10.5% yield but must take a 200% loan.

Reader says...

I have some money in bank and my Relationship Manager is pushing me to buy unit trusts with leveraged.

Recommend me to take 100% loan so the yield will be higher from 5% to 8%.

I could also take a 200% loan to get 10.5% yield.

Good or bad?






AK says...

Gear up 200%!?

Sack your Relationship Manager.

Of course, the bank he works for won't sack him.

You sack him!

I don't borrow money to invest with.






When you buy a unit trust, the only people guaranteed to make money are your Relationship Manager, the bank he works for and the fund managers.

You are the one bearing all the risk.

Do you want to increase that level of risk?

(It is a fact that if you leverage up, they will be guaranteed to make even more money from you while you are only guaranteed more risk.)





Someone I know bought into a REIT mutual fund before the Global Financial Crisis.

It lost about half of its value.

Imagine if he had financed that investment with 200% leverage!

His losses would have been hugely magnified!

Shudder...

Remember that no one cares more about our money than we do and don't ask barbers if we need a haircut.







Warren Buffett believes investors should avoid using borrowed money to buy stocks.

"It is crazy in my view to borrow money on securities," he told CNBC on Monday.

"It's insane to risk what you have and need for something you don't really need."

"My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage," he said.

"Now the truth is — the first two he just added because they started with L — it's leverage."





He shared the data that revealed Berkshire Hathaway's stock declined by a range of 37 percent to 59 percent multiple times over the last five decades.

"There is simply no telling how far stocks can fall in a short period."

"Even if your borrowings are small and your positions aren't immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary." (Source: CNBC, 26 Feb 18)





AK agrees.

Peace of mind is priceless.

You might want to read these blogs:
1. A great crash is coming!
2. Lost life savings and now in debt.

And also this "e-book":
Survivability and opportunity in times of crisis.





In case you just joined us, another blog was published earlier today.
See: Make investing easy.

Keep $20K in CPF OA when taking HDB loan. (Growing CPF SA after OA was wiped out by home purchase.)

Just as I was about to publish this blog, I saw the news hot from the oven.

"Flat buyers will have more flexibility in using their Central Provident Fund (CPF) money, the Housing Board said as it launched 5,101 flats for sale from Tuesday (Aug 28).

"Buyers can now keep up to $20,000 in their CPF Ordinary Accounts (OA) when they take a Housing Board loan. Before, they had to use all the funds in their OA first.

"The funds can be used for their monthly mortgage instalments in times of need and will improve retirement adequacy if left unutilised."

Source:
The Straits Times





........................
Reader says...
Thank you for sharing so freely.

As like many others, I feel inspired and in awe.

I hope to get some advice if possible.

I recently emptied by OA to purchase a flat (on hindsight not such a great move).

Since then OA has been accumulating till it's about 10k now.






I plan to sell in 5-6 years time (depending on market).

Should I already start to transfer all my OA to SA?

Will there be any repercussions upon selling my BTO in 5 years time?

I am sorry if some of these questions look abit directionless.

Never been good with numbers, learning the hard way now.






AK says...
5 to 6 years from now, if you are not at least 55 years old or if you would be 55 but do not have the FRS in your CPF, you would have to pay back the accrued interest on the CPF money you used to purchase this flat.

I don't give advice but I will talk to myself.






If I had a mortgage now, it would not be a good idea to transfer all the money in my OA to my SA because if things do go terribly wrong, the OA money would go some way to pay the monthly mortgage.

I would keep enough in my OA for 12 to 24 months of mortgage payment (or any number of months that I think I might need to find work offering similar pay I had before).






Then, if I am certain I do not need the remaining OA money for any other purpose, I can consider transfering any balance to the SA.

Please remember that OA to SA transfer will not enjoy any income tax relief.

So, if income tax relief is important to you, you might want to do cash top ups to your SA instead.

Fresh funds from you will be required.






The first $7K of cash top up to the SA each year enjoys income tax relief.

Although OA to SA transfer does not enjoy income tax relief, it is financially less demanding as it is simply moving money that is already in your CPF account and not a demand for fresh funds.

Saving more in the SA is a long term plan to help fund our retirement but we should not do it without first considering our circumstances and what might go wrong.








