Financial issues affecting Singaporeans

You can read the key financial news affecting Singaporeans in the FISCA website, http://easyapps.sg/assn/Org/Information.aspx?id=5

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Emergency Fund

Every person should build up an emergency fund of 6 months of earnings. If you earn $5,000 a month, the emergency fund should be $30,000. This fund should be invested in a liquid form, e.g. keep in the bank account, fixed deposit, money market fund or invested in short term bonds. The return is low, but it is more important to have the flexibility to withdraw the savings in an emergency, without any loss.

This emergency fund is needed to meet your cash needs during unemployment, unexpected medical bills or other emergencies. If you have an emergency fund, you will not have to borrow money on your credit card and incur 24% in interest charges.

This tip is important for young people. You should build up the emergency fund early. Do not spend all of your income away. Put aside savings for this emergency fund. It may mean that you should not buy your car or pay too much for your flat.

Tan Kin Lian

Gini index

The United Nations measure the Gini index as the ratio of the average income of the top 10% (richest) compared to the bottom 20% (poorest) in the country. A higher index shows a bigger inequality of income. Here are the findings:

High income countries
Japan            24.9
Germany       28.3
Canada         32.6
France          32.7
Australia       35.2
UK               36.0
Israel             39.2
USA             40.8
Singapore      42.5
Hong Kong   43.4

Low income countries
Indonesia       34.3
Russia            39.9
China             46.9

We have seen unrest in China and Israel about the high cost of living. Both countries have high Gini index. I have included Australia and Canada as these countries are rated to provide a good standard of life for their people.

America is considered to have high income inequality. Singapore is worse than America.

Source: http://en.wikipedia.org/wiki/List_of_countries_by_income_equality

Impact of Income Inequality

Let us look at two hypothetical countries, X and Y

X - 90% of the population earn an annual income of $40,000 while 10% earn an average of $120,000 (3 times).
Y - 90% of the population earn an annual income of $40,000 while 10% earn an average income of $240,000 (6 times).

In X, the top 10% earn 25% of the total income. In Y, the top 10% earn 40% of the total income.

Which country give a better life to its people? Most people would probably say that country Y is better - as 90% of the people l earn the same income as X, and it gives the opportunity for the remaining 10% to earn much more.

But this reasoning is wrong. The higher income earners of Y can afford to pay higher prices for property and other products and services and push up the cost of living - which creates a negative impact on the remaining 90%. This is why "the rich gets richer and the poor gets poorer".

A country with a greater income equality will allow more people to earn enough to meet the cost of living and raise a family. This is why a low income country with greater income equality gives a better life to the people, rather than a high income country with greater income inequality.

It is the inequality of income and the high unemployment rate (a main contributor to the inequality) that leads to unrest that has been seen in many countries during the past year.

Read this article about income inequality in America.

This article compares the Gini index of Singapore with other familiar countries.

Tan Kin Lian

Income inequality in USA

I wish to quote the following article from Wikipedia about income inequality in America, and explain in a separate article why it cause greater to people at the lower income level (compared to a society where the income distribution is more equal). I will also show the how Singapore fare in the Gini index, i.e. it is worse than America.

Quote from Wikipedia:
Income inequality is the extent to which income, most commonly measured by household or individual, is distributed in an uneven manner. While there seems to be consensus among social scientists that some degree of income inequality is needed, the extent of income inequality and its implications on society continue to be a subject of great debate, as they have been for over a century.

A study by the Southern Economic Journal found that "71 percent of American economists believe the distribution of income in the US should be more equal, and 81 percent feel that the redistribution of income is a legitimate role for government." 

Data from official sources indicate that income inequality has been increasing since the 1970s. As of 2006, the United States had one of the highest levels of income inequality, as measured through the Gini index, among the high income countries.

In 2010, the top 20% of Americans earned 49.4% of the nation’s income, compared with the 3.4% earned by the roughly 15% of the population living below the poverty line. This earnings ratio of 14.5 to 1 was an increase from the 13.6 to 1 ratio in 2008 and a significant rise from the historic low of 7.69 to 1 in 1968. 

Looking back even further to 1915, an era in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned roughly 18% of all income. Today, the top 1% account for 24% of all income.

Tips on life insurance

Someone wanted to know about  asked about life insurance. Here are the options:

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Low interest rate is harmful

America, Japan and Europe have low interest rate for many years. It was thought that low interest rate would reduce cost to business and encourage more businesses to be created to create jobs for the people. It did not seem to work well.

The low interest rate has caused asset prices to increase, especially property prices. It has made housing more expensive and out of reach to ordinary citizens - although the low interest rate helps to remove the pain of paying the mortgages.

At a certain point in the future, the housing prices will collapse. It happened in Japan, USA and Europe. This is why the banks are shaky, as they have lent too much on the inflated housing prices. There seem to be no escape from the disaster down the road.

There is actually a solution - and that is to get away from the concept of marking to market of property prices. I shall not go into much discussion here - as it requires a totally different approach. It may be necesary to avoid the global disaster.

