Wednesday, December 07, 2016

Where did all my savings go?

I started tallying the past records of all my savings recently. My aim is to find out where all my hard earned savings go to. Did I 'waste' a lot of my life energy, which is captured in the form of savings, into frivolous stuff? It's a pity that I only started tracking seriously in 2008. I started work around mid 2003, so those 5 years until 2007 are like my lost years

The breakdown over the years

2008: $53k
2009: $50k
2010: $50k
2011: $53k
2012: $29k
2013: $25k
2014: $68k
2015: $64k
2016: $67k ?

I haven't close 2016 yet as there's still some weeks left before the year is up, so that's just an estimated figure. To sum it up, I've accumulated about $460k worth of savings over 9 years, ignoring the lost years from 2003 to 2007 where there's no data available. It averages out to be about $51k savings every year. There are good years and there are bad years, and here is the record that I've made in the most recent 9 years.

I checked back on my past records in order to find out more about the lost years between 2003 and 2007. I should have about $100k to $120k accumulated over about 4.5 years, since I started work in mid 2003. That means I save about $25k per year during that period.

How did I double my savings rate?

On reflection, I think the best thing I did was to buy an freaking expensive whole life plan. I wasn't financially literate back then and I was like a sheep out for slaughter. If I remember, the plan will cost me about $3k every month to service, and that makes me wake up to the fact that I might be scammed. I sucked it up and took it upon myself to find out more about investments, and this lead to that, and eventually I entered the stock market to pay even more tuition fees. It's silly how I resented the fact that I have duped myself to buy such an expensive whole life plan, but years after that incident, it turned out to be one of the most important inflection point in my personal finance. It's the pain of having been scammed that made me push through the hard work to read up all the stuff needed to understand all about finance.

The second thing was that I started tracking my expenses down to the cent. In the past, I had used the old school method of keying expenses in a notebook in my mobile phone, then transfer the data over to my desktop spreadsheet. In 2012/13, I switched to YNAB and never looked back again. An initial experiment to just track my expenses fully for 1 month lead to a start of a habit that lasted for nearly 10 years now. The thing about tracking expenses to this level of detail, is that it leaves no room for mental accounting. It is what it is. I make it a point to reflect upon the data I've collected every end of the year (like what I'm doing right now), and that lead me to believe that there's only so much room to cut expenses, and so I started looking at a lot more ways to squeeze in more work to earn a higher income. This lead to a series of actions to slot in more work and up my game.

Where did all my savings go to?

Adding up all my savings in my 13 years of work, it'll amount to $580k of my life energy. Not a small amount! It was quite a shock to see the figures like that. I'll show you roughly my breakdown below. The disclaimer is that it's really a rough figure, and while I tried my best to trace out what data I can especially during those years without proper record, it's highly possible that I could have missed out a few details. My aim is just to see where my hard earned savings went to.

1. About 41% goes to my portfolio, warchest and emergency cash
2. About 14% goes to cpf
3. Another 18% goes to renovation and furnishing of my flat
4. Home related expenses like downpayment and option takes up 9%
5. 6% is lost away plus bad debts (don't ask me that)
6. Down payment of cars takes about 4% (monthly expenses and installments is under expenses)
7. Another 4% is for partial capital payment for HDB to reduce the loan quantum
8. The last 4% is just a big fat unknown.

I add up all those categories as best as I can, and it more or less tallies with the $580k, so it's fully accounted for. The 4% big fat unknown could be things like headphones, guitars, games, computers, handphones and other stuff that I now classify under 'play fund'. These are the assets that I didn't include in my networth calculation because realistically, nobody will really buy them. It should also include money spent on vacation, also one of those things you use your savings on, but never really reflected in the asset part of networth calculation.

Is that okay? I guess so. I realize I don't have a lot of bad habits financially, so a bulk of my savings is invested in assets. Housing is one big part where I might have gone a little overboard, but it's also a place where I spent a lot of my time in.

What's the difference between expenses and allocating your savings?