You might want to read this:
Topping up our CPF savings can wait for some.

Lost life savings and now in debt. (Investor or speculator?)

When are we investors and when are we speculators?

When we buy into something that has intrinsic value which generates revenue and ideally provides us with an income, we are investors.

When we buy into something that is the complete opposite but we feel that we could sell it for a higher price in future, we are speculators.





People often get into serious trouble when they think they are investors when they are really speculators.

Speculating is not for everyone.

People of more modest means would do better if they stay away from speculating and just stick to investing.










The value of all outstanding cryptocurrencies has fallen by about $600 billion, or 75 percent, since the peak in January.

The damage is likely to be particularly bad in places like South Korea and Japan, where there was minimal cryptocurrency activity before last year, and where ordinary investors with little expertise jumped in with abandon.

Kim Hyon-jeong, a 45-year-old teacher and mother, put in about $90,000 last fall.

She drew on savings, an insurance policy and a $25,000 loan.

She is down about 90 percent.

“I thought my family and I could escape hardship and live more comfortably, but it turned out to be the other way around.”





Twitter is also filled with complaints: “It’s really hard to stomach losing all my hard earned money. Just broke down and cried.”

On Reddit, a user posted a picture of the $100,000 loan that he had taken out in December to buy cryptocurrencies — and that he will now be paying back out of his salary for the next three years.

“I’ve made a mistake, and now I’m going to have to unfortunately pay the cost for the next few years.”

Source: New York Times.






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

Before parting with our money, question if it is an invitation to invest or an invitation to speculate.

Oh, I don't even borrow money to invest with.

Borrow money to speculate with?

That is how some people "ki chia" lor.

Related post:
My final word on Bitcoin and friends.
"When people tell me that they invest in Bitcoin, I get the impression that they are either confused or they are out to confuse other people."

Survivability and opportunity in times of distress. ("E-book")

Be warned.

This blog could be considered heavy reading, especially on a weekend.

From time to time, I still read or hear people say that an emergency fund is really over rated and that there is no need to have one.

Of course, regular readers know that I disagree with this and that I even have an emergency fund that does not only cover 24 months of my own expenses but my parents' as well (and then some).

Bad things do happen in life and that is what insurance is for but if we buy insurance for all the things we could possibly think of that could go wrong in life, we could go broke.

Yes, buying insurance for everything that could go wrong in life is wrong and I have blogged about this before too.

See Chapter 1:
How insurance weakened a family?






Then, there are those investors who have an emergency fund but do not believe in having a war chest, preferring to stay almost 100% invested all the time.

To me, there are times to be 100% invested but, most of the time, it probably isn't a good idea.

There are many reasons why and one is that those who do not have a war chest might be tempted to use their emergency fund, if they have one, to invest with if Mr. Market goes into a depression.

No! No! A thousand times, no!

I have said before that we should not invest with money we have earmarked for other purposes.

We do not want to be caught in a situation where we have to sell at whatever price Mr. Market offers because we have no choice.

See Chapter 2:
This way to $50K passive income?





Yes, it can happen.

Remember, if Mr. Market goes into a depression, possibly, it is because the real economy is in a bad shape and we might lose the job we depend on to bring home the bacon.

Of course, if you are born with a spoon made of some precious metal in your mouth, please ignore this blog.

See Chapter 3:
My family almost went bankrupt.






The no emergency fund and no war chest camp sometimes say that the option to borrow money is always available.

Of course, regular readers know that I think it is a bad idea to think like this.

The Global Financial Crisis happened 10 years ago but human beings have a short memory.

Still, some of us might remember how difficult it was to borrow money then.

Don't put ourselves in a situation where we have to borrow money.

It is not a good place to be.

See Chapter 4:
Compared to anger, shame is a thousand times worse!

So, is debt a bad thing?

No, that is not what I am saying.

I am saying that depending too much on debt is a bad thing.

Debt is really just a tool.

If we think about it, it is just a tool that magnifies our financial decisions.

If we make good decisions, they will look better with debt.

If we make bad decisions, they will look worse with debt.

See Chapter 5:
Gear up and receive more income?






Debt cuts both ways but it is just a tool.

