Tuesday, December 16, 2014

My offensive and defensive strategies

I wrote about my dilemma regarding whether to pay down my HDB loans or use the excess money for investment. That was back in Nov 2013 and more than a year had since passed. Back then, I really put in an extra 24k to do partial repayment for my HDB loans, and it shaved off 2.5 yrs off my 30 yrs loan.

One year later, I still don't know if I did the right decision. The dilemma is always the same: given a sum of money, is it better to use it pay down the 2.6% mortgage loan or invest in the market to get a yield of more than 2.6%? The decision is complicated by factors such as:

1. Certainty of interest payable on money borrowed vs uncertainty of returns in the market

2. Property insurance bought in the event that either owners hit death or TPD

3. The liquidity of the money invested in the market vs doing a partial capital repayment

In the end I opted for a balanced solution, meaning that I will save a portion for investment and save a portion to make partial capital repayment for my HDB loans. This will avoid the two extreme end game scenario of being asset rich but cash poor (if I use my savings to pay off HDB loans early) and paying excessive interest by dragging the loan period to the maximum (if I invest my savings totally). Both are not ideal outcomes for me, so I would avoid both.

This year, I'm more slanted towards investing my savings in the market. Value is emerging in the stock markets, and so I would keep a larger part of my savings liquid to take opportunities. I made a proposal to my wife to see if she can part with 6k (12k in total) to make partial capital repayments. If we can keep at this rate for every year, we'll be out of debt in 14.2 yrs. This is opposed to not doing any repayments, and letting the loan drag for 24.4 yrs. 6k per person per year seems like a reasonable amount to be able to continue for the long term (at least 10 over years!), and with that we can save about 70k off the total payment for our flat.

I did a comparison by doing several amount of repayment, ranging from 6k all the way to 24k annually. The table shows the results obtained. I tried putting in half yearly too, which means say instead of putting in 24k per year in one shot, I put in 2 injections every half a year of 12k each. Interestingly, not much difference, so I dropped that plan.

24k per year (12k per person per year) is too insane. I can do it for extended period but I'm quite sure my wife would be complaining. If I save 50k per year, 12k would be roughly 25%, so it might be a tad too much. The consensus so far is 12k or 6k per person per year, roughly 10% of my savings of 50k. Like the government, I'll have to adjust this percentage on a yearly basis, seek the shareholder's vote (aka wife's consent) and roll out the plan.

This year, I seem to have a lot of bright ideas to manage my personal finance, like setting up a emergency fund of funds in CPF by doing voluntary contribution and building a base of 240k so that I can generate enough yield to cover my mortgage loan of 1k, It seems like I'm a headless chicken running around in all different directions, don't you think?

But I have my financial freedom plan! On one hand, I'll build up a capital base of 240k. Grow big enough to make my problems smaller. At the same time, I'll reduce my debts by making capital repayments. That's my 'offensive' strategy. My 'defensive' strategy is to lock up enough funds in my CPF OA by doing voluntary contribution, so that I can depend on it in the event that I cannot work for prolonged period of time. A back of the envelope calculation means I've to put 6k per year to make partial repayments (I'll make an effort to do it annually), another 6 to 12k to put into CPF OA (entirely optional, depends on circumstances), so in total about 12k to 18k out of my savings will be channelled into my strategies. And the good thing is that I reserve the rights to change my opinion anytime haha! I'll tweak to my heart's delight every year based on the circumstances. That will give me the leeway to evolve my financial plans together with me.

Here's the summary of the 'budget' needed to run these 'programs':

1. HDB capital repayment plan (intermediate priority)

Short summary: Pay extra $ on top of mortgage payable to reduce interest paid for flat
End point: Be debt free in 14.2 yrs
Amt needed per year: 6k
Expected project duration: 14.2 yrs

2.  Build up of capital for 1k/mth dividend plan (highest priority)

Short summary: Build up a base of 240k (shortfall 100k), invest at >5%
End point: 1k per month dividends based on 5% returns
Amt needed per year to fund: 30k to 50k
Expected project duration: 2-3 yrs

3. Emergency fund of funds (lowest priority)

Short summary: Do voluntary contribution, build up OA acct to contain 1 yr of full monthly mortgage (2k)
End point: Have >24k in OA account
Amt needed per year: 6k to 12k (depending on earnings and tax reliefs obtained)
Expected project duration: 1 to 5 yrs

That's why I need to save money!! 3 programs and I need the budget to run them! Somewhere down the line, the 3 programs will overlap and I will (likely) change my plan again. Paying off my HDB loans will require me to have less money in my emergency fund of funds, then I can use the money to build up my capital of passive income, which will lead me to have more money to pay off my housing loans and have more emergency funds etc etc.

We'll see :) I think my plan for the next 3-5 yrs are crystallising nicely. I'll just need time and effort to carry it through then.

1) Updates of goals on 8th Nov 2016 here