2017: Try Budgeting Yearly

budgetingAs the year 2016 draws to a close, I invite you to try something different for the coming year: yearly budgeting.

If you’ve done any kind of budgeting exercise, you’ve probably made lists or spreadsheets of your monthly expenses. Things like rent or mortgage payments, utility bills, and student loan payments.

Why should we budget for a full year? It’s because if you set aside just enough money to cover your monthly bills, you won’t take into account all the unexpected or one-time expenses that are bound to happen. Such expenses do not only include bad stuffs like car repairs and medical bills. One-time expenses include holidays too!

Budgeting yearly makes it easier to save up for those expenses. By working those items into your budget, you can work backwards and save a little each month toward your goal.

If you’ve tried monthly budgeting in the past and found yourself coming up short because of unexpected expenses, try yearly budgeting to give yourself a cash cushion.

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A Quick Guide To Retirement Planning

Many people work their entire lives with one goal in mind – retirement. It’s one of the most important life events that is experienced by most people.
From a personal and financial perspective, achieving an easy, well-funded retirement is a lifelong process that requires early planning and commitment to a long-term goal. Once you reach retirement age, you can then enjoy the benefits of a comfortable retirement in which you have more than enough money to cover your living costs.

Managing Your Retirement

When it comes to retirement planning, the earlier you can start in your career, the better off you will be.

The problem, however, is that most young people are not thinking about retirement. After all, when you are in your 20s or 30s, being 65 or older can seem like forever.

Even for older people, it can be daunting. While everybody would like to retire in comfort and financial security, the amount of time and complexity of creating a successful retirement plan can make the whole process somewhat intimidating.

As a matter of fact, retirement planning often can be done very easily. All it takes is a little homework, an obtainable savings and investment plan, and the long-term commitment to preparing for your retirement years.

How Much Do You Need for Retirement?

After you stop working, your expenses don’t stop. In fact, given the fact that you probably will be dealing with more health issues, they are likely to be higher.

So how much money do you actually need to fully fund a comfortable retirement? While an exact answer is impossible to give, there are some factors that should be considered:

Medical Expenses – If and when you become ill, you are going to want the top-quality medical services that are available. Most people don’t want to have to depend on charity or welfare. In Singapore, everyone is entitled to MediShield Life benefits. But this publicly funded program only covers minimal expenses. And there often is a gap between what the government will pay for and what you actually need.

Living Expenses – You are still going to have to live indoors, wear clothes, eat food, and have heat and fresh air to breathe when you are retired. All of these things cost money. Even if your mortgage is paid off by the time you retire, you are still going to have to pay property taxes, homeowners insurance, and maintenance costs.

Other Expenses – A comfortable retirement includes such non-essential expenses as entertainment, transportation costs, and other expenses that don’t fall into the other categories.

Add these all up, add the rate of inflation between now and your retirement date, and you have a general idea of how much money you are going to need for your retirement. Now all you have to is multiply that number by how long you expect to live!

Start Planning Now

Retirement planning is a process that takes decades of commitment in order to achieve the end result: The comfortable retirement you deserve. The concept of saving and investing money in a retirement fund may seem daunting, but with a few basic calculations and commitment to a realistic plan, you can achieve it.

Which is Better Protection – Level Term Insurance or Mortgage Decreasing Term Insurance?

Recently, I have been asked by quite a number of my married couple friends during our gatherings, whether they could rely on the Home Protection Scheme (HPS), a Mortgage Decreasing Term Insurance which is administered by the CPF Board, to protect their financial interest in the event of unfortunate circumstances. It is good that we could use our CPF Ordinary Account to pay for the premiums for HPS. However, there are other aspects which we should consider and be concerned about. The table below compares between getting a level term insurance with your private insurer and relying on HPS for your protection needs.

  Level Term Insurance HPS (Mortgage Decreasing Term Insurance)
Types of Coverage Death, total permanent disability and critical illnesses. – Covers any form of debt/liabilities outstanding and provides income replacement. Death and total permanent disability only. In the event of a critical illness, you need to continue with the mortgage repayments.

 

– Covers only mortgage liability for residential property.

 

Transferability – Applies to all types of housing. 

– Coverage remains even if a new property is bought to replace the current one.

 

– Applies to public housing only  

– Coverage is specific to a property:

 

·       If you decide to sell your HDB flat in future and buy another one, the existing HPS policy will be terminated and a new policy has to be purchased.

·       At this time, you will definitely pay a higher premium because of an older age and run the risk of not being insured if any health condition develops.