Savings = Income - Expenses. We save so that we can use the money in the future, for fulfillment of both short and long term goals. Some people might save up for that nice bag they wanted to get for themselves, others might be saving up for that dream car. You can also save for retirement, so that you have a sum of money to draw down years down the road. Something one off. Expenses are usually more immediate and is chronic, so things like food, bills, even insurance premiums, pocket money for parents, all these are classified under expenses for me. You can even see expenses as spending from your cash flow while allocating your savings is more like spending from your balance sheet. I'm not an accountant, but I think the concept is similar to capitalised cost. I stand to be corrected.

I generally use my savings to advance my goals in life. If I'm a company, savings are like my retained earnings. You distribute some as dividends to reward yourself, but not excessively, so that you can continue to do the same good work you've been doing. Some of it you use it to buy other assets so that it can generate future earnings. If you don't know where your retained earnings go to, then you're not utilizing it the best it should be. I will use my savings to purchase financial assets so that it can continue to generate income for me to prepare for the eventuality where my human assets can no longer generate income for me.

That's my goal and I use my savings to advance it. And that's how I intend to do so until the goal is reached.

Could I have done things differently?

My wife saw me typing this and asked me what I could have done differently. I don't usually think things like that, but I gave a few ways:

1. I would have gotten married as soon as possible and get a flat as soon as I can

The rationale is that housing prices kept going up and it disadvantaged conservative people like me. If I got into a property without ensuring a certain amount of savings first, I could have been debt free by now. My flat could have been cheaper by 100k to 200k if I had bought it a few year earlier. But we also see cases where couples getting married when both are not ready or their mindset is not aligned, so they break up before they even get the keys to their flat. I don't think I would advice anyone to just get married and get a property asap - it's plain irresponsible. My wife added that we might end up in divorce if we married any earlier, because she is not the same person back then and I'm not the same person right now.

2. Start gearing up when I start work in 2003 to reduce/remove that lost years

I took 4.5 yrs to save 100k. Thereafter, it only took me about 2 years on average to reach the same amount. Why? I was putting so much limiting beliefs on myself that I have to break it one by one. That first 100k is the hardest amount I've ever saved because I've to learn how to have that mindset through trial and error. At the end of the research needed to write this post, I am thinking how great it was if I had shortened that journey. Imagine I could have saved another 150k to 200k if I had started tracking my expenses way way earlier! This is hindsight analysis and is just pure fantasy, I know, but one couldn't help but wonder. I alone knew that certain mindset is honed by battle, and even if there is a mentor to guide me on how to gear up my work, I might have a million excuses to avoid taking action. The teacher might be there, but the student is not ready to receive, so that's that.

In summary

I'm not here to preach about savings. I already know that if the reader is not ready, he won't even be here to read this. Or it wouldn't have that eureka moment where all things clicked inside you. I'm really doing it for myself, as a chronicle of what I had done and/or what I should have done. I have my own family with a kid coming soon, and I'm doing pretty decently in a job that I really like, have a roof over my hand, have a lao pok (old and used) car to drive around, and also building up my portfolio to generate dividend income for me. There's a tremendous sense of satisfaction and achievement in seeing the long term plans fall into place through careful planning, hard work and meticulous use of my savings.

I suspect that sense of gratitude and happiness is something I can never achieve by using that savings to buy any material things. This is who I am, and this is what I'm going to be. Working hard to save up, one year at a time.

Sunday, December 04, 2016

Financial competition

Lim, Tan and Lee sat around the marble table of the kopi-thiam. They are classmates that had not met each other for the past 30 years, so naturally they had plenty to share. The conversation flowed along, interrupted only by the periodic crunch of the kaya butter toasts and the sipping of kopi-o in the quaint porcelain cups, until it came to the topic about their children.

Tan started it first when he said that his son is very capable. He is earning $100k per year at age 25 as a banker. Lim said that was nothing to boast about. His daughter is already saving $100k per year at age 22 as a property agent.

