Sunday, 29 May 2016

How we manage our finances as a couple

I met my wife in our first year at university in Melbourne in 2007. As a student couple overseas, we spent a lot more time with each other on and off campus since we were in the same course and didn't have any family there. We made our own and common friends, which allowed for social interactions as individuals and a couple. However, we were basically living together unofficially.

After graduating in 2009, we moved in with each other and lived together officially. From there, we transitioned into a working couple and started building our careers in Melbourne and Sydney. The benefit of being together for a long enough time through different phases of our lives means we had more practice and experience with managing our finances as a couple. This came from learning from the many mistakes we made and having the opportunities to improve on our management style.

Before marriage

As a student couple, we kept our finances separate and this worked because we were fortunate enough to only have to worry about expense management and income from part-time jobs. We graduated with no student loans and were able to find full-time jobs within six months.

I read this post from Bridget Eastgaard at Money After Graduation on What Should Your Net Worth Be By Age. She made this point that I agree with - The net worth number you end up with by age 30 is going to be almost wholly dependent on how much financial privilege you enjoyed in your 20's.

The biggest determinant Bridget mentioned was how much money your parents donated to your cause. Our parents were able to fund our higher education and together with the partial scholarships we received as international students, we were able to graduate with no student loans.

The second biggest determinant Bridget mentioned was how much money you earn. Our bachelor degrees were in accounting and finance and our starting full-time jobs were in the banking and accounting industries. The pay is above average when compared to the other industries.

When coupled with the fact that we had more experience than the average couple in managing our finances after graduating, this gave us a headstart in building up our savings and net worth. We have to acknowledge the financial privilege we have enjoyed and be honest with our money story. I'm just relieved we didn't waste and squander this opportunity afforded to us and we keep working hard on this journey to financial independence.

Anyway, back to the topic, we continued to keep our finances separate even after moving in together. We had separate bank accounts for our savings, separate investment accounts for our stocks and no joint accounts. Expenses such as rent, utilities, groceries, entertainment and travel were tracked in a monthly spreadsheet that were split evenly between the both of us. We were also individually responsible for paying our credit card and other bills.

The reason was simple. As long as we were not married, we should not be sharing our finances no matter how much of a future we saw for both of us or how long we have been together. Although our savings, investments and net worth were growing positively with each month, the rate was slow because we didn't implement a couple personal finance strategy.

It was tempting to start joining our finances and using our dual income to achieve a higher savings, investments and net worth growth rate. But we figured we were still young and it was more important to have a clean and simple personal finance relationship with each other.
After Marriage

We moved back to Singapore from Australia in 2014 and got married in the same year. My wife was 26 and I was 28. Marriage to a couple that has been living together for several years like us is not as significant as to a couple that is only going to live together after getting married.

However, being married means we now have a legal basis to implement a couple personal finance strategy. This may be a technicality to many people but it was an important milestone for us. Over the years, we started to realised that I had a keener interest in personal finance than my wife. After we got married, we still didn't open a joint account but I started to manage both of our savings, investment and retirement accounts.

It was more efficient because I was able to allocate both of our funds accordingly to increase the growth rate without being limited by what's hers and what's mine. It was also more effective because I was able to access a greater pool of funds for investment. Of course, this is only possible after we have both agreed on a common savings, investment and retirement strategy i.e. I was provided with the mandate to do the above.

I like dealing with personal finance at a micro and macro level but she only likes looking at it on a macro level. This is why I enjoy researching on high interest bank accounts, cash rebate credit cards, bonds, shares, ETFs etc. However, my wife only checks in at the end of each month on the performance of these accounts.

This way of managing our finances as a couple works for us because we took the time to understand our personal finance personalities. We also developed ourselves individually first before working together as a couple towards our goal of financial freedom. Most importantly, we spent a lot of time and effort building a foundation of trust before taking this approach. The next decade would be the most financial demanding and I am interested to see how this works out for us.

Friday, 27 May 2016

Should we invest in a Gold ETF?

I was reading this guest post by Kim Iskyan on BIGfatpurse about 3 Good Reasons You Should Own Gold. It got me thinking about whether we should include Gold in our portfolio.

