Financial freedom tag-team

It's important to choose a spouse carefully, it seems. According to the book that I'm reading, "The Millionaire Next Door", it mentioned that for a large proportion of the millionaires that they had interviewed, their spouse are more frugal than them. The constant complain about their spouse is that they can't get them to spend money!



The book mentioned about having quality offense and quality defense when playing this game of financial freedom. One of the couple, usually the male, would play good offense. They would go out and earn a lot of income. It's mentioned that most of these millionaires interviewed have higher household income than average too - so that's the offensive side. The spouse, usually the wife, would stay at home and play quality defense. They are the ones who would manage the household, making sure that as a whole family, they not only stay within budget but way below their income. That's the kind of tag team playing that I found it interesting.



It's hard to say who is more frugal - me or my wife. For the little things (those that cost less than $50), I'm the more frugal ones. I always have to remind my wife not to overspend on such things. However, for big ticket items, my wife is the more frugal one. She would have to remind me that even though I have the means to afford, we should still be careful on how we spend it. For the recent resale flat purchase, I have to convince and reassure her that the 40k cov is worth the money. Same thing goes for the renovation. I guess my wife and I are not spendthrifts and each of us are more frugal than the other depending on the amount spent! That makes us a compatible tag team partners because we defend each other weak points, haha!

Nacho Libre - I absolutely love the movie!

On the flip side, it's very hard to be financially free if your spouse do not support the idea. The journey towards it involves making sacrifices now so as to enjoy greater rewards in the future. Not everyone wants to reach the end point, that I understand. If one of the couple wants to climb a mountain, the other has to belay the ropes and egg each other on, supporting and encouraging each other along the way. If there is only one person actively climbing the mountain, the other would drag along and act as a complaining dead-weight behind you as you climb. It's still possible to make it to the top, of course, but it makes the journey unbearably difficult.



Thus for those of you who so desire to reach the top of the mountain, choose your other half wisely. Pick the characteristics of the person that you think would aid you, for I believe that a marriage is like a partnership - it should benefit both parties, and not just to one only (or worse - none). Choose a tag team partner that you can synergise with - if you play quality offense, pick someone who play quality defense for instance. You can't pick both who play good offense (because you might spend all that you earn), nor both who play good defense (because playing defensively all the time might take too slow to reach the end). When all the beautiful face and great body fades away with age, what is it that still endears you to your spouse?



*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

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The little boy and the dollar notes

A stranger walked towards a small little boy whom he met along the streets. The man told the little boy that it is most fortunate that fate had brought them together, hence he is going to bestow a gift to the little boy. He can have a choice of a $100 note or a $10,000 note, with no strings attached. He can just take the money and go, with the knowledge that on this particular day, a kind stranger had chosen to bestow a great gift to an unknown boy. By the time the man told the little boy about his choices, a crowd grew around them, eagerly trying to find out what was causing the commotion in the streets. Some of the people in the crowd began to advise the boy, telling him that it is stupid not to take the $10,000. It doesn't even require simple maths or quantitative analysis to figure out which choice is the most rational one to take. There's only one solution to this happy problem, and that is, rationally, the boy should take the $10,000. Such an obvious choice do not even require any thinking at all, some of the people in the crowd thought aloud.

The moment of truth arrived for the boy to pick his choice. The boy took the $100 note instead of the more rational $10,000. Those who had advised the boy scolded him profusely. They told him that he is stupid not to take the $10,000 note. How can anyone be so irrational when it comes to making such decisions, they bemoaned. As the smarter and more rational crowd dispersed in disgust, an old lady walked towards the boy, who was holding the $100 note and positively beaming with joy.

The old lady asked the boy gently why he had not taken the $10,000 note, as advised by the other more savvy crowd. The boy smiled brightly and explained that he took the $100 note because he wasn't sure that the man would really give him such such a great sum of $10,000. However, he was sure that the man wouldn't mind giving him a smaller sum, hence he took the smaller $100 note. 

The old lady smiled at the little boy's train of thought, surprised by how wise this boy is beyond his years. The boy, among all the crowd that gathered around them, is about the only person who had analysed the problem differently from the rest. 

There are often many ways to analyse a problem, and focusing on numbers is just one aspect of the analysis. Why should we be trapped by such quantitative analysis? Is it irrational to place greater emphasis on the psychological aspect of this problem - that is, whether the man is really going to give the $10,000 to the boy? Likewise, is it rational that we focus solely on numbers to analyse a problem? To place emphasis on numbers as the only way to solve a problem seems unrealistic to me. If I'm extreme in advocating moderation, does that make me an extremist too? Sometimes I wonder...

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Market warning bells

Market bells are ringing softly....can you hear it? When will the bells ring louder? You don't need to know how to read charts or value companies to know that the market is overheated. It can be as easy as paying more attention to the surroundings and people around you. These warning signs might not tell you the exact date in which the market will crash, but a rough estimate is better than none, so that you can make preparation in case it happens. Here's a few points that I can think of:



1. When newbies that comes to the market and start to make a lot of money without knowing anything at all, that will be one sure danger sign. In the market, newbies are supposed to lose money. If they earn anything, it's more by luck and only a handful of these newbies will survive because of their skills. Thus, when you see a lot of newbies who don't know how they made money, it's a sure sign that the market is overheating. If even the newbies are in the market, who else is going to buy the shares from you?