Both of them turned their heads towards Lee, fully expecting him to top their stories. Lee looked back at them, and gently put down his cup of kopi-o back to its saucer. The porcelain tinkled like a bell, as if reminding the audience to keep quiet while the curtains are rolled back and the show is about to start.

Lee did not disappoint. He said that his son gave him a million dollars just after reaching 21 yrs old.

Wow, the two of them exclaimed, unable momentarily to process all the sound that they had just heard. Tan, who started all this, naturally asked how Lee's son manage to earn so much money at such a young age?

Lee's faced was sombre.

He said that his son bought an insurance and jumped off the building.

Friday, December 02, 2016

Networth updates in 2016

Usually I'll do a networth update around end of the year, so with few blinks of an eye, we're here again after 1 yr. This year is a fantastic year for me, but I'll talk more about that when I reflect on the year 2016 and how grateful I am for the ups and also the downs. The last time I did my networth was back in 7th Dec, 2015, here.

There are so many ways to calculate networth, but I've always done my this way. It's assets minus liabilities. So, the assets part include:

1. Cash in my wallet
2. All the money in my various bank accounts
3. Cash holdings under mattress and milo tins at home
4. Money in my paypal account
5. All the money in the 3 accounts in my CPF
6. Money market fund account
7. Marked to market investment portfolios
8. Surrender cash value of whole life insurance plans

I do not include the value of my 5 room flat that I'm currently staying in, and also the value of the family car that I own.

Under liabilities:

1. Credit card bills
2. My portion of the HDB mortgage loan (total remaining loan amount divided by 2)

This year I finished the car loan of my previous car and paid up in full for my next car, so I do not have any existing car loans, unlike last year.

So, here are the tabulations:

2014: Assets: $226k, Liabilities: $220k, Networth: $6k
2015: Assets: $295k, Liabilities: $207k, Networth: $87k
2016: Assets: $351k, Liabilities: $188k, Networth: $163k

Compared to 2015, I increased by assets by about 56k. The increase in assets mainly comes from work. A tiny percentage comes from dividends and market returns of my portfolio. This is pretty in line with what I had planned, which is to add a minimum of 50k to my assets every year.

I had also decreased by liabilities by 19k. The bigger drop in liabilities is likely due to my car loan, which I had entirely paid up for. If only this is for my flat!

With that, my networth increased by 76k, which is slightly bigger than expected. This figure doesn't mean much for me, so it's just a number that tells me I'm on the right track. It had been a long while since my networth was nearly 0 in 2014!

The projection for 2017 is that my networth will increase by another 60-70k, so that will bring my networth to be higher than my liabilities. That means my assets will be twice that of my liabilities by next year. Since my liabilities consists mainly of my mortgage loan divided by 2, that means I can choose to cash out everything and pay off my HDB entirely if I chose to. But of course, I won't do that. It's still a thought though, haha

Friday, November 25, 2016

ROE vs PB of regional banks

Just out of curiosity, I did a study on the ROE vs PB ratio for the different banks across the region. I fully understand that it's not a good apples to apples comparison because different banks have different regulations and capital requirements, and also different rules to recognise profits, bad debts and so on. But it's still good to see how the banks fare on these two metrics across the board.

All the figures are taken from the bestest platform to happen onto me this year: Investingnote. I don't just use them for the charts, but if you click on the tab 'Fundamentals', you can also get a quick and dirty ratios that are used commonly. They just don't have ROE, so I have to use a quicker and dirtier way to get my ROE by taking two ratios that they do have in the platform, namely Price to Book and Rolling PE. I just took the Rolling PE divided by the Price to book to get a rough ROE. For those companies that I can't find it from Investingnote, I used Yahoo finance to get the figures I want.

Don't trust me, I could have keyed in wrongly though.

Anyway, here's the scatter plot:

First look is that you can see a few clusters. Let me roughly group them for you:

The pink ones are the HK/China banks listed in HK. They are supposedly the best since they have the highest ROE with the lowest PB. But can their book value be trusted? We need to dig deeper into the figures. The best among them is ICBC and Agricultural development bank of China. ROE of 15+% with a PB of 0.7 to 0.8 is fantastic. Too good to be true? Again, I recommend readers to dig further and not to take these figures at face value.

