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Singapore has one of the highest rates of home ownership in the world.

Most Singaporeans, including myself, own our own homes. Your home is your single biggest investment you will make and has a fundamental impact on your lifestyle and your retirement because our retirement fund — the central provident fund (CPF) ordinary account savings can be used to pay for the home. Thus, your choice of home will determine the amount you can save, invest and ultimately your financial freedom.

Choice of Home

During the times of rising property prices and overall economic growth of Singapore in the 60s to 80s (prior to recession in 1985), the conventional wisdom was to buy the biggest home you could afford because rising affluence, economic and population growth coupled with our small land area meant that property prices for both Housing and Development Board (HDB) flats / apartments as well as private residential property (landed and apartments) only went up one direction. UP! However, the 1985 recession made some aware that property prices could go UP and it could also go DOWN.

But those whose jobs were secure and had extra cash who bought in 1985-86 period made a bundle as property prices continued their onward march upwards until the Asian crisis hit in 1997. I still remember the time when people talked about the windfalls they could make by upgrading their HDB apartments from 3-room to 4-room to 5-room to executive apartments etc. Many thought that property was the way to financial freedom and wealth for the ordinary working class.

Paradigm Shift - 1997 Asian Crisis

The key takeaway for me during the 1997 crisis was the fragility of this entire cycle of prosperity. Job security became a novel concept because globalisation meant that jobs and sometimes entire industries could be outsourced and lost to lower cost competitors. Along with the evaporation of liquidity and speculative fervour that propped up properties prices, the collapse was dramatic and drastic. Those who could not hold on to their jobs or businesses had to downsize their homes or worse, lose their homes when they couldn’t pay their mortgages.

A new paradigm emerged to challenge the long-held view that buying the biggest property you could afford and upgrading was the way to financial freedom. Instead, it became buy what is sufficient for your family size taking consideration your financial capacity as well as security of your job because if you lose the roof over your head and also a lot of your equity.

Property as a home as a hedge against inflation

The reality check brought on my the asian crisis in 1997 hammered home the realities of life in modern Singapore. Job security is an illusion. Your home being the single largest liability in your life has the ability to virtually bankrupt you if you fall behind your mortgage payments. Because if your source of income ceases, the mortgage payments do not and the bank can foreclose on your property if you fall behind your payments.

Those who bought HDB apartments direct from HDB were somewhat shielded in that whilst the loans were from the HDB, the statutory board was not as quick on the draw to repossess homes should lessees default on their loans. This changed dramatically when policies were put in place to restrict the number of times one could get subsidied HDB homes. Hence, some had to finance their homes using commercial loans where banks were not as forgiving compared to the HDB is enforcing their interests should the borrowers default on their loan payments.

If you learn not to over-extend yourself in buying your home, it can be a good hedge against inflation while allowing you to save on rental expenses. Singapore’s tight supply of residential homes means that rentals have recently shot up very quickly. Even HDB apartments are renting for $2-$3k per mth in choice locations. Under increasing immigration, the real demand for residential homes will be here. Therefore, buying your own home allows you to have your own roof over your head.

In addition, because you save on rental expenses, your instalments to pay your mortgage can be released back to you in the future should you need to sell your home. If you rent, rental expenses cannot come back to you. At the current rates of immigration, demand for homes will still be robust. Owning the roof over your head gives you a place to stay and also helps to maintain some value in your property.

Whilst property gains can be cyclical, overtime, if you can control when you wish to sell your property, you are able to reap some returns. Your CPF monies will have to go back to your CPF account subject to prevailing minimum withdrawal age and minimum sum requirements but the cash you used to pay for your home can come back to you.

For those of you who are facing the empty nest syndrome in your retirement years, you can opt to downgrade and buy a smaller home or rent. Paying off your loans as fast as your circumstances allow I realise while managing my own investments is that beating the market and getting returns higher than mortage loan rates are not that straightforward. Some investment gurus claim that beating 4-5% mortgage loan rates are easy and run down my approach towards using my spare cash and CPF to pay off my mortgage early.

One guru claims that mortgage loans are good debt and should be used to free up cash for investment opportunities. Individual skills, abilities and financial circumstances vary and I know my own lack of expertise in being able to time the markets well most of the time.

