Tuesday, August 23, 2011

Cash flow management I

We all heard how important managing cash flow is. In business, if cash flow management is not up to par, it'll lead to bankruptcy even though the company has a strong balance sheet and income statement. Cash flow is the life blood of business, and so it is also the life blood of individuals. It is really just about tracking each drop of cash that comes in and out of your bank account so that you know where the cash flows to at the end of each month or each accounting period that you decide.

How to begin, one may ask. I think the very first thing you need to do is to begin tracking the cash that flows out of your pocket every day for a month. If you can have the discipline to do so for around 4 months, you'll get a good picture of what your baseline expenses are. Baseline expenses are what you have to spend on things that are necessary, like food, housing loans, pocket money for kids and parents, bills and so on. Those are the fixed expenses, as opposed to discretionary spending like the occasional gadgets, a new tv or a holiday trip. Discretionary spending are, well, discretionary, so they are variable by nature. It doesn't occur every month, or at least, they shouldn't.

If you sum up your variable, discretionary expenses with the fixed, baseline expenses, you'll get the total expenses for that particular month. It sounds easy, but it requires a lot of discipline to actually track and record every transactions you make. Try it, and see if you can last a week. I think everyone can have the discipline to do this, it's just whether you are properly motivated or not. If you don't see the point of doing so, then you won't be motivated to do it. As for me, I've been tracking my expenses of 3-4 year now. I started off wanting to do it for 1 month only, but it gets kind of fun knowing exactly where my cash flows to at the end of the month, so I carried on doing so. Now, I can tell you a very good estimate of how much I spend per month.

It's as simple as to begin tracking down your transactions

That figure is one of the aims of tracking your expenses. If you know how much you earn per month, and you know how much you spend per month, you can tell if you have positive or negative cashflow. Positive cashflow occurs when you take in more money than when you spend them i.e. cash inflow is greater than cash outflow. Negative cashflow, on the other hand, occurs when you spend more money than what you take in i.e. cash outflow is greater than cash inflow. It is obviously better to have more months in a year where you have positive cashflow.

The only way in which you can have a positive cashflow is to spend less than what you earn monthly. There are no two ways about this. Assuming that you have positive cashflow, so where do the difference between the cash inflow and cash outflow go to? It becomes your savings! It is only when you are disciplined enough to control your expenses below your earnings that you are able to save up every month from your take home pay. If your expenses is 50% of your earnings, then you will save 50% every month. If you spend 80% of your earnings, then you will save only 20% every month. What you do not spend is yours to keep, so try to keep at least 10% of your monthly take home income. If you manage to do that, for every $1 that you earn, 10 cts will be yours to keep!

It's important to have a healthy saving habit. This cash is important to kick start a lot of programs that are beneficial to you downstream. Without this stream of cash that comes upstream, you will have to work forever just so that you can live each month paycheck to paycheck. The good thing about savings is that you can use this to do 3 important things: Emergency funds, Insurance and Investment. The first, emergency funds, are used to deal with immediate life changes like retrenchment, medical fees (the initial cash component that is not paid immediately by insurance) or a punctured tire. The second, insurance, is meant for protection against the loss of life, limb, health conditions and the ability to carry on making an income that generates the cash inflow in the first place. The last, investment, is meant to grow your savings into a bigger sum so that you can achieve the financial goals of your life.

So try it! Begin a new and financially healthy life by good proper cashflow management!

Thursday, August 18, 2011

No eye deer

The very recent market weakness shows how true your steadiness is, in the face of potential losses. There are many newbie market participants who started this journey after the horrible financial crisis and had never seen the market crashing 5% every other day, plummeting the so called defensive stocks like blue chips and high yield dividend counters into smithereens. Well, if you had never witness your portfolio blown away by perhaps 50% or more, if you've not seen the value of your stocks decreasing day by day until to to the point of giving up, whatever fancy theories about holding long term and buying when ABC counter is at X level (where X is usually way below current price) is just bullshit. Merely untested action plans for a bear market that is planned for in the bull market.

