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A new flat on the way and $200K in spare cash.

Wednesday, July 9, 2014

She and her husband have some $200K in spare cash. She is in her 20s and they have a new flat on the way. This is my reply to questions posed by her:


Hi YX,

Firstly, please remember that I am not giving advice. However, I can share what I would do given the same set of circumstances. :)

1. I would take a 30 year housing loan instead of 10 years even though I might have the ability to pay it off at one go. It is less of a burden in case bad things should happen. If I had more spare cash over time, there is the option to pay down the loan, doing partial capital repayments.

2. I would invest some of my spare cash for higher returns. This would make sense as long as the returns are higher than the interest payments on the housing loans, all else remaining equal. If interest rates go sky high, then, it would be time to pay down the loan. Some of the spare cash goes into an emergency fund and the rest goes into a war chest, waiting for investment opportunities.

3. I don't think it is a good time to be in bonds. Higher interest rates on the horizon make bonds a bad investment now, I feel. Cash, we always need to have. Doesn't matter that the banks pay peanuts for our savings. Gold is an insurance and conventional wisdom says we should have 5 to 10% of our wealth in precious metals. However, it doesn't generate income.

My approach is about having stronger cash flow while keeping necessary debt manageable, if any at all. Also, we always need liquidity and insurance in life. Why? Because bad things happen in life. As long as we are prudent in our finances, always saving some money and investing for income, we will do well over time. :)

Best wishes,
AK


If you have any ideas which you would like to share, please do so in the comments section. I am sure a meaningful discussion would be appreciated.

Related posts:
1. Gear up and receive more passive income.
2. InvestX Congress: Q&A (some relevant questions).
3. What should I do when I am down 25%?
4. Buying an apartment. (See point 2)
5. Young working Singaporeans, you are OK?

31 comments:

coconut said...

AK, generally i agree with your recommendation. but i'll go further by asking where on earth does the 200k comes from? if its through hard work and saving, i think i'll stop giving advise, they will do well whatever the case may be. or maybe i should ask them for advise instead haha.

AK71 said...

Hi coconut,

I would hazard a guess that they are a financially prudent couple. Haha... :)

naro said...

Hi AK,

If housing mortgage loan interest rate is higher, say 4%-5%, would you still take a 30 year loan?

Regards,
naro

AK71 said...

Hi naro,

It is all relative, really.

If I was able to get a genuine and sustainable 10% return on my investments, then, a 5% interest rate on the housing loan wouldn't be difficult to accept.

It all depends on the alternatives which we have. :)

temperament said...

30 years mortgage or heck 100 years even better. Provided there is a provision(escape clause) that the loan can be redeemed fully at any time without penalty payment.
If your incomes are stable for servicing the mortgage, go for more leverage.
On the hand, the earlier you are debt free, the faster you will build up your equity and therefore asset.
We were very blessed to be able to be as debt free as early as possible because we just live quite "simply".

xin said...

Hi AK, Thanks for your sharing (*not* advice right? :P) I've worked out my HDB Gameplan; to take 30 years loan and keep the cash (as warchest! and emergency) and invest the rest.
@coconut, it is partly inheritance from grandmother, partly cos my husband is self-employed so this is also 'his cpf', and we don't spend much, usually eat at hawker centres.
- YX

AK71 said...

Hi temperament,

The feeling of being debt free is truly amazing. I know. I felt it too. :)

However, with money being a scarce resource for most of us, trying to make our money work harder is a good idea, conditions permitting.

A 100 years loan? Heavens forbid but actually, it is forbidden by our government. No need to go too high up. LOL.

AK71 said...

Hi YX,

"Someone is sitting in the shade today because someone planted a tree a long time ago." Warren Buffett.

Fortunate are those who have inherited some wealth which happened because people who loved them had been able to create and manage wealth prudently.

As you embark on your journey to financial freedom, gambatte! :)

pf said...

If the couple hv adequate insurance and not too fearful of retrenchment. Then no need to keep too much emergency fund.

Not too much cash lying around also good. No need to cover other ppl's emergencies.

AK71 said...

Hi pf,

I feel that we should always be fearful of retrenchment or the possibility of a recession. Anyway, that's me. ;)

loony said...

