Monday, December 27, 2010

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.

23 comments:

AK71 said...

Hi MW,

In point 6, you mentioned that SRS is not for you because you have yet to hit 40 years of age? Why is that?

I am curious because I have been religiously contributing to SRS since it first started years ago.

Wonder if I am missing something here.

Peng said...

This is a very good post that enlightens everyone! Thank you for sharing that.

kennethso said...

SRS is applicable, and can actually reduce $11475 from your taxable income. Since this money will be used to buy shares anyway to add on to your retirement nest, it is prudent to reduce your tax as much as possible.

As rich dad says, tax is the legal way of taking your money away. Reducing it as much as possible is the way to go.

la papillion said...

Hi mw,

You might want to check out icici bank, which is offering a high rate for fixed D. They are offering 0.1% for savings account too.

http://www.icicibank.com.sg/pb_sa_interestrates.htm

U might want to check it out :)

Lizardo said...

I guess saying that age 40 before using SRS has to do with an estimation that one would be in higher tax bracket then. An SRS portfolio built up from then till retirement would be of a size that when drawn down over a 10 year period should attract taxation that would end up being net beneficial (potentially tax free if <$40,000(?) annually). This is assuming the tax brackets do not changes over time.

On the other hand, if one was at a low tax bracket and invest in SRS at a young age, there is a good chance the SRS portfolio could have grown so big that the tax on the draw down amount annually would end up being more substantive.

Musicwhiz said...

Hi AK71 and Kennethso,

Paiseh, thought I'd read somewhere that tax reliefs can only be accrued from age 40 onwards - not sure where I read it now but it was just at the back of my mind which was why I blogged about it.

Perhaps I need to re-check the facts again, thanks for that.

By the way, I think SRS is only good for people who earn a LOT, so that the tax relief is significant enough to reduce their tax payable. For myself, I already have some parenthood rebate; plus I don't earn that much, so I probably do not have much need for SRS anyway.

Regards,
Musicwhiz

Musicwhiz said...

Hello Peng,

You're most welcome. Thanks for visiting my blog too!

Cheers,
Musicwhiz

Musicwhiz said...

Hello La Papillion,

0.1% for FD? Well, I don't usually park monies in FD as it is not liquid enough for my purposes and there is a penalty for early uplift (forfeit all your interest + bank charges).

In fact, I have opened the CIMB Starsaver Account which pays 0.8% per annum on all savings as long as you have a minimum of $5,000 and add in $500 per month. Maybe you can consider parking some money there too?

Regards,
Musicwhiz

Musicwhiz said...

Hi Lizardo,

Yes I actually had that notion as well, that I would be earning much more when I hit 40 (hopefully!) and thus SRS will contribute more towards reducing my tax bracket.

But as I've told Kennethso and AK71, I will need to read up a little more on this as it is noe so simple.

Thanks again,
Musicwhiz

AK71 said...

Hi MW,

SRS is useful for anyone who pays any income tax at all and not only useful for people who have high salaries. :)

I actually advised someone who makes about $40+K a year to start a SRS account and contribute about $5K to his account every year. He has not paid a cent in income tax since. ;)

My thoughts on SRS and CPF:

SRS and CPF

AK71 said...

Hi MW,

You might be interested in this:

SUPPLEMENTARY RETIREMENT SCHEME

Happy reading. :)

Musicwhiz said...

Hi AK71,

Thanks very much for the link. It's very helpful for me to understand SRS better. Yes I may decide to take it up next year assuming I have sufficient funds to channel there.

Regards,
Musicwhiz

Singapore Man Of Leisure said...

I applaud your conviction to pay off your HDB loan early - despite all the "theoratical" exhortations not to. At the end of the day, it what works best for us in our own journey towards financial freedom.

Not paying down a housing loan and investing the cash flow elsewhere for a higher % return is a form of "carry trade". It's also similar to cancelling whole life and switching to term insurance and investing the difference.

It only works if we can achieve that higher % retun in reality ;)

For me, I prefer not to pay off my housing loan; but accumulate my CPF as an "opportunity fund" to invest in CPF approved stocks or unit trusts - whenever the opportunity presents itself.

Imagine if March 2009 presents itself again, and we have no more "gunpowder"!

Temperament said...

Hi,
For me I think I will use "OPM" (leverage) only when I am running a company.
Other than this I always try to be debt free, if I can.
So all these years I can sleep without worrying about $$$ and job retrenchment.
I have sticked to my preference all these years.
Now, I may not be wealthy compare to people who leveraged a lot and succeeded.
But now, I am doing quite O.K,depending only on at least four "passive incomes."
I think it is because my $$$ works hard for me since day one(no debt).

Musicwhiz said...