The danger always lies in human behavior and their feeling of invincibility.

If we keep using debt, we might get drunk on debt and history has shown this to be the case.

Overly dependent on debt, people over extended themselves.

Overly leveraged, when things did not go as planned, they could not repay their debt sufficiently and went bankrupt.

See Chapter 6:
When are we over leveraged?







So, I did not mention the Global Financial Crisis just for fun.

It should be remembered and be used to stress test our finances as the worst possible financial storm that could hit us.

Without an emergency fund and a war chest but, instead, have quite a bit of debt, could we survive or do better in another Global Financial Crisis?

It doesn't matter if we have good or bad debt, debt is debt and this question should be in our base plan.

Do you believe that good debt can go bad quite quickly during hard times?

See Chapter 7:
Don't think and grow rich!







Yes, it is true that there is an opportunity cost in holding an emergency fund and a war chest.

However, having these will improve our survivability and let us capitalise on opportunities in times of distress.

They are self insurance policies.

Opportunity cost?

It really is a small price to pay.

Of course, I have blogged about how having a steady stream of passive income is self insurance too but that is another topic.

See Chapter 8:
Best insurance in life.







No emergency fund and no war chest?

You could be doing yourself a big disservice.

See Epilogue:
How much should you have in an emergency fund?

Questions from an investor on HDB and CPF.

Reader says...
I have been following your blog for a few years and am grateful for the nuggets of wisdom that you post on your blog.

I bought a resale HDB flat that is of the same age as me and by the time I fulfill the 5 years MOP, the remaining lease would be 59 years.








In other words, I understand that there would be certain restrictions on the use of CPF for potential buyers of my flat.

(See:
Older HDB flats with remaining lease of less than 60 years are problematic.)








However, I am not intending to sell the flat as I think the lease is sufficient and the flat is big enough.

To pay for the flat, I took up a bank loan with 2 years fixed interest of 1.58% and am currently using my CPF OA to pay my monthly mortgage.






I am thinking since I don't intend to sell the flat, I might as well not repay the accrued interest and continue using CPF OA to pay the monthly mortgage. 

I could use the extra cash to do my own investments.






However, I also wonder if I should use cash to pay the monthly mortgage so that my CPF OA can grow and government can pay me 2.5% interest?

I hope you could shed some light on what would be the best way forward. 

Thank you very much 😊

AK says...
I will try to focus on what is important here if I were in your shoes.

Feel free to ignore me.

I wouldn't use my CPF OA money to pay a loan that attracts 1.58% interest.

I have lost 1% interest right away.








I would use cash to pay the loan.

Even if you do not intend to sell the flat and would not need to repay the accrued interest, it still doesn't make sense to lose that risk free interest.

This is especially if you believe that having an investment grade bond in your investment portfolio is important.






AK does well enough as an investor but he is not a very good investor.

AK needs some certainty in retirement funding and risk free, volatility free CPF helps him to sleep better at night.

If you are a very good investor, please ignore this blog. ;p







Related post:
Free money from the government is good.

Stronger personal balance sheet and cash flow statement.

Reader says...
I need to spend more time to learn more about investment and not wait till it's too late.

I find it inspirational to read your blog and it motivates me to invest more to be like you.





I have some savings every month and would like to seek your advice on how I can manage it to optimize the very little amount and still be able to grow it further.

1) Reduce my housing loan with the bank in Jan 2020

2) Transfer money to SRS to reduce my income tax contribution for 2018

3) Put aside for my savings account

4) Put aside money for trading





Should I divide my savings evenly among the 4? And since the money in SRS cannot be withdrawn, do you think I should use it to trade?

AK says...
Welcome to my blog. :)

I am glad that you have realised the importance of investing for income.

I believe that you will thank yourself in your golden years. :)





For sure, unless we are born with a spoon made of some precious metal in our mouths, we need to save money in order to have money to invest with.

OK, I know we can also borrow money to invest with but not everyone can sleep well investing with borrowed money.

Indeed, I have a blog on how to have peace of mind as an investor and you might want to read the related posts at the end of this blog.





You have to know that I am not a financial adviser and I am not allowed to give specific advice to anyone.