Correlation between asset classes in our portfolio

From our asset portfolio, there is a strong correlation between the ETF and Share portfolios since the Global and Singapore stock markets tend to move in the same direction. However, they have low correlations with our Cash, Wholesale Life Policies and Bonds portfolios. Given the size of the ETF & Share portfolio and the Other portfolio are about the same, this has helped to lower the volatility of our asset portfolio.


I do agree with the article's view that since stock markets and Gold have little correlation, Gold would be a good hedge for our portfolio and offers protection when stock markets fall. We have considered adding an exposure to Gold in our Other Portfolio before for the same reason, specifically via the SPDR Gold Shares ETF on the SGX. However, we have been deciding against it so far mainly for this reason.

No distributions

The equity and bond ETFs in our portfolio have annual, bi-annual, quarterly or monthly distributions. This works to our advantage due to the way we re-balance our ETF portfolio. Instead of selling out-performing ETFs to buy under-performing ETFs periodically, we build up our cash holdings and allocate more of it to buying the under-performing ETFs.

Since this reduces the need to sell out-performing ETFs, the turnover in our ETF portfolio is lower and we hold on to the ETFs for longer. Hence, the distributions are a good source of passive income and increase with the size of the ETF portfolio.

The Gold ETF does not have distributions and it will require us to actually sell and buy the Gold ETF to take advantage of price increases and decreases for rebalancing purposes. There is little benefit in holding on to and not selling the Gold ETF for the long-term without regular distributions.

Protection against degradation of paper currency

I also agree with the article's view that gold can preserve value in a way that paper money can't. This is an important consideration in the current era of quantitative easing by central banks around the world.

For our asset portfolio, we would probably start to invest in a Gold ETF after the size of our ETF & Share portfolio grows to be significantly bigger than our Other portfolio. It only makes sense then to introduce another low correlation asset class exposure to better manage the volatility and try another rebalancing method.

By the way, we went to Seoul (South Korea) over the weekend and it's a great place for shopping, eating and sightseeing. Personally, I still prefer visiting Japan and have been to Tokyo, Kyoto and Osaka for our honeymoon as well as Sapporo and Niseko for a ski holiday. Maybe it's because I'm more used to the sights, sounds and cuisine in Japan.


Anyway, I like including our leisure travel destinations in the blog posts just to make things more interesting. After all, one of the main motivations of improving our personal finances is so we have more money to travel around the world.

Thursday, 19 May 2016

Should we invest in real estate?

I realised that my blogging frequency has been going down recently. It has been a busy time at work with the deadlines for the deliverables of a few tax advisory projects overlapping. I just want to get through this week before we fly off to Seoul (South Korea) for a short holiday. Looking forward to that!

Anyway, I just read this post by Budget Babe on understanding home loans in Singapore and started thinking about our home loan. We bought our apartment in the East in 2011 and the interest rate then on our housing loan was 3-month SOR (Swap Offer Rate) + 0.75%. It has since increased to 3-month SOR + 1%.

The 3-month SOR has increased over the years causing our monthly mortgage amount to increase. The current interest rate on our housing loan is 2.2% and we expect this to go up in time. This goes to show it is critical to consider increases in interest rates when working out the housing loan amount you can take out.

In our case, an interest rate up to 5% is manageable with slight changes to reduce the rest of our expenses. Once the interest rate exceeds 5%, we will have to make more significant changes to our budget. In fact, we might even consider paying down a portion of the housing loan to reduce the monthly mortgage payment.

All these considerations got me thinking about whether we should invest in real estate as an asset class in the future. To be fair, this apartment was purchased in 2011 with the option of either renting it out when it was completed in 2014 or us staying in it if we move back to Singapore by then.

Since we started working in Singapore in Jan 2014, we decided to stay in the apartment instead of renting it out it even though this was before our wedding in Nov 2014. After all, we enjoyed living with each other and wasn't used to living with our parents anymore.

You could argue that this property was purchased for the purposes of home ownership rather than investment. This means we have technically not made our first real estate investment i.e. purchasing a property and rent it out for income. Should we do it?

Commercial/Residential real property as an asset class

It is possible for a retail real estate investor to invest in commercial and residential real property. I'm going to focus on residential real property since I have more experience in looking for an apartment to rent/buy in Melbourne, Sydney and Singapore.

