and that got her so excited. When she finally got bored of it, I cut two holes at the side, tied a string across, and "transformed" it into a hat. She was more intrigued by that cup than most of the toys she has.
6. Look into Your Old Stash. I have to thank my mother-in-law for this. She actually kept my wife's doll house for 20 over years! We whipped that out and my daughter had so much fun playing with it. Some figurines have their necks broken, but nothing too catastrophic that super glue can't resolve. 
7. Polyclinics for the Win! Like many first-time parents, we only want the best for the kids, but sometimes we really should pause and consider if the cheaper alternative is indeed inferior. The first few vaccines that my baby had to take was at a GP/Gynae. The charges weren't sky-high, but they weren't cheap either. We decided to take our daughter to the polyclinic for her vaccines on the advice of other parents, and I instantly regretted not going there right from the start. Most of the compulsory vaccines were FOC, and the nurses were all very well-trained and professional. There was once when we had to bring home some paracetamol just in case she develops fever after the injection, and so I made my way to the dispensary. I couldn't believe my ears when I was told to pay like 30c (I really couldn't remember the price because it was ridiculously low) for the bottle of medicine. Being Singaporeans, there are really many things to be grateful for.
8. Have a Few More! Last but not least, have a few more babies, and keep their age close! The cost of raising the second child is likely to be lower than the first, as many things can be handed down. That's economies of scale right there for you to exploit.

That's it! These are 8 practices I keep to to prevent my wallet from emptying out too quickly. And yes, I do practice what I preach: my second child is arriving in Mar =)

Networth Update

Taking stock of what you own and owe.

 WHAT IS THIS POST ABOUT

2016 is coming to an end, and I thought it might be useful to take stock of where I am now financially. I've stayed prudent and thrifty for the last 4.5 years since I started working, but I've never taken stock of my financial position. Instead of setting aside fixed budget every month, I view every spending opportunity independently, and rely on my principles (more on this in a separate post) to guide my spending decisions. While I can be sure that every cent I spend is well worth it, and that there are no more "fats to be cut" without inflicting much discomfort on myself or on people around me, I won't be able to say with certainty how much I've been adding to my net-worth annually. By putting down in details my financial status year after year, I hope to better quantify my progression. This is the first stock-take I will be doing, so wherever I am now today will set the baseline. I aim to do a review bi-annually.

WHAT I HAVE

Growing your networth bit by bit.

Let me first detail what I have. I'm going to exclude the DBSS that my wife and I bought because we still have a big mortgage to service, which makes our flat more of a liability than an asset.

Cash and Equivalents:

1. Personal Savings - $110,000
2. Joint Savings with Spouse - $50,000
3. Daughter's Savings - $19,000 ($13,000 in her CDA; $6,000 in cash)
4. (Unborn) Son's Savings - $10,000 (Part of this will be used to pay for the delivery expenses in Mar 17)

FD and Equivalents:

1. Dad's CPF - $20,000 (Can be withdrawn with short advance notice as my Dad is past 55 years old. Basically, instead of him withdrawing from his CPF at age 55, I gave him $20k cash. I treat it as a 10 year FD yielding 2.5% p.a.)
2. Mum's CPF - $7,000 (My mum has minimal CPF balances, hence I've decided to contribute to her SA and getting some tax relief in the process. She will receive monthly payout from CPF LIFE when she reaches around age 65 to help offset her living expenses.)

Personal CPF:

1. Ordinary Account - $31,000
2. Special Account - $31,000
3. Medisave Account - $45,000

Investments:

1. Common Stocks - $42,000 (market value on 23 Dec 16)
2. 1 Oz Canadian Silver Maple -  $1,177.50 (50 coins x $23.55)
3. Bonds - $1,000 (market value on 23 Dec 16)

TOTAL OWNED: $367,000

WHAT I OWE

The burden of debt.

The only liability that I have is the $650,000 housing loan that my spouse and I took from HDB. Monthly mortgage is about $2,680. Very substantial in relations to our income.

1. Outstanding Housing Loan - $610,000

TOTAL OWED: $610,000

MY GOALS FOR 2017

So where am I going next? For 2017, I am targeting to sock away $30,000 (inclusive of the $7,000 I will be contributing to my mum's SA) from my salary, and joint savings of $25,000 from our rental income. We are expecting our son in Mar 17, and I hope that the additional expenses will not set me back too far from my target.