As a blogger, however, it should be safe enough for me to talk about things in general and you have to make your own decisions.





1. If interest rates go much higher and is even higher than the 2.5% we earn on our savings in the CPF-OA, it makes sense for us to pay down our home loan, especially, if we don't know how to safely invest our savings for much higher returns.

2. Use the SRS to reduce income tax payable only if you have maxed out your CPF-SA. With the CPF-SA, you earn 4% to 5% per annum. 

If you decide to do this, remember, only the first $7K of top up (per year) to the SA will enjoy income tax relief. 







If you have more to contribute, let it flow into your SRS and you could use the SRS savings to invest for income (but dividends cannot be withdrawn until age 62 together with the SRS savings).

See: SRS: e-book and analysis.

3. We always need an emergency fund and a war chest. Having more money saved up is a good idea.

4. Of course, you should think about investing for income.





Which one you do and in what proportion depends on what is more important to you.

If you feel that some measure of financial security is more important while retaining flexibility, then, you should concentrate on #3 first, for example.





It doesn't take much to have a stronger personal balance sheet and cash flow statement.

It does, however, require a lot of discipline.

Related posts:
1. Peace of mind as investors.
2. Top Up SA, MA or SRS?
3. How much in Emergency Fund?

Pay home loan and HDB housing grant fast?

Reader says...
I hope you bear with me while I share the info about it - resale flat was purchased at 480k and I got a hdb housing grant of 50k for 1st timer.

My fiancee and myself went for a bank loan instead of hdb loan.

The loan principle I have to service is 384k.






I would really appreciate your advice/guidance to my following questions:

a. I thought of repaying my housing loan using cash instead of cpf.

I think this is still manageable from my side from a cash liquidity perspective since I could save on the chargeable accrued interest (at the point of future flat sale) and at the same time continue to earn the 2.5% int.

What do you think about this approach in terms of pros/cons?






b. I took the housing grant of 50k which I know will be charged accrued interest.

I'm not sure how accrued interest is charged on this 50k but is it considered wise if I try to repay this?

Or in actual fact, it doesn't make a difference because it will net off from the interest that I earned for the OA that continues to reside in my cpf account?






c. If at any point in time I thought of partial loan repayment to my bank, say a sum of 30k in cash every beginning of the year so that principal amount will reduce and I look to repay the full loan in 7 to 10 years.

What do you think about this approach and possibly the risks that go with it?

Many thanks in advance, and I really appreciate your feedback and suggestions.

AK says...
As long as your home loan attracts an interest rate of less than 2.5%, it makes sense to pay your loan with cash instead of using money in your OA.

(I would also add that as long as money in your savings account is paid less interest than the interest paid by the OA, it makes sense to pay your loan with cash.)

If you have no intention of ever selling your HDB flat, you can worry less about accrued interest on OA money used or the grant as long as you hit the prevailing full retirement sum (FRS) by the time you are 55.






By 55, you can withdraw all money from your OA and SA in excess of the FRS.

So, if you were to sell the HDB flat after you turn 55, you could take out all the money which includes the accrued interest you owe your CPF account.

It would be like asking you to put in money only to immediately take it out again.






Partial capital repayment makes sense when interest rate goes much higher.

When exactly to do that?

It is up to you as it should also partially depend on what you feel you could get if you were to invest the money instead.

I remember when I paid the housing loan for my previous home in full, the interest rate on the loan went from 4.1% to 5.1%.

Ouch.






Congratulations on your new home.

Related posts:
1. How to stop accrued interest from growing?
2. Almost 55 and worried about CPF.

What is our goal and is debt unavoidable?

Reader says...
I am one of those silent readers following your blog and i greatly appreciate your thoughts and wisdom regarding a multitude of issues.

I am currently facing a dilemma of whether to pursue a post graduate education and i was wondering you could knock some sense into me :)




I am a 29yo engineering graduate who developed an interest in finance and was fortunate enough to make an internal switch to a business and financial analyst role within my company.

I was able to pick up the job requirements for my current role but i feel the need to gain more knowledge on the finance side of things and hence i am considering taking up a part time masters in finance.





