Saturday, January 09, 2010

New York Times: 31 places to visit in 2010

Singapore missed this list in 2010. I hope that it will be included in 2011, when the two casinos open for business.

Financial planning - learn before you leave school

My friend suggested that I give financial planning talk to couples when they get married. I said that it would be too late. I have to give the financial planning talk to students before they leave school or university and start to work.

Here are the key points:
a) Save 50% of your earnings for the future. You can count your CPF as savings, so you only need to save 15%. You should repay your study loan or other borrowings early.
b) Keep your savings in liquid form, e.g. in a bank account . Do not worry about investing it yet.
c) Buy Medisheld to cover medical expenses and Personal Accident insurance to cover accidents.

When you are ready to invest the savings, choose a money market fund or exchange traded fund (ETF) where the expenses are low. Do not buy a life insurance policy yet, as it is rigid and gives a poor return (due to high expenses). Do not talk to an insurance agent (including your friend) at this time. Do not buy any structured product or investment product sold by a marketing person.

Read my book on Practical Guide on Financial Planning or join FISCA (Financial Services Consumer Association). You can think about investing later on, after you have been educated about the financial products.

Tan Kin Lian

Rubik Cube

The Rubik Cube was introduced in 1980 and was the craze for a decade. It has recently been re-introduced and has become popular. For people who are interested to learn to solve this puzzle, here are some instructions from Dan Brown on Youtube. I find the instructions to be excellent and easy to follow.

Part 1:
Part 2:

Friday, January 08, 2010

NSRCC: Planning your finances early

Published in National Service Resort and Country Club magazine.

When should you start a financial plan? How do you go about it?

The answer is, “As soon as you start work”. And your financial plan should be, “Allocate 50% of your earnings for your current expenses and 50% for the future”. The allocation for the future is to be used mainly for the purchase of a home and for retirement, but a small portion can be used for your children's education and emergencies.

Save 50% of earnings
Hey, wait a minute. Do I really have to keep 50% for the future? Maybe, my starting salary is quite low and is insufficient for me to get by.

Well, if you are working in Singapore, you are already saving 34.5% of your earnings in the Central Provident Fund or CPF. Your contribution is 20% of earnings and your employer is contributing 14.5% for you. So, to make the total of 50%, you only need to set aside 15.5% for your personal savings account. This still leaves 84.5% of your net pay to spend now.

And how do you invest the 15.5%? Don’t worry about that now. Keep it in your savings account at the bank. Although the interest rate is less than 0.5% a year, it does not matter. When you have accumulated a few thousand dollars, you can then start to look for ways to invest the savings.

Repay your study loan
If you have a study loan, taken for a university education, you should try to repay it as early as possible, using the balance of your earnings.

Contribute to family expenses
If you are staying with your parents, your personal expenses are likely to be quite low. But, you have to be fair to your parents and make a contribution towards the household expenses. May, you can give 30% of your earnings? Talk to your parents about it.

Avoid borrowings
During this time, you should avoid incurring debts, especially on credit cards where you have to pay interest of 2% per month on the roll-over. This works out to more than 24% a year on a compounded basis.

If you are not careful, you can early chalk up a large credit card debt just by spending money freely at expensive joints, buying jewellery or going on a holiday. The monthly interest payment can take away a large part of your earnings. Just imagine, how hard you have to work to earn your salary. So, do not give it to your bank.

Lend to yourself
Do you know that your savings can earn you interest of up to 24% a year? No kidding - you can lend the money to yourself.

Suppose someone falls seriously ill or meet with a serious accident and a large medical bills has to be paid. Where can you raise this money? Or you have lost your job and you need money to start a small business.

If you do not have any savings, you have to borrow from your bank or use your credit card. This can cost you interest at up to 24% a year.

If you have accumulated some savings in the past, you can draw down on your savings and save this large interest expense. You can lend the money to yourself.

If you lend to yourself, you also have to pay it back. You should make additional savings from your future earnings to replenish the savings that you have drawn down. This is a necessary discipline - sign a contract with yourself on the repayment.

Summary: start a financial plan now and set a goal to save 50% of your earnings (including CPF) for the future

Home purchase and financial planning

Someone asked me about my recent interest in HDB flat. This is part of my research for my financial planning book.

In my book, I advised that a person should set aside up to 25% of their family income towards the purchase of a home. They should not exceed 25%.

