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!

Voluntary Contribution to CPF Special or Retirement Account - Not As Easy Emotionally As I Believed

Save for your retirement and save on taxes - only available in Singapore.inc.

Sometime in June this year, I blogged about how anyone in similar situation as mine can instantly get 7.53% capital gain and a 5.38% yield on capital per annum [link]. It was easy going through the fancy numbers and writing about it, but to actually put the plan to action? Tough. No matter how impressive the plan looks on paper, the idea of locking up my money for the next 15 years and never getting them back in full doesn't really sit well on me emotionally. It feels like I'm "giving away" my money, and who does that?

But as much as I hated that feeling of parting with my hard-saved money, I knew I had to stick to my plan if I am serious about securing my financial future. So I bit my tongue and took the plunge, contributing $200 to my mum's SA a few days later. Yes, a grand total of $200. This is the first time I am using the e-cashier platform on the CPF website; it's only prudent to test it out first. Expectantly, the money appeared in my mum's CPF account a few days later.

Then, here comes the hard bit. I intended to contribute a total of $7000 to my mum's CPF to maximize my tax benefits, which left me with $6800 more to go! Okay well, to some of the higher-income earners out there, maybe this does not sound much to you, but it's sizable and significant to me. You know how sometimes people can conveniently leave a $2 note in a corner of their house and forget about it? $6800 is not that to me. $6800 is an amount I will safe-keep in a strongbox made of 10 cm thick fire-resistant alloy that's hidden in the most concealed corner of my house and drilled to the wall with a pair of 10 cm long screws. Yes, it's exactly that, and now you can see how difficult it is for me to use that money to buy a golden egg that will only hatch 15 years year. In fact, it's so difficult that I actually put the plan on hold for the next 1 month.

In that 1 month, I kept looking for reasons not to follow through with the plan. I could not find one compelling enough.

So again, I bit my tongue for the second time and made a contribution of $2800. The money appeared where it should a few days later.

With $4000 left to go, I sat on the plan yet again. I sat on it so much that I nearly developed piles. Eventually, I got so sick of sitting and the risk of actually developing piles got so high that I went back to biting my now-swollen tongue instead and made my final contribution of $4000.

And now I can rest and prepare myself for the next round of tongue-biting and piles-developing exercise. I hope it gets easier.

Education Savings Plan for My Daughter?

A trustworthy and a very close friend of my wife highly recommended this education savings plan to me. I am inclined to take a closer look at the plan because I know that commissions she earns from selling insurance does not form the bulk of her income. She has other things going on for her. The conflict of interest, though not entirely eliminated, is at least kept to a minimum. If the recommendation was from anyone else, I must admit that I wouldn't give it a second look.

So was I disappointed by the recommendation? Not totally, but I think the financially savvy can do better with a bit more effort and discipline.

The plan is called Manulife Educate. Here are some screenshots of the brochure I received.









Let's take a closer look at the example provided to determine if we are really getting good value.

Nancy's father bought the Manulife Educate policy for her at birth, paying a premium of $3723.20 a year for the first 10 years. The total guaranteed cash benefits received when Nancy turns 21 is $44,000. The estimated bonus at maturity, assuming a return of 4.75% per annum, is $17,668.

In summary:
Total premiums paid: $37,232
Total returns (guaranteed benefits + non-guaranteed bonus): $44,000 + $17,668 = $61,668

Looks good at first, but let's analyse the numbers in two segments: (1) Non-guaranteed Bonus and (2) Guaranteed Benefits.

Non-Guaranteed Bonus

Non-guaranteed bonus is, well, not guaranteed. If we can set-up an imaginary portfolio that tracks the performance of the funds that the policy buys into, how much do we have to put into the portfolio in order to have $17,668 (assuming 4.75% annual returns) after 21 years? I did some calculations using a spreadsheet, and the result is: $814.30.



