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Paid off $15K debt and pondering other money matters.

Sunday, July 31, 2016

Hi AK!

Few days ago I happen to come across your blog while searching for some information regarding finance management. So i'm considered a new reader of yours. 

After reading them I find that you are someone that is quite knowledgeable in this area and I though maybe you could give me some advise on my situation based on the current knowledge and experience that you have.

So here's my current situation:

My take home income after deducting cpf is currently 3k per month. I have been working for exactly 3 years (since I started this first full time job on 1st aug 2013). I manage to clear off a 15k debt within these 3 years (5k per year). 

And in my second year I started to buy insurance. This is the problem number 1. I really spent too much on it I guess it's because I didn't have enough knowledge regarding finance options at the point of time that I bought them.

Insurance that I bought:

1) Ntuc income: it's an endownment plan which I bought it for savings purpose. Payment term is 5 years (about $2.5K per year); contract term 20 years. The guaranteed amount that I will get back after 20 years is $15k.

2) Ntuc income: another for savings. This is the one that I later regret buying but I had already paid the annual amount and terminating it would mean losing money. As I spent too much on it. Contract term is 20 years as well; payment term is 10 years (about $5.8K per year)... I have already paid about $8.3K.....

3) Prushield monthly is about $350 per annual for my current age.

4) Prulife (about $3.3K per year) for 15 years. I have paid for 1.5 years already. 

I am now very confused as I am not sure if it's a good idea to hold it out for so many years or should I consider suffering some short term losses and just give up on the one or two policy? 

If I were to give up on prulife and revosave I would lose about $13-14k in total which is an 'ouch' for me considering I just started working. HAHA but trying to be optimistic I just turned 27 years old June this year so I guess the good thing that I have here is time.

After all these I currently have $10k in my bank account as emergency fund. I have been using 360 account from ocbc and have been fulfilling the 3 criteria. I didn't start the SRS account but I read some of your post and I will be getting it soon but I don't think I will be able to transfer a lot of money into it to totally avoid income tax. Afterall my income tax is about $300 plus per year. Probably help to cut a little. As SRS will be locked up for a very long time till we are age 62 and I am only 27  that is really a long time to lock away our money. But I am not sure how much should I put into SRS as having cash on hand is also important.

The way I see myself now is that I made decisions in the past that didn't allow my money to work harder for me. However, regarding investment I really have zero knowledge and I am also someone that wants certainty more than taking high risk. Especially on something that I am not sure I will not go into it. 

So the second problem I have is do you have any advise for a newbie like me regarding investment. For example what are the skills that I need to have before deciding to go into investment and what are the risk etc. The thing about investment is that I have read about people losing alot of money imagine 100K or more and I am not sure if I will be able to take that blow in the future especially if I were to start a family. 

Currently I don't intend to go into investment as I think I do not have the required knowledge and $$ and I don't like to go into something I am unfamilar of.  

My priority now is to save up. I wanted to take this time while saving up to gain more knowledge. But I felt really lost as investment look like a very big world to me so many things and I don't know where to start.

I guess I have the discipline to save up since I am able to pay off 15k and still have 10k in my bank after paying all the insurance, bills and daily expenses etc. With my 3K take home pay. I can still feel my heart ache when I type the word "insurance".

The last part would be on cpf:
I am 27 this year so I believe transferring OA account money into SA would be advantage to my situation. However i have some concerns. Because me and my partner is planning to get a bto flat hopefully by next year. We are planning to get a 3 room flat in a non-mature area so as to get more grant. Assuming the flat is 200k. 10% would be 20k which i think the grant should be able to cover. 

So now my question is should I keep the money in my OA and pay for the rest of the bto flat and get as little loan as possible to save on the loan interest or should I just aim to pay for the minimum 10% and try to get the maximum loan. We are planning to sell this flat away instead of for permanent stay. 

My current plan now is to transfer about 15k to my SA but my concern here is after that every month how much should I transfer from OA to SA in order to hit the minimum sum by the time I am 55 years old. Is there a way that can help us calculate because I really have no idea what is the minimum sum that I must have in my SA by the time I am 55 years old. And how to calculate how much i should put in every month in order to hit that amount. 

Cheers,
XY =D





Hi,

Welcome to ASSI! :)

1. You seem like a prudent person when it comes to debt. Stay that way.

2. You only need to buy Term Life for as long as you have dependents. It pays in case you die. You buy some Critical Illness coverage for in case you don't die and have to stop working due to these illnesses. You need H&S coverage and if you think class C or B2 wards are good enough for you, you only need Medishield Life. You don't need to spend a lot of money to get the insurance coverage you need. Whether you want to make changes to your insurance portfolio or not is your call, of course.