I decided to carry out some research into the price of HDB flat, as it affects 85% of the people in Singapore. If they are able to keep their purchase commitment to an affordable level (i.e. 25% of their family income), they would be able to have sufficient savings for other purposes. This is explained in my financial planning book.

My book will be sent for printing in January and will be available in the bookstores in March 2010.

Are home buyers prudent?

I carried out a survey in my blog about the price of HDB flats. 50 people replied. 47% replied that their monthly repayment to the housing loan (including CPF withdrawals) is within 20% of their family income. I consider this to be prudent, as it is within 25% (which is my benchmark).

Another 38% said that the repayment is 30% of their family income. 15% said that the repayment is 40% to 50% of their family income. The commitment is clearly excessive for this 15%.

I would consider that two thirds or 66% (i.e. 47% plus half of 38%) are prudent and that the remaining one third is over-stretching their finances towards their HDB flat.

Thursday, January 07, 2010

Financial planning for a child

I wish to write an article on financial planning for a child. The key features are:

a) annual expenses for a child's education
b) savings for tertiary education of a child, especially if the child wishes to go overseas
c) insurance for the child's medical expenses arising from accidents and illnesses.

Are there any other special needs? What are the key concerns of a parent?

The annual expenses should be met out of current income. The parent should consider the need to spend money on enrichment programs and tuition, which seem to take a significant monthly budget. The best way to save for tertiary education is to have a savings plan that gives a good yield. The child can be insured for Medishield or private Shield, but the expense should be kept low.

Any views?

Survey on pricing of HDB flat

Take part in this survey.

Here are the survey results based on the first 98 replies.

Asset enhancement

Since the mid 1980s, the Government implemented market pricing and the asset enhancement policy for public housing, i.e HDB flats. The aim was to allow the heartlanders to have a chance to enjoy the appreciation of their HDB flat, which represents the the key assets for most of them.

This policy has led to a more than 10 fold increase in the price of HDB flats during the past 30 years. For most HDB flat owners, the increase in asset price does not translate into real wealth. They still need a place to live in, as the HDB flat is the only home that they hold. If they sell the flat, they have to buy a private propety at an even higher price.

The only people who can benefit from the appreciation in the HDB flats are those who emigrate from Singapore and the few who are able to downgrade to a smaller flat. Some of these people are permanent residents who are able to cash out on the appreciation to return to their original country.

For the majority of Singaporeans, the increase in price is actually a financial burden, as the monthly installment will represent a larger proportion of their earnings. The high prices hit the future generation harder who now has to pay a much higher price and monthly replayment for a roof over their head.

Too many people are paying too much for a HDB flat. To be comfortable, a person should not spend more than four or at most five years of the combined family income (after deducting the cost of employing a maid) to buy a home. I believe that many people are over-streching to six years or more.

Tan Kin Lian

Stabilising the market

The annual report of the Housing & Development Board (HDB) showed a variation of up to 50% in the price of a 4 room HDB estate in Punggol during 2008/09. Why should the price of the flat vary by so much for the same location, type and year? If we allow for closeness to MRT station or amenities, the difference should perhaps not exceed 15%. A large part of the difference could be due to the volatity of the property market during this year.

While the market was volatile during this period, due to speculation, it would be better for the HDB to stablise the market by setting the benchmark pricing, rather than add fuel to the speculation. If the HDB were to offer a large number of new flats at stable prices, it will give comfort to the home buyers that prices will be stable (and still reflect the market) and will not increase sharply due to supply shortage or speculative demand. It will reduce speculation and fear.

I hope that the HDB will play this important role of stabilising the market and still have prices that reflect the economic growth of the country and the income level of the people. The Singapore economy will be stronger, if the prices of housing and many other cost of business are kept stable (and still reflect the market price in Singapore or globally) and not manipulated by speculators.

Tan Kin Lian

Improve transparency of prices of new HDB flats

The HDB (i.e. Government) should improve the transparency of the prices of new HDB flats. This can be done as follows:

(a) Publish the prices of new flats offered for sale
(b) Publish the prices of new flats purchased in recent years, with details of locations, size, floor level and other relevant factors
(b) Publish statistics on the average price of new flats by location, type and size.

This will set a good example to the market, of providing transparent information for the buyers to make an informed choice.

S'pore workers clock up longest work hours: ILO

DESPITE the recession that hit towards the end of 2008, Singapore workers still clocked up the most hours, says a report by the International Labour Organisation (ILO).