In other words, if we can save $814.30 every year, and generate 4.75% per annum on that savings, we will have $17,667.58 in 21 years. Note that we are not discussing whether 4.75% is an achievable target, nor are we analysing which investment product gives you the best chance of achieving this return. We are merely determining the amount that we need to put aside every year, channel the money into somewhere that yields the same return, so as to have the equivalent of the non-guaranteed bonus offered by the policy.

Guaranteed Benefits

If we set aside $814.30 every year to try and get the non-guaranteed bonus, we will have ($3723.20 - $814.30) $2908.90 left. With this amount every year, what would be the required rate of return for us to receive the same amount of guaranteed cash benefits offered by the policy?



The answer is, 2.89%.

Meaning to say, the policy offers you 2.89% return per annum for the guaranteed benefit. Is this a good enough return for tying up your money for 15-20 years? Would you put your money into a 15-20 year fixed deposit for 2.89% p.a.?

Alternatives

To beat 2.89% p.a. is not hard if you invest in a low-cost STI ETF for the long term. However, that is hardly a close alternative because of the risk involved.

A closer alternative to the policy is our Child Development Account (CDA) and Post-Secondary Education Account (PSEA). The interest rate for monies in CDA is currently at 2% p.a. (for balances up to a maximum of $36k for OCBC), while that for the PSEA is pegged to the CPF OA rates (currently at 2.5% p.a.). The money in the CDA account can be used to pay for approved expenses, so it's not totally illiquid. When your child turns 12, unused money in CDA will be transferred to PSEA, which can then be used to pay for post-secondary education expenses.

So how does this alternative compares to the Manulife Educate policy? Again, I ran some numbers and found out that we will end up with about $4000 lesser. That's about $200 lesser yearly.



As with most things, there are always the good and the bad. Below is a summary:



If I just starting out in my career, I would probably appreciate some liquidity in the first few years of my child's life. CDA-PSEA will suit my needs better.

If I aspire to send my child for overseas education, I will prefer to receive all benefits in cash. Manulife Educate will then be my choice.

If I think that interest rates will rise, even if I know I will be worse off by $4000, I might still decide to take my chances and buy into something with returns that better track the risk-free interest rates. In this case, CDA-PSEA is better.

If I would rather not manage that $814.30 every year to try and get the non-guaranteed bonus offered by the policy, then Manulife Educate will work for me. I will just leave it to the "experts" to manage my money. [Like AK71, I don't believe in mutual funds and unit trusts due to the high expense ratio. But I believe for some, these might still be their best option.]

There is no easy option. What I've done is to break down the policy and analyse it in greater detail. Hopefully this helps us in our decision-making.

*The plan provides the Life Insured with coverage for death and terminal illness. I don't currently have the details to this coverage, hence I've left it out in this analysis, Depending on the coverage, the policy might become more or less attractive.

Gold to Monetary Base Ratio and other Interesting Charts

Chart showing the 100 year history of gold prices. From the chart alone, gold price looks overvalued, but is it really?

Just before Brexit, I almost bought gold at SGD 1746 on SilverBullion. I created a new account, added one ounce of Canadian Gold Maple Leaf into my shopping cart, filled in my address and all the other details required to place an order, but backed-off at the last stage.

Well, we all know what happened after Brexit. Gold price had a good run-up amidst the uncertainties, and I missed my chance of getting my bullion at a good price. At the time of this post, one ounce of Canadian Gold Maple Leaf is more than SGD 1900 already.

I actually wanted to buy gold in December last year, but I chose to buy silver Maple Leaf instead. Silver prices at that time reached 2008 level. That simply doesn't make sense to me. We all know how much money printing there was since the GFC, so how can silver prices not go up given the huge increase in monetary base? Same for gold as well, but I was more compelled to buy silver. I bought a total of 50 ounces of silver Canadian Maple Leaf from Bullionstar at about SGD 23 each.