There are also people who seems that they are not prepared for a protracted bear market. Seriously, unless you have the unlimited bullets cheat code, you should never fire until you run dry. A typical correction on an uptrend will last perhaps only 1 day or so, but a protracted bear market (where the normal movement is down and punctuated by short upwards correction in price) can last for many months. You certainly do not want to fire at a horde of enemies, emptying your clip, thinking that the worse is over when the next wave of enemies come rushing at you. Bam bam bam, click... The hardest thing is therefore to decide whether a 'crash' in the prices is really just a correction or the beginning of a bear market. You can look at the charts to tell you, but ultimately, when it comes to action, you'll have to employ smart money management. The oft mentioned rules apply - don't put in too much in one counter, always have some cash at hand (even if it is eroded by inflation), fire sparingly...blah blah blah. I'm sure there are plenty of books / blog articles out there that will expand this topic further for your reading pleasure.

When market is highly volatile, you're start seeing a lot of talking heads coming out to talk about the market. Some will no doubt tell you that the worst is over while others will say that they had sold out all their positions and are waiting for STI to reach XYZ. I remember clearly during the great bear of 2008, there are some people in the cbox that mentioned that he had sold out all his positions and is waiting for STI to reach 2000. Eventually when the level broke, he began waiting for STI to reach 1800...then 1600...then 1400...then 1200. I'm not sure if he succeeded in waiting until it reaches there (I think the lowest is around 1450) and bought while the market clears the pivot point and turns around decisively. The point is that there are always people on both sides of the camp - that's why there is a market in the first place. There'll always be people more bullish and more bearish even if the same facts are presented to both. This is where, you, as the sole manager of your own money, will have to decide what to do. While the market is in the recovery phase currently, do your action plan and know what you would do if the market reaches this and that. Know what stocks you're going to get and at what price. Know how much capital you're going to spend at which junction. If you have a plan, you won't freeze like a deer looking at the headlights of an incoming car. In the market, making no decision is a decision. You're just simply passing the opportunity to make a decision back to the market to decide for you.

Is the worst over for now? We're certainly not doing those 3-4% movement per day now but I'm not that optimistic. I'll defer buying because 'the sale worth waiting for' could be coming. Anyway, I've already bought some counters back at great prices in the last round. If anything, I'm actually looking to sell some positions. But don't believe me, I'm just the talking head that I mentioned earlier on.

Friday, August 12, 2011


Lately I'm not in a very good mood. I think I'm in quite a stressful part of my life as a lot of things are happening at the same time. Stress is when you are caught in a situation where you are not familiar with, yet you have to perform it as perfectly as possible because the consequence matters. So how do I extricate myself out from this stressful position?

1. Familiarize yourself with the situation

Practice will help to familiarize yourself with the new situation. However, it's not that we can practice and practice. Sometimes the important things in life, you can only do it once and once only. There's no second chance or third chances either because the consequences are hard to bear with or simply that there are no more occurrences.

2. Don't aim for perfection

If you do not aim for 100%, the stress level would be reduced but not eliminated. That should help a great deal in certain situation. I think for a perfectionist, anything less than perfect is unacceptable. I would say that I used to be a perfectionist, but it's such a miserable to be one and it's miserable to be near one, and so, I have to change. Try my best and let god do the rest, I always say.

3. Make light of the consequence

Perhaps the consequence isn't that bad, if you think more in depth about it. Okay, maybe not in depth, but philosophically about it. Life has many forks and just because the pathway you chose is blocked doesn't mean you can't get back to the same path through another lane. I think understanding that most decisions are small and insignificant towards the really important things in life would help to alleviate that stress.

I'll try to remember that 'stressed' spelt backwards is 'desserts'.

Wednesday, August 10, 2011

Kena whacked by bears

Changed a new header to reflect our current situation now. Don't they say that we have to change according to the times? Haha! Well, the times are so bad, with the market eerily mimicking the great financial crisis in 2008. Perhaps I should change the blog title too haha!

This is called kena whacked by bear

But why am I not unhappy? If you take the circumstances that we are at now, where everyone is losing money because their portfolio is being sold down without care, then I should be very sad indeed. But I'm not. If you look at the things that you have right now - like good health, like a paying job, like your loved ones, like a cup of afternoon tea with kaya toast - the loss in your portfolio might not look so bad. I'll link up this post that I had in the past because I thought it's relevant once again - "How my world came tumbling down".