Shorter work weeks and temporary lay-offs introduced to save jobs during the downturn trimmed working hours here to below the mandatory cap of 44 a week - but only slightly. With working hours still way above 40 a week, Singaporeans put in more hours than workers in 12 other countries used for comparison in the recent report, an update on ILO's Global Wages Report 2008-09 released in November 2008.

The report shows 11 of these 13 countries posted a fall in working time in 2008 and the first three months of 2009, compared with 2007. Average working hours in the 13 countries declined from 39 to 38.2 per week.
'Men and women have both been affected,' the report says. 'Among the six examples with disaggregated data, we find that hours worked by women declined from 36.4 to 35.8, while hours worked by men declined from 40.7 to 40.'

The report says the cuts in hours contributed much to slower growth in monthly wages, which eased from an average 4.3 per cent to 1.4 per cent for 53 countries. 'Overall, while a majority of countries could maintain declining but positive wage growth in 2008, more than a quarter experienced flat or falling monthly wages in real terms,' the report says.

One of them is Singapore, where real wages slipped one per cent. The others include the US (zero per cent), Germany (-0.6 per cent), Switzerland (-0.7), Japan (-0.9), South Korea (-1.5) and Iceland (-4.8). Wages fell 3.6 per cent in Taiwan and 6.2 per cent in Hong Kong.

'Compared with the annual average of 2008, real wages in the first quarter of 2009 fell in more than half of the 35 countries for which data is available,' the report says. Although the report was released recently and quotes International Monetary Fund figures from October 2009, it does not go beyond June last year.

Working hours overall, including those in Singapore, should have fallen further as the recession deepened in Q2 2009. And that means wages as well. 'The picture on wages is likely to get worse in 2009 - despite the beginning of a possible economic recovery,' the report says.

Only workers in Iceland - which nearly went bankrupt - put in almost as many hours as Singaporeans in 2008 and Q1 2009. South Korean workers, who, like Singaporeans, are expected to work 44 hours a week, clocked up fewer than 40. Taiwanese workers also put in fewer hours, while the Japanese held constant.

Wednesday, January 06, 2010

Practical Guide on Financial Planning - additional materials

After receiving feedback, I will be adding the following pages to the book:

Glossary of terms
Real life experiences - 5 people wrote to share their stories previously

Creative destruction - mobile phone and financial centers

Read this article.

TKL Practical Guide to Financial Planning

I am sending the book for printing soon. It comprise of about 100 pages. This is based on draft 6 (which was published earlier) but has since been further corrected. The book is expected to be ready by early February in the bookstores. Please give your views of an acceptable price for this book.

How food is produced

Watch this video.

A new pricing formula for HDB flats

I will be stating what is obvious to most people - the Government is able to control the prices of public housing in Singapore.

As private housing (i.e. landed properties and condominiums) is very high relative to the income level, most people have to depend on public housing built by the Housing and Development Board (HDB), by buying a new flat directly from the HDB or from an existing owner on the resale market.

The HDB now uses the resale price on the market to set the prices for new flats. In turn, these prices will determine the prices on the resale market. This seems to be an incestious situation.

A market works well only if there is elastic supply, elastic demand and market competition. In the case of public housing, the supply is virtually in the hands of a monopoly, i.e. the HDB. The demand is also not elastic, as each person has to find a place to live in and is allowed to own only one HDB flat. In the resale market, the seller has to find another place to live in, before he can sell his HDB flat on the market. Hence, the demand cannot drop, even if the prices are too high.

By controlling the supply of new flats, HDB is able to control the prices in the resale market, and indirectly the prices of new flats.

There is also a large element of speculation. If the market perceive that HDB is restricting supply, the speculators (e.g. people renting flats) will buy the flats in the resale market and cause a panic that prices are rising. This causes prices to rise.

If we recognize that the resale market is not a true market (and is affected by supply control and speculation), it is better to adopt a different policy to price the new flats. I suggest that it should be priced relative to average national income - a benchmark price is computed on this principle and the actual price is adjusted to reflect relativities due to location, distance to MRT station  size of flat and standard of construction.

HDB should release a large supply of new flats (still under construction or ready for occupation) to be selected by the people on the waiting list, based on these pre-determined prices. If there are several buyers vying for the same flat, the flat can be allocated by a ballot - which can be efficiently managed using IT technology. The unsuccessful applicants will automatically be considered for the next flat of their choice.

The flats determined by HDB will be much higher than the cost of land and construction and will give a profit margin which is revenue to the state. It will stabilize the prices of new flats to be more reflective of the true market (rather than prices that are affected by speculation and lack of information). In turn, the market for resale flats will follow the prices of the new flats, on a relative basis.