So anyway, back to the main reason for this post. Post-Brexit, Dow Jones Index (DJI) immediately plunged 610 points, or 3.1% to close at 17,400. The market continued to be jittered by the unexpected turn of events and shed another 1.5% on the second session. After which, stocks made a u-turn. Somehow, somewhat, the uncertainties subsided, and suddenly everyone started to think that Brexit is actually good for the economy. I don't know what caused the u-turn, or if there was an invisible hand orchestrating all these, but here is my observation:

When the market plunged in the two trading sessions following Brexit, gold price shot up by about SGD 100 per ounce. This did not came as a surprise because during uncertain times, gold is the safe haven. Investors were selling British Pounds to buy USD and Gold. But, when DJI recovered subsequently to hit 18,000 points, gold prices remained stable. This is not usual. DJI and gold prices are usually inversely related.

Well, in the short term, perhaps this is nothing out of the ordinary. Perhaps there were still many people cashing out their British Pounds and buying gold, which explains the sustained demand, and hence price of gold. I don't want to guess why all these happened because admittedly, I have no clue, but my hunch tells me that something is brewing. Perhaps this is the last rally before the storm. Or so I wish.

That observation prompted me to look for some charts to verify my perception of the inverse relationship of DJI and gold prices. I chanced upon marotrends.net, which boasts of many interesting charts. Here's a snapshot of the homepage.

A snapshot of the different types of charts offered by macrotrends.net.

What caught my eyes are these two charts:

1. Fed Balance Sheet VS Gold Price

A chart showing the relationship between the Fed Balance Sheet and Gold Prices, taken from macrotrends.net. Looks like there is an unlikely divergent uh?

2. Gold to Monetary Base Ratio

A chart showing the Gold to Monetary Base Ratio, taken from macrotrends.net. We are at a century-low.

In the first chart, we can see that percentage gold price increase (referencing gold price at 2004) tends to track the monthly percentage growth of the Federal Reserves balance sheet from 2004 up till around 2013. After which, there is a divergence. Fed Reserves balance sheet continues to climb, but gold price actually dropped. If history is a good teacher, sooner or later, the gap between the orange line and the blue line has to narrow. This can happen in three ways: (1) Fed Reserve balance sheet got to come down, (2) gold price has to go up, or (3) both. How can the Fed's balance sheet come down though? Let's take a closer look.

Just like any other balance sheet, Fed's balance sheet comprises of assets and liabilities. When the Fed buys something, that automatically becomes its assets. Traditionally, the assets that Fed holds in its balance sheets are high quality government securities and the likes. However, to save the economy during the last GFC, the Fed embark on a series of Quantitative Easings (QEs), which is just a fancy term for printing money. Well, most of these money doesn't actually end up in the pockets of the citizens as physical notes. The Fed merely bought over massive amount of toxic assets that threatened to bankrupt the largest of financial institutions. These actions means that a good proportion of the assets held by the Fed are low quality assets that actually no one wants. To reduce the Fed's balance sheet, Fed has to sell their assets. But, how much of their assets can actually be sold?

If the Fed's balance sheet can't be reduced easily, how else can the gap between the orange line and blue line converge then?

Then we have the second chart showing the Gold to Monetary Base ratio. We are at a 100 year low, meaning that gold is very lowly-priced now relatively to the amount of currencies slushing around the the market. Even with gold prices having been already risen quite substantially compared to 2008 levels, the rise is nothing compared to the increase in monetary base. Will we continue to hit new lows? My guess is as good as yours.

Till date, I am still not vested in gold bullion though. Always missing the lows and refusing to chase the run-up. It's just hard psychologically to buy something that cost 150 dollar cheaper just a few days ago. Maybe if viewing gold as a form of insurance is the right perspective to adopt, I should not be too overly concerned with short term fluctuations.

CPF Life - Basic or Standard Plan? (Part 1)

Do you know that there are two different CPF LIFE Plans that you can choose from - LIFE Standard Plan and LIFE Basic Plan? The former gives you a higher monthly payout but a lower bequest for your beneficiaries, while the latter gives you a lower monthly payout but leaves more behind for your loved ones. Below is an illustration taken from CPF website:

Figure 1: LIFE Standard Plan gives you higher monthly payouts, but leaves behind lower amount of bequests for your beneficiaries. The opposite is true for LIFE Basic Plan.

