## Friday, June 10, 2011

### My personal financial goals

I need some long term plans to have an idea of how I should allocate my resources, and if that proves to be insufficient, to step up my effort to get more income and hence more savings. The biggest financial bomb so far is my resale flat. I got a loan of 501k from HDB, with a monthly installment of 2k over a period of 30 yrs. Let's do some math:

Loan amt: 501k
Total amt paid at the end of 30 yrs: 2k x 12 x 30 = 720k
Interest: 219k

Due to the curse of compounding, even at a low interest rate of 2.6%, over a long period of 30 yrs, the original loan amount of 501k becomes 720k. The total interest paid to them is 219k, which is almost half the original loan amount.

I wanted to reduce my monthly installment to less than 1k per month, and in so doing, it will reduce the total interest paid for my loan amount too. My plan is to do aggressive down payment of the loan in the first 5 yrs and see how it goes after 5 yrs. A lot of things are varying over the next 5 yrs, so there's no point in coming up with a precise plan. Time should clarify my plans further.

Each year, based on the minimum monthly payment, I will have to fork out 24k (2k x 12). I should aim to double that payment per year to 50k. Without touching on the complicated maths and just doing simple calculation, since I'm paying twice the amount of the required yearly payment (I'm paying 50k instead of 24k), I should reduce my loan duration by at least half. That means instead of clearing the loan in 30 yrs, I should be able to clear in 15 yrs and probably shorter than that due to compounding again. Let's take it as 15 yrs to clear the loan.

To clear the loan in 15 yrs (based on the above simple calculation), I will need to pay off 4k per month. Let's add 4k expenses (my average expenditure inclusive of everything is 2.8k monthly). 4k loan payment plus 4k expenses is already 8k, and I don't want to have zero savings at the end of the whole thing, so I've to factor in another 4k of savings per month. 4k of savings per month would roughly translate to 50k per year, which is my usual savings target. This means that my minimum income should be 12k per month.

This would also tie in with my 100k savings challenge per year. 50k of savings would be set aside, another 50k of savings would be used to pay off the housing loan. At the end of 15 yrs, I would have finished paying off the housing loan and end up with a sizable amount for retirement (50k x 15 yrs = 750k). I would be near 50 yrs old too.

This is an overestimation of the figures. But I like to overestimate figures. I rather end up on the wrong but comfortable side of the error at the end of the whole thing. A few things can derail me off:

1. Children - as of now, there isn't any plans to have kids. Should that come in, then retirement have to be pushed back. My wife's savings and income per month, which had not been factored into the entire equation so far, would have to be considered.

2. Inability to work due to illness - I'm covered by suitable insurance coverage for such events. If that happens, I'll have a monthly payment of around 2-3k per month. It's barely enough to cover my own expenses and so it's quite impossible to finish the payment early too. This is actually the worst case scenario, because if I've TPD or just plain ol' death, the home mortgage insurance would kick in and would ensure the house is fully paid up. My whole life insurance and term plans would also kick in so money shouldn't be a concern in that event. I can't increase my disability income benefits without exorbitant cost, so I just have to have enough savings. A backup plan would be to liquidate my stocks, but I'm not sure by then how long it can last. Well, every drop will have to count.

3. Parents - they do not have whole life plan nor term plan at all. At this stage, it'll be too exorbitant anyway. They do, however, have H&S plans, so the problem is thus TPD or critical illness that is not hospitalised. They have some savings, not much, but it can be the first line of defense. I've a elder brother too, that'll be the second line of defense. And I'll be the third line of defense. How much this event will affect me depends on how prolonged the illness will be. My guess is that everything would have to be delayed by an indeterminate period of time.

4. Retrenchment - or simply drastic changes in my career environment that can greatly reduce my income earning capability. This is possible but improbable. I can't be retrenched easily so the problem is about finding more work. This would have to be sorted out in the next 2 years (I give myself 2 years to sort out this). Career backup plans? MOE teacher. I hope that with my academic qualifications, they would at least grant me a teaching position without even considering my experience in teaching. Passive income would have to come from somewhere to offset this risk of loss of income too. This stream of income will progressively be more important as I age. Have to work on this too.