Downpayment

The biggest problem we have with real estate investing is the downpayment required. The amount of downpayment can vary depending on the laws in the city and how expensive the housing market is. More often than not, it will require a significant sum of money for the downpayment.

This causes the rental property to form a significant portion of your asset portfolio once you make the investment. Unless we have been preparing to invest in real estate, it would end up overweighting our asset portfolio especially when we already have a certain portion allocated to REITs. It would also drain quite a bit of our cash holdings at one time and this can cause cashflow problems if not properly managed.

Entry and exit costs

There are monetary costs (stamp duty, legal fees etc) in entering and exiting a real estate investment, which are much higher than an equivalent investment in equities for example. This is not forgetting the length of time required to enter and exit the real estate investment, which makes it difficult to react to changes in personal and employment situations.

Local vs Overseas

Your residency status can impact the cost of investing in real estate. Currently, a Singapore PR has to pay 5% in Additional Buyer's Stamp Duty (ABSD) when purchasing his first residential property. It's even worse for a Foreigner who has to pay 15% in ABSD.

Although it might be more cost efficient to invest in your local real estate market, it would be risky to have such a big portion of your asset portfolio exposed to fluctuations in a single country. Even if you try to diversify by investing in overseas real estate markets, it is not as cost efficient and you can incur significant monitoring costs. Imagine having to deal with real estate agents and repairs to your rental property when you live in another country.

Debt

Real estate investing usually involves the use of property loans i.e. one of the few asset classes that almost always requires you to incur quite a bit of debt to invest. This increases the interest rate risk in your asset portfolio and might cause cashflow problems in servicing the debt in a rising interest rate environment such as now.

Maintenance costs

Again, this is one of the few asset classes that has ongoing maintenance costs. The time, effort and money required in having to deal with difficult tenants, repairs to the property, real estate agent fees etc can really add up over time.

Admittedly, real estate is probably one of the best asset classes to generate wealth over a long investment horizon. If you time the real estate market well (e.g. buy at a low point of the cycle and use leverage wisely), the growth in the value of the real property and generation of passive rental income can be greater than any other asset class. However, making mistakes with real estate investing can have serious financial consequences that will take much more time to recover from.

Our view is that we will only consider investing in real estate after our asset portfolio (i.e. Investment, Retirement & Cash and excluding our current apartment market value) reaches S$1 million. It's currently at less than half of this size. This means that it will probably be many years later before we even consider buying a rental property.

We will hopefully have gained much more investing experience by then and be more mature in our investment outlook to manage such a risky asset class. To overestimate our knowledge and skill in real estate investing will be to do so at our peril which might derail our journey to financial independence.

Sunday, 15 May 2016

How much cash to hold in our portfolio?

I have discussed the cash component of my portfolio in some detail in my previous posts but I have not dedicated an entire post about cash yet. Given that about one year has passed since we started seriously investing in Singapore in May 2015, it's a good time to discuss in more detail the role of cash and the amount of cash we hold in our portfolio.
Why do we hold cash in our portfolio?

In my asset allocation post, I discussed how we hold cash for the three main purposes of Emergency, Spending and Investment. I will give an overview of how we have been using our cash for these purposes.

Emergency 

We have set aside Emergency cash holdings to be used in the event of financial emergencies. We have yet to experience these unpredictable and life-altering events in the past year but I should mention that the risk of retrenchment has increased. We try to exercise about twice a week to keep ourselves active and healthy in the hope that this reduces the risk of medical emergencies over time. So far, the draw down of our Emergency cash holdings has been minimal.

Spending

This is where we set aside cash for paying our monthly mortgage, credit card and travel expenses. The draw down of our Spending cash holdings has been much more frequent and significant. Our living expenses are higher than average and it's been something we have been working on to reduce.

Investment

We hold quite a bit of cash for investing into ETFs and shares every month.  The draw down of our Investment cash holdings has the widest variations. When the markets are down like in Jan and Feb 2016, we use these cash holdings to make significant investments. When the markets recovered in Mar and Apr 2016, we didn't use much of these cash holdings and allowed them to build up.

How much cash to hold in our portfolio? 