As housing has become a large part of the cost of living in Singapore, it is time for the Government to review the pricing for HDB flats, and to find a better system that reflects the  true market and keeps the prices in line with the ability of the people, based on their income levels, to afford them. We may return to the good days of Singapore a few decades ago.

Tan Kin Lian

GST exemption - penalty or benefit

Printed in Today paper, 5 January 2010

I run a small business with a turnover that falls within the GST exemption limit.
This exemption was supposed to be a benefit to assist small businesses but it turned out to be a penalty. I have to pay GST on my rental, utilities and purchases of supplies and services, but I am not able to recover the GST inputs from my sales to business customers. I cannot increase my prices to these customers to cover my GST inputs, as they do not receive any GST credit for purchases from exempt entities.

With great reluctance, I decided to “volunteer” to be a GST registered business and bear the burden and cost of keeping GST records and submitting quarterly returns to IRAS.

IRAS accepted my voluntary registration and sent me a written notice that have to attend a GST briefing within three months, failing which my registration would be cancelled. I tried to register for the next briefing but it was fully taken up. I sent an e-mal to register for the next briefing but have not received any reply after two weeks. I get the impression that IRAS does not really welcome a small business to volunteer to be registered for GST.

Instead of making life difficult for small business, I hope that IRAS will tell the Minister of Finance why small businesses are volunteering to register for GST, when they are not required to, and why it is troublesome for IRAS to collect small amounts of GST revenue from these volunteers.

It will be better for the penalty on small businesses to be removed, so that they do not have to volunteer to be registered for GST. This can be achieved by allowing all eligible purchases by business entities to be treated as GST credit, regardless of whether they were purchased from exempt or non-exempt suppliers.
Apart from helping the small businesses, it will simplify the GST system and reduce the burden to businesses of keeping separate records to comply with the accounting of GST. The loss of revenue to IRAS would be quite small and could be offset by the savings in their administrative cost. More importantly, there will be cost savings for the economy by reducing the unproductive work.

Tan Kin Lian

I receive a call from IRAS to explain the delay in replying to my registration. I told them that the delay is unimportant. It is more important for the Minister of Finance to review the implementation of GST to remove the unintended consequences, i.e. many people "volunteering" to register for GST when they pay little GST. This has caused unnecessary work for the small business and IRAS.

Tuesday, January 05, 2010

Price of new HDB flat

I wanted to carry out some research into the cost of a new HDB flat, to see if it is still affordable. I had a difficult time to get the relevant information.

I visited the HDB website to find out what is the price of a new flat. I found this page but could not get the information that is needed. I was only able to find the prices of resale flats here. I don't know why HDB don't want to publish the price for new flats in a similar table, as this is helpful to home seekers.

After some effort, I was able to find some information about new flat prices from the HDB annual report but I was quite surprised at the wide range of prices (difference of up to 50%) for the same type of flat in the same estate within a period of one year.

Maybe, HDB wants to peg its place for new flats based on the market price for resale flat and for new home owners to be given a housing grant. I did some search for this grant and came to this page. It seems to be quite complicated to find out about the amount of housing grant that the buyer can get.

I do not know why buying a new HDB flat should be made some complicated, with no published price list for new flats and a complicated structure for the housing grant. I am afraid that, with this type of complexity, many people will not be able to make a sensible decision about getting the flat that they can afford, which is convenient for them to live in.  It would be better if things are made simpler, so that the ordinary people can make the right decisions.

Tan Kin Lian

Investing savings of $10,000

Someone wrote to ask for my advice. He has savings of $10,000 and wish to have a better return compared to bank interest. He wanted to pick some stocks to buy and sell when there is a profit. I advised him that it is not suitable to trade in stocks, as the transaction cost and spread will eat away the gain from the stock. There is the risk of capital loss that he must also consider.

I hesitate to suggest that he invest in ETF, as the stock market is rather high and the economy is has not recovered. Do you have any suggestions?

Financial Planning for Ladies

I am asked to write an article on financial planning for ladies. How are the needs for young ladies different from young men?

Most of the needs are similar, i.e. to save for the future, to have liquidity, to have a good yield and to protect against risk of premature death or illness.

There are some risks of female illnesses and events connected with childbirth. And females live longer than males, so there is a need for more savings to take care of a longer life expectancy and long term care.

There is also the special needs for unmarried females. However, this situation should also apply to unmarried males.