I do not have to finish paying by 15 yrs of course. I would like to have the ability to pay off, or rather take it like this - I want to have an option but not the obligation to pay off my loans early. I can see the possibility of investing the amount saved to have a bigger amount in a shorter period of time instead. In short, my goals are:

1. Monthly income of 12k

2. Savings target of 100k per year, or around 8k per month

3. Option but not the obligation to pay off my housing loans in less than 15 yrs

So there, I've listed out the rough plans for the future. They are related to each other, so most likely hitting one would also be hitting all at the same time. What's my next step? Go ahead and do it.

Freedom Achiever said...

Hi,

If possible, rent out one or two rooms. It will solve most of your problem.

Regards,
Freedom Achiever

Anonymous said...

Wow,
You really have a lot to think about. But your human capital worth a lot also.May you prosper.
Shalom.

Anonymous said...

Would it be better to invest the additional 2k in low-risk products, ranging from government bonds to blue chip corporate bonds?

Hyflux 6-8% preference shares is definitely good enough to offset the HDB 2.6%, no?

JWT

JK Holdings said...

oh man, \$2K per month for 30 years... can't imagine that....

la papillion said...

Hi FA,

I don't think I would want to rent out my rooms. I'll pay the price for privacy as I value it very much. Thanks for the suggestions though.

Hi Temperament,

Planning ahead is good. My human capital is not worth a lot lah, it's just that I'm such a slaver driver to myself that I whip it to be more valuable. Human capital is a depreciating asset, so while it lasts, we better convert this temporary asset into something (hopefully) more permanent so as to last through our old age and maybe to the next generation.

la papillion said...

Hi JWT,

I am doing both actually. The 2k that I am paying extra would be used to reduce the loan, while the 4k that I stash away is used for investment. I want to have both cash and lower debts and I don't believe it can't be done. And so I will make it happen.

Hi JK holdings,

I treat it as a business cost, so it's not too bad. If I do it right, I should be able to reduce that amount to 1k or lesser, then I won't be so eager to pay off the monthly installment.

Isaac said...

Hi LP,

you always think thru things in such a pertinent and succinct way. I wish you the best of luck. :)

Anonymous said...

Was just looking through the cbox history on Steven's question of choosing between a 99 year 300k HDB or a 1mil freehold condo.

If you have 1 mil, would you prefer to to use it to buy a freehold condo or use 300k to buy a HDB and use the 700k to have a passive income of between 5 to 6 % per year (35k to 42k) ?

Those of you below 40 years old would not have seen housing loan interest rates of 7.5% in the late 80s and early 90s.

Live your life now and let the future generations take care of themselves.

A casual passerby

Seth said...

Always interesting to learn about other people's financial goals.

For your disability income benefits, I'm not sure increasing it will necessarily come with an exorbitant cost as you can choose to take up a DII for a shorter term, longer deferred period etc. to keep premiums lower and still boost your coverage. Of course, depends on what you define as "exorbitant".

It's quite lucky that your parents have H&S plans as most older people do not qualify due to health reasons or do not take it up altogether due to ignorance. If they haven't already done so you may also look into Eldershield supplements for them since the premium can be paid to a certain limit with Medisave and as such not as taxing as a cash obligation.

My 2 cents. Good luck for your financial goals!

Anonymous said...

LP,

Its been a while since I last posted on your website.. hope that all is well with you.

The high cost of housing a drag on the financial resources of the young.

I wish you all the best.

I was lucky to pay off all my housing loans in 10 years and now is debt free. Looking to buy a condo within the next couple of years.. .more for my son when he grows up.. or for rental income if he is financially capable..

Kids is going to be a big drag on your financial resources... unless you can resist the Singaporean Kiasu mentality and skip all the unnecessary tuition classes, piano, ballet yada yada yadaa... you get my drift...

Good luck now. ;)
mm

Anonymous said...

Mortgages are the simplest and easiest way for you to have some means to reallocate resources for investments that potentially earn more than the interest you pay.

Couple of points:
1. Mortgage insurance - bumps up networth immediately should the unfortunate happens, and your family will be well-taken care of in terms of housing

2. Have a tighter investment/re-investment plan that you must stick to - save such that you can pay off your loan if you have income troubles later (loss of job/recession/great depression/war)

3. Kids definitely a drag on finances but it is the cycle of life, and you will love your kids, they bring different kinds of joy. Also, not necessary to pay for a lot of stuff etc. Just need to adjust expectations.

