The name is Bond, Singapore Savings Bond (Part 3).

There is more news on the Singapore Savings Bond (SSB) by now and there is also plenty of discussion in cyberspace about it. I am sure there is no shortage of questions along the line of "Good or not har?"

So, this is AK asking the same question (i.e. "Good or not har?")  and attempting an answer.




To answer this question, we must first answer a couple of other questions:

1. What is our purpose for considering the SSB?

2. What are the alternatives out there?

When I first found out about the SSB, I thought that it might be a good place to park my emergency fund and war chest. 

Whether I would do it or not would very much depend on the yield I could get from the SSB.




Currently, I park my emergency fund in fixed deposits. The emergency fund is money that I will not touch unless things go very wrong. If the unthinkable should happen, I would have to break the glass, um, I mean fixed deposits. 

So, locking up the money in several fixed deposits that pay 1.08% to 1.25% per annum made sense.

As for money in my war chest which is to be used to capitalise on investment opportunities, I need them to be very near to me. 

The nearest form would be money in savings accounts (unless we consider money I keep in a tin at home as well). I could easily transfer money to my broker using internet banking from my savings account without having to visit the bank.

So, I have an OCBC 360 account which earns higher interest of up to 3.05% (but this is due to change to 2.05% from 1 May, apparently) for the first $50K. I have a CIMB savings account which pays a flat 0.8% for the first $750K. 

I also have some money in my brokerage account which pays 0.6% in interest per annum. All of these rates are better than the 0.05% we get from regular savings accounts here. 

We need a war chest but we should try to reduce the cost of holding money.

If our war chest is somewhat bigger (and, logically, this should mean at least more than $50K in size since the OCBC 360 account, even at 2.05% per annum, would beat any 12 months fixed deposit's interest rate today), then, it makes sense to have some money in fixed deposits which offer interest rates higher than the 0.8% offered by the CIMB savings account. 

Try to make sure that each fixed deposit is smallish in size so that we don't lose out too much if we should have to break one.




When would the SSB make sense for me then?

I understand that the SSB's interest rate would step up every year and if we were to hold the SSB for the maximum of 10 years, we would receive the same yield as a 10 years Singapore Government Security (SGS) which has a yield of about 2.4% per annum. 

So, if we are simply renewing a 12 months fixed deposit each time it matures to capture higher promotional interest rates for the next 12 months, would the SSB be a better option?

Well, right now, the interest rate is about 1.4% for a 12 months fixed deposit and it is more likely than not that interest rates will increase, given time. 

With expectation of higher interest rates in future, each successive fixed deposit would probably have a higher interest rate in the next few years. In such an instance, it makes the SSB less attractive.




If the SSB is not really that attractive an option for my emergency fund, then, it is definitely not an attractive option for money in my war chest which is less likely to be locked up for a much longer period of time compared to money in my emergency fund (touch wood).

We want to remember that in a deflationary environment, interest rates will keep dropping. In an inflationary environment, however, interest rates are likely to keep rising.

Of course, I do not know for sure what is the yield going to be like for the SSB if it were to be held for only a year or two. Only the MAS knows the answer. 

However, I do know that if it is not above the interest rate which I can get for a 12 months fixed deposit from a local bank, it is probably not going to attract me, keeping my purpose for considering the SSB in mind.

Related post:
The name is Bond, Singapore Savings Bond (Part 2).

The name is Bond, Singapore Savings Bond (Part 2).

On 26 March, I blogged about the Singapore Savings Bond (SSB) and during last night's "Evening with AK and friends", we talked about it too.

I am of the opinion that the SSB's coupon is unlikely to be as high as the CPF-OA's base 2.5% interest rate although it has been said that the coupon will be linked to long term Singapore Government Securities' (SGS). If we look at the yields of the 10 years to 30 years SGS, they are above 2% to under 3%.

The SSB gives holders the flexibility of early termination without incurring penalties. Holders will not have to worry about price volatility if they were to sell their SSBs before maturity date. Bonds are supposed to be safer if held to maturity. With the SSB, there is no need to hold to maturity and will be equally safe. This is a big plus.

Of course, now, what is on our minds is what will be the yield?

During last evening's session, Azrael, a fellow blogger whom I got to know not too long ago shared that the yield might be between 0.375% to 1.75%. He blogged about it too. You might want to read his blog post: here.

Credit: Yune Ki.