Hi Man of Leisure,

Haha thanks for your kind words, and also your view of the carry trade. Yes I agree with what you said, but I want to accumulate more in my CPF OA before using it for index fund investments. Till then, the slog continues to pay down that housing loan!

And since you are a man of leisure, I assume you've attained financial freedom? Hehe...

Regards,
Musicwhiz

Musicwhiz said...

Hi Temperament,

Good to know you can employ leverage to your advantage. I think that's my weak spot, not knowing how to properly use leverage and instead just sticking to good old boring cash. As you say, if you are conservative in using leverage then your risks are much lower, and that's something I have to teach myself in the New Year.

4 types of passive income? Wow. I can probably guess that two of them are rental and dividends, but may I find out what are the remaining two?

Thanks!
Musicwhiz

Temperament said...

Hi Musicwhiz,
Sorry, I have let you misunderstood my thoughts about leverage.
In fact I don't believe in leverage unless I am operating a Company or unless I really need to.
I am very 4Ks.
I believe people paying me interest rather than I pay people.
In this way I build my wealth slowly like the toitoise rather than the hare.
But I can sleep at night.
And I don't have to worry about losing my job.
Actually I am not working anymore.

Passive Income.
I prefer all dividends from stock holdings rather then rental income.
The reasons are dividends return are usually higher. You don't have all the landlord and tenant "emcumbrance".
You can liquidate stocks quite easily.
But then compare to a company, a house is "brick & motar". If it's freehold it will be always there. No one can say the same thing about a company.
So, what to do?
A property is a no option choice.
Can you suggest a better choice for diversification?

After 55, (especially now), do not close your CPFIS account. Treat it like a "bond account". It will pay you minimum 2.5% P/A.
But remember you can also treat it like a "cushion account"-an emergency account.
Hope you can enjoy the same previlege when you reach 55.
Ha! Ha!

The last of course is MSS.
It's earning 4% P/A. now.
Try not to touch it if you have enough of passive income for daily living and "holidays".
(I am not sure I have. Ha! Ha!)
Again, especially now.
The bank is paying us "peanuts" in interest
Please give your feedback for me to look at another angle.

N. B.
By reading your bloggings, I think you are one of the most sincere and humble guys around.
Cheers & thanks for people like you.

Temperament said...

Hi everyone,
A Happy & Properous New Year!
Cheers!

PanzerGrenadier said...

@Kennethso

The reason why I don't like SRS is because of the lock-in feature and if you do early withdrawal, capital gains are taxed which is not the case if you use cash to punt on the market.

@Musicwhiz

Tuition helps to diversify income but is still falls under trading time for money :-)

My blogging income is now much lesser as I don't actively blog as much but focus more on my work as it brings in the most returns for the investment of time and effort (i.e. work hard and work smart!) ;-)

Musicwhiz said...

Hi Temperament,

Oh now I see what you mean by your four passive income sources. You have included CPFIS and also CPF MA and SA as well. Hmm, interesting because at my age I do not see CPF as something I can "touch" yet which is why I do not view it as passive income, though as you mention the interest rate is very attractive @ 2.5% for OA and 4% on the other balances.

I can't suggest a better choice for diversification in terms of asset classes. As with you, I too prefer equities over property and would rather receive dividends as compared to rental income. I concur with you that property requires maintenance and upkeep and this can be onerous and tedious for the landlord. Even though I am renting one room now and enjoying some rental income, I am unlikely to aggressively pursue property as a passive income source unless there is a big crash in the property market. Haha.

Thanks for your compliments! It's my pleasure to be able to share this information and my thoughts on investing and personal finance. I just hope I'd eventually be able to succeed in achieving my financial goals so that I can better relate my journey and success story for others to learn. But for now, it's still a hard slog!

Cheers,
Musicwhiz

Musicwhiz said...

Hi Panzer,

Yes very true about tutoring it's still active and not passive income, but it's something I realize I enjoy doing and part of why I do it is also because I get to interact with teenagers and young adults, which makes me feel young too! Haha. Talk about "cheating" the ageing process by psyching yourself up psychologically and hanging out with the younger crowd....

As for working smart, yes I also try to put in standard hours at work and not do too much overtime, as it is becomes counter-productive cos family time is sacrificed (and forever lost).

Thanks for the advice,

Musicwhiz

Temperament said...

Hi Musicwhiz,
Knowing you from your blogging,
I am 101% you can.
And you definitely do it much earlier than most people(including me).
By that time, don't forget you still have a lot of time to really let down your hair(Enjoy life with your family).
Shalom.

Musicwhiz said...

Hi Temperament,

Thank you for your encouraging words. I will continue to strive for financial freedom, with debt-freedom being my first goal!

Regards,
Musicwhiz