Beautiful. Also her husband can top-up CPF. Up to 5% risk free return and let compounding make it grow over years. We only realize the value of CPF when we hit 40-50.

pf said...

Think fear of retrenchment and recession has a lot to do with attitude in life.

I just went to salary.sg forum. Some ppl said they hv been jobless for months. Sent hundreds of resumes. Yet, willing to stay at home, not even want to take up a part time job or lower salary expectations.

If hv such attitude, then retrenchment and recession would be quite fearful I guess.

Anyway, coming back. ...if there is such fear then better to make sure we are high value contributors at work then.

AK71 said...

Hi loony,

Indeed so. Compounding needs time to do its magic. Compounding at 4% per annum is powerful magic. I am 43. I have witnessed the power of this magic. ;p

AK71 said...

Hi pf,

Really? Jobless for months and still picky? -.-"

I should say in my earlier comment that we should work towards being less fearful of retrenchment and recessions. That happens when we have a meaningful and reliable passive income stream so that earned income becomes a nice to have item but not a critical item. :)

Sanye ◎ 三页 said...

HI YX,

Just share my thought with you.

If I were you, I would take a 30 years loan too. Instead of keeping the 200K as spare cash, I would put 40K into my husband's CPF SA since he is self-employed without a CPF contribution. (my assumption) This money will grow and by the time he reaches 55 (assuming he is 25) he will have more than 140K in his SA... Imagine 4~5% return of an investment over 30 years and risk free.

xin said...

Hi all, appreciate all your comments! Indeed AK, I am blessed to receive an inheritance, and I hope to make every effort to make it not go to waste.

will definitely consider putting into cpf! right aft it's cleared out when we receive our keys. otherwise cannot earn the interest alr :P

job wise, im an engineer in govt-linked, nv heard of anyone retrenched before. for now, our household cashflow is healthy, every year can save at least 30k. husband is self-employed so if recession hits, that could be a point to worry. which explains why i'm quite cautious and undecided on what to do with the money...

Insurance - we have life, health, accident insurance. endowment plan for kids edu should hv abt 80k in 15 yrs time. (no kids yet, pardon my kiasuness). another endowment plan would hv 90k in 8 years time - may use it to pay down house if required or find another investment channel for it.

we alr hv a paid up car, left behind by my late father. prob will just renew the coe when time's up in 2016 *fingers crossed*

current stock portfolio:
capitaland, 4 lots
sph reit, 7 lots
mapletree gcc, 6 lots
oue, 3 lots
courts asia, 7 lots
total cost about 10% of assets.. hoping to bum this up but trying to figure my way in the maze of investment.

the rest are in fixed deposits and ocbc 360 account

hope you all can share more on your experiences! thank u!
-YX

coconut said...

@xin,

wah i'm so envy you, at 30 i'm still penniless.

yes go for the 30 years morgage loan from HDB if they still subsidise for the interest @2% or something like that, definately!

as for what to do with the cash, i think its up to individual, be it save, invest, CPF top up... in my line there is this golden word - "capital preservation". hope its useful.

AK71 said...

Hi Sanye,

Wah! That was my magic number too: $40K. :D

I transferred all my OA's money to my SA in the first few years of my working life. I didn't have an inheritance then (**jealous of YX**). LOL.

I stopped at $40K and let compounding perform its magic over time. I am now 43 and I have witnessed the magic. ;)

coconut said...

by the way i had a friend who was a big earner, got 300k out of his retrenchment, ask me what to invest with the money. frankly i told him not to buy anything for investment!

his case is rather different cos he had never invest in anything before (thats what he told me) nor interested in the subject and he is close to retirement age!

AK71 said...

Hi YX,

Thanks for sharing your finances in detail with us here. The way I see it, you are in good shape! Seriously, I know many who would like to be in your shoes! LOL.

I understand your worries because I am like you. I worry a lot. Kiasu. Kiasi. LOL. However, I believe you will do fine. Don't worry. ;)

AK71 said...

Hi coconut,

Indeed. For someone in retirement, it is better not to make money than to lose money. :)

xin said...

reading up on cpf top up now! thanks AK and Sanye :)

pf said...