While the illustration is factually correct, it leaves out tremendous amount of information essential for decision-making. There are many more considerations than just the monthly payout and the size of the bequest. Even if these are the only two factors, we still need to get a better sensing of the relevant figures to make more informed decisions.

This Straits Times article published on the 23 Aug 15 provided some useless (yes, this is not a typo) figures for comparison of the two plans [link]. It's useless because of one important change - members only need to choose their LIFE Plan when they wish to start their monthly payout. This change applies to CPF members who turned 55 on or after 1 Jul 15. 

Figure 2: Screenshot of the Straits Times article on the comparison of the two CPF LIFE Plans available. 

The article was published after the change. The author also acknowledged this change in the beginning of the article, so he/she must be aware of it already. However, this is where the major discrepancy is: the author did not factor this change into his/her subsequent analyses.

As enclosed within the purple box in Figure 2 above, the figures in the article are supposed to illustrate the monthly payout and bequest for a male who turned 55 on July 1. However, on closer look, the figures totally ignore the change mentioned earlier! For a male who turned 55 on July 1, 2015, he only needs to make his choice when he wishes to start his monthly pay-out, which is when he turns 65 at the very earliest. This means that between 55 and 65, the money will stay in his Retirement Account (RA) to earn interest. The major giveaway is at age 65. If the member is to pass on at 65, just before he starts receiving his monthly payout, the bequest amount should be the same for both plans because the money in his RA has not yet been (or just been) used to pay for the CPF LIFE premium. This is clearly not the case for the illustration used by Straits Times. I think the author must have used the figure for someone who turned 55 before 1 Jul 2015. For this group of people, they have to make a choice at 55, which is also when the first deduction up to the Basic Retirement Sum of $80,500 is made. Figure 3 below explains this. The scenario provided by the Straits Times article is clearly not for those who turned 55 on 1 July 15.

Figure 3: Deductions of premiums for CPF LIFE Standard Plan for members who turn 55 before 1 Jul 2015.

For this group of people who turned 55 before 1 Jul 15, the interest earned on the money used to pay for the CPF LIFE premiums will not be refunded upon the death of the member. This means that the first deduction of up to $80,500 at age 55 will not earn "refundable" interest for the next ten years. This explains the lower bequest amount at 65 for the LIFE Standard Plan.

I am appalled by this piece of misinformation by our news publisher. With such a large reader base, such mistake can cause many readers to make the wrong choice. I almost gave the wrong advice to my dad! Luckily, I didn't take the numbers presented at face value, and went on to read up more on CPF website.

I urge all of you who have vested interest in the CPF LIFE to read up more on CPF websites to further your understanding, instead of relying solely on news publications. If Straits Times can make such a mistake, CPF can too, but we will have a stronger case to fight for justice if the mistake is made by the latter. 

For those turning 55 on or after 1 July 2015, Figure 4 below tells you how the premiums are being paid instead. This is taken from the CPF website. 

Figure 4: Screenshot from CPF website showing the difference in premium payments for the two different CPF LIFE Plans.

I first started out with this post hoping to do some analyses on the figures provided by the Straits Times. Now that we know they are not relevant anymore, I will have to try and derive some figures myself. I am quite sure I don't have all the information to calculate the figures accurately, but I hope to be able to make some guesstimates. 

That will have to be in the next post.

Meanwhile, I hope this post helps you to avoid making a false decision because of the misinformation provided by the Straits Times. 

Cash Is King, Until It No Longer Is

Allow me to share with you a (true) story.

My paternal grandparents were born in the 1920s/1930s. They owned a small piece of land in Pulau Tekong where they cultivated rubber trees, grew vegetables, reared live stocks like chickens and pigs et cetera. As you all know, the island is now exclusively used for military training. My grandparents were displaced when that happened, but not without being compensated with a 3-room HDB flat right beside Tampines Mall and some money. Exactly how much, I have no idea, but at one point, my granddad had over a $100k.