The green cluster is our Singaporean local banks: OCBC, DBS and UOB. All of them have very similar ROE with OCBC taking the lead. DBS is the only one that is still priced below book (PB < 1) so technically they are still undervalued in terms of that.

The yellow cluster spread over a whole range of PB ratio, and these are the US financial firms. Of these, Wells Fargo and JP Morgan seems to be the best. US Bancorp seems too overvalued, even though they have the highest ROE.

The purple clusters are the banks from the EU side. Generally they are not doing too well, since they occupied the lower left corner of the scatter plot, characterised by low ROE and also low PB. It's interesting when there are investors who only look at PB ratio and determine that a low PB is always a good thing. Take a good look at the troubled banks. Almost all of them have low PB.

Why almost? You might also be wondering where is standard chartered bank? Here it is:

I excluded those banks with negative ROE (meaning they have negative earnings) so that we can see the scatter plot clearly. Barclays, Credit Suisse and Stanchart is right below the x-axis because they have negative earnings. The high PB ratio of Stanchart is strange. I didn't dig further but accepted the figures as it is. But those who are interested might want to do the dirty work of perusing their statements.

Seriously, I still think our local banks are worth buying, even after this recent run up. At the peak, they can reach a PB of 1.9 to 2.0. We're now around PB of 1.0 for the 3 local banks, so you can do your own calculations. Even at 1.5, there's still a lot of room.

STI 4000? Hahaha!

Tuesday, November 15, 2016

Capitamalls asia bonds optional redemption

Another bond bites the dust.

Don't worry, this is not from the troubled oil and gas sector. It's the optional redemption of Capitamalls asia bonds, CapMallA3.8%b220112 announced from sgx here. I blogged about the bonds here and here.

The full maturity of the bond is actually on 12-Jan-2022 but there is an option for early redemption on 12-Jan-2017 and every year thereafter. Since there is a step up option for the bond  if it is not redeemed on 12-Jan-2017 to 4.5% instead of 3.8%, I guess there's every reason for them to redeem it back in full. The 3 months SIBOR now is 0.87%, about doubled since Jan 2015. I guess I was wrong to think they wouldn't redeem it. There's still another bond out there with 3.08% by Capital Mall Trust (not the same, but yeah) with no step up option and with maturity date in 2020.

How would this affect me?

It wouldn't affect my portfolio because I don't have any more of this bond. But it'll affect my parent's retirement portfolio, to the tune of $26k. Guess what, I'm going to take the redeemed amount and return it back to them. The last time OCBC pref shares redeemed back, I took the money and reinvested back into FCL bonds, but I'm not going to do so now. It would seem that in the very near future, it might be better to put the money in the safety and guarantee of a fixed deposit in the banks, rather than to take that extra bit of interest and risk the price volatility of the bond. Especially if I'm the one guaranteeing their capital.

Nope, going to return them the money. No more reinvestment of the money into bonds for them.

Early Retirement Grid

I chanced upon an excellent blog that talks about FIRE (Financial independence Retire early) in 4 pillars. I will take some time to explore the site but I'm liking it already! It's here, called Four Pillar Freedom.

There's a post called early retirement grid with the following picture below

Picture taken from fourpillarfreedom blog post here

Basically it shows you how long you take to reach financial independence given your after tax annual income and annual spending. There's a few assumptions that comes with the table:

1) You're starting from nothing. It's good for those who had just been through the financial bombs of marriage and housing and renovation, because that's essentially what it is. After going through those 3 bombs, I have to start from scratch again and save up.

2) This is using a draw-down method of 4% of the portfolio annually. So you'll end up with almost nothing to pass on to the next generation.

3) It assumes you're investing the savings at 5% pa, and you no longer need to have any capital expenses in the near or distant future.