I chose the conservative strategy of paying off my mortgage fully whilst my financial means allows me to do so while I am still not near retirement age. I do this because my experience during the Asian financial crisis in 1997 opened up my eyes to the relative insecurity of the modern job market. This coupled with the knowledge that job security has an inverse relationship with age made me more aggressive in pursuing a pay off your loan as soon as possible (ASAP ) strategy.

I would not recommend my strategy to all because each of your financial circumstances is unique. You have your own ways of approaching financial freedom and how to achieve it. For me, my assumption was that as I grow older, our Singaporean ageist employer mindset would be a risk that I would have to manage. My way of managing it was to rid myself of the single largest liability in my life - my housing loan. By clearing my loan during the relative peak of my earning years, I have created myself a buffer for the next 15-20 years of working life to use my income to support my living expenses as well as to save for my retirement over and above the mandatory CPF contributions.

Furthermore, I have the backup to downsize my home should I really need to unlock cash from my home as this provides me with the security to know that I have an asset that can be monetised IF I need to. This assurance gives me a lot of confidence in my day-to-day working knowing that I am not a SLAVE to my job as I do not worry about the roof over my family’s head. Each of us have different ways of deciding the type of home we want to live, how we go about financing it, and how we go about paying it off early or late. Your choice is yours to make, the consequences of your choice are also yours to accept. There are no right or wrong answers as the paths to financial freedom are many and the ways to get there plentiful. Be well and prosper in whatever decision you make.

Flickr image “Bleeding Wallet” by adobemac.

When I was growing up, I remember thinking that I wanted to earn as much money as I could so that I could spend as much money as I wanted.

Now that I’ve grown up, I realised that it’s not about how much you earn but it’s about how much you spend.

Financial freedom is about taking control of your lifestyle and taking control over your expenses.

The Straits Times article, “Credit Card Crunch” (17 November 2008), demonstrates aptly how people who were making $12,000 and $10,000 a month could still end up with unpaid credit card balances of $228,000 and $75,000 when their incomes plunged drastically due to the start of recessionary factors affecting the companies they worked in.

Credit Card Debt - Living Beyond Your Means

Credit cards are a tool. They allow you to spend first and pay later. You defer the payment but you don’t avoid it. Hence, if you use it wisely as a means to manage your cashflows by paying up within the credit terms (30 days), it is just a means of payment for you. But if you decide to only pay the minimum amount and rollover the balance, then you are effectively borrowing that amount of money from the bank at 24% per annum.

At 24% p.a., a balance of $1,000 unpaid will rollover to become $2,000 in 3 years time. Your fixed deposits at say, 1.5% p.a. will double in 48 years. See the difference?

Credit card or unsecured debt is a powerful and dangerous form of leverage. By borrowing at such high interest rates, you open yourself up to being made a bankrupt should you be unable to pay a debt. A person can be made a bankrupt for a debt of $10,000 and above. Being a bankrupt is no small matter. You are restricted in many activities and your credit history goes to pieces and you will find it very difficult or near impossible to borrow money in the future for a home or a car.

Living Within Your Means

The path towards financial freedom lies not in attaining a high income level. Of course, earning more money makes it easier to achieve financial freedom IF (and that is a very big IF) you manage to live within your means. Someone who earns $10,000, lives a lifestyle that spends $9,000 will have only $1,000 per month in savings. Another who earns $4,000 but saves $1,500 per month will end up saving MORE than the person who earns 2.5 times his income. Lifestyle inflation is something we have to be aware of to avoid this trap. To become financially free, you need to learn the lesson of living within your means and sometimes even below your means. This frees up cash savings that can be channeled into savings and investment.

Living within your means doesn’t mean scrimping and denying yourself all consumption. You need to eat, wear clothes, spend on transport, housing and other day-to-day living expenses. You need to give yourself some small luxuries now and then. The trick is to bear in mind what you can or cannot afford to spend given your income level.

One of the greatest traps of living beyond our means is to keep up with our neighbours. Human beings are social creatures. We compare and evaluate our self-worth, to some extent, based on how we fare against each other. Thus, a pretty woman sometimes checks out how other women are dressed when she walks into the room. A guy may check out how others are decked out when he makes his entrance. It’s a relative game that we humans play. Play less of this game if you want to be more focussed on living within your means.

I picked up the habit of recording my daily expenses in my PDA from reading, “Your Money or Your Life” by Vicki Robin and Joe Dominguez. The book made me aware of why it’s a good habit to know how much money you spend. The actual amount will amaze you because it’s usually higher than what you think. Knowing how much and where you spend your money is the beginning of understanding why you don’t save as much as you can.