This is one of the most important questions we should ask ourselves when constructing an asset portfolio. It depends on so many factors that there's no one-size-fits-all answer. I'm going to try and apply what I have read to our situation so you can have a real-life illustration of these factors.

Risk of retrenchment

Our salary is the main source of income that allows us to build up these three cash holdings. However, the risk of retrenchment affects the Emergency cash holdings the most. A good way to look at it is how many months can you live on the Emergency cash holdings (ignoring all other cash holdings) when you lose your job.

In our scenario, if we both lose our jobs at the same time (assuming no changes to lifestyle), our Emergency cash holdings can last for 6 months before it runs out. Of course, it's more likely that we will adjust our lifestyle and start paying more of the mortgage from our CPF. This can probably stretch the Emergency cash holdings to 12 months.

Fixed and variable expenses

The amount of monthly fixed and variable expenses affects the Spending cash holdings the most. Due to our higher than average living expenses, we hold about 3 months worth of Spending cash holdings. Since this should continually be replenished by our salary, dividend and interest income, we don't think it's necessary to hold more than that especially if we have a sufficient Emergency Fund.

It's important to assess how difficult it will be to reduce your fixed and variable expenses. The more flexibility you have in adjusting these expenses downwards, the less Spending cash holdings you have to hold. We have identified the areas in our fixed and variable expenses where we are working on reducing the amounts spent. This is a continuous process and a good exercise in budgeting.

How do you plan on investing during bear markets and downturns?

For any investor, it's essential to have a strategy during bear markets and downturns. It's even more important that you execute this strategy effectively when the time comes. Our strategy is to invest into ETFs and shares every month, less in good months and more in bad months. We try not to time the market but we do adjust the amount we invest depending on the market performance in the month.

This requires us to have sufficient Investment cash holdings to buy the ETFs and shares every month. It's probably higher than average to allow us to execute our strategy of increasing these investments during bad months. Depending on the severity of the bear markets, the draw downs can be significant. More importantly, we don't let these Investment cash holdings increase past a certain level to keep ourselves vested in the markets for the long run.

Ultimately, how much cash to hold in your portfolio becomes a question specific to your circumstances. I agree with the argument that for a couple at our age, we should aim to hold less cash and more equities since that should translate to a higher return over a long investment horizon. However, I also think that having a long investment horizon means we can afford to be more patient with our cash. We can take our time to deploy the cash slowly but efficiently. As such, we have a high regard for cash and continue to hold more of it where possible.

Tuesday, 10 May 2016

Which retirement scheme do I prefer?

In my previous post, I gave an overview of my Superannuation in Australia and Central Provident Fund (CPF) in Singapore. This post will be about my personal opinion on which retirement scheme I prefer. It's important to note that Superannuation and CPF serve as retirement funds in Australia and Singapore respectively where the cost of living, tax rates, lifestyle etc are different.

It can be difficult to compare these two retirement schemes on a level playing field. This comparison might not be fair but it will be based on my experience and views. At the very least, isn't it interesting to read about how different retirement schemes measure up against each other?
Employer Contributions 

The purpose of retirement schemes is to provide you with income in retirement. The more funds you have in the retirement schemes, the more income you will receive when you retire and stop working. Employer contributions can go a long way in building up these funds especially when you can't make as much employee contributions.

The current employer contribution rate is 9.5% for Superannuation and 17% for CPF. However, there is a monthly Ordinary Wage (OW) ceiling cap of S$6,000 for CPF i.e. the employer only needs to contribute 17% of your monthly salary up to S$6,000. The employer does not need to contribute 17% of your excess salary above S$6,000. I don't think there's such a cap on employer contributions for Superannuation.

This probably only makes a difference when you are a high income earner in Australia or Singapore. Given I have only been working for a few years in each country, this point goes to CPF for me since I had more employer contributions on an average salary.

Employee Contributions

There is no mandatory employee contribution for Superannuation but the mandatory employee contribution rate for CPF is 20%. I like how the Singapore Government is essentially forcing each employee to save for his/her retirement by contributing to the CPF. It might not be a bad idea since I chose not to make any contributions to my Superannuation.