A more fundamental question is - could the developed economies have adopted a different approach (instead of low interest rate) to grow the economy and create sufficient jobs for everyone? The answer is "yes" - and that is to get everybody to work less, so that the available work can be distributed to all those who are willing to work. There will be more time for social life. Life is not just work alone.

How can work be better distributed? This is another interesting question and requires a more detailed discussion. At this juncture, I only wish to bring out this concept. Maybe, some economists have already written about it, and we can share their thinking.

Tan Kin Lian

Financial issues affecting Singaporeans

You can read the key financial news affecting Singaporeans in the FISCA website, http://easyapps.sg/assn/Org/Information.aspx?id=5

You can attend the talks given by FISCA by registering here:
http://easyapps.sg/assn/Org/Event.aspx?id=5

High dividend shares

Due to the recent correction of the stock market, some blue chips shares are giving a high dividend yield. A telco, Starhub now gives a yield of 7%. The media company SPH pays 6.1%. This is the dividend paid during the past 12 months, expressed as a percentage of the current share price.

The stock market has corrected during the past month due to uncertainty in the global economic environment. When the global economy turns bad, the profit of companies are expected to drop. In a bad situation where the profit profit drop by 50%, the dividend yield will still be more than 3%, which is quite attractive compared to bank deposits and bonds.

The share price may drop sharply during a very bad market. But, if you are investing for the long term and does not have borrowings, you can afford to wait for the stock market to recover. There is no need to sell the shares in a bad market.

Investing in high dividend shares make sense in this uncertain market. Before you invest, you should study the borrowings of the companies. If they do not have large borrowings, you will be quite safe. If there have large borrowings, i.e. high leverage, they may be badly affected by a downturn in the economy.

You should still diversify your investments by spreading the total invested amount into 5 to 10 blue chip shares. If you do not have sufficient funds to diversify in this manner, you should invest in the Straits Times Index ETF managed by SPDR or DBS.

Calculating the yield on existing life policy

Here is how you can calculate the yield on an existing life insurance policy for the next 5 years. It helps you to decide on whether to continue or terminate the policy.
http://tankinlian.com/admin/file.aspx?id=557

US regulator files suit against big banks

The US regulator is filing legal suits against several big banks for the subprime mortgages that were sold to Fannie Mae and Freddie Mac. More details here:
http://slatest.slate.com/posts/2011/09/02/mortage_lawsuits_big_banks_to_be_sued_by_federal_regulator_over_.html

I expect that the legal fallout can be quite serious for the global economy.

Tips on critical illness insurance

A critical illness policy is one of the most popular policy, but is not well understood. The insurance agent tells the consumers about the cost of critical illness and the need to buy life insurance to protect against this event. Everybody will have to suffer a critical illness one day, and that will lead to death. But, is insurance the best answer? Read this article to learn about how to make the right decision.

Half Truths about Life Insurance

An insurance agent is taught many ways to convince a customer to buy life insurance, even if the customer suspect that he is not being given a good deal. Here are some half truths told by the agent and what the correct situation really is. Read this FAQ.

US Govt plans to file law suit against major banks

This is an interesting development. The lawsuits are for misrepresenting the risks in the mortgage backed securities. These products caused the global financial crisis and led to heavy investment losses for Singapore investors following the collapse of Lehman Brothers. The US Govt alleged that the banks failed in their duty. 

Pointed replies

How to reply in difficult situations
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Medishield beyond age 85

Medishield insurance (provided by CPF) stops at age 85. The annual premium payable at age 85 is $1,123. I believe that this is subsidised by the younger members and the true cost should be higher.

So far, the Ministry of Health is unwilling to extend Medishield beyond age 85. If it is extended, the premium is likely to be $1,500 to $2,000 a year for the next 10 years. This is likely to be beyond the budget of the elderly people.  When the premium is so high, those who are healthier are likely to stop the insurance. Only those who are in poorer health will continue. The cost could increase more sharply, due to the small pool.

What can the elderly consumers do? Beyond age 85, most people have so much health problem that  it may be impossible to fix them. I know of many elderly people who prefer not to go to hospital, and to let their medical conditions be untreated. They know that their time will be up soon - it is called ageing, and that there is very little that can be done by medical science.

If they want to be treated, they can still reduce their cost by going to subsidised wards, and pay from their Medisave account, or from their children's accounts. They can also try to minimise the cost by staying for short periods and only when necessary.

Tan Kin Lian

Low default risk in ETF

Dear Mr. Tan
I am a retiree. I intend to buy STI ETFs with my savings instead of buying annuities.I would also like your advice on what happens if we put our life savings into ETFs and the company behind it goes bust. Are there any other ETFs worth considering now?

REPLY
The ETF is a trust fund invested in the top 30 companies in the SGX. The fund manager is DBS or State Street. If they go bust, another fund manager will take over to manage the underlying assets (shares of SGX). The risk is very small and it is safer than investing in any single share.

