Monday, October 26, 2009

Build up 6 to 12 months of savings

Hi Mr Tan,
I have read the draft 5a of your Financial Planning book. It is a great read and contains many practical financial tips.

Would it be better for young people to clear off their debts (e.g. study loans, wedding loans, renovation loans, car loans) before embarking on an investment plan?

Most young people are short-sighted and do not see the benefit of saving 6-12 months of their salary. Recently, I have attended a course which covered personal finance. The trainer said that it is beneficial to have savings to fall back on as you can treat it as a interest free loan instead of borrowing from the banks.

Considering how much the banks are charging for the loans, I realised that having money at hand to handle personal emergencies is very important indeed.

Would you agree that for a HDB housing loan, it would be better to borrow to the max(30 years) as Mr Larry Haverkamp has suggested in his articles. What are your opinions for a bank housing loan as a comparison? Do you agree that housing loan is probably the only loan that we should not draw down on even if we have the means to do so?

REPLY
I agree that it is better to pay off the loan, if they carry a higher interest rate than the yield on low risk investment (say 3%). As HDB loan is 2.6%, it is better to take the max loan from HDB and invest to earn more than 2.6%. I agree that a housing loan is probably the only loan that you should have in your lifetime.
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2 comments:

Anonymous said...

I think a critical consideration is what kind of job you hold.

If you have an iron clad civil service job, then it is probably ok to max out on a subsidied HDB housing loan.

However if you are working in the pte sector, then you might want to take a more conservative approach and repay the loan first. This is because if you lose your job, the montly repatment woould be a heavy burden.

October 26, 2009 12:20 PM
Anonymous said...

I also think paying off all loans in the earliest time is better.

What you can earning is not guaranteed but the loan amount/interest is.

When you pay off all your loans, including the HDB, you have zero liabilities.

Even if you were to be retrenched or forced to take up a lower-paying job or face a pay-cut, it is not an issue at least roof over your head is protected.


Regards

An Insurance agent.

October 26, 2009 6:24 PM

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