We really have to wait for more details from the Monetary Authority of Singapore (MAS) closer to the date of the launch which has been scheduled for sometime in the second half of this year. Who knows? We could be pleasantly surprised with the yield. 2.5%? Dare I hope?

Although I really like this development, I feel that the banks will have reason to be worried. Of course, by extension, their shareholders should worry too. Interest income forms about 60% of their total income. The finance companies will have to worry too. Interest income forms about 80% of their total income.

These financial institutions' interest income will take a hit if their cost of funds should go up. Cost of funds will probably go up if they have to compete with the SSB for deposits. By this, I mean they will have to offer more competitive rates for their fixed deposits. Will they be able to charge borrowers correspondingly higher interest rates to maintain their NIMs? Well, whichever way we slice it, things will get a lot more competitive for them.

However, all is not gloom and doom because the MAS also said that there will be a cap as to how much SSB each person is allowed to buy. They said that they want a broader reach and I think, by that, they mean that the SSB is not to benefit the very rich but the masses. This is similar to the mission of the CPF. If the cap is rather modest, then, the impact on the banks and finance companies is likely to be minimal. A cap of $20,000 to $50,000 per person, perhaps?

A modest allowance of SSB per person will also mean that the institution that is the CPF remains relevant as a long term savings tool. The SSB could be like the SRS which is an additional tool to help us achieve retirement adequacy.

I do feel that the government will tread carefully so as not to make the CPF less relevant nor cause hardship for the local financial institutions (which will have unpleasant ramifications).

Let's wait and see.

Related posts:
1. The name is Bond, Singapore Savings Bond.
2. National Day Rally (2014): CPF and retirement.
3. SRS: A brief analysis.

An interest rate of 10.68% per annum for a fixed deposit!

In January, I shared in my blog about POSB's Chinese New Year fixed deposit special.

The offer was:

Get 1.88% per annum for a 12 months fixed deposit from a minimum sum of $1,000 to a maximum sum of $1,000,000.

I tried taking part in it and because I am such a dinosaur with IT stuff, I wasn't sure if my application went through.

In fact, when a reader asked me about this during the second "Evening with AK and friends" last week, I was not able to give a clear answer.

Anyway, I checked earlier and I found that my account has been credited with $88. Apparently, I was one of the first 10,000 customers! My application was successful!

We need little happy surprises like this from time to time in life.

For POSB customers who deposited only $1,000 and received the $88 ang bao, they are actually getting an interest rate of 10.68% per annum!

In fact, it is more than that since the $88 ang bao is given now and not at the end of the 12 months period!

Thank you, POSB, for the generous ang bao.

I'm smiling. :)

Where to put your emergency funds? Fixed deposits aren't too bad. See related post number 1 below.

Related posts:
1. A special chest for emergency fund.
2. Should I put money in a foreign currency FD?

Why have I been silent on Mr. Lee's passing (till now)?

So many people have blogged about the passing of our country's founding Prime Minister, Mr. Lee Kuan Yew. Some asked me why I have not said anything in my blog?

Well, apart from the fact that other bloggers have done such a good job of it, I am really not very good at writing eulogies. I do feel very sad and, actually, it goes beyond sadness. It is a deep sense of loss.



After all, even after he retired as Prime Minister, he was still very active, dispensing good advice and, for a while, it felt as if he would always be there for us.

Anyway, why am I blogging about him now?


Mr. Lee Kuan Yew "wore the same exercise shorts for 17 years. And when it tore, he patched it up, or his wife patched it up for him." 

This was revealed by Law and Foreign Affairs Minister, Mr. K Shanmugam.

Mr. Lee Kuan Yew was a very frugal person.

I might not understand all of Mr. Lee Kuan Yew's great wisdom even if I tried but I can certainly identify with his frugal habits.

When I see some of my relatives throwing away perfectly good clothing just because they were out of fashion or children not finishing their food just because they didn't like it, I would feel very sad. I would worry, probably needlessly.

I remember the hard times my family had to go through. I remember being told never to waste food and, till today, I will finish all the food on my plate. When I buy cooked food, I would tell the vendor to give me less rice because I don't want to throw away what I cannot finish.

Once, I actually told my brother in law's sister to finish her food when she left so much unfinished. She looked at me, irritated, and asked if I would like to finish it for her. If I wasn't going to do it, keep quiet. I was surprised. She was quite a few years younger than I was and I probably expected her to listen. Anyway, it wasn't a response I was expecting.

