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Being Penny Wise Pound Foolish

>> Saturday, July 16, 2011

In SGD terms, Cents Wise Dollar Foolish.

Just my luck that I was sending a friend home and went up to his apartment for a short 20 mins drink. As Murphy would have told me, Anything that can go wrong, will go wrong. Saving the trouble of tearing a 50 cent coupon cost me a $30 parking fine.

*Gentle reminder: these highly trained ninjas catch you when you least expect it.

Well, enough of my sad story, this actually led me to think about the 2 couples in their late 50s that I recently met.

Couple A, typical hard core savers. They worked hard their whole lives diligently, paid off their HDB mortgage (which isn't very much since they bought their flat 20 years ago) and received a fair amount of CPF at age 55. They do have some cash savings since they have set aside their income consistently, accumulating in fixed deposits as they do not wish to take any risk at all. However, they are afraid that the amount saved right now might not be enough to last as their children need their help for a head start in tertiary education, wedding and housing. Hence, even though they are retired, they are still worried as interest rates are so low and they are still working odd jobs just in case.

Couple B, have children too and not "earning" as much. They too worked their whole lives and cleared their 20 year ago purchased HDB flat. For CPF, when the government announced many years ago that it can be used to purchase property, they immediately both jumped on the bandwagon and emptied their CPF into 2 private properties. At age 55, though they will not have much CPF to withdraw, they have 2 fully paid assets that have more than doubled in value. In addition, they do not have any worry about income as they have been receiving a steady stream of rental from the 2 properties.

"Earning" is in terms of salary paid as an employee. However, inclusive of the rental income, they will have overall more income.

Surprisingly, couple A is much more educated and salary about twice that of couple B. No doubt investing does carry risk, however, it is important to see the big picture. Scrimping and saving on day to day expenses but neglecting to properly manage your overall savings will cost dearly in future. What couple B did was not very complicated and risky but it allowed them to be financially free.

Disclaimer, I am not saying that property is the best investment and it is the way to financially freedom. In fact, this may not prove feasible today with the high property prices, high COV vis-a-vis affordability. Just felt like sharing their stories and instead of being constantly tied down with everyday decisions on small expenses, some serious thought must be put into seeking a suitable path to financial freedom in the long run.


financialray July 17, 2011 at 10:06 AM  

Hi Lau,

What you mentioned correlates to the elderly whom I have met who were financially free or at least are happily retired. My numbers are not big, perhaps 8 to 10 but ALL of them who are comfortable in their 60s to 70s have bought at least a 2nd property many years ago, some only in early 2000s.
Timing though is important and buying at peak will however let us see the other side of this double edged sword of leveraging. This is the experience of even some seasoned property investors, like Mr Rayney WOng who recently published a book on property. He bought semi-Ds in the 1996 peak and had to take a big hit.
Risks however can be minimised. The first step is to know one's finances very well and not to over commit. As long as a property is held long term (up to 10 years or more), property investment over long term is generally one of those that give good returns.
Besides timing, location is another important factor, and may even mean understanding the economy of the country.

Anonymous July 17, 2011 at 2:07 PM  

When we are still working for a living, we must prepare by investing our savings for a return that can at least replace 80% of our salary on the day we want to stop working. This is easier said than done by most people.

And further more this income generating assets when you retired should be able to last at least 20 - 25 years, just in case His GRACE wants to keep you on earth longer, hopefully for a purpose.
If only i know when i am "going",
then i know i am one of the riches man on earth.
In Singapore, it is getting more and more difficult for working class to save & invest for retirement.
Except the Elites of course.

Lau July 17, 2011 at 5:10 PM  

hi FR,

Thanks for sharing.

Firstly, property price peak or not, we only know on hindsight. Couple B actually bought at a high at that point in time (much similar to prices now, your guess is as good as mine if prices continue climbing or come down). In my opinion, if prices have not moved up, the rental income should compensate. Even when prices increased, it is still paper profit unless they realize it, but that will cut their current flow of income. Price risk reflects paper profit or loss if one's focus is on current income.

Secondly, they in fact bought at a pretty poor "ulu" location then, in undeveloped North East area. But today, the area has developed and that is where the capital appreciation is greater.

Hence, though I agree that timing and location is important, we may over think things and analyze until paralyze. Point is, one took the leap of faith to take action.

Lau July 17, 2011 at 5:18 PM  

Hi Temp,

In essence, you have summarized my main point I'm trying to make.

Indeed, Singapore has progressed so much so that expectations are increasingly hard to meet especially for the middle class.

