Financial Resolutions for 2011

The time of the year has come again for us to take stock of our lives and look back on what had transpired in the past year. As I celebrate Christmas and the upcoming New Year, I am reminded of my financial commitments and my promise to steer myself towards financial freedom. 2010 has been a somewhat turbulent year for me in terms of my personal life (I will not elaborate), and my finances have also been somewhat strained even though I have managed to maintain my saving habit. As the year draws to a close, I find myself heaving an unconscious sigh of relief now that I can look forward to a brand new year. Hopefully, it is a better one financially and also for me on a personal front.

Here are some of the financial resolutions which I have set down as part of my investment and personal finance review. Some of these resolutions will probably span more than one year, but it is good to write them down now and monitor them as I go along, as distractions and busy-ness may cause me to lose track and forget some of them. Here they are (in no particular order of importance):-

1) Review and fine-tune me and my wife’s insurance policies – After some soul searching and also by reading some good quality posts on Value Buddies forum on insurance policies, I had decided to do a thorough review of mine and make some drastic changes. I met my financial planner in mid-Dec 2010 and decided to surrender some whole life policies, to be replaced with Term policies and a Disability Income policy. Suffice to say that this decision results in short-term pain (there is a loss realized as some of the policies have yet to compound) but would result in a long-term savings (term policies are cheaper and can allow me to invest the difference). Plus, disability income insurance ensures I get a payout should I be unable to perform my job roles and duties and acts as a protection for my wife and child should something impair my ability to work. Some of the changes only take effect next year (as I will be paying the premiums next year), and it is my resolution to get my insurance coverage right once and for all so as to enjoy future peace of mind.

2) Improve budgeting techniques and track cash flows more rigorously – Normally, I prepare a rudimentary budget at the start of every new month in order to budget for any one-off expenses, and to ensure my account has sufficient cash to handle all my GIRO expenses. The payment dates and amounts are fixed and they are all keyed into a spreadsheet to simulate expenses for the entire month. I had discovered in 2010 though, that there were still some months where my credit card bill was higher than expected; though with my current “Pay Myself First” policy this has not affected my savings adversely. However, this means that I will have to be more stringent in reviewing my expenditures and ensuring I do not rack up a bill larger than what I budgeted for. I had thought of implementing a rolling budget for 3 months but will see how tedious this can be before deciding.

3) Increase savings rate from current 50% - My current lifestyle allows me and my wife to save 50% of our take-home salary, and thus far I am pleased with the progress though I must admit that some months are pretty tight when it comes to ad-hoc expenses (e.g. weddings, medical bills, capital expenditure with regards to my child), and have to be supplemented by dividend income. The aim for 2011 is to be able to raise my savings rate from 50% to 55%, and this should be possible if I assume my lifestyle remains unchanged (i.e. simple living without a car) and me and my wife’s salary increases through normal increments. Admittedly, this may be tough but if it cannot be achieved at least the retention of the 50% mark with an increase in salary translates into higher absolute amounts being saved per month.

4) Devote time to researching investment ideas and reading good investment books – This resolution is going to be tough as I am more and more occupied with work commitments as well as family commitments. Family commitments would include, of course, interactions with my family members as well as my in-laws, as well as spending sufficient quality time with my daughter, who is getting more precocious by the day! I realize that serious investment research is not so much difficult to do as it is tedious, and it is a task which consumes copious amounts of time as one needs to pore through annual reports, quarterly filings (financial statements) and corporate announcements. Compiling spreadsheets and adding annotations and footnotes is also very time-consuming, and writing the report from a quantitative and qualitative perspective in order to either justify the purchase or reject the thesis is also another tedious task in itself. My last report on SIAEC stretched up to 40 pages including diagrams, charts and tables; and I believe that if I do undertake extensive and detailed research on another SGX-listed company it may also take up the same amount of time and effort. But I shall endeavour to channel more time to such constructive activities, and I am also prone to using time on the bus or MRT to think through investment issues and gather my thoughts on potential companies to invest in. As for good books, I shall resolve to visit the library more often to borrow books which enhance my knowledge of investing and which can also teach me lessons on stock market lore and history.