Life is too good now, perhaps.

Waste not, want not. This is something we should all try to remember. Not something to do with meritocracy or good governance, perhaps, but this is something Mr. Lee Kuan Yew would probably want us to remember too.

Farewell, Mr. Lee Kuan Yew. Thank you for all that you have done for Singapore. We owe you a great debt that can never be repaid. May you rest in peace.

Related posts:
1. Some of my stuff (Part 1).
2. Saving time and money but lost face?
3. An essential habit to becoming richer.

Should I forfeit $5,000?

Read this and see if you get upset like I did:

I have recently become interested in growing my wealth and financial planning because I have seen how my own parents failed. However, I am only just starting, plus I am terrible with numbers. I am probably only good at capturing the theory, but terrible at application, and may have made some mistakes, which I now need help with. I have no one else to turn to except insurance agents, who I am sure you know are mostly biased towards their own products.

Grapes.

One major mistake I made recently was buying from an XXX agent a pure investment product called PPPPPP. I have put 5k into it. I am not sure if the agent mentioned at the time that this product is a premium payment product, because I was shocked to learn only after everything was done that this is something I have to pay for monthly or yearly. She had put me down for 30yrs, I believe that is because she knows I am looking at long term investment. I was also informed by a third party that unless the funds make more than 6% returns, I would not be able to offset the charges and fees of the product. 

All in all, the impression I got from the agent who sold me the product was that this is similar to something I would get from the stock market, a one time payment, wait for gains, sell if you need to, otherwise hold and allow the gains to roll. I knew there would be fees and charges because this product is from an insurance company, but I did not know I would be unable to surrender any time before 30yrs is up.

My question is whether I ought to give up this product. I talked to the customer service at their headquarters, he told me if I surrendered the product I would simply be forfeiting the 5k, that even though the agent havent given me the policy document, I was past the 14days free look policy. The alternative would be to hold on because the funds are good. 

I had initially agreed to the product because i recognised a lot of the funds eg Blackrock, Schroder, Legg Mason, Pictet. Plus, I thought this product would be a safety net for me, just in case I screwed up my own private investments, because I had believed in the ability of these funds to do better than I could.

I am unable to decide now if surrendering the product would be a rash decision. However, if you are able to tell that this is a bad decision and surrendering the product now will cut future loss, please let me know. I promise I will not sue or come back to you for revenge because the funds turned out to be profitable. I have no one else around me with appropriate financial knowledge who is unbiased towards any companies, and as I think you can tell, I am a green horn greener than grass. 

Any advice or feedback will be greatly appreciated.

Banana...

Misunderstood? Misrepresented? Negligence?

I have passed this case to a friend who is a professional to follow up. However, feel free to share your opinions in the comments section. I am sure the victim reader will take all the comments (if any) into consideration in deciding what to do next.

Related posts:
1. Know what is good for us.
2. Will I retire happy?
3. "A safety net in case we screw up our investments?"
(It is the CPF.)

The name is Bond, Singapore Savings Bond.

A new product is going to be available soon for people who are risk averse but are looking for better returns. Enter the Singapore Savings Bond!

Singapore Savings Bonds will offer the higher returns of a long-term bond and give what investors call a term premium, while retaining the flexibility of a shorter-term deposit, and the safety of an instrument guaranteed by the Government. (Senior Minister of State for Finance, Josephine Teo)

Source: CNA

In summary:

1. Interest rates linked to long term Singapore Government Securities.

2. Ability to get back our money at any time without penalty.

3. A "step-up" feature will pay long term savers more interest with each passing year.

4. Guaranteed by the Singapore government.

This could spell trouble for banks here as I foresee savers moving their money from fixed deposits to these Singapore Savings Bonds.

Well, I know I am really looking forward to this. Aren't you?

Updates:
A. The name is Bond, Singapore Savings Bond (Part 2).
B. The name is Bond, Singapore Savings Bond (Part 3).
C. Singapore Savings Bond: Good or Not?

Related posts: 

1. A special chest for emergency fund.

2. CPF or Singapore Government Securities?

Should I top up my CPF-SA, CPF-MA or SRS account?

This blog post is inspired by a comment by a reader, Lee Jiahui, who thinks that the "SA is last priority to throw cash at", preferring to top up "self SRS or parents or children's medisave account".

To read the full comment, please go to my FB wall.

Since I always say that we should beef up our CPF-SA and do it early, what is my response to this comment?