Thursday, August 04, 2011

Home mortgage insurance

Not a lot of people talk about home mortgage insurance, so maybe I should start the ball rolling. This kind of protection is good if you have a mortgage for a property and you want to insure against the risk that you will strike the big three - critical illness (CI), death, total permanent disability (TPD) - while you are still paying the mortgage loan for the property. If it strikes you, then you don't have to pay for the proportion of the mortgage loan that you are covered by the home mortgage insurance. For example, if you opt to cover 50% of the total mortgage loan only under the insurance plan, then when you are struck by the big three, your part of the payment of the mortgage loan will be paid for by the insurance company. If you opt to cover 100% of the total mortgage loan, then the property will be paid fully. Another thing about home mortgage insurance plan is that it is a decreasing term plan. Decreasing means that the amount covered will decrease yearly, which is good because you paid up the mortgage every month so the amount of loan outstanding will also decrease. This should cause the premiums to be cheaper than say a level term. Term plan means that it will stop coverage by a certain age, usually 65 yrs or until the duration of the loan.

Since I bought a resale flat by HDB, they offered me their own brand of home mortgage insurance called the home protection scheme (HPS) offered by CPF. I ran into some problems during the health checkup phase (they sent me a letter saying that because my sum assured was too large, I'll have to go for health checkup) so I wasn't covered by the HPS eventually, though they told me I can re-apply again after 6 months with a report on my health status. That was when I began to check on private home mortgage insurance plans offered by insurance companies.

I found out some interesting observations by making some comparison between the quotations offered and the standard HPS plan. To make it transparent, I was comparing Prudential's PruMortgage against HPS for a 30 yr loan period, 100% coverage of mortgage loan. Here's what I found out:

1. I found out that HPS is more expensive than that by PruMortage. The premium for HPS is 27.1% more expensive compared to prudential. The absolute amount we're talking about is a few hundred dollars (<$200) per year.

2. To make a fairer comparison, I multiplied the premium of both plans by the number of years that you have to pay the premium i.e HPS is 27 yrs and prudential is 30 yrs. I found out that the total premiums paid for HPS is still more expensive than that offered by prudential. It's more expensive than prudential by 14.4%. The absolute amount works out to be 4 digit figure (in my case, it's less than 3k). I just realised that for prudential, there is no need to pay the premiums for the last three years of coverage. This is similar (but not the same) as HPS, which states that the last 10% of the yrs of coverage, you do not have to pay premiums. This means that for shorter mortgage duration (<30 yrs), the total amount of premiums paid for prudential should be lower than that of HPS. For 30 yrs loan period, there is no need to pay premiums for the last 3 yrs of coverage for both HPS and prudential.

I liberally took this from another blog : I hate to plan - http://www.ihatetoplan.com/

3. Actually, the difference in premiums isn't that much after considering the total premiums paid for both plans (for mine, it's less than 5k difference). But is the coverage similar too? A resolute no. For prudential, you can get a crisis waiver that is somewhat like a CI rider on top of the basic plans. The premiums are waived if the conditions for CI are met. This means that all the big 3 strikes are covered. What about the HPS? They only cover TPD and death. 

4. When the conditions for claims are met, the HPS do not give cash at all. It is paid directly to HDB and you will not touch the claim amount at all. For prudential's plan, you are paid in cash if the conditions for claim are met. This means that the options becomes more varied because you can treat the prudential plan like a normal term plan that insures against your health and death risk, besides insuring against the risk that you're unable to pay for the mortgage loan. I might choose to carry on this plan even after I've finished my mortgage and treat this as a normal term plan. Have to find out if this is possible.

5. The premiums for HPS is paid through CPF, so there is no cash outlay at all. However, the premiums for prudential's plan is paid through cash. I've no CPF contribution at all, so it doesn't really matter to me which payment mode is better. But I do suppose that this could be an important consideration, especially to those who have tight cash flow. If you can pay through CPF, that is one less thing to pay out of your pocket. I believe this could be the ultimate deal breaker to choose between HPS and other private home mortgage insurance plans.

Now, who would have thought that CPF's HPS would be more expensive than private home mortgage insurance plans? I certainly didn't think so. Do take note that I'm not a financial advisor nor do I pretend to be so. Without insulting my readers who are all discerning adults, I wish to lay down my disclaimer. The whole of this article are based on my possibly wrong interpretation of facts and analysis, so if you are interested, do find out more from someone certified and qualified.

*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.