It might not be possible to hit all the assumptions. In fact, ignore that and let's see this philosophically. Firstly, you should be in the green zone. If you're in the red zone, that's quite dangerous because you're going to take a pretty long time of above 50 yrs to reach financial independence. Meaning you're going to work till you die. If you're in the yellow zone, you're too near the danger zone, and minimally you're going to need at least 25 yrs before reach your retirement. If you're in the green zone, you need less than about 14 yrs to reach your retirement.

Let's be truthful about this. It's good to have that option of being able to retire early upon reaching financial independence. You might not want it but it's still good to have that option. That's because when you're older, the choice might not be yours to take regarding your employment status. Someone will decide whether you can work for them, and when you still have bills to pay, that's going to be highly stressful. So, look up your annual after tax income and look up your annual spending and see what number you're at.

You probably know your after tax income, but you might not know your annual spending, especially if you've not been tracking diligently. It's alright, at least you know that now you have to have some semblance of tracking your spending. If you don't like to track every expenses down to the cents using some technology, that's fine. You can see how much you have from a dedicated spending account at the start of the month, and see how much there is at the end of it. It'll work fine. Either way, you need to know both your annual income and your annual spending.

From there, you know your FI number. The lower the number, the lesser the number of years that you still have to work, and the better it'll be. Did you notice that as you go down the column, your FI numbers drop too? Going to the right will also drop your FI number. Going down the column means you cut $5k off your annual spending, and going to the right means you increase your annual income by 5k. You'll notice for almost all the boxes, going down will decrease your FI number faster than going to the right. So do the easy thing first - cut down your expenses. Once you've cut down what you can, the only way to decrease your FI number is to raise your income level. I've talked about this at length in my blog posts here and here. That's why having a salary increment yet keeping your personal inflation checked in will be such a powerful force multiplier in your journey towards financial independence.

It makes you think twice about spending $5k on a Chanel bag right? That $5k you spent on the bag represents between 1 to 16 years of your life energy working before you can have early retirement! Think about it!

Monday, November 14, 2016

My 50k savings goal back then and now

I was reading back my previous post on my 50k savings challenge here, and trying to see if there's any difference between then and now. I first started back in 2009, and it had been 7 yrs since. How time flies!

Comparing the difference between 2009 and 2016:

1) Shift in focus between 2009 and 2016

I had a plan on how much to save every month back in 2009 and it was further broken down into weekly goals for savings. That created a lot of stress because I have to watch my expenses like a hawk! While I appreciate the shocking jolt that made me rewire my thoughts and actions to align myself to this goal, I think I would not have done the same way again. This year, I just saved what I could after my expenses, and didn't really keep a tab on how things are going. The idea is that I've already streamlined my behavior after so many years, so things are almost on auto pilot mode now. I know if I hit a certain income level, I will have hit a certain savings level at the end of the year. And because of that certainty, my focus is not on cutting expenses, but more on getting that critical mass of students so that I can hit an income level that will guarantee my savings goal. There's only so much to cut in my expenses, but my income can be unlimited. Well, more or less.

Summary: Shifted focus from cutting expenses to increasing income

2) You can get used to shit

I was complaining back then about working 10 hours in a day and having lessons at 7am and ending at 1130pm latest. It was quite entertaining reading about such things because it must have been quite a shock to me back then to work so hard. Back then, I also have my Sunday off, so it wasn't as bad. Compared to 2016, I think the work load in 2009 is considered a breeze! This year I had 14 hours workday, starting at 7am and ending at 11pm with 1 hr break in total for lunch and dinner. 9 hours on a weekday is quite normal and during peak seasons, 12 hours workday is the norm. I was quite stressed up over work back in 2009 and was generally feeling burnt out and unhappy. But this year in 2016, I was just laughing and enjoying my work (mostly), even though I was working a lot harder and longer. Like a hedonistic treadmill but in reverse, you can get used to shit, and when you do, it's no longer shitty.

Summary: I can take shit and enjoy it too. It's just takes a reframing of the shitty situation.