However, it would be nice to have the choice of my employee contribution rate to CPF. After all, I might decide that having the cash on hand is more useful at the start of my career when I am anticipating future significant expenses. Although I agree that the Government should encourage employees to contribute to their CPF, I don't agree with the current paternalistic approach to mandate a rate of 20%, which is even higher than the employer contribution rate. This point goes to Superannuation for me.

Flexibility of use

Superannuation can be used to cover life, disability, and income protection insurance premiums but there are not many other uses. CPF can be used for a variety of purposes - housing, investment, education, insurance and medical expenses. By allowing for greater flexibility in using CPF, this offsets the disadvantage of me having to make mandatory contributions to CPF.

Although you could make an argument that having so many uses for CPF detracts from its main purpose as a retirement fund scheme, it does come down to how you manage your CPF.

Superannuation is difficult to understand at the start but easy to manage once you get the hang of it. Once you start working after graduation and select a superannuation fund, ensure that the investment option is balanced or aggressive and the monthly contributions will take care of the rest.

The problem with CPF is that you really have to monitor how much of the OA you are using for housing, how much you can contribute to the SA and how much MA you have left for medical expenses.

Nevertheless, this point goes to CPF for me because it's better to have more options of use for the retirement fund schemes. After all, you can always decide not to use your CPF for anything and just allow the balances to build up.

Growth of funds

This one is tricky. Superannuation works by dollar cost averaging into the units of a fund on a balanced or aggressive investment option i.e. growth by exposure to equities. You could replicate this by using the CPF Investment Scheme, which allows you to invest your OA and SA in a wide range of investments to enhance your retirement funds.

Both schemes require you to not attempt market timing by changing the investment options for Superannuation funds or buying & selling the investments for the CPF Investment Scheme.

I guess where CPF takes the point for this is that the interest rate on the SA can reach 4% to 5%. Even by not using the CPF Investment Scheme, effective utilisation of the SA can enable your retirement funds to build up quickly over time without taking on much risk.

Fees

Superannuation funds charge fees for maintaining your retirement balances and CPF don't charge fees for the same service (unless you are using the CPF Investment Scheme). You could argue that Superannuation funds have to execute more monthly transactions (i.e. buying and selling of units) to justify the fees.

After all, CPF doesn't have as many monthly transactions since interest only gets paid at the end of the calendar year. You do have withdrawals for other purposes such as housing and insurance but those can be automated and require less monitoring.

My view is that fees eat into the returns of all funds and CPF takes the point for charging little to no fees.

Access at retirement

This generally refers to when and how you can access the Superannuation or CPF. The conditions of access can be complex for both Superannuation and CPF. For a simple comparison, Superannuation can be fully accessed at age 60 but CPF can be partially accessed at age 55 and fully accessed at age 65. More importantly, the entire amount of Superannuation can be withdrawn but CPF can only be withdrawn as a monthly payout once you hit the preservation age.

FYI, my view is that the preservation age for retirement schemes in most countries are likely to get higher over time. I would think this applies to both Superannuation and CPF i.e. I have no idea how old I would have to be to access my retirement funds.

As much as I think it's a good idea not to allow for retirees to withdraw the entire amount of CPF at one time, this should be a choice that they have. Again, I don't agree with the paternalistic approach that the Singapore Government has taken on restricting retirees' access to their own retirement funds. Hence, point to Superannuation for me. It might be a better approach for more personal finance education in schools and companies to empower everyone with the ability to make good financial decisions.

Conclusion

I must emphasize that you could reach a different conclusion even after assessing the same factors. In my case, I find that CPF is my preferred retirement scheme. It allows for me to build up retirement funds quickly from higher employer and employee contributions. This is especially effective when I have not been working in Singapore for the initial few years of my career. CPF also gives me more options in utilising the funds for other purposes and I find the flexibility useful as long as I have the self-discipline and knowledge to manage this. 

Thursday, 5 May 2016

Retirement - Superannuation vs CPF

My post on What are Retirement Funds is the second most read after the post on Monthly passive income hits S$1,000. It does seem like personal finance topics like passive income and retirement continue to be among the most popular. 

I thought it would be interesting to have a post about my experience with Superannuation in Australia as a retirement fund scheme compared to Central Provident Fund (CPF) in Singapore.