Well, in a nutshell, what a person does would depend on his objectives.

The purpose of the CPF-SA is to fund our retirement and cannot be used for other purposes unlike the CPF-OA which although is meant to fund our retirement ultimately can be used for myriad purposes.

Keep going.

Discounting the additional 1% for the first $40K, the CPF-SA pays a 4% per annum base rate which, if given time and a boost very early on, will result in almost magical results. 

The 8th wonder of the world, remember? 

This was what I thought almost 20 years ago when I first entered the workforce as a working adult. I decided to experiment with it and regular readers know the results today.

I also like the idea of having an SRS account and contributing to it to reduce total income tax payable. 

Topping up of the CPF-MA is also a good idea since it pays 4% per annum too and get "free" H&S insurance in the process. (See related post #5 at the end of this blog.)

We can also top up the CPF-MAs of loved ones to help pay for their H&S plans.

These are all financially prudent things to do but what we do ultimately depends on our objectives.



If our objective is to speed up the creation of a retirement nest egg in a risk free manner, then, doing CPF-OA to SA funds transfer very early on in life is something we can consider.

This was what I did.

Doing MS top up to our CPF-SA will also help and this comes with the added advantage of income tax relief (for up to $7K of top up per year).

However, not everyone will have the spare cash to do this, especially early on in our careers. I know because I was in the same shoes before.



There are many things we can do to help ensure that our personal finances are healthy.

However, there are so many areas to cover in personal finance and what we do or don't do now (beyond the basics) will depend on our objectives which would probably be prioritised differently for different people, depending on our own beliefs and circumstances.





Whatever the case may be, in a world like ours, we need to have a sound long term financial plan. 

Some are lucky to have their parents plan early for them. For most of us, we have to take on this responsibility ourselves and the earlier the better.

Source: CPF Board.
Always bear in mind that there are opportunity costs.
Always bear in mind that our home is a consumption item.

Map out a path but be on the lookout constantly for a better way to travel towards our destination. 

It will be hard in the beginning. It might even be demoralising. I know. 

However, if we keep doing the right things, it will get easier with time and we will be rewarded. Believe it.

Related posts:
1. Ten questions from an undergrad.

2. If we are not rich, don't act rich.

3. Save 100% of your take home pay.
4. SRS: A brief analysis.
5. How to get free medical insurance in Singapore?

AK answers ten questions from an undergraduate.

Question and answer time:

Hi AK,
I was about to post a comment on the thread, "Want that $1m in liquid assets or $120K in passive income? Thursday 19 March 2015".

I am somewhat in a similar situation  as the person who emailed you (uni/about to graduate) and have some questions as well.

Currently I'm vested in a couple of IPOs from 2010 onwards (dad's advice) and some stocks through SCB (no min comission) but only got really active in 2014/2015. 

Building up my knowledge at the moment through borrowing / reading books and the internet.

1. You seem to be skilled in both FA and TA from your 2010 posts as well as book recommendations and current posts using Chartnexus, and advocate learning both. Would I be on the right track in learning FA to sieve out companies and TA to pick a correct entry point?

AK: I am probably semi-skilled but, yes, I think we should know both fundamental analysis and technical analysis. 

Fundamental analysis (both quantitative and qualitative) tells us the track record, health and prospects of a business while technical analysis provides us a window into Mr. Market's emotions which might give us clues as to when might be a better time to buy (or sell).





2. Do you do any trading currently or in the past and what is your take on trading? Considering advocating a certain % of my portfolio to it. Not sure if it's the right move. Say 5-10%.

AK: I do a bit of trading and make some good money from time to time when I see what I feel is a good set up. 

So, it is not about allocating a percentage of my resources to trading. It is about whether there is a good set up. 

I will say that a good trader must know technical analysis. There are many tools in technical analysis. 

Each of us will have to choose the tools that we are best at interpreting with a high level of confidence. 

Only time will tell which combination of tools works best for us.

3. With so much knowledge out there, it can get confusing what path to take sometimes. For example picking individual stocks vs etf indexing your portfolio (random walk down wall street, EMH) vs a permanent portfolio weighted by certain % (equities, bonds, gold, cash) vs trading vs a myriad of other strategies and derivatives. Would you have any advise for this?

AK: What I will tell you to do is to explore all the options and then ask yourself if the options will meet your objectives. 

Choose the one that meets your objectives best. 