How Interest Rate of our CPF OA Account is Calculated and its Repercussions

Yes! I finally found the exact formula used to calculate the interest rate that the balances in our CPF OA accounts earn. This should be public information, but somehow it took me much effort to find this.

THE FORMULA

The legislated floor rate for OA balances is 2.5% per annum. Since the 3-month average of major local banks' interest rates is lower than this, our OA balances will continue to attract interest at a rate of 2.5% p.a. from 1 Jan 17 to 31 Mar 17.

It's enlightening to know that the OA interest rates is calculated based on 80FD:20SD. I've always thought that only fixed deposit rates are considered.

One thing that is not specified here is the tenor of the fixed deposit. Is it a 12-month fixed deposit, or a 24 month one? I went on to the banks' websites to check it out for myself.

As shown in the above image, 12-month fixed deposit rates for DBS is used for the computation. Cross referencing UOB and OCBC websites yielded the same outcome.

So now we know exactly how CPF OA rates are computed, what does it mean for us then?

WHAT IF INTEREST RATES RISES?

If the computed rates should go above the legislated floor rate of 2.5%, the interest rates on our CPF OA will always be slightly lower than that of a 12-month fixed deposit due to the 80FD:20SD formula. This has a few repercussions:

1. Paying your home loan earlier than necessary using cash no longer makes financial sense. As the HDB home loan rate is pegged at 0.1% above CPF OA rates, which in turn will always be slightly lower than the 12-month FD rate due to the 80FD:20SD formula, the interest rates on your HDB home loan will be very similar to that of a 12-month FD. Paying down your home loan using cash quicker than necessary no longer makes sense in this situation. If your excess cash is put into a 12-month fixed deposit, the amount of interest earned from this will be very similar (or even higher if you choose a 36-month FD instead) to the interest you could otherwise have saved if the money is used to pay down the home loan. Interest savings is the main reason why we might want to pay down our mortgage early. If this is negated when CPF OA rates rises above the legislated floor rate, it might be wiser to simply leave our excess cash in a FD account to maintain liquidity.

2. CPF Concessionary Housing Loan will really be concessionary. For the longest time, we wonder how is the home loan offered by HDB concessionary. Home loan interest rates offered by private banks have been lower than the 2.6% that HDB is charging, and it seems like people who took up HDB loan have been taken for a ride. Further, banks have came up with innovative products that peg mortgage rates to fixed deposit rates, not dissimilar to how OA rates is calculated. While this might provide more stability than products pegged to SIBOR or SOR, they aren't actually better than HDB housing loan in a high interest rate environment. Let's take a look at the FHR mortgage provided by POSB.

The FHR-18 home loan rate is calculated by taking the prevailing 18 months SGD fixed deposit rate offered by DBS bank for amounts within $1,000 to $9,999, and adding 1.30% to it. This is inferior to the HDB loan in a few ways:

• The rates for 18-month fixed deposit is likely to be always higher than the 12-month fixed deposit rates used to compute CPF OA interest. For comparison, the current 18-month fixed deposit rate is 0.60%, as opposed to the 12-month rate of 0.35% (for DBS).
• While the home loan provided by POSB adds 1.30% to the FHR18, HDB only adds 0.10% to the CPF OA rate.
• CPF OA rate takes into account savings deposit rate using the formula: 80FD:20SD. Since SD rates are always lower than FD's, the resulting rates will be lower.

What this means is that once the 18-month fixed deposit rate exceeds 1.30%, interest rate of this particular product will be higher than that of HDB concessionary loan. Now we see how HDB Concessionary Loan gets its name.

3. Cash will give you higher risk-free returns than balances in CPF OA accounts. Due to the 80FD:20SD formula used to compute CPF OA rates, balances in OA will yield slightly lower returns compared to a pure 12-month FD. The gap will be even wider if you compare to a 36-month FD. Further, cash in FD affords you greater liquidity than balances in CPF OA. There will really be no reason why you would prefer CPF OA over cash parked in FD.

SO WHAT DOES THIS MEAN TO US?

If you expect interest rates to stay long for another decade, then what we have been used to thinking doesn't change. That is, we should continue to:

• choose to take up home loan from banks instead of from HDB.
• pay down our housing loan using cash as fast as we can to save on interest expense
• use cash to make our monthly mortgage payment if you can afford to, and let your OA balances compound (assuming you are only interested in risk-free instruments, so stocks/REITS or other more risky investments are out of your radar)

However, if you think interest rates will rise soon, then we should start questioning the "conventional wisdoms". We've been in a low interest rates environment for far too long, and we are starting to take it for granted. If rates are to rise, we should do the following:

• choose HDB Concessionary Loan over banks' home loans. 
•  your mortgage loan should stretch out for as long a period of time as HDB is willing to grant you. Interest expense incurred can be easily covered by the interest earned from FD.
• use your OA balances for mortgage repayment as much as you can. Keep your cash for FDs, which are likely to earn you more interests, albeit marginally. 