I like to invite comments on this matter, especially from ladies.

Monday, January 04, 2010

Health insurance for an aging population

There is a school of thinking that the state should not provide health care for the aging population, as this would be too costly and, due to limited resources, this is best left to the private market.

I disagree with this argument. With limited resources, it is important that the resources are used efficiently and not wasted. The private market allocate these resources to those who can afford to pay, but it is likely that the limited resources will be used wastefully, especially as the final allocation is also also determined by the profit earned by the medical profession.

If health care for the elderly is provided or paid by the state, there will be control over the unnecessary medical treatment, as they would be disallowed by the state. Private individuals are not able to know what is necessary or not, but the medical experts working for the state would be in a better position to make this type of decision on the optimal use of the state resources.

Even in America, the health care for the elderly is borne largely by the state. There is a need to prevent excessive consumption of health care by the elderly, but this is a challenge that has to be faced and overcomed. Pushing the problem to the private market does not solve it, as it will lead to worse outcomes.

Tan Kin Lian

Unfair application of exclusion

A policyholder took a travel insurance policy. He met with an accident and lost a tooth. He required immediate treatment overseas and follow-up treatment in Singapore. He submitted a claim for the dental expenses. He was told that his travel insurance policy excluded "all dental expenses".

This is an unfair application of the exclusion. The exclusion was intended to exclude claims for treatment due to poor dental health, but should not (in my view) be applied to dental treatment arising from an accident.

Sunday, January 03, 2010

Economist debate: European Holidays

Motion: "This house believes that Europeans would be better off with fewer holidays and higher incomes"
Do Europeans take too many holidays?

Dear Reader,
We have a winner in our debate on vacation time. The team arguing against the motion has won the debate convincingly, with 79% against 21% of the votes. This house does not believe that "Europeans take too much holiday."

The voting record shows the weight of opinion has been consistently 4:1 against the motion from the outset, though the pro team's Robert J Gordon did shift his share of the vote by a few percentage points in the course of the debate. The final vote (and the many laments from the floor by overworked Americans) shows that most readers believe lost income is a price worth paying for extra holidays.

For his part, John de Graaf, arguing against the motion, eloquently made the case that there is more to life than work and money. His argument that Europe has established a better balance between work and leisure was bolstered by the contributions from guest commentators.

John O'Sullivan
Debate Moderator
Economics Correspondent
The Economist

UK Companies Investigation Branch

From UK Daily Mail
2 January 2010

Robert Burns has a blunt message for cheats who set up companies to con the public. 'There is an organisation that can take action against you and put you out of business,' he warns. That organisation is the Companies Investigation Branch. You may not have heard of it - much of its work is confidential - but it may have quietly taken action to stop you falling victim to sharp practice.

Some traditional types of malpractice recur. One involves 'land banking', where plots of land are purchased and sold to investors on the basis that planning permission will be granted.
'We find time and time again that the prospects of planning permission are south of zero,' says Burns.
'In one case, the land had everything wrong with it from a development point of view. It was green belt, a heritage site and was on a flood plain. There was just about every conceivable obstacle.'

The benefits of social insurance

Social insurance is operated differently from private insurance. Social insurance is operated by the state, and is usually compulsory. It is funded partly by contributions from the insured members with the deficit covered by tax revenue.

Examples of social insurance are the unemployment insurance and old age pensions operated by many developed countries. In America, this is called social security. It is popular in America, which is the capital of capitalism and free market. Many countries also have health care insurance operated as a social insurance, e.g. UK, Canada and most countries of Europe.

Under a social health care insurance, there is no need to worry about pre-existing or congential conditions as they are covered. There is the risk of over-consumption of health care services which are paid by insurance, but this can be controlled to a large extent. There is also the need to control the charges made by doctors and hospitals. When the control is exercised by the state, backed by the law, it produced better results than control by private individuals exercising market choice, as can be seen by the high cost incurred by private health care insurance in America.

Singapore has stayed away from social insurance on the fear that they can be abused. This fear is exaggerated, and reflects the mindset of Singaporeans, including our leaders, in avoiding taking personal judgement and responsibility. We have to change this mindset and find new solutions to problems that have been ignored a long time. Private insurance is not suitable to handle problems such as unemployment relief and affordable health care.

Tan Kin Lian

Responsible communication

Here are two rulings by the Supreme Court in Canada that recognize the importance of responsible communication made in the public interest.

US Debt - a Ponzi scheme?

Read this editorial in The Nation.

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