Which method we choose must match our motivations. It is about choosing the right tool for the job we want to have done. 

I have my own way and I am careful to say that it is never my way or the highway.

4. With regards to CPF, I'm also wondering whether I should do full 100% transfer from CPF-OA to SA in the first few months/years of working life to allow 4/5% risk free interest rate compounding to work it's magic. I have no education/housing debt in the near future. However I understand that cash in SA wouldn't be able to buy shares except for STI ETF's and Bond Index, is that a relevant point? As I wouldn't have a potential "warchest" to scoop up deals when times are bad.

AK: The CPF is a risk free and volatility free instrument available only to Singaporeans and Singapore PRs. If we can, we should take full advantage of it. 

Money in the CPF-SA earns 4% to 5% per annum but the downside is that it is not near money. 

I decided very early on that I wanted something that I didn't have to worry about monitoring which would give me a meaningful nest egg. 

The CPF-SA was an obvious choice for me. It is a low hanging fruit which I decided to pick very early on. 

If all my investments should go awry, I would still have my CPF savings. 

I used cash on hand to invest in stocks and used some of the funds in my CPF-OA for investments for the first time during the GFC.

5. The irreversible part of transferring is also an issue to me. Thus would it be prudent to transfer a certain % out instead? Say 50%. Or whatever I feel comfortable with. Open to ideas.

AK: Oh, for sure, whatever you do, you have to feel comfortable with the decision. What I am comfortable with, you might not feel the same. 

However, if you have read my blogs where I shared how much I have in my CPF-SA and CPF-OA today, bearing in mind that I transferred all the funds in my OA to the SA very early on as a working adult, it is possible to beef up our SA and yet have substantial savings in our OA by a certain age. 

It is about delaying plans to buy a home by a few years.

It is about a willingness to downsize and locking in capital gains if the opportunity presents itself. 

It is about being prudent in personal finance always so that we have an option not to drain our CPF savings dry.

6. Lastly, i'm also looking at insurance. Correct me if I'm wrong but I believe you are an advocate of BTIR? I do know you had some non-term plans from a long time ago from your blog posts. I am considering BTIR, but also considering term vs whole life (premium paid to certain age and insured for life) as I'm wondering whether having the insurance over my entire life is worth the extra premium paid.

AK: If I had known the things I know now when I was much younger, I would not have bought any whole life or endowment plans. 

Of course, there is no way to know whether a much younger AK would have been a prudent investor or if he might lose all the savings from buying term instead. 

Anyway, now, I believe that we do not need a whole life policy (for examples, till 85 or 100 years old) unless we have dependents in our old age. 

Buying term life till age of 55, for example, makes better sense and we are more likely than not to save a bundle of money. 

(At 55, if we have been conscientious in our efforts to meet and exceed the minimum sum, we would probably be collecting a tidy sum from our CPF accounts then.)

7.What are your takes on the SAF Group Term Life Insurance Policy as well? Is it worth keeping? $12.80/month for 100k coverage.

If it is worth keeping, could I just upgrade the plan to have a higher premium and thus higher coverage, which you mentioned 500k, thus that would be my term insurance part settled? I understand 500k is just a rough guide and should be individualised.
http://singaporeanstocksinvestor.blogspot.sg/2014/08/how-much-term-life-insurance-should.html

AK: I think that is a value for money Term Life Insurance. 

How much insurance do you need? 

It depends on how important you are financially. 

Do you have dependents? How many are there? How much money from you goes to supporting them? What if you were to suffer from permanent disability and not death? 

These are some questions you have to consider when buying a term life policy. You might want to read:  http://singaporeanstocksinvestor.blogspot.sg/2014/09/term-life-insurance-why-buy-term-how.html

8. I do also already have a private H&S plan, would be waiting for Medishield Life and the relevant changes by MOH.

AK: Your private H&S is an integrated shield plan. 

You don't have to do anything because Medishield Life will form the foundation of your private H&S plan.

9. I'm also wondering what other steps should I take on my financial journey.

AK: Well, always start with the basics. 

a) Make sure that you are always prudent with your personal finance matters. 

b) Get the necessary insurance coverage but don't overpay. 

c) Know what are needs and wants. Delay gratification. 

d) Go for low hanging fruits. 

e) Invest in income producing assets to supplement your earned income. 

f) Be an opportunist and buy more when assets are on sale. 

g) To do that, have a war chest ready always. 