5) Finding more ways to increase passive and active income (and sources) – With me and my wife’s jobs being our main source of active income, it is my desire to actively search for other avenues which will bring in cash. Currently, I have a tenant and am drawing some rental income monthly, and am also giving tuition to one student (another source of active income). From my blogging, I am also deriving some minor income from Nuffnang. I resolve to try to look for ways to enhance my active income sources, such as taking on another student (if time permits and does not violate my apportionment of time for my family) and to seek out business opportunities to be a sleeping partner in a business with a robust business model. For passive income, I will endeavour to increase my equity investments’ cost and enhance my yield so as to increase the passive income cash inflows from current levels. As of now, my estimated dividend yield for 2011 is 6% and will bring in about $12,000 of passive income purely through dividends (assuming all dividends remain the same for 2011 as for 2010). However, this increase in yield shall NOT be at the expense of margin of safety, in other words capital preservation shall always be paramount, and will rank ahead of superior yields.

6) Seek out methods to lower expenses and costs – With the impending re-structuring of my insurance policies and the lowering of premiums, this is also one source of cost-cutting for me moving into 2011. Other methods I can think of include looking into ways to reduce tax payable (SRS is not applicable to me as I have not hit 40), reducing unnecessary expenses on dining and leisure, using more discount coupons, bringing my own water out for lunch daily instead of purchasing drinks; and other such small habits which will add up. I also plan to clear up the clutter in my house and uncover any objects which I thought I may have lost, so that I do not have to spend money replacing what I already have. All capital commitments shall be reviewed and unless absolutely necessary, I will not upgrade or replace any items (yes, this includes my 5.5 year old trusty phone which still works very well). If an item can be repaired or re-conditioned, it shall be done instead of buying a new item to replace it. After all, the motto our government likes to promote is reduce, reuse and recycle, right?

7) Reducing my HDB Mortgage Loan – Even though it has been reiterated time and again that an HDB loan is one of the cheapest loans around (at 2.6% per annum interest rate), the fact is that I am still servicing this loan using my CPA OA funds (which accrue interest at 2.5% per annum). This means that technically, I lose out on 0.1% per annum every year. With the new CPF rules stipulating an additional 1% interest on OA balances up to S$20,000, this means that the amount is now accruing interest in excess of 0.9% over my loan interest rate. Therefore, technically, I should retain the loan as long as possible. However, factoring in the low amount of my CPF OA (which has mostly been used for loan servicing with only a 6-month buffer) and the fact that I want to use my higher contribution (I am still below 36) to clear off as much loan as possible, I will be exploring methods to reduce the loan through higher loan instalment payments or lump sum one-off repayments.

8) Seeking higher interest rates on my emergency and opportunity funds – With interest rates hovering at a dismal 0.125% per annum at most major banks for savings accounts, my funds are being eroded at a rate of about -3.275% per annum (with inflation raging at 3.4%). I will thus seek out banks offering more attractive interest rates, such as the CIMB Starsaver Account. Please note that I am NOT advertising for the bank and will receive no commission whatsoever from promoting this account. The account has no minimum fees and as long as you contribute S$500 per month in increments, they will pay 0.8% per annum interest on your balance. The catch is that the account must be open for at least 6 months (or there will be a penalty fee) and the minimum initial deposit is S$5,000. Another issue is that CIMB Bank currently has only two outlets in Singapore – Knightsbridge and Raffles Place; and ATMs are also severely limited in number. However, as I plan to operate this as an Internet-only account using GIRO transfers to effect fund movements, this should not be a problem.

I guess there are probably going to be more “resolutions” which pop up as the year goes by, but I think for now that’s a good laundry list. Part of me was also afraid to get too long-winded, as I know I have the ability to just ramble on (and bore the reader). Perhaps readers can share some of your financial resolutions as well?

My year-end portfolio review and special review will be out either on December 31, 2010 or January 1, 2011 as I still have to crystallize my thoughts and put them on paper. It’s going to be rather lengthy but I hope to be able to explain my own performance to myself so that I can (hopefully) suggest improvements for the new year.