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5 Poor Money Decisions Due To Peer Pressure

>> Tuesday, December 16, 2014

Peer pressure is usually associated with teenagers who are at a phase that they are easily influenced. What comes to mind is the persuasion of friends to try out smoking or drinking. However, it also subconsciously has a huge influence in adulthood when making certain financial decisions.

1. Property
In Singapore, our residential property for most of us will be the single most expensive purchase in our lives. When making the huge decision of which property, the often heard advice is “the bigger the better”. Reason is many people drawing reference from historical performance, property prices in Singapore only goes upward. So, with leverage, the potential for absolute appreciation is better for bigger properties. Hence, peer pressure to get larger units.

2. Travel
A common expensive “hobby” among Singaporeans has to be travelling, so much so that it has become surprising, even shocking, if someone mentions that they have not travelled overseas over the year! In addition, it has become sort of a competition to go more and more exotic locations. Hence, peer pressure to be a globe trotter.

3. Dining
There is now a need to find unique dining experiences during occasions. Be it a birthday, anniversary, promotion treats, farewell and even weddings. Many a times comparison is drawn that the previous time at so and so place was amazing, this time needs to outdo the last. Hence, peer pressure to fancy dining places.

4. Accessories
For lack of a better word, this would be all the things people buy. Like cars, watches, handphones, handbags, jewelry, proposal rings, shoes, clothing, gadgets, etc, just to name a few. It has sort of become a norm that if certain things are not changed in 2 years or if they are not branded, you are classified as a dinosaur or cheapo that owns something belonging to a museum. Hence, peer pressure to keep buying.

5. Gifting
This would be more of a “face” (Chinese – Mian Zi) issue and I just realized that there is simply no direct English translation for this. An attempt to translate will be to preserve the honor, dignity and reputation. So, to save “face”, the gift for occasions need to measure up to expectations. There are even guidelines online for the “market rate”. Gifts mean during occasions like birthdays, weddings, funerals, baby showers and any other celebrations. Hence, peer pressure to give bigger ang pao-s (red packets).

And a sixth one just for parents - Children. This deserves a whole separate topic for cradle to grave. It starts with comparing which gynecologist/hospital, milk powder, childcare, extra classes to growing up tuition and grades. Hence, peer pressure to provide better for children.

Overcoming peer pressure, especially during adulthood, is easier said than done. We may think we have out grown it, but in actual fact, our decisions are often influenced by marketing, the environment, society and simply those around us.

Well, everything within ones means - do not yield to peer pressure and over stretch the finances. Merry Christmas and A Happy New Year!
Are you guilty of the above as well? Do share in the comments.

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Mortgage Management: CPF, HDB or Bank

>> Tuesday, December 9, 2014

After a fruitful discussion with a friend who was considering among the options of (1) using CPF to pay in full, (2) take a HDB loan or (3) take a bank loan for his HDB flat, I did quite a lot of calculations, so I thought I might as well share it, in case there are others who face the same dilemma.

Option 1 will need to be the reference point. Based on the assumption of $100k as a ball park figure in CPF where any other amount can be multiplied from. Time frame will be another consideration, but will pick a short time frame of 5 years and any other tenure will compound the differences further.

Option 1, CPF will determine the opportunity cost which will be using (1.25^5 – 1) = $13k.

Option 2 (assuming the $100k in CPF is squirreled away in a CPF investment before it gets wiped out and then placing it back), HDB loan with 2.6% interest, will be a monthly installment of $1,780 paying $6,800 in interest, approximately earning about $4,660 in CPF interest and creating an opportunity cost of $8,145.

Option 3, bank loan with 1.2% interest on average. Monthly installment of $1,718 paying $3,080 in interest, approximately earning about $4,846 in CPF interest and creating an opportunity cost of $7,861.

Conclusion:
Option 1 – Pros, save paying anyone any interest. Cons, creates a huge opportunity cost “deficit” owing back to CPF without earning any actual interest.
Option 2 – Pros, interest rate is fixed and can at least have some CPF earnings. Cons, high interest is loss to HDB as the interest charged is higher than interest earned.
Option 3 – Pros, interest rate is lower than CPF rate at the moment and hence interest earned is higher than the interest paid to the bank. Cons, rate is variable and interest is loss to the bank.

Well, my opinion at this point in time will be to proceed with a bank loan and maximum tenure. Until the point in time where the bank floating rate exceeds the CPF rate of 2.5%, will re-evaluate the options based on the new assumptions at that point in time. Options are to pay in full or re-finance with possibly a fixed rate and different tenure, however, HDB is no longer allowed.

Do share your comments for discussion if you have a differing opinion. Thanks.

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5 Financial Mistakes Most Regret Committing

>> Saturday, May 31, 2014

After meeting and planning for so many people, I start to find that a common pattern was forming. Many a times, they comment regrettably making some kind of financial mistakes. So, here are the 5 most often heard ones.

#1 I regret not having a budget
This is no surprise. Budgeting is such an important life skill and yet it is not taught in any school in Singapore while I was growing up. We learn how to differentiate, sin/cos/tan, Pythagoras theorem, etc by age 16. But know absolutely nothing on how to manage money properly. In addition, I am also quite certain, many school teachers know very little on this subject as well.

#2 I regret not having an emergency fund
Without a proper budget to save, it would be very challenging to build an emergency fund. I was also astonished when some even mentioned that they could resort to borrowing if the need arises. No wonder the concept of insurance seems so repulsive when this basic concept of an emergency fund to insure against the unforeseen is not even present.

#3 I regret the kind of spending lifestyle
It is only after the fact that regrets sets in. At the initial stage, many would desire the instant gratification, without much consideration of the consequences. After some time, most realize that keeping up with the Jones, chasing the latest fads and trends amount to nothing. This unsustainable spending for the sake of “face” – the lavish wedding, luxurious honeymoon, upgrading cars, latest gadgets & fashion, etc was pretty much pointless.

#4 I regret not investing appropriately
They are mainly divided into 2 groups. First, those who regret not investing at all, and see their savings and income not keep up with inflation. Second, those who invest but not appropriately, sometimes taking ill advise from others to invest and ultimately suffered a substantial loss. It is important to learn about investing to invest appropriately as one should take ownership of one’s own investments. Moreover, learn early to start investing at an early stage.

#5 I regret not taking up health insurance early
When one is healthy, the thought of falling ill would have been very remote. Hence, the concern of having coverage is the least of concerns. Usually, it is only when a health screening or pain sets in and the diagnosis require medical attention, before reality sets in. By that time, it may be too late to take up any health insurance. Some may even think that the employers group insurance is sufficient, only to realize near retirement that they will not be working and covered forever.

I feel fortunate to have heard these points at a young age and can learn from others. I share this in a hope that others will not commit the same mistakes.

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