10. Also you mentioned "You probably read my blog posts on what fresh grads should think of doing first to help towards a financially secure future. Must always get the basics right first."

May I enquire which are the blog posts you are referring to? Would love to read the related posts for fresh grads/young adults.

AK: I have thousands of blogs by now and it is quite hard for me to track down specific blogs. 

From time to time, I unearth useful old blogs. 

I think if you were to do a search in my blog, you might find some of the blogs which might be useful to you. 

Many are already found in the right side bar of my blog. 





Hope you could help a young Singaporean adult in a small way.

Thank you very much AK, your blog has been an inspiration and the frankness of the content is great.

Sorry for the very very lengthy email.

Kind Regards,
DJ

Related post:
Read 9 wealth building blog posts.

What should I study to become a good investor?

There are a few times in our lives when we have to make big decisions and they could be easier for some than others but I don't think they are easy, by any measure.

AK talks to "himself" here.





----------------------------------


Reader says...

I'm AK too! I would like your advice for my course of studies.

I'm interested in investing. However should I take a degree in Business (in NBS ) to learn investing?

And would an engineering degree put me at a disadvantage due to not being able to learn accounting and economics?

I ask my father and friends and they all gave very different answer. I hope you can help me! Thank you.

P.S. I really enjoy reading your blog and find that many of your habits are worth following. Whenever I get home I always look foward to reading your posts be it where you eat and how much you save. 

AK says...

Alamak! You are asking an Arts grad whether you should study business or engineering? 

I have no clue! 

OK, end of reply. LOL.

I will say to go with your heart. Do what you want to do. 




I decided to do what I wanted to do too when trying to decide which degree to go for. 

If I had been a bit more practical in my choice, I would probably be making more money now but would I be happier? 

I don't know, really.

I did a part time diploma in business later. 




It was a bit demanding because the twice weekly classes were from 7pm to 10pm and the course went on for almost 2 years. 

It does show that if we want to study business or accounting later on, we can always do so as a mature student.

Enjoy your studies and whatever you do, as long as your are prudent in your personal finances and if you invest to supplement your earned income, in my eyes, you are on the right track. :)





Related posts (maybe):
1. A letter from a fresh grad.
2. A reader in his early 20s.
3. Take steps towards financial security.
4. The Millionaire Next Door.
5. How to be "One Up On Wall Street?"

A dollar saved is a dollar earned.

I was chatting with a fellow blogger recently on FB and he says he enjoys saving $1 coins:

Photo shared by the reader.

And I told him I do too. So, here are never seen before images of AK's pouch of $1 coins (and I only keep the old ones which I like more than the new ones):

Saving is a habit. No matter how little we save. If we do it regularly, it does add up.

"A journey of a thousand miles begins with a single step." - Lao Tzu.

Some friends were surprised at what I would do to save $1 before: Queue for S$1.00 parking fee redemption?

Remember what is the very first step to becoming richer? Clue.

Related post:
If we are not rich, don't act rich.
"I cannot save money because I don't make much."

Get income from investments to meet interest payments?

I remember when I paid off my housing loan many years ago, the interest rate that the loan attracted was 5.1%. That was pretty pricey. For a few years now, interest rates have been very low and, so, it has been pretty cheap for people to borrow money to help pay for their homes.

Personally, I am holding back from doing partial or full capital repayment on my current home loan because even with the sharp increase in the 3 months SIBOR in recent months, the effective interest rate on my home loan is still below 1.8%. The cost of having liquidity is not exhorbitant (yet).

Even if my investments are only able to generate a dividend yield of 4.0%, financially, I would still do OK. So, arbitrarily, an interest rate of 4% on my home loan could be the tipping point for me to want to pay it down at a faster clip.

Hi AK

I have been following your blog for about 4 months now and was rather impress with what you have.

I am in my early 40s and had just got a BTO which will be ready in 3 yrs time. When the house comes i will be down in loan by S$350k. Now i am with only S$50k in HDB Bank Loan with DBS Bank serving an interest of 1.6%. What i noticed is that out of my annual contribution to the Loan installment, about 60% will goes to the interest payment and only about 40% is paying up on my actual premium. That is alarming to me.

I had wanted to get a dividend income just like you, but if i were to have S$50k on hand, should i be paying up my loan or putting them into the dividend paying stock that gives about 6% return? Of course dividend stocks comes with value appreciation but no matter how we should not be thinking about stock price appreciation when talking about income generation.