By any chance, you sound like you could be from NCC?

financialray July 17, 2011 at 6:44 PM  

Hi Lau,

I agree we only know that our property investment is on the right track in the end only on hindsight, so property investment is not to be taken lightly as we all know it may be the single most expensive investment we ever make in our life.
We may not know the exact timing but certain indicators can help. For instance, if you are looking into residential property investment now, timing maybe wrong as many units will be built over the next few years and we depend on the government to decide if they will let in more foreigners. If THarman's warning about the economy today is not enough to strike fear, go on to read Khaw Boon Wan's blog.
If any property agent still insist anytime is good for property investment, you would probably know whose opinions carry more weight and who has the idea to influence where property prices go.
In fact, MM Lee before the completion of the IRs, expressed his confidence of the SIngapore's economy over the next 5 years, " the best years we will ever have".
Now will be a better time to work towards saving or preparing to pay up our mortgage loan should interest rates start to rise phenomenally. We can start looking at residential property investment later perhaps, unless we have deep pockets like Jackie Chan. Even then, he only bought a 500-600 sq feet condo if I did not get my facts wrong.
How about Landed property? THey are limited in supply and prices should be able to hold or even rise but only if you are prepared to live in it for years of capital appreciation. Only caution is never buy a 99 year landed at its peak which may be now.
ANd then there is still industrial and commecial property investments. THink too long winded liao.

financialray July 17, 2011 at 6:56 PM  

Perhaps can tell about this couple who are now in their 60s with a fairy tale ending. They belong to the working class and could be a living example for MM Lee to quote. Couple work hard for many years. Finally they own a 4 rm flat in Tampines. They have some excess cash in early 2000s but do not know about investments. They have heard of friends and siblings who invested with the banks when they visited to renew their fixed deposits in the 2000s. Luckily they did not. One day, the couple decided to put their money down as a deposit in a private condo near city fringe. What attracted them was there was going to be a large mall and MRT beside. I must emphasize this is in 2005 or earlier, before the property craze. I went to the show flat but thought otherwise of their investment, as an MP previously even had to apologise for saying the area is pitch black during nightfall. Thus on hindsight, timing and location are extremely important. Today, the couple enjoyed capital appreciation and passive income. They even have the luxury to decide where to stay or whether to sell one to realise their profits.
Flip over on Sunday Times when they ask financial experts about retirement and even planning for children's education. So far I remember only Chris Firth mentioned that commercial property investment could be one way to early retirement. Otherwise, when most financial advisers mention about every investment eg unit trusts, and don't advise on property investment, you know the picture is not complete.

Anonymous July 17, 2011 at 8:58 PM  

No lah. i am not from NCC.

Lau July 19, 2011 at 2:40 PM  

Hi FR,

Property will most likely be everyone's single most costly investment financially. True blue financial planners cannot ignore this aspect.

However, they probably do not get any income advising on mortgage or very little on term mortgage insurance. And may not even possess any knowledge in this area at all.

Hence, most will stick to advocating ILPs and UTs.

financialray July 19, 2011 at 3:44 PM  

Hi Lau,

Precisely, even the CPF SAvvy website will give advice on how to plan for retirement or for your children's education but inevitably, property investment is left out. I agree with you that property investment is not a viable option for everyone. In the course of educating ourselves financially, we however have to recognise that property investment is truly an option. Otherwise books like Rich Dad and Poor Dad will not be a bestseller. Another book I read is "Tricks of the Rich" written by a former Irish financial consultant Paul Overy, available in library. He admitted that as a so called financial consultant, he was more like a financial product sales person. Now he wrote the book to right the wrong concept.

Anonymous May 8, 2012 at 10:21 PM  

HI Lau, first of all, I wanted to applaud your effort to create such a informative blog for people who care for long term financial planning.

Sad but true, a lot of Singaporeans can only think of the model whereby one purchase a 2nd property in hope of renting it out. Given the current property market, i'm afraid the rental yield (est. 2.6% based on a $800,000 apartment, after deducting expenses and interest paid) is not worth the effort at all.

Bottom line is this: When it comes to long-term investment, we must look at risk vs reward. Any form of asset class is not worth doing it if it can't beat inflation by at least 100%. E.g. If average inflation is 3%, then the return (after deducting expense) must be at least 6% to be worth doing it.


lau May 9, 2012 at 9:46 PM  

hi Joel. thanks for encouraging words. I do derive great satisfaction from seeing people I help achieve their financial goals.

at the current situation it may not make sense but the unforeseen side is capital appreciation.


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