At that time, that much money could get you a freehold landed property. But nope, my granddad decided that keeping it in the bank is the way to go. The outcome needs no elaboration. 

While cash is king, we must remember that we are actually losing money every year if the returns on that money is lower than inflation. My portfolio consists of mainly cash now, as I wait patiently for the opportunity to pick up great companies on the cheap. I don't know when that will come, so meanwhile, the best I can do is to find the highest yielding place to park my money without taking on too much risk nor losing too much liquidity. Not that I have got tons of money though, as a bulk of my savings were spent on wedding, down-payment for my property, renovation & furnishing, having a kid, and all the other things that an ordinary, young married adult will need to spend on. What's left, I park them in the following places while waiting for the right time and opportunity.

1. OCBC 360

Criteria to fulfill to earn bonus interest on balances of up to $60k in OCBC 360 account. 

This is my salary crediting account, and it yields me 1.25% (1.2% bonus interest + 0.05% base rate) without me doing anything else. Of course, the other low-hanging fruit is making 3 online bill payments to earn an additional 0.5%. I am also usually able to spend $500 on my OCBC cards to earn the other 0.5%, yielding me a total of 2.25%. However, I prioritise my UOB credit card spend before OCBC's because UOB gives me a higher yield on their UOB ONE account, which brings me to the next point.

2. UOB ONE

Criteria to fulfill to earn bonus interest on balances of up to $50k in UOB ONE account. Note that unlike OCBC 360, spending of $500 on UOB credit card is a must for the account to qualify for any bonus interest at all.

I strictly maintain $50k in this account, nothing more, nothing less, due to the tiered structure of its interest rates. I've already set up three GIRO bill payments, so it only makes sense for me to prioritise spending $500 with my UOB ONE Card. If I don't, I am back to earning the base rate for that month. If I do, the GIRO deductions will bump up the effective interest rates to 2.43% on the $50k balance. Spending $500 on my UOB credit card also helps me in getting higher interest rates in my 3rd account - Bank of China's SmartSaver account.

3. BOC SmartSaver

Criteria to fulfill to earn bonus interest on balances of up to $60k in BOC SmartSaver account.

I maintain a minimum of $50k in this account, so my base interest is 0.40%. Together with the 3 bill payments, the account already yields me 1%. I forego the 1% from crediting my salary into this account because well, I only have 1 income source, and OCBC gives me 1.2% for that. The last criteria, $500 credit/debit card spend to give an additional 1.55% is the real deal. I am going to let you in on a little secret of mine; this mighty combo I believe many of you will be thrilled to find out. Ready? Here it goes: 

The Bank of China Great Wall International Debit Card that is issued together with the SmartSaver account can be used to pay for another credit card bill. This IS the real deal. I use this as the perfect combo with UOB ONE Card. This means that I only need to spend $500 a month with UOB ONE card, and then use BOC debit card to pay for that credit card bill. Voila! I kill two birds with one stone. It's hard to chalk up so much credit card spend every month, so this works like a charm, giving me an additional 1.55% interest on the balance in this account to yield a total effective interest of 2.55%.

So if you have $170k cash, and are thinking hard about making them work harder for you, the above solution might work for you. With just $500 credit card spend, OCBC will give you 1.75%, UOB 2.43%, and BOC 2.55%. If you can chalk up $1000 credit card spend a month, OCBC can yield an additional 0.5% to make 2.25%. Not worth forcing it just for that 0.5%, but on months when you have that extra expense coming in, why not, right?

Note that bill payment is never a concern because you can simply pay $5 to the same three bills that are GIRO-ed from UOB ONE account. Do this using your OCBC and BOC accounts every month, and the outstanding amount will be GIRO-ed from UOB ONE account.

What about you? Where do you park your warchest to maximise the return while you wait?