One is for future payment and the other is for near term paying out of the housing loan. It seems that paying up on housing loan is the priority.

The next question for you is given two stock, A and B, A gives dividend yield of 6% and share price appreciation of about 4% and B gives Dividend yield of only 3% but has a share price appreciation of 10%, which would you consider for long term income?

Any advice from you will be most helpful.

Regards

M

Reply from AK:

Hi M,

A housing loan is amortising in nature. As we pay down the loan, the interest portion will shrink and the principal repayment portion will grow even as the monthly installment stays the same. If you would like to pay less interest, one way is to shorten the loan period. Then, you would be paying more of the principal amount monthly. However, your monthly installments would also be bigger, of course.

As for whether you should pay off the housing loan first or invest for higher returns, it depends on what is the interest payment on your housing loan and what you are able to get from your investments.

Imagine that you have a housing loan of $300,000 and that the interest rate is 2%. Let us assume that the loan is non-amortising for the sake of illustration. In a year, you would have to pay $6,000 in interest payment. If you were able to generate a 5% return through investments that year, you would make $15,000 which is more than enough to cover the interest payment.

Of course, there are good things to be said about paying down our housing loans ASAP no matter the interest rates or potential investment returns. Do what gives you peace of mind. That is priceless.

Now, as for stocks A and B, not an easy question because there could be so many different circumstances surrounding them. I would, however, first ask if the dividend is sustainable, if it is sustainable and if we are after passive income, I would go for stock A.

Price is, after all, often a function of Mr. Market's moods while there could be some certainty in dividend payments if they are sustainable. Like I said, bear in mind that this is actually a very simplified approach to a possibly very difficult question.

Best wishes,
AK

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1. A car loan is different from a home loan.
2. A new flat on the way and $200K in spare cash?
3. Newly married and planning for a child?
4. Interest rate on home loan jumped 15.84%!
5. POSB HDB Loan: Peace of mind (for 8 years).

Tea with Solace: A review of Dividend Machines.

The following is a voluntary review by a guest blogger, Solace, who signed up for the income investing course, Dividend Machines.

Solace says:

Disclaimer : I am not paid or given free access to the course materials to do this review. Solace has paid $XXX USD like everybody else to take a look at the course content. These are my personal views and readers should make their decision on whether the online course is value for money.

The online course has 4 Modules:

- Personal Finance (Covers the mindset, psychology and own personal financial situation.

- Dividend Machines (Covers 8 checklists/steps in screening for dividends stock)

- REITs (All about REITs, business, valuation, financial, management etc)

- Portfolio Management

In addition, there are also:

1. Video lessons

Where they do in depth case studies and how to screen for stocks based on their methodology.

Video Lessons will commence from 25 March 2015, Wednesday onwards.

2. Q & A session

You can post your question in this segment. The Trainers have been rather prompt in answering your queries. All questions are usually answered within 24 -48 hours from observation.

Website: Dividend Machines.

I leave it readers to read more about it.

Who is the course suitable for?

In short, this course is excellent for all who are looking for insight and a consistent method to screen for dividend stocks.

This is especially so for beginners who are still trying to find their way. Even for seasoned investors, time to time we might need to defrag all knowledge we have in our mind and this course helps to do that. It helps to streamline our thought process.

While many of the fundamental concepts are not new to me, I still look forward to the case studies where I can exercise my brains to practice analyzing. I am also attracted to the Q&A section where there will be interesting discussion with fellow investors and trainers.

In my interactions with many people who are starting out with investment, I would recommend them to read different kinds of investment books. This has worked extremely well for me. However, there are people who have difficulties digesting the content inside the book and find it hard to apply them. Another group might be overloaded with many schools of thought and do not know which methods work best for them.

This particular group will always wonder: 

"What is the essence of investing? Is there an easy method which I can follow?”

What the Fifth Person has done is basically summarize the key points and presented them in a very clear, easy to understand and easy to follow manner. And there we have it, the very “essence” to dividends investing.

If you can follow the method well and are able to identify a good dividend stock that will serve you well for many years, then, paying a course fee of $XXX USD would well turn out to be a “multibagger investment” for you.

There is still slightly more than a day to sign up for the course and have a workshop session thrown in for free. Please go to the related post below for the link to sign up for the course.

Dividend Machines by The Fifth Person

Related post:
Listen to AK and create your own Dividend Machines.