 

Changes in mortgage repayment/ repayment pattern Sum assured remains constant throughout policy term. 

 

 

·       You need not have to worry about being underinsured if you take up a mortgage with floating interest rate.

 

 

 

·       If you default on loan repayments for a certain period, sum assured remains the same.

 

 

 

·       You can refinance your property without worrying that your sum assured has changed.

 

Coverage is pegged to sum assured, meaning your sum assured decreases as mortgage outstanding decreases. Mortgage interest rate is assumed to be constant over loan tenure.

 

·       In reality, floating interest rates for bank loans will result in a change in monthly repayment aomount. Hence, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

·       If you default on loan repayments for a certain period, sum assured for HPS continues to decrease during the period, leaving you underinsured.

 

·       If you decide to refinance your property, your outstanding loan may be a higher amount than your sum assured, leaving you underinsured.

 

 

In addition, in the event of a claim, CPF Board will make it compulsory for the lump sum which you are insured under HPS to be fully paid towards clearing your outstanding mortgage.

As for making a level term insurance claim with a private insurer, the lump sum payout which you receive can be used at your own discretion instead of clearing your outstanding mortgage. This would be more flexible in the scenario where the monthly mortgage repayment can be met solely by the healthy/surviving spouse’s monthly CPF Ordinary Account contribution.

Therefore, getting yourself covered with a level term insurance through a private insurer would provide you with a greater peace of mind as compared to solely relying on HPS.

Are Your Debts Good or Bad?

Debt is like a double-edged sword. It can help you, but it can harm you too. Making good use of debt can create wealth for you, but mishandle it and you can possibly be put into bankruptcy.

Therefore, we should learn how to use debt wisely to let our money grow. Debts can be classified as bad debts and good debts. Here’s a table showing annual interest rates of various types of loans currently:

CURRENT INTEREST RATES FOR VARIOUS LOANS
Type of Loan Interest Rate
Mortgage 1.8% – 3.75%
Education 4.6%
Car 5%
Renovation 5% – 7%
Personal Unsecured 14%
SME Unsecured 5% – 10%
Credit Card 24%

Bad Debt

bad debt

What types of debt should be considered bad? Any expense-related debts can be classified as bad. Examples include taking a loan for travel and taking up a hire purchase with interest for your home furniture.

This is because the value of these purchased goods usually drop after you purchase them. For example, after getting a new TV at $3,000 hire purchase, the value of it drops by $500 in the following month.

Another popular form of debt comes from something almost all of us use – credit cards. If used smartly, credit cards can help us enjoy discounts and savings when we make purchases from relevant merchants. On top of that, it allows us to carry less cash in our wallets and makes payment convenient. However, if you were to delay your credit card debt repayments, the interest payment can be as high as 24%. Let’s say a person has just charged $10,000 to his/her credit card today and defaults on his/her repayments for the next 3 years. Based on the rule of 72, the total debt would have grown twice the size 3 years later. Yes, that’s a whopping $20,000!

Therefore, please think twice before you use your credit cards or when taking up bad debts. You may land yourself in huge financial trouble if you fail to make repayments on time.

Good Debt

mortgage

A loan that helps you to acquire an asset which can potentially earn a higher rate of return than the loan interest rate can be classified as a good debt.

Mortgage and business loans are examples of good debt. In fact, the interest rate on mortgage is the lowest among different types of loans which we can get. Although a HDB Housing Loan is at 2.6% per annum currently, you can potentially earn a higher yield if your house is timely sold in the future. At the same time, CPF Board credits a return of 2.5% per annum into our CPF Ordinary Account (CPFOA). This means that your HDB Housing Loan interest is offset to 0.1% annually.

Many successful entrepreneurs have also benefited from the use of good debt. Through the use of business loans, small enterprises are able to expand their businesses. Large companies are able to grow even bigger.

Another example of good debt is your education loan. The knowledge gained through your education allows you to acquire a good job and earn living. It is definitely a worthwhile investment.

In summary, leveraging on good debts to grow your wealth is one of the important principles to growing rich.

Be careful not to over-borrow

Here’s a warning – do not over-borrow, as you may get yourself into trouble. How do we ensure then, that we do not over-borrow?

Your monthly debt repayments should not add up to more than 35% of your monthly salary. If your monthly salary is $4,000, then your monthly debt commitment should not exceed $1,400.

Avoid bad debts and use good debts smartly – this is a sure way to create great wealth for yourself.