2. When the uncles and aunties you meet on the streets are talking about buying this stock and that stock, you'll hear the market bells ring louder. During the peak market, you can see actors and actresses busy buying stocks. People are talking about stocks in the lifts. Taxi drivers are also talking about them when you took the cab. Thus, when people who ordinarily have no interest in the market start to talk about the market, be careful.



3. When the analyst start making more calls to buy, it'll be another sign. The reports will be glowing with optimism and ever increasing target price (the target price are met so they have to upgrade again and again). Another thing I noticed is that they would shift the valuation benchmark to PE based, instead of asset based ratios like PB.



4. When the newspaper start to talk positively about the market and stories about people who made a lot of money from the market, it'll be one of the last warning signs. Newspaper are usually reactive, and they would not make a bold statement about the market unless the trend had been going on for a long time. This last ditch attempt to lure more sailors to the sirens would propel the market to ever greater heights, eventually capitulating and start the bear cycle.



5. When speculative counters (think ass-shares and warrants) chalk up the top volume, be careful. Usually the newbies that enter the market have little capital, so the only way they can participate in the market is to punt on penny stocks. Most of the blue chips have done its part to bring the index to new heights, so the last to run are usually the pennies. Many stocks that are rubbish will have extreme optimism attached to it, because of the belief that a greater fool will buy it from you. Be careful that you are not the last fool holding the hot potato, if you choose to play this game.



Can you think of other signs of market overheating?


*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

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How good are you at accumulating wealth?

I'm currently reading a book titled "The millionaire next door". From the few chapters that I gathered, the book is about the characteristics of wealthy people. As I read it, I am keenly aware that while wealthy people have certain characteristics that make them wealthy, it's not true that by following such characteristics, I'll be wealthy too. This logical flaw is similar to this: It is found that all cancer patients drink water, so drinking water will cause cancer. Basically, it's a mistake on causation and correlation. Correlation does not imply causation. I think it's important to have this principle in mind so that when I'm reading this book, I won't be unduly swayed by these characteristics and start to follow them, thinking that it'll lead me to wealth.



There is, however, one thing that I found quite interesting as I was reading the book. It's a heading about how to determine if you're wealthy. As described in the book, you can determine this by this rule of thumb:


Multiply your age by your realised pretax annual household income from all sources except inheritance. Divide by ten. This, less any inherited wealth, is what your net worth should be.


Let's say a 30 yr old person earning 50k a year and having an investment return of 10k a year, will have a calculated net worth of 180k. If that person has a networth of less than 180k, he is a UAW (under accumulator of wealth). If he has a networth of 180k, he is a AAW (average accumulator of wealth). If he has a networth of twice the calculated amount, that is 360k, he is a PAW (prodigious accumulator of wealth).

I found this idea rather interesting. Based on the rule of thumb, I'm considered a AAW because my networth is around that value calculated. For computation of networth, I included all my cash, cash equivalent and investments (marked to market), cpf and the cash value of whole life insurance. I did not include my house since I treat the asset value of the house at cost and that will be balanced by the liability of the loan in my balance sheet. I guess the reason why I'm not a PAW is because my investments are not returning a fantastic return to me. That is something that I would have to do about in the future.



You'll realised that you cannot just pluck the numbers and key into the formula straight away. You'll need to find out how much you earn per year (that is usually easy for salaried workers). You'll also need to know your assets and liabilities and calculate your actual net worth so that you can have something to compare with. I think by doing this little rule of thumb exercise, you can get to know more about your own financial status.



So go on, try it and tell me if you're a PAW, AAW or UAW.


*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

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Thoughts on dollar cost averaging

There's a lot of talk about using the standard chartered bank trading platform to do averaging down. The reason is because the platform offers a very cheap way to buy small lots without the penalizing minimum trading fees, which is usually $25 ++ minimum. What's averaging down actually? It's just a way to reduce the emotional part of investing by buying at suitable time interval using a fixed cost, regardless of the price. By doing that (you can do the math), when the prices are low, you'll end up with more shares and when the prices are high, you'll get lesser. Averaging out, you'll get a lower price, which is the whole point of doing dollar cost averaging.



I assume that those who are doing dollar cost averaging are those that do not have an interest in the market, hence buying a blue chip counter (generally, these people will get index instead of individual counter because index cannot go bust but a million other things can happen to individual counters, no matter what the colour of the chips are) will be safer for the longer run. I also assume that people who does dollar cost averaging do not believe in timing the market, just time in the market. The reason is that if you can time the market, it'll be better to just buy at the right time instead of whacking the counter every suitable interval.