4. Most people under-allocate for health and human social needs. You will need to set aside about 20% of income for health insurance (US style) or you will find that you have to sell your house in order to qualify for subsidies. Don't rely on the government - this one does not intend to spend anything on healthcare that will compromise on business competitiveness (which of course is wrong, all business and economic activities are meant for humans - philosophically, business does not exist if there were no humans).

Createwealth8888 said...

I thought for HDB flats. Home ownership insurance is compulsory. right?

la papillion said...

Hi iz,

Thanks!

Hi Seth,

I've posted a blog article about it:
http://bullythebear.blogspot.com/2010/03/disability-income.html

My wife is a financial advisor, so she helped me churn out a few quotations. Based on the occupation, it seems that being a pte tutor is a high risk job. I get quotes of 1.2k premium per year for 3k coverage until age 55. I think it's too exorbitant.

Currently, I'm using the saf group insurance coverage with disability income rider. I pay around 120 per year for 30k sum assured (I think it works out to be around 2k, can't remember the exact amount). I don't mind paying more, but certainly not to the extent of 1.2k per year.

Will consider eldershield, thanks!

la papillion said...

Hi mm,

Been a while indeed :) I guess since I want a certain location and I'm picky about it, I've no choice but to pay more. It's alright lah, I just have to step up to the challenge.

I wish you all the best in your property hunt too!

Hi anonymous,

Anonymous said...

Rehi LP.

I think you missed my point. I personally think it's better to maintain your housing installment of 2k and use the additional 2k to purchase bonds that offer good returns relative to HDB 2.6% loan.

Why bother reducing the loan when you can "beat" the housing loan interest?

JWT

la papillion said...

Rehi JWT,

Sorry if I missed your point.

I think while it's important to have good cashflow, it's also important to have a healthy balance sheet. Getting more than 2.6% and paying off interest of 2.6% is good for cashflow, but with such a huge amount of debts, it just isn't comfortable for me. I would withhold additional cash payment for the housing loan if the amt of debts is reduced, rather than the existing 600-700k.

That's why I mentioned that I would pay off additional sums until the monthly payment drops to less than 1k, and review from there. I would want to have the money to pay off but whether I would actually pay it off depends on the actual circumstances then.

I guess it all boils down to how comfortable you are with a heavily debted balance sheet.

Are you doing what you've suggested too?

Anonymous said...

Rerehi LP.

Sorry for not asking for your permission. i have done the math for you.

The assumption is that u pay 4k/month installment right FROM THE START (which is not the case for you), then you will finish your debt payment by the 12th year

http://2.bp.blogspot.com/-oBSos60wOtA/TfYmBi6A1TI/AAAAAAAAAK0/FWqKt9Ge33g/s1600/Untitled.jpg

But by doing that, you will lose an "opportunity" cost of 60k based on a 5.6%yield return. Of course, we can lower it to a 30yr SGS bond. Suppose that bond yield is around 3%, without showing the math, the opportunity cost lost is reduced to 15k

JWT

Createwealth8888 said...

Why do some people always think that they will always get POSITIVE compounded returns on their investment every year for the next 30 years?

Anonymous said...

Because you can invest in things like SGS bonds, as mentioned.

unless singapore crash....

jwt

la papillion said...

Hi JWT,

Thanks so much for putting the time and effort to do up the spreadsheet for me, I appreciate that a lot!

I didn't know that the opportunity cost is 60k. I do not quite understand your spreadsheet so pls bear with me. Is the 60k based on present term or future term?

Nevertheless, I mentioned to you in the cbox that money is not the concern here. Say for instance, that the opportunity cost is 100k. If my plan to increase my income works, i'll have saved 100k in the first place anyway, so the opportunity cost to me is 1 yr worth of my working life. That doesn't seem much if I can get 18yrs (30-12 yrs of early repayment) of debt free sleep or ease of mind.

If I didn't succeed in my plans, then I wouldn't be able to raise up the 4k to pay off my loans early anyway.

I understand what you are trying to say here, because I did the same thing when I'm younger too. It's all very convincing but somehow I'm still not touched by the sheer logic of it. It's not that it's irrational, but rather I'm rational about my choice to pay off the loan early. It's about the value that I place upon my decision. Instead of placing greater importance in cash flow, I'm place greater emphasis upon a debt free balance sheet.