7.53% Instant Capital Gain + 5.38% Yield on Capital

Is there an investment that gives you an instant 7.53% capital gain + a minimum yield on capital of at least 5.38% for the next 15 years? Sounds too good to be true? Read on to find out more!

I haven't given much thought to this excellent long term "investment" previously, but ASSI's blog post on "How Younger Members can Get 6% per year from the CPF" inspired me to dig deeper and think harder. Yes, like what most of you seasoned personal-finance gurus would have figured out already, this investment is our CPF.

Before I came across the article, I only thought about contributing to my own CPF to get the 4%  that our Special Account (SA) is yielding. But because I am 4 decades away from retirement, have a huge mortgage to service, a 10-month-old daughter to feed, and 2 aging parents who aren't quite prepared for their own retirement, I put off the idea.

But what if there is a new variety of seeds that will start to bear fruits in 15 years time? What if there is a 7% early bird discount now? Will I buy those seeds to plant them today? I am very tempted to.

Let me first explain how I got the numbers.

If I make a cash top-up to my loved ones' SA, I get to enjoy tax relief of up to $7000 per calendar year. In my latest year of assessment, after all the reliefs I qualify for, my chargeable income is between $40k to $80k. This means that if I were to contribute $7000 to my mum's SA, I will pay $490 lesser in tax (source: IRAS). Essentially, this is like getting $490 for free from the government if I put in $6510, or a 5.38% gain in capital immediately (490/6510 x 100%). Got freebies who don't want???  
*do note that any contribution above the Full Retirement Sum is not eligible for tax reliefs. My mum has (only) $12k (after checking, I realised she only has 2k, but nevermind, we can assume she has 12k for the subsequent illustrations in this post.) in her CPF, so I don't have to worry about that.

Tax relief for the giver? It's like free money from the government!

What about the 5.38% yield on capital that I purported above then? If you look at the footnote# under the table in the print screen above, the first combined balances of up to $60k attracts an additional 1% interest. This means that for my mum who just turned 50 this year, balances in her SA will earn 4+1 = 5%! But remember my capital outlay was only $6510? That gives me a yield on capital of 5.38% (350/6510 x 100%). Okay, I am really just playing with numbers here, but it really does sound like a good deal, doesn't it? Moreover, the interest rates will be bumped up to 6% for the first $30k when she turns 55.

So what's the game plan?

Given that I only qualify for 7% discount every year on the first $7000, with the likelihood of the discount getting bigger in the years ahead (pay rise, yay!), I am inclined to spread out my contribution.

Let's run some numbers.

8th Wonder of the World, indeed.

Let's assume that my mum has $12k to begin with, and I start my yearly contribution of $7k just before she turns 51. This will last for 5 years. Thereafter, I will not contribute anymore.

Total capital outlay (after tax relief): $12,000 + ($6510 x 5) = $44,550
Balance at beginning of 65 (after compounding for 14 times) = $89,495.29

Not bad. Almost hitting the Basic Retirement Sum of $93,215 for her cohort.

How much can she expect to get every month?

Referencing the Straits Times article published on 23 Aug, 2015, the amount one can expect to receive per month on the Basic Life plan is about $650. (I will talk about why I prefer Basic Plan over Standard Plan in another post) This is based on $80,500 being set aside at age 55. I have no idea how the smarties in CPF or MOF came up with this numbers, and I concede that I am not half as smart as them. So how? How can a layman like me estimate the amount that my mum can expect to receive?

Let's try two methods:

First Method: Proportionality. 
If $80,500 set aside at 55 results in about $650 a month from 65 onwards, $53,265 will result in...

(53,265/80,500) x 650 = $430

Second Method: Use the tools provided by CPF here, but tweak the inputs.
The tool only works for those who are between their payout eligibility age and 80 years old. For my mum's case, the tool doesn't work, but I can cheat the system a little to get an estimation.

Since we've already computed the amount she will have in her RA when she hit 65, I will simply assume that she has already hit 65 this year (means the year of birth is in 1951). The amount in her RA, I will input as $89,495 as computed.