It’s Not About How Much You Earn

By all means earn a good income and learn to grow your means. But all this means nothing in your journey towards financially freedom if you cannot manage your expenses and allow it to creep upward along with your increased income. Financial freedom is about the balance between how much you earn against how much you spend. High earning, high spending people can still get into bankruptcy, financial problems and cashflow problems when they don’t control their lifestyle.

Happiness in life doesn’t have to revolve around making tonnes of money. Happiness in life revolves around being able to balance your lifestyle between your level of income and level of expenditure such that you don’t feel pressured by money problems and can focus on enjoying life through good health, family and relationships with friends and the occasional indulgence.

Above all, know what you need (necessities) vs what you want (luxuries).

Be well and prosper.

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Flickr Image by johnmarcos.

If you are in your 20s, 30s and even early 40s, retirement may be something that is far away. It is a concept that is fuzzy, just as personal finance knowledge among the average person is also fuzzy.

The recent debacle arising from the collapse of Lehman Brothers’ resulting in derivative investment products such as Minibonds and High Notes sold by financial institutions and intermediaries has made me rethink about retirement now even as I have not hit the age of 40. It has made me think about the future using the framework of black swans, which are rare events that have a significant impact.

Why does retirement planning have to do with black swans?

All of us have to deal with retirement one way or another. Some of us may approach it by saying we will work until our CPF Life runs out or we die whichever comes first. Some of us may be betting on the Monday or Thursday TOTO ticket being our answer to the retirement funding issue. Others of us may just believe in living within our means, saving and investing, growing and protecting our means.

Whilst I believe in the financial freedom principle of being prudent, working hard and saving for the future, the pitfalls of not knowing what the future holds means that I should re-think about retirement planning.

Black swans are present in our retirement futures. Whether we can fund and enjoy our retirement really depends on a few variables. Our economic working life, our lifespan, our healths and our family lifestyle needs are all various factors that impact how our retirement plans can succeed or fail as dramatically as the recent financial crisis has resulted in many people’s retirement funds being reduced due to the fall in value of their investments upon which their retirement funds are based.

The current financial crisis is a black swan event many people who are in their retirement years now or soon would not have predicted. But even as the High Notes 5 investments are now technically worth zero dollars, those who put all their monies there thinking it was a safe retirement investment vehicle would have lost their entire retirement savings outside of CPF. Unless they are the ones who fall under the vulnerable category and get some compensation, the Lehman debacle has generated a negative black swan event that destroys their hope for a funded retirement.

How to rethink retirement in the light of possible blacks swans?

The risk of a black swan event happening for my own retirement (or semi-retirement) before the age of 67 means that I now have to invest in preparedness rather than in saving and investing and praying that the stock markets, bond markets or whichever markets upon which my retirement funds are placed do not crash.

Of the areas of [1] living within my means, [2] saving and investing, [3] growing my means and [4] protecting my means, I see that I have to continue with all 4 steps but pay particular attention to [3] and [2]. I had taken the approach of putting about 65% of my portfolio in equities (stocks and shares) but realise this is susceptible to market downturns upon retirement. This makes me increasingly favour an approach of putting more of my savings into more conservative places such as fixed deposits, treasury bills, government bonds. Equities have a volatility that as a future retiree I cannot accept.

I also am becoming more open to growing my means more in internet ventures. My tinkering in blog monetisation has started to yield some returns that can in the future pay off my daily subsistence (but not more). This makes me realise that the model is sustainable in the long-run but would require my commitment and continued investment of time, effort and energy into maintaining the blogs.

My experience in blog monetisation has strengthened my belief that you need to really tinker and experiment with small ventures before they take off. My own blogging efforts are close to two years before I start to see some growth. There’s still no substitute for hard work plus a dose of luck from playing around and implementing ideas online.

One of the factors pushing me towards this is the realisation that ultimately while black swans abound, you can still do something about it to make yourself more prepared and less likely to be killed by them. I hope that these experiments in growing my means plus rethinking my savings and investment approach would pay off when I do plan to retire in 15-20 years’ time.

Learning something new and doing something with it

What have you done to learn something new every day, every week or every year? Have you learn something new, put it into practice that allows you to be better at [1] living within your means, [2] saving and investing, [3] growing your means and [4] protecting your means?

Be well and prosper!