Xin, as u r an engineer, I suggest u to invest in yourself and your career. Engineers have it harder to change job as each and every engineer role is different. Since you hv no kids now, its impt to spend the time gathering professional certs that can help u get new job or change job. This is even more impt becoz ur husband is self employed as his income stability is of higher risk. It may not be a case of retrenchment at civil service. But rather, how to earn better income when you have kids and you would like to provide more for them.

I hv a friend who worked 11 years at her same engineering job. Her business unit was sold away and she realized she does not have up to date professional certs and skills to get a new job. So, she had to be "sold" to the company that took over.

pf said...

Contd from above...

My friend was "sold" against her will. The new company did not pay her on time amongst other problems. Her told company took her back and assigned her a role in another business unit.

My point to her and other engineer or IT ppl r to keep upgrading and gather skills which are not easily transferable and/or easily outsourced to mumbai.

Ppl in these roles in their 40s are easily replacable by the younger and cheaper ones because their role is technical with easily trf knowledge and skills. However, management skills not so easy. Especially project management skills...getting ppl to work and/or work together. So, I encourage ppl to strive towards that.

Don't be afriad of new challenges. Keep adding on to your own knowledge pie. Especially cross discipline. E.g. engineering +marketing or engineering + business analytics, etc etc....

Keep yourself healthy in body and mind. Internal resilience and positivity really helps to reduce fear.

I dont mind to hv passive income. But perhaps I am not such a passive person...I like to strive towards what I want in life. I like to earn more income better than reduce spending. Hee hee....

AK71 said...

Hi pf,

Our country needs more people like you. Our economy needs people like you. Gambatte! ;)

pf said...

Whahahha....its funny. But I really must say, its true...

My engineering friends are largely a contented lot. The friend I mentioned went through a few rounds of wage freeze for years. Although she realized the lack of up to date certs are impt, her job keeps her too busy to attend courses. Moreover, due her passive nature, she would rather hang on to her current job and continue working hard for mediocre pay rather than find new job with higher pay and better work life balance.

I see most of our fellow singaporeans tend to be more laid back in their 30s after they got a job that pays say 5k monthly salary. Then they complain

pf said...

...complain that work place is filled with foreigners....they can't compete and can't move up...salary increments low, barely beat inflation, etc. Then fear of retrenchment sets in w the big 4-0.

Well, no employer hv incentive to pay a staff higher than inflationary rate increment if there is no increase in value brought to the organization. So cant expect to be paid more for same work....

Since xin is still in her 20s, time is on her side totally. Bright future ahead. :)

xin said...

Agree w u, pf! Upgrading skills is so impt to getting better pay. instead of just expecting pay to increase.. Just completed a Systems Engineer course. Thankful for a company that puts emphasis on personal and professional development; every year must attend one course of each type :P

Matthew Seah said...

Hi YX,

Congrats on having a positive net worth.

Jia You

Rgds,
Matthew

paul ng said...

Good discussion. I think my risk appetite is quite low. Always trying to clear debt fast. Reflecting bk my 20, I am not so savvy with investment. I did have the same idea to put my money to get higher return than the interest rate. But the challenge is whether I could achieve a sustained return. I lost in managed fund investment but gain through my personal equity investment. When reach 30, I chose to liquidated and pay off as much loans. I am glad my conscious effort has helped me to be debt free for my property and car now. Slightly younger than ak☺

While 30 yrs loan period is longer and lower instalment but we are paying alot more for interest in the long run. I thought where possible we should opt for short loan period. Just my view.

Totally agree with pf, a need to actively upgrade and grow income. 40 is a challenge for many who have been focusing on doing work but not improving themselves.

AK71 said...

Hi Paul,

Thanks for sharing your experience with us here. :)

I like to be debt free too and for a while a few years ago, I was. Well, my housing loan attracted an interest rate of 5.1% in the year I finally paid it off. -.-"

Was I able to confidently generate a return higher than 5.1% per annum then? By paying off the housing loan, I "made" 5.1% per annum automatically. LOL.

Now, I am once again in debt as I took a 30 year housing loan for my new home. -.-"

However, the intention is to pay off the loan within 10 years or earlier if interest rates should go much higher once more.

It is OK to take a longer term housing loan if interest rates are low and if we can generate higher returns on our funds. It is not OK, however, to over-leverage. Not having the ability to pay down a housing loan in full or significantly when the need calls for it, to me, is a sign of over-leveraging.

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