3. Having an emergency fund is prudent. Roughly, it should be enough to cover 6 months of expenses for those in their 20s. For those in their 30s, 12 months and for those in their 40s or older, 24 months. Nothing sacred about this. Just a comfortable guide for myself.

4. SRS is useful if we want to sock away more money for retirement. The income tax relief is a nice feature. We can also consider doing MS Top Up to our CPF-SA to enjoy 4% interest per annum. Will get income tax relief for the first $7K contributed per year too.

5. Read up and learn about investing. Then, decide if this is something we want to do and are comfortable doing. To be quite honest, many people are not cut out to be investors because they cannot stomach volatility. If you do decide to invest, never invest with money you might be saving for other purposes.

6. Doing OA to SA transfer in the first few years of my working life was an important move that helped to get my CPF savings to where it is today. Whether you should do it and at what pace if you do it would depend on what you plan to do with your OA money. Just remember what is the primary purpose of the CPF and also the opportunity costs involved in using your CPF money. I won't say more.

Gambatte!

Best wishes,
AK

19 comments:

Sillyinvestor said...

Think he is sold to the concept of "forced savings" by agents. Quite obviously, he is over-exposed to "insurance"

But cutting loss? Might not actually be a good idea. If I read correctly, he is more than 30% into insurance, I wonder he is going to save significantly for his marriage/ new home. Unless his pay raise significantly...

Miselling is rampant indeed.

Sillyinvestor said...

Prulife covers death or with raider?
It could be a hole despite the hefty insurance bill? Especially on CI and advance CI. I seriously think he is not covered on those..

AK71 said...

Hi Mike,

Quite sad, isn't it?

Makes me angry each time I read an experience like this.

Although cutting loss will be painful, it could be a good idea to bite the bullet and stem the bleeding. As you have observed, I think the "blood" is needed elsewhere. It is something the reader must decide for himself, of course.

Indeed, no one cares more about our money than we do.

AK71 said...

Hi Mike,

He mentioned to me that PruLife covers CI and PD but you and I both know that we can get the necessary coverage for a lot less. Prudential isn't the most competitive in terms of pricing.

Kevin said...

Hi XY and AK,

In my opinion, you should spend 1% of your income to buy a term insurance or accident insurance. You do not have to worry about critical illness insurance as the incidence is likely to be low for young people and the expenses are likely to be covered by your employer.

You mentioned that you are a newbie with zero knowledge in investments and you probably might want to consider investing your savings in a low cost investment fund, such as the Straits Times Index Exchange Traded Fund (STI ETF) available in the Singapore Exchange while learning the ropes on investments.

The STI ETF is professionally managed and is well diversified in 30 blue chip shares in Singapore. During the past 20 years, the fund earned an average yield of 9%.  In the future, the yield is likely to be lower, but is likely to be within 3-4%.

For the CPF part, you mentioned that you will get a BTO flat next year and sell it away eventually? What will your housing plans be thereafter? Do take note of the accrued interest part when you are using your CPF OA for it.

You should also be mindful to purchase a property which is not more than 5 times of your annual income and monthly mortgage payment should not exceed 1/3 of your monthly salary in order to have adequate savings for retirement.

AK71 said...

Hi Kevin,

Thanks for the very thoughtful suggestions and reminders. I like. :)

Only one bit I am not so sure about and that is no need CI coverage because still young. OK. AK is kiasi type. I think cover at least $100K. These things are hard to say. If suay suay kena and don't die is very cham... I actually know of a couple of cases where people kena CI in their 20s. :(

INVS 2.0 said...

Hi Ak,

I am also 27yo but my insurance is the SAF Aviva Group Term Life (now covered free by Mindef) and the Aviva Living Care which I only need to pay $20 a month. I find that the reader is spending too much on insurance packages. Unless one is living a really unhealthy lifestyle and eating on illness-causing diet, else I don't think one needs to go such an extent in protecting oneself from illnesses. :)

RayNg said...

Healthcare myth...

As I'm still young and healthy and have employer benefits, there is no need for me to buy health insurance.

.....

Health conditions can develop when you least expect it. You may be denied coverage if you develop some health problems before purchasing insurance (including CI). It is advisable to insure yourself early before that happens.

MediShield and IP premiums are age -based, i.e. they are much more affordable at the younger ages, and you can use your own or your family members' Medisave account to pay for your insurance premiums. Unlike MediShield and IPs, employers health benefits will end when you retire or change employers, and may leave you with no coverage.

