Tuesday, December 22, 2009

Need for savings and liquidity

It is important for each person to have savings and liquidity. I have suggested that each person should set aside 50% of current earnings (inclusive of CPF) for housing and the future. As CPF takes about 35% (including employer's contribution), the personal savings should be 15%. Younger people living with their parents can save a larger proportion (say upt o 30%) if they do not have to repay any study loan or contribute towards their family expenses.

It is also important for the savings to be liquid. They can be kept in a bank account to earn interest of 1% or less.  This allows the savings to be withdraw without any penalty, to meet expected cash needs, such as medical bills, down payments or temporary unemployment.

For longer term investments, the savings should be invested in financial products that have low front end charges. For example, they can be invested in stocks and bonds traded on the Singapore Exchange, where the transaction cost is 0.3% of the invested sum. They can also be invested in a diversified exchange traded fund, where the annual fee is also 0.3%. As these products typically earn a yield of 4% to 6%, the upfront charge can be recovered within one year.

You should avoid investing in financial products, including life insurance products, where the front-end charge can take away up to two years of your savings. As you need liquidity, you cannot afford to incur such a large penalty. As you have the choice of SGX products with a front end charge of only 0.3%, why pay up to 200%?

If you need life insurance cover, buy a term insurance and pay the cost of insurance. It is small. Do not worry about getting this money back. Treat it as an expense.

Make sure that your savings earn an attractive rate of return. Invest in products that have a low transaction charge (say 0.3%) and a low annual fee (say 0.3% per annum) to enjoy professional management and diversification. Make sure that you have liquidity and do not have to pay a high penalty when you need to withdraw your savings for the unexpected expenses.

Tan Kin Lian


Anonymous said...

Make sure that when you need money you can withdraw from your saving plan without having to make a loan.
By now many consumers should know that wholelife or endowment products have built in traps to penalise you.
Have you ever wondered if the whole life product you bought is a saving plan why do you need to borrow? I haven't heard of this load of craps that you need to borrow from your own saving account and pay a very high interest and this interest doesn't go into your account but somebody else's account. It is dumb, right?
If you have already made a mistake becuase your insurance agent conned you into buying this dubious product I can understand your dilemma.Ask yourself what you need really. Is it protection or saving? Neither of these the wholelife can satisfy. If you are healthy and insurable the best option is to cancel it and start a new plan. BUT don't use an insurance agent again. Insurance agents are salesmen whose only interest is to sell you something that can make them a commission.
Use a financial planner and discuss your concerns with her or him and let them come up with an efficient plan which covers you adequately your needs and not half as insurance agents will always do and saving plan that gives you the best chance of higher return above inflation.Only real wealth is created when the return is higher than inflation and wholelife products fail miserably.
Another point to consider is don't let these salesmen frighten you that your saving plan is risky. It is not true. The fact is wholelife products are VERY risky. They don't give decent return. Breakeven point is SO FAR AWAY and you are not told what is the return or what will be the return.The agents don't tell you your premium is also invested in the same pool of funds with the others who have different objectives and time and risk appetite.It is a one size fits all investment just like the agents sold you the product as a cure all product.Remember the koyok man at Waterloo Street? Worse, after waiting for 25 years you found out that the return is miserably low and eaten up by inflation and you are worse than the day you started 25 years ago.How to retire when you depend on it for cash value? The agent lied to you, right? The agent fooled you about the return, right?
Please , do not fall into the trap again. The motive of wholelife and endowment is to raise cheap money for the insurance companies and to do that they use the greedy agents to help them in this insidious scheme.
If you are unsure consult FISCA before being conned by agents.
I reiterate ,99.5% OF THE INSURANCE AGENTS ARE NOT QUALIFIED TO PLAN FOR YOU.(they can call themselves by whatever titles, financial consultants, senior or executive, they are disguised salesmen and women.)

The Watchman

Young employee said...

Mr Tan,

May I clarify is the % used should be applied to salary including employee's CPF contribution, salary excluding employee's CPF contribution, or salary including employee and employer's CPF contribution?

For example, if we are recommended to save 50% of earnings for retirement and housing, should this be 50% of earnings including CPF contributions from both employee and employer? At the current contribution rates, CPF make up 34.5/134.5 = about 25% of salary earnings including CPF contributions from both employee and employer. Does this mean that we should put aside another similar amount in take-home pay, to make up 50%?

Thank you for your clarification in this!

sgcynic said...

"I have suggested that each person should set aside 50% of current earnings (inclusive of CPF) for housing and the future. As CPF takes about 35% (including employer's contribution), the personal savings should be 15%."

Mr Tan, what is your view on spending 30% of our income on housing loan over a period of 30 years? Is it "affordale"? What is your definition of affordability?

Anonymous said...

Rule #1....never trust insurance agents with your financial future.
Rule #2 is rule #1

Anonymous said...


How do I know that FISCA will also not con me? You cannot trust anybody these days.

Everybody has a hidden agenda when he or she "wants" to help.

Anonymous said...

Anon 3:42PM

FISCA is not licensed to distribute products and thus will not recommend you products and thus you will not be conned unlike insurance agents who have motives. FISCA's hidden agenda is to educate you against the unethical practices of agents.

Anonymous said...

Mr. Tan's advice is good, especially on life insurance and the amount of debt a person should take.

I would like to suggest that we use a common software but one that surprisingly few people use to calculate their personal costs of debt, the fees that can be charged for years on their insurance policies, unit trusts, and many other financial calcuations.

I am talking about Excel in Microsoft or the spreadsheet in Google.docs.

It only takes a short time to learn to use the financial functions and can save you a lot of guessing about the effects of taxes, fees and inflation over many years.

It will also help you to check some of the rosy predictions of future wealth that financial agents will tell you.

As a start, here is the link to Excel help webpage: http://office.microsoft.com/en-us/excel/CH011165461033.aspx.

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