I would think that this is a form of good debt by investing in myself and having this paper qualification could possibly open up more opportunities in the future but at the same time, this will put me $40k in debt and part of me thinks that this money could be put to use by income investing.

Could you kindly advice what your younger self would have done in this case?

Thank you for hearing me rant.





AK says...
It is very simple. ;)

Ask if this is a need or a want? 

If you need this, go do it even if it puts you in debt.

Having said this, ask if there is another way to get what you want without going into massive debt?

I decided that I needed some knowledge of business when I left teaching to go into sales. 

So, I did a part time diploma in business for about 2 years. (See related post at the end of this blog.)

I didn't have to go into debt to do it.

It probably cost me less than two thousand dollars to do the whole course back in those days.




I decided what I needed was knowledge and learning in a structured manner to speed up the process. 

I didn't need a prestigious degree for my purpose.

So, ask yourself what are you trying to achieve and if debt is unavoidable?
------------------

Although I try to avoid debt in life, it is not because debt is an absolutely bad thing.

Used judiciously, debt can be a good thing if it helps us to generate more income.

Always remember that even with good debt, it is important not to over-leverage because things do go horribly wrong like they sometimes do.





When do we know we are over-leveraged?

There is no precise measure of over-leverage but if we are unable to service our debt for even a short period of time (i.e. 6 months to 24 months) if we should lose our jobs, I would consider us to be over-leveraged.

Of course, this will bring us to another favorite topic of mine which is the importance of having an adequate emergency fund. (See related post #2.)






Related posts:
1. What should I study to be a good investor?
2. How much should we have in emergency funds?

Financial security in Singapore plain and simple.

Singapore retrenchment: Will Malaysia share the same fate?






Reader:

I found your blog over the past week, and I have been looking your posts when I have the time.  

I don’t want to be a slave to my job when I am in my late 40s or 50s. 

I know that being an average salaried employee, it is quite difficult to ever be financially free.

Some facts about me:

• Working since 2013, earning $5.7k a month
• 
  
• Save about $900/month in cash
• 
  
• Invest $300/month in STI ETF (I read blogs for beginner investors that said STI ETF as a low risk, simple, long term investment that seemed to be ideal for young investors without much capital)

I have just bought a 3 room BTO for my mom and myself. 

Hence, I have emptied out my OA for house payment and spent my cash savings for renovation. 

In a way, I am starting over from scratch again, with $0 in CPF OA and very little in cash savings.

I understand that since my loan interest rate is much higher than the OA interest rate of 2.5%, I should look to repay the loan as soon as possible (assuming I don't re-finance with a bank loan).
(Parts of the email omitted.)

For only $300, you gain instant diversification.

AK:
What you do depends on what you want to achieve but what you do should also depend on the resources available and your ability to stomach volatility and some risk.

Investing through an STI ETF is good for someone who does not have the inclination nor time to research into specific stocks. 

It is a long term strategy that should yield decent results over a 20 to 30 years period. 

This is your exposure to the local stock market.
http://singaporeanstocksinvestor.blogspot.sg/2013/07/tea-with-matthew-seah-posb-invest-saver.html







You can think of the CPF as your exposure to an investment grade sovereign bond. 

In this respect, you might want to use less of your CPF money for housing loan repayment and use more cash instead. 

This will give you better returns than leaving your savings in the bank right away. 

Remember, this is a long term savings tool and you won't be able to access the money till you are 55 and, later, 65.
http://singaporeanstocksinvestor.blogspot.sg/2015/11/retire-with-investment-grade-bond-and.html







Of course, please ensure that you have an emergency fund first. 

How big should it be? Read this:
http://singaporeanstocksinvestor.blogspot.sg/2015/05/how-much-should-we-have-in-our.html

Also, you want to be adequately insured because you have to take care of your mom. 

I would suggest buying a term life insurance for yourself.
http://singaporeanstocksinvestor.blogspot.sg/2014/09/term-life-insurance-why-buy-term-how.html







We don't need some magic formula or complicated strategies to be more financially secure in Singapore.

Of course, if you decide to become an active investor or trader, you could make more money but you should know if you have the temperament for this. 

That is all I will say. :)







Related post:
Taking steps towards financial security.

See: PMET took a 30% pay cut but thankful.