Upfront disclaimer - I can only compare my experience with Superannuation during my 4 years working in Australia vs CPF during my 3 years working in Singapore. I'm aware this is an insufficient time frame for the benefits of each retirement fund scheme to realise but this is just my opinion based on how each system has worked out for me so far. The facts may also not be fully accurate as I am writing some of them from memory.

Overview of my Superannuation in Australia

When I started working in Melbourne after graduation, my employer contributed 9% of my salary every month to a Superannuation fund of my choice. The employer usually has a preferred Superannuation fund and I chose that because I had no knowledge of any Superannuation fund. I tried reading up but was overwhelmed by the number and range of Superannuation funds available. To be fair, it was my first full-time job in Australia and I was coming from Singapore where everyone only had one retirement fund that contributions go into i.e. CPF.

I decided not to make any voluntary contributions because I was unsure of how long I will be living in Australia. The Superannuation fund had 4 main investment options - cash, conservative, balanced and aggressive. I selected the aggressive investment option since it had the highest return over the long term due to the biggest exposure to equities.

This meant that the monthly contributions by my employer went towards purchasing units in the aggressive investment option of my Superannuation fund. It's essentially a dollar-cost averaging approach and the valuation of the units change depending on the value of the underlying assets of the fund. Hence, the value of my retirement funds in Australia could vary significantly with each year since it depends to a large extent on the performance of domestic and international stock markets.

Life, disability and income protection insurance premiums were also deducted from my superannuation fund monthly. The coverage amounts were good relative to the amount of premiums paid. This is a benefit from selecting the preferred Superannuation fund of the employer.

However, there is a monthly account maintenance fee deduction and the amount can vary depending on whether the investment option is cash, conservative, balanced or aggressive. Superannuation fund fees can really eat into its returns if you are not careful.

After I moved to Sydney and started working for a different employer, I decided to roll the holdings in my previous Superannuation fund in Melbourne to the new preferred Superannuation fund in Sydney. This can be a hassle when you think about the number of times a person can change jobs over the span of a career. It's probably the reason why Lost Superannuation is such a big issue in Australia since it can be difficult to keep track of all of your Superannuation fund holdings.

Overview of my CPF in Singapore

When I moved back to Singapore, I had to leave my Superannuation funds in Australia since I can't withdraw it due to my status as a Australian permanent resident. Before leaving, I changed the investment option of my Superannuation fund to cash to reduce volatility in the value. It will grow much more slowly over time but made the most sense for me since there are no longer any monthly contributions to my Superannuation fund.

I had previously written about how I manage my CPF in Singapore. Basically, a Singapore citizen or permanent resident employee has only one retirement fund in Singapore i.e. CPF. There are no other choices available, which is a lot less confusing compared to Superannuation. In my case, the employer contributes a higher percentage (17%) of my salary to CPF. However, I have to contribute an even higher percentage (20%) of my salary to CPF. This is mandatory and I don't have any choice in the matter unlike with Superannuation where I can choose not to contribute and only have my employer contribute.

As you can see, these contributions are significant (37% of my salary) and they are split into 3 accounts. Ordinary Account (for housing, insurance, investment and education), Special Account (for old age and investment in retirement-related financial products) and Medisave Account (for hospitalisation expenses and approved medical insurance) in the percentages of 23%, 6% and 8% respectively.

The interest rates earned on the OA, SA and MA are 2.5%, 4% and 4% respectively. However, there is an extra 1% interest paid on the first S$60,000 of my combined balances (with up to S$20,000 from my OA). This means I can earn up to 3.5%, 5% and 5% on my OA, SA and MA. The interest earned is credited at the end of each calendar year.

You should be able to observe the big difference in how my Superannuation fund and CPF balances grow. My Superannuation fund return in the aggressive investment option depends on the performance of stock markets while my CPF return depends on the setting of the interest rates. The former mainly relies on the effectiveness of the dollar-cost averaging approach to equities while the latter mainly relies on the interest rate environment.  

These overviews are necessary as an introduction to my next post on whether I prefer Superannuation or CPF as a retirement fund scheme. It should be an interesting comparison based on my experience and even I would like to know which one I prefer at the end of the post.