Source: MOH


RayNg said...

Quote Kelvin "The STI ETF is professionally managed and is well diversified in 30 blue chip shares in Singapore. During the past 20 years, the fund earned an average yield of 9%. In the future, the yield is likely to be lower, but is likely to be within 3-4%."

I guess you are referring to STI CAGR of 9% over last 20 years (excluding 3~4% yield).

Going forward for the next 20 years, SG projected growth is about 2~3%.
http://www.straitstimes.com/singapore/slower-but-quality-economic-growth-over-next-20-years-0

Having said that, if one wants to invest STI ETF for the longterm, it is wiser to invest during pessimism period or mean reversion. See STE's blog.
http://singaporeanstocksinvestor.blogspot.sg/2016/07/ste-says-to-see-crises-as-opportunities.html

Cheer!

AK71 said...

Hi INVS 2.0,

I agree that we do not need to spend too much to get the insurance coverage we need. SAF Group Insurance is an inexpensive choice but it is only available to Singaporean males who have done NS.

AK71 said...

Hi Ray,

Very helpful comments, as always. :)

Thanks for chipping in. :)

Kevin said...

Good August to AK and all readers,

XY might want to consider standard chartered esaver account too. Earn up to 1.55% - 1.7%p.a. from August 1 to September 31 2016 which I think is very attractive. Good place to park war chest funds too. :P

https://www.sc.com/sg/save/saving-esaver.html

(^v^) said...

Hi,

I think there are some secondary purchaser of insurance policy (usually longer term life policies or endowment plans) such as REPs Holdings who could take over unwanted policies with a haircut. Not sure about the deal size, but worth a check for people who have committed a fair bit and wanted to cash out. The Edge ran an article on one of them (not the link below) on one of the players in Singapore, cant remember which issue/firm. In that article, they have given some calculation to show that these secondary purchaser would give you more than the cash-out from insurer for termination.

http://www.repsholdings.com.sg/wp-content/uploads/2015/07/130413-BT-Pg-30-31.pdf

JG.

K said...

Hi all, I was discussing with my friends on using CPF vs Cash to pay for housing. Some newbie talk.

On one hand, using CPF frees up cash. The freed cash well, for youngsters, can be used for car, family. But I think many don't save enough outside of CPF. So on one hand, using cash, but one has to bite the bullet because Singapore is seriously not cheap. The upside is that the CPF is just for retirement only. What do you all think? I think many use CPF to pay.

AK71 said...

Hi K,

For my view on this, please see related post #4. ;p

I think most people will tap their CPF-OA savings for the purchase of their first home. If they do this because they are short of money but need to purchase a home quickly, think about possibly doing voluntary refunds to their CPF-OA in future. If they have sufficient cash on hand, then, I feel that the prudent thing to do is not to use their CPF-OA savings.

Solace said...

$2.5K per year x 5 years + $5.8K per year X 10 years + 3.3k per year X 15 years.

Total is about: $120K

The opportunity costs is too high, only happy person in this case is the insurance person.

AK71 said...

Hi Solace,

And the insurance companies the agents are working for.

MJ said...

Hi AK,

Greetings! I'm a frequent visitor to your blog and enjoyed learning from you. Thank you so much!:)

It's good to see younger folks are starting early to help themselves, save invest and build their retirement goals. Wished I had done so early too.

Just like to share my experience. In my younger years, I used to think that just having savings are good enough for retirement. But realized my simplistic thinking didn't help as due to our growing cost of living, we are getting lesser with our accumulated lump sum savings as we grow old. I'm happy that I have started build a portfolio that is seeing the returns of some regular dividends.

And more recently, I was hit by a major sickness which required hospitalization that wiped out a huge sum of savings despite having a basic H&S insurance & medisave/medishield. The thing is I was always careful of keeping myself healthy all along and really didn't expect such a major event to occur. So life can be really uncertain no matter how young or healthy we think we are loh hahaha. To have a peace of mind, it is important to protect one's savings/wealth by getting a good H&S plus rider that covers all of the medical costs.

Regards
MJ

AK71 said...

Hi KJ,

Welcome to my comments section. Hope that you will be commenting regularly in future. :)

Yes, for many of us, just saving money alone will not make the cut if we want to retire comfortably:
To retire by age 45, start with a plan.

Having a good H&S plan and having meaningful CI coverage is important to avoid wealth destruction:
1. Enhanced Incomeshield for my mom.
2. Without CI coverage, could we become a burden?
Thank you so much for sharing your experience.

Hope your health improves day by day. Have happy thoughts. :)

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