Next, the tool will ask you for your annual assessable income and annual property value. This is to determine if you qualify for CPF Life Bonus. My mum does not, so I chose the highest range for both so no bonus will be included in the calculation.

Nope, my mum doesn't qualify for CPF Life Bonus.

The result? She will receive about $444 a month. Not too far off from my first method, so I think it's rather safe to assume that she will receive slightly more than $400 monthly from 65 onwards.

Is this a good amount? I think it's not too shabby. It's not enough for sure, but it can certainly help to ease the financial burden a little.

What do you think? Are any of your parents without much money in their CPF? Maybe this might work out for you too.

Expense Update - May 16

So I started keeping track of my expenses from 10 May. I've been wanting to do this for the longest time, but every time I felt compelled to start, I always managed to rationalise to myself that it is not worth the effort. I finally managed to take the first step on 10th May.

Because I don't receive my salary on the 1st of each month, my financial month runs from 10th to 9th of the month. It makes life a bit harder, but it works for me.

Let's start with my own personal expenses.

---

Since this is my first post, I will list down my fixed expenses.

1. Joint Account Contribution: $1300
2. Endowment Plan: $198
3. Parents' Allowance: $150
4. Savings for Daughter: $50
5. Investments for Daughter: $100
6. Auto Insurance: $138.26
7. Road Tax: $50
8. Medical Insurance: $50

The first item on the list is actually a joint account I maintain with my wife. Both of us each contribute $1300 to this account to pay for "joint" expenses. I will detail our "joint" expenses in the next section.

Now, let's examine my variable expenses for May:

Food - $100. Note that meals out with my wife are charged under our joint account. This segment only accounts for the meals I take when I am not with her, i.e. usually lunches on workdays.

Car - $711.61. Apart from the auto insurance and road tax, which are accounted for under fixed expense, there are other running costs associated with car ownership. This month, I spent $400 on tyre change, $150 on cashcard top-up, and the remaining on petrol. $150 in my cashcard will probably last me more than a month.

Bills and Misc - $49. Mobile phone bill came up to $44, while an additional $5 was spent on haircut.

Discretionary Spending - $450. This is where I lost control this month. I spent $450 on LEGO sets. Bad bad. There are usually a few sets that I will be eyeing, but will put off buying them until I've got enough to buy to chalk up $600. I need this minimum amount to be charged to my StanChart Singpost Credit Card in order to get the 7% cash rebate for online spending. This month, the stars are aligned: weaker USD, 20% discount on a set I've been eyeing, et cetera. I spent $450 on sets that I want, and another $300 (tracked under joint expense) on a set that both my missus and I want. =/

In summary...

Total Fixed Personal Expenses: $2036.26

Total Variable Personal Expenses: $1310.61

Total Personal Expenses: $3346.87

---

Let's examine our fixed joint expenses:

1. Household Contribution (given to parents as we stay with them): $500
2. Maid's Salary: $580
3. Maid's Levy: $60
4. Conservancy: $90
5. Property Tax: $108.14
6. Medical Insurance for Daughter: $30
7. Utilities: ~$200
8. Mortage: $2680 (CPF OA)

Our mortgage is a bomb, I know. It's one of the financial mistakes we made, but no regrets really. More on this in another post.

Our variable joint expenses:

Food - $173.15. This didn't come up too badly. We are eating out a lot lesser now that we have a baby.

Baby's Stuff - $62.90. $50 for a booster seat and $12.90 for a cardigan.

Gifts - $272. $250 on wedding angpows and $22 on fruits for grandparents.

Discretionary Spending - $300. LEGO. Nuff' said.

In summary...

Total Fixed Joint Expenses: $1568.14 + $2680 (CPF)

Total Variable Joint Expenses: $808.05

Total Joint Expenses: $2376.19 + $2680 (CPF)

---

This is the first time I am listing down our expenses like this.

Scary sight.