Hence, it puzzles me that in the cbox, there are people who wanted to do dollar cost averaging using the cheap transaction cost offered by scb trading platform, but keeps looking at the market for the latest quote. The point of doing dollar cost averaging is to reduce the emotional part of investing, and also the labor of active investing, by buying at a fixed interval using a fixed cost. If I'm doing that, I'll just be looking at the market once every quarter or so, put in my transaction and carry on living my good life without the market interfering my peaceful existence.



But I'm not doing that, not in the traditional sense of averaging, no. I'm doing a TA-based averaging.



The idea is simple. You buy only when the charts show you that it is okay to buy. If the signal don't work out, I don't cut loss. I'll wait for the next point where the charts say it's okay to get and buy in another bullet. Each counter has a limit of say 2-3 bullets, and the amount for each counter and each bullet follows strict money management rules. For instance, I won't be averaging down non-stop and getting all my money stuck up in a single counter. Oh, and I only do this for fundamentally sound counters too. Averaging down on ass shares is a lesson I hope I will never have to re-learn again. Conversely, I'll do the same when selling. When I see a short signal on the chart, I'll sell a portion.

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Are you surviving or living?

In thinking about our wants and needs, conventional literature always advise us to concentrate on our needs and forgo our wants. Resources are limited, hence we should ration the things that our resources can exchange wisely in case it runs out. We should budget what little we have and try to scrimp and save to make sure it last long and good. Excess and frivolous frills should be trimmed, reduced and eliminated. Get the smallest house that you can afford, do not overspend and buy a huge house. Get the cheapest furniture and get the barest renovation so that the money can be saved up for investment.



That is a way to survive, but is this the way to live?



I understand totally that all of us have different standards of living. I'm not advocating that we should model our standards of living after others, but we should really figure out what we want to achieve in our financial goals. If accumulation is the end by itself, then that goal can never be accomplished. There's simply too much to accumulate and accumulation as an end will never end.



There must be a balance between the two extremes - spending too much and saving too much. I know which side I'm on and which side I should be working towards. Finding that sweet spot that balances the two extremes will be a unique journey for one to discover. What is the right way to live? There isn't a right answer nor a wrong one, though there is a sustainable or an unsustainable way of living. In the face of such open ended possibilities that is inherent in life, what then should we do?



Walk the middle path, for the answer lies somewhere in between the extremes.


*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

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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.

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Old MacGrath and his bucketful of milk

Old MacGrath owned a farm in a countryside where he kept a few cows for dairy milk. In one particular milking session, the cows gave him a huge bounty of milk. Usually, Old MacGrath will have two full buckets of milk on average, so can you imagine his wrinkled but beaming face when after milking all his cows, he realised that he had not two, not three and six buckets of milk!

Old MacGrath was full of joy, and on the way back to the farm, he was already thinking of what to do with the milk. Oh, how his mouth salivate when he thought of the many milk products that can be made from the six full buckets to feed himself and his family! He can make cheese, butter and all sorts of delicious products from the milk. After making so many products, he couldn't possibly finish all of them by himself, so he can even sell it to the market or barter it for some other goods. How fortune smiles upon him! 

But on the other hand, he could also sell the extra milk to the market so that he can have some extra money immediately for him to buy some seeds for the summer planting season that is to come in a few weeks time. With the new seeds, he can plant more crops too! Oh decision decision decision...what should Old MacGrath do with his six buckets of milk? It was such a heaven-sent gift, but for hellish reasons, he couldn't make up his mind on which options he could best utilize this 'windfall'.

So, being unsure of himself, he called for a quick meeting among his family to discuss the matter. His wife told him to sell it to the market for some quick cash so that he can buy more seeds for the summer crops. His eldest son told him it's wiser to keep the milk and turn it into dairy products for their own consumption. His daughter told him that he should use 3 buckets of milk for their own consumption and sell 3 buckets of milk to the market. After a whole day of discussion, Old MacGrath was still unsure of what to do with his milk because everyone makes perfect sense.

Tired of all the heated discussion, Old MacGrath thought that he should take some of the milk to quench his thirst. Taking a ladle, he scooped up a cupful of milk from one of the buckets and took a deep sip, wishing the refreshing taste of milk to sooth his throat. He spitted it out immediately! It was so sour! Looking closely under the dimming light, he realised that almost the whole day had passed since he last milked the cows and the buckets of milk had turned bad!

Oh horrid horrid fate, he cried out loud, totally inconsolably by his family who crowded beside him. His indecision had caused nature to take the decision off his own hands! On hindsight, any decision made on his part seems better than the one that nature had forced upon him unwillingly. Oh horrid horrid fate....


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Special thanks to SMOL for teaching me the value of story telling. Stories are wonderful wonderful way to impart values and at the same time, because of their ambiguity, it is also timeless and borderless. Reading the same story at different times of your life will elucidate different aspects of your life. Reading the same story by different people will teach different things to them too. Like the Rorschach ink blot test, the variance in interpretation varies across time and space. That is also the reason why I like reading children's story books. 


Good children's books are meant for children to read, but for adults to understand.


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*This article is contributed to IM$avvy financial portal, which is managed by Central Provident Fund Board and supported by MoneySense. This site has a noble aim of promoting financial literacy to the general population.

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