Some Thoughts on Financial Responsibility

As most the guys in my cohort begin seeing a positive cashflow for the first time in some 25 years, many of us are starting wrestle with the responsibilities of working life. All of a sudden you need to worry about things like buying insurance, investing your savings, and buying big ticket items like a house and car. I too have been trying to navigate through this sea of information, and for those of you who are actually reading this, here are some of my key learning points:

On insurance:

1) Make sure that you have Life Insurance that covers you both in the event of death, as well as in the event you get hit by one of the 30 major illnesses. The premiums start climbing really quickly as you get older, so it is very important to get in as soon as possible. You may be able to hold off on the accident and health insurance, as well as the hospitalization and surgery insurance, but you must buy into life insurance early. See this insurance as an investment that you make today for the benefit of your future spouse and kids in the event that something happens to you. But do not treat insurance as an investment for yourself.

2) Which brings be to my second point: It's probably not a good idea to buy investment-linked insurance. If you want insurance, buy insurance. If you want to invest, go buy some index funds or something. Don’t mix up the two because essentially you are buying into a unit trust over which you have very little control. Even if you have the option to switch unit trusts “for free” (as in the scheme offered by Prudential), your choice is still limited since you only have one option for each major sector. However, if you know you're lazy and are not going to invest on your own, then this might be a convenient way to settle everything at a one-stop shop.

On investments:

1) Avoid structured products like the plague. These are the special “savings accounts” that are hawked to you at banks, promising you the potential of super high returns. Most of the time, the banks are buying an option from you and giving you really crappy returns for the amount of risk that you are being exposed to. Always ask the bank what your worst case scenario is coz you can actually come out of the whole endeavor negative.

2) Unit trusts such as those purchased through fundsupermart.com are the most straight forward way to diversify your portfolio across countries and thus reduce your exposure to the risks in the Singapore market. However, unit trusts on average under-perform the market in the long run, so you are probably better off buying passively managed index funds that track things like the S&P500 or the STI. This is a much less exciting way to invest, but it will likely give you more stable returns over the long run.

3) Buying a house is NOT necessarily an investment. I first encountered this idea in Kiyosaki’s Rich Dad, Poor Dad in which a house was classified as a liability rather than an asset. Today, most Singaporeans still think of buying a house as an investment. The argument against renting a home is often based on the assumption that the money you spent on rent is wasted since you end up with nothing at the end of the day. (See article) However, when you pay interest on your home loan, you also are throwing money away – money that could be better invested in other things. The important thing here is to separate an investment decision from a personal decision: should you buy the house that you want to live in, or the house that will give you the highest return? You need to realize that these two homes may not be the same. (I use “house” as a generic term since most of us, myself included, will scarcely be able to afford an actual house)

4) Having said that, HDBs are a whole different animal. The upfront discount given by the government means that your