ADOPTING A BALANCED APPROACH

The above are some actions that we can take under the two extreme scenarios. However, none of us can predict with certainty what the future might look like. Our best bet is to take a balanced approach and hedge our positions. If you have $100k of excess cash to pay down your mortgage, why not just do $50k first, and keep the remainder as cash just in case? There is no right answer to this really, it depends on what you are comfortable with, and where your conviction lies.

What I hope this article will achieve is to remind all of us that, while we are very used to, in fact, too used to a low interest environment, there is this other side of the coin that looks vastly different. When we take up a mortgage loan, choose to pay down our loan, and make voluntary contributions to our CPF accounts, we are committing to decision that cannot be easily unwound. It is thus prudent to consider the merits of our choices under different but entirely plausible circumstances, and thereafter calibrate our decisions accordingly.

Turning a Mistake into Opportunity, and Strengthening My Conviction in the Process!

Building streams of passive income - a hard but worthwhile goal.

THE MISTAKE

One of the biggest financial mistakes I've made is buying a 5-room DBSS flat in Tampines. I paid $722,000 for it, and even after $30,000 first-timer grant from the government, the flat still cost a princely $692,000. It is a lot of money for someone just fresh out of college. I must have been out of my mind when I bought the house, and AK's post (link) doesn't help me feel better.

Well, it's not that we don't have our reasons for buying the flat. As compared to balloting for a BTO, which will have us waiting for 4 years or so, the DBSS was a sale-of-balance exercise and will be ready in a year's time. My wife and I really wanted to start a family while we are young, and so we went ahead with the purchase. I know I know. We could have bought a resale flat in a non-mature estate and that would have cost us a fraction of what we paid for the DBSS, and possibly be able to move in even earlier as well. I concede that there can be no justification strong enough for the purchase, and that's why I started off by admitting that this is a financial mistake.

Have I regretted buying the flat then? I am not sure. I still like the house and the location very much, and I think good things have happened after we moved in. I got a small promotion at work and my wife gave birth to a beautiful daughter. I am a little Pan-Tang this way, and I think the house must have brought us some good luck.

THE OPPORTUNITY

After my wife's maternity leave, she has to return to the workforce because my single income cannot keep up with the mortgage payment and the household expenses. As we wanted to minimize the potential for conflict between ourselves and our parents-in-law, we got a helper to take care of the little girl as well. At first, we tried shuttling between our own house in Tampines and my in-laws' place in Serangoon, but that proved too cumbersome. We reckon that it's not beneficial for the baby in the long term as well, since we always got to wake her up early in the morning, disrupting her sleep. I thus suggested that we moved in with either my parents or my wife's. Of course, my wife chose the latter as expected.

Our house was newly renovated at this point. We only stayed there for about 15 months or so. When I suggested to my wife that we should rent out the house since we won't be staying there for at least a few years, my wife objected to it vehemently. She didn't want the tenant to spoil our furniture etc. I cant blame her for that, since it also took me a bit of self-psycho-ing to convince myself that this is the most sensible thing to do. After all, I really wished to reduce the "damage' that this "mistake" has caused us.

STRENGTHENING MY CONVICTION

It took a few more sessions of coo-ing and molly-coddling before my wife finally relented. Looking back now, it turned out to be a decision that both of us are thankful for making. We are now receiving $2,500 per month in rental income, and I insisted that we save up all of these monies to make early repayments for our mortgage loan. In 2 years' time, assuming that the cost of renting the house is about $5k a year (agent's fees, income tax, delta in property tax, and maintenance), we will be looking at an additional saving of about $50,000. This is amazing, as it takes little to no effort on our part to save this amount. Imagine if we can continue to rent out the house for a total of 5 years, we will be able to bring down our mortgage loan by $125k, and the cost of our house down from $692k to $567k. This figure is closer to what a 5-year-old, 5-room HDB in a mature estate will cost. Sounds less like a mistake now? Definitely!

Besides the financial benefits, this experience gave me a taste of what receiving passive income feels like and strengthen my commitment and desire of building a substantial steam of passive income!