Somehow age has mellowed that desire to earn that extra money. I'm not sure if you would feel the same when you're older too, haha :)

Appreciate your effort here, really. Thanks :)

Anonymous said...

Morning LP. The 60k refers to the future value in 30years' time.
And yes, these are afterall just numbers. We need to factor in other stuffs like psychology, current and future liabilities to make a wiser decision... Very subjective and situational. So i will leave that to you. Cheers cheers.

Jwt

Anonymous said...

LP, i realised there's an error in my computation. The opportunity cost should have been 30k instead. I will update the math tonite and email to you.

jwt

Market Strategist said...

Anonymous said...

Hi,
In business sense, as long as your cash flow can service or cover or better still exceed your liabilities, your business is viable. Or you have "good debt" if you believe there is such thing as going into "good debt". The more "good debts" you have, the faster you become rich. But who can ensure the cash flow always exceeded or at least able to service the debts? If you run into cash flow "jam", by then you may have to convert some of your assets(if convertible and in time)to service your debts. If not able, well.....sad, sad.

The other way is to be "debt free" as soon as possible.When you are debt free not only you can sleep soundly at night, this is also the time where you really start to accumulate wealth without worrying about servicing debts. Also your relationship with your kins and friends will be better because you will be happy and "light-hearted".
i have chosen the latter.But to each his own.

Createwealth8888 said...

In 1997/1998 Asian Financial crisis, after seeing with my own eyes on 50+ ex-colleague broke down and cried after hearing the news after he was retrenched. He was so worried over his mortgage payment and how to get a new job that could pay well to cover his mortgage.

At that time, I was still young but I have learned two important lessons from him.

1) Your job is not safe
2) Paying off your mortgage early means one BIG thing less to worry in the future recessions.

I went thorough a few recessions myself and I always have one BIG thing less to worry in those recessions. :-)

Anonymous said...

Hi LP,

Here's the update. A big mistake for the computation. The basic assumption here is based on yearly compounding, instead of monthly.

It suggests that you are better off paying off your debt earlier, unless you can seek for guaranteed yield of >5.3% consistently for 30years.

Not too easy, but also not too difficult. You decide yourself. :)

http://1.bp.blogspot.com/-16Dj3BeDQE8/TfdvP8WOEDI/AAAAAAAAAK4/4s9AQm1flUs/s1600/breakeven.jpg

JWT

la papillion said...

Hi Temperament and CW,

Thanks for sharing your experiences with us all. I guess you all must have the life experience to truly believe in what you've said.

I'll listen to you and I'll make my decisions. Thanks!

Hi JWT,

Haha, so the conclusion is this - that it's better to pay off early unless you can get more than 5.3% pa for 30 yrs?

I guess it's a matter of my loan amount too.

Knowing this, would you still have invested your money instead of paying off the debts? Just curious to know what your thoughts are on this, haha

Anonymous said...

Hi LP

If it is not too late for me to add my 2 frame's worth here.

I bought my HDB taking almost full loan @ 2.6% and paying all by myself.

There is a little option in HDB finance called "Partial Capital Repayment". Any amount is welcomed and any \$ above \$1k will earn you an interest rebate for that month. With this payment, you can choose either reduce in loan duration or reduce in loan amount payable (still the same loan period).

Yes, you can pay it via HDB online & e-banking.

Back to myself, what I did was to dump all spare cash and leftovers from the previous month budget.

With the help of some free software (now not available anymore), I managed to come to some sort of back-of-napkin conclusion. That is :

In the 1st 1/3 of the loan lifespan, every 1 month of partial repayment made, I will shave off like 2.5 months of loan repayment time. This is assuming that monthly repayment remains. This gain will become less favorable at the later part of the loan period as payments are made to reduce capital borrowed, not towards the interest as seen in the early lifecycle of the loan.

SO.... I did what i did and skipped a few lavish parties (but kept pace with my frequent holidays spree).

I redeemed the HDB loan in 3.5 years. That very evening after making the last \$2k payment, I felt the load off my chest. Much like after the last paper of the A-level finials.

Oh yes, the nay sayer will say like "HDB loan very cheap. You will be an idot not to invest in the markets for higher returns".

Well, after the experience of motor loans, I would prefer not to have anything like this over my head.

Hoped this helps.

SnOOpy168

la papillion said...

Hi snoopy,