A person's perspective of minimum wage

I asked my blog reader, Hang Lian, about how the minimum wage impacts business and people in New Zealand. Here is his reply.

Hi Mr. Tan,
I did not look into the minimum wage in details. What I know is it's $13 an hour (about $500 a week on 40 hrs). The exchange rates between Spore and NZ is about 1:1. 

As far as I can see, although minimum wages have been applied, the cost of living is not as high as one would expect. Many employers here are SMEs, so I also don't see how a minimum wage could add a lot of burden to businesses, let alone the MNCs.

I think the most important advantage I see is that as long as a person is willing to work, even if he earns the minimum wage, he will be able to live a reasonably comfortable live (without the need to spend too much time working as well). I lived alone for a while when I first came here, and I can say that the minimum wage is quite sufficient to support a person's basic expenses of accommodation, food, transport, etc (in some cases even 2 people). 

In Spore, for those very low income earners who earn less than $1000 a month and in some cases, working more than 10 hours a day, I can't see how this group of people make ends meet. I suspect their quality of live would be greatly compromised.

There are some employers who try to work around the minimum wage policies by paying less, which is against the law.

Of cos a lot of things are also a result of a combination of various other factors, like the general environment, working culture, lifestyle, taxes, labour laws, etc.

Hope that helps.

Hang Lian

Financial Planning Talk by Sam Goh

Here is a new financial planning talk organised by FISCA. The speaker is Sam Goh, who has experience in delivering this talk to several government agencies. Do attend his talk and widen your knowledge. Details can be found here.

Danger for the property market

The property market has gone up too high, due to low interest rate. When interest rate increases in the future after quantitative easing is over, it will cause a drop in the property market. The impact is more severe in a place like Singapore, where property are financed on short term interest rate. When interest rate rises, the impact will be severe.

Let me quote a simple example. Suppose the buyer pays for a property on a 20 year loan at an interest rate of 2% per annum. With a monthly repayment of $5,000, the borrower can afford a property worth $981,000. When interest rate increases to 4%, which is a more realistic interest rate (given that inflation is now 2% to 3%), the monthly repayment will increase by 17%. Some borrowers cannot meet the higher payment, so they have to sell the property. The next buyer can afford to buy the property at 17% lower. So, the property market will drop by 17% due to the increase in interest rate.

What can you do now - to prevent this financial disaster? You should have a 20% buffer. If you can afford a monthly payment of $5,000, buy a property that requires payment of only $4,000. The additional $1,000 is to meet higher repayment in the future.

You may not be able to get the property if you pay 20% less. In that case, it is better to wait for the property market to correct. Meanwhile, you can rent a property. Even if the rental is high, you are paying for it one year at a time. You can wait for two or three years, to see the correction in the market. It will come!

Tan Kin Lian

FISCA Talk - Financial Planning

Here is the handout for the FISCA talk on financial planning. Feel free to download and print the handout. You can attend the talk organised by FISCA by registering in www.easysearch.sg/fisca (click on Events).

FISCA Talk - Get value from your life insurance

This is the handout of the talk given by FISCA on life insurance. Attend the talk and get a better understanding of how to select the right life insurance policy. Feel free to download the PDF for your reading. If you wish to attend the talk, go to www.easysearch.sg/fisca and click on "Events".

Let elected MPs do their duty

This letter was not published in the Straits Times.

31 August 2011

Editor
Forum Page
Straits Times

I refer to the letter from the director of corporate and marketing communication of the People's Association "Why opposition MPs cannot be grass-roots advisers". She said, "Besides connecting people to people, grassroots advisers are required to help the Government connect with people and help promote government policies and programs such as anti-dengue and active ageing........Opposition MPs cannot be expected to do this and thus cannot become advisers to GROs."

I am disappointed with this partisan position taken publicly by a senior civil servant. I would request her to take a more objective look at the mission of the People's Association, which is to build and bridge communities and promote racial harmony and social cohesion in Singapore. I could not detect any reference to the need to link up with the people ONLY through the ruling party which forms the Government.

Members of Parliament from all political parties were elected to represent the people in their constituency. It can be argued that they are part and parcel of the government process of community engagement and representation. They should be entrusted with the role. All MPs, regardless of their political party affiliation, are paid out of public funds and should be required to perform the duties for which they are paid - otherwise, the public funds would be wasted.

I would suspect that the defeated candidates from the ruling party would have to struggle with the indignity of being advisers to grassroots organizations which have to connect with people who have rejected them. It does make a mockery of our democratic system.

After the last general elections, the Prime Minister had sincerely pledged to engage the people of Singapore and to respond objectively. I respect him for that and urge him to take a closer look at this aberration of our democratic process and let the opposition MPs do the job that they have been entrusted with by the people.

If they still do a good job, they deserve to be given the chance to be chosen again by the people. If they do not, despite the level playing field, the decision of the people will be swift and sure.

I would also call on the professionals in the publicly funded statutory bodies to perform their duty in a neutral and non-partisan manner. Singapore has matured and there's no need to perpetuate the political baggage of a different era.

Tan Kin Lian