3) Impossibility made possible

Back then, I don't think I can save 50k. It takes a few years of doing it and stressing over it before my mindset is changed. I think it took about 3-4 yrs before my internal dialogue changed from "I think it's crazy" to "I might be able to do it" to "I think I can do it" to "I did it again". I can't stress how important it is to be able to leap from the impossible to the possible, because it gives a shot of confidence in my ability to go through the entire process of goal setting, planning, execution and review. I could never imagine that now, saving 50k is a norm and not a challenge anymore. That's just crazy.

Summary: Plan something crazy and go do it. The growth to achieve that crazy thing you're aiming for will be the catalyst for many other crazy things you could possibly aim for. If you don't challenge yourself and expand your limits, you'll NEVER grow.

Saturday, November 12, 2016

Choose yourself!

I am reading this book by James Altucher titled Choose Yourself. I'm still in the midst of it but am loving the message that the book is trying to convey. In this kind of economy, there's not much loyalty for any particular company. Everyone of us has to treat ourselves as a company and behave like we are one!

Here's some tips on choosing yourself from my own experience:

1. Have a personal brand and personality that people know you for

I think the general impression I get from people is that I'm very well read, disciplined and reliable. Try thinking of any one and rattle off 3 characteristics about that person. It doesn't matter whether it's true or not, but the perception is what matters. If you're perceived to be an asshole, then you will be treated like one. Jobs come and go, but your personal branding and personality stays. When times are bad, your personal branding might be the only thing that can differentiate between you and another stranger in the interviewer's perception. It takes a while to build up a personal brand and reputation, so remember that all it takes is 10s to destroy it. If you don't want to keep up the appearance, then be authentic and real. It'll be easier in the long run!

2. Marketing yourself - everyone must know what you're doing for a living

This is related to point 1. Everyone that I know must know that I'm a tutor, if not I've failed to market myself. It is said that the lobangs come from people outside your inner circle - the acquaintances in your 3rd, 4th, 5th and above degree of separation, so start telling people what you do for a living. If nobody knows what you're doing, then how can they offer help?

I'm not the hard marketing type also, so you likely won't see me dropping name cards in social events. I don't even have a name card lol! There's another side to marketing - you can market yourself all you like, but you better be good in what you are doing. If not, you'll be like the exploding samsung handphones. A good product is meaningless without good marketing while a bad product needs no marketing.

3. Upgrade and invest in yourself

This is not to satisfy some certifications or professional training time. We're talking about real useful skills here. If you choose yourself, then don't let others dictate what is good to learn. Choosing yourself requires responsibility and that involves having a goal in mind and looking for skill sets gap to fill. It can be a formal course like taking a proper training course offline or online, or just reading. Remember we're not upgrading to show others that we have the certification. We're upgrading ourselves because we want to be better, so you don't have to take up official qualifications. Reading is a form of upgrading of skill set too, especially if you read widely. I'm not picky - even reading comics is a form of upgrade. Hey, it takes imagination to jump from frame to frame! But do yourself a favour, don't just read comics. Read a proper book too :)

4. Exercise, meditate and take care of yourself

Resting and taking good care of your mental and spiritual health enables you to walk a further distance than others. Life is a marathon, not a sprint, so make yourself better so that you can provide better quality of service to others. Take care of yourself so that you can take care of others. Treat yourself well because you're a machine that needs occasional oiling and maintenance too!

5. Learn to say no

I'm still learning this. Learning to say no means you value your own time. You don't waste time on nonsense people or events that you do not enjoy. If you value your own time, you can be sure others won't value yours too. Choose yourself and make yourself happy. That way, you can be sure others are happy and don't have to listen to your complains too :)

Tuesday, November 08, 2016

Review of financial goals

I wrote about my offensive and defensive strategies two years ago here, but never really got a chance to review it to see if it's still relevant. Let's do it now.

In that post, I talked about the dilemma of using cash to shave off interest at 2.6% by doing a partial capital repayment, or using it to invest in the market by getting a return of more than 2.6%. It's not an easy solution and I opted to do both to avoid the two extreme end game scenario of being asset rich but cash poor OR paying excessive interest for my housing loan and being in debt for a good 30 yrs. So, I came up with 3 plans:

1. HDB capital repayment plan

This is to top up 12k every year, shared between me and my wife, so that my 30 yrs loan will be shortened by about half. So far, I've been consistently topping up 12k towards the end of every year towards the completion of goal. From last calculation, I would have finished the loan in another 12 years. I talked to my wife about the interesting scenario where my son will be stressing over his PSLE while we will be celebrating and popping champagne for a completed milestone of finishing our HDB loans, LOL! Finishing our home loan will be one of the greatest accomplishment and I look forward to giving HDB my last check to wrap up the whole affair.

2. Build up of capital for 1k/mth dividend plan

This plan is to build up a base of 240k capital, and when invested at >5% pa, will generate 1k/month. In that post, the expected duration is about 2-3 yrs and I think I'm still on track towards that goal. Next year will be the 3rd year and I don't see why I can't fulfill this project on time. Well, at least for the capital build up phase. I intend to slowly deploy even if I have the capital, so there's no rush to get the 1k/month. Realistically, I can channel $20-40k per year to this project, depending on how much I can save, and that depends on how much income I can earn, which is a variable. Every year, my income will drop drastically as the graduating students leave so I will have to work hard to push it up to last year's income as fast as possible in order to save more. I was initially worried about my income for 2017, but I felt a lot more secured when currently I have about 75% of my income confirmed for 2017. I should be able to start 2017 running. This 1k/month dividend income will come in at a very good time as I will have to reduce my work load to prepare for more family time. It couldn't have come at a better time, so I'm glad I started this way ahead.

3. Emergency fund of funds

This project is to do voluntary contribution to my 3 cpf accounts in order to build up a full year of mortgage payment, to the tune of 24k. I did a tweak for this project. Instead of topping up 6 to 12k as mentioned in the article, I will top up 10 to 15k as voluntary contribution annually. Firstly, this will reduce the amount of tax I have to pay. Secondly, 56.77% of the contribution amount will be channeled to my OA, so that will be about 5 to 8k every year. I will then do a partial capital repayment of 6k using CPF (instead of cash).

So, the workflow goes like this:

Doing this achieves 5 things in one shot:

1) Reducing personal income taxes because voluntary contribution (VC) will have tax reliefs

2) Topping up MA to pay up for compulsory medisave contribution, as part of the VC (24.33%) will be channeled to MA, so there will be less cash outlay to top up just for the compulsory MA portion

3) Topping up OA to build an emergency fund of funds to have 1 yr of mortgage as reserve, so I know I can last 1 year without income and the mortgage for the house can still be paid for

4) Partial capital repayment to reduce housing debts so that the housing debt will be reduced and it helps to save on the interest for the remaining loan amount

5) More cash available since (1) to (4) comes from the same tranche of money by doing VC, so this enables my investment porfolio to build up faster. Ideally, I should have more money outside CPF than inside, to hedge against the policy risk and constraints of using CPF solely as a retirement tool.

It took me some years to realise this workflow and I should have done it much sooner, but that's the point of this post. If there's some self employed out there who is in a similar situation, you can short cut a few years of trial and error modify/adapt the workflow to suit your circumstances.

To be frank, having a child is not part of the plan when I wrote the post back in 2014. I think it'll be interesting to see how these goals will change when I review it a few years later after having a kid running around the house. I would expect more modifications to come for sure.

Tuesday, November 01, 2016

Buy High Sell Low, not Buy low Sell High

We often hear this nails-scratching-on-blackboard phrase "Buy low Sell high" until our eyes roll and our skin crawling with goosebumps. There's truth in it, except that like all aphorism, it's not as simple as it is. Let's deconstruct that phrase.

Buy low sell high consists of two parts. Firstly, you have to buy at a low and then you have to sell at a high. But unfortunately, the aphorism didn't really say what we're buying at a low. It's implicitly taken to mean buying at a low price and selling at a high price, but I think it's not right. Sometimes buying at $2 might not be better than buying at $2.50, especially when taking into account the risk of dropping even lower. It's better to bottom fish when the mud had settled and the waters become clearer; the chances of fishing a stone that breaks your line is lower. But clarity comes at a higher price, so if we have to follow another aphorism "Do not lose money", then it will make better sense to buy at a higher price rather than hope than the stock will make a V shape recovery by buying at a lower price.

The more correct 'thing' we're buying should be value. Hence it's more correct to say Buy High (in value) and Sell Low (in value), rather than the more risky proposition of Buy Low (in price) and Sell High (in price). Value means different thing to different people. If you're a trader observing a counter moving uptrend, buying at high value means the price touching the lower boundary of the envelope and then selling at the upper boundary of the envelope. If you're an investor, buying at a high value could mean buying when the price went below the intrinsic value of the company and selling when it's above. But do take note that regardless of what type of market participant you are, the price is never the thing we're focusing on. It's always about what the price means with reference to something else.

Since the aphorism consists of two parts, can we also reverse the order? Sell high (in price) and buy low (in price)? Effectively that's what shorting means. You sell off something and then buy back again at a lower price to make your profits. Again, this runs into trouble because basing your decision on price alone is hoping that the high price alone will catalyze the precipitous fall thereafter. No, it should be Sell Low (in value) and Buy High (in value).

By itself, this is quite an un-actionable advice. Without telling people how to determine value, it's impossible to follow this advice, hence it's not actionable. But to tell people how to determine the value, regardless of the 'value' in question here being a trading value or investing value, it will take more than 4 words. Maybe not even 4 books have the breadth and length to begin discussing it fully.

And that's the real reason why I love aphorism. If you know it, you'll appreciate the beauty and simplicity of all the mountains of knowledge condensed into a short sentence with a nice sound bite. If not, you'll understand it after you've made a mistake following it. Either way, you're going to take home something.

If you're interested in aphorisms, may I recommend a very good one by Nassim Nicholas Taleb titled "The Bed of Procrustes". It's a very easy read, but as with every such aphorism, you'll have tons of things to think about. I think of this book as an aperitif; something to whet your appetite with promises of more things to think about. Also works great if you're a blogger and need materials to write about HAHA

Monday, October 31, 2016

Money beliefs and habits

When students come to me for help, the solution is not as simple as telling them to study. They are obviously not doing well, and the reason for them for not studying can come from a variety of reasons. It could be low self esteem, seeking attention from parents or peers, trying to fit in with his close group of friends and so on. Unless the root cause of the problem is dealt with, any methods of improving the grades is just symptomatic treatment and will seldom work for long, if it works at all. Hence, being a tutor is sort of like a doctor because you see the symptoms of bad results, and you try your best to decipher the symptoms and finding out the root causes.

It's the same for financial advice. If someone is not doing well in his personal finance, it's never as simple as save more and spend less. The symptoms show that the person is not good in his finances, but the root cause springs from his money beliefs. So unless the money beliefs are changed, any symptomatic treatment like budgeting, or separating wants from needs, or just spending less is not going to help much.

That is why Kyith's article here is such a fantastic write up. It's hard enough for people to talk openly about money, and it will be even harder for people to tell you their money beliefs enough for you to know what's wrong. Hence, to change a person's mindset about personal finance is going to be such a up hill journey. I guess the first part is at least to remove the barrier about money being a taboo subject. Once we share our own journey, it might open up the hearts of readers to talk about their own situation and how they handle their money problems, and things will fall into place from there. As a personal finance blogger, I think I have a part to play in this. I will share my journey, and how I navigate the various pitfalls and challenges of life, and hopefully readers will share theirs and we will grow as a community.

If you're interested in such money beliefs, you can try reading Secrets of the millionaire mind by T. Harv Eker. He will scold you and beat you up in his book (and I heard in his seminars too), but the job will get done. You will learn about money beliefs and how it's all linked to our money memory and most importantly, how to delink it and change within yourself. If you're sick, you eat medications to feel better. If you're sick financially, you should start by reading books to change your mindset and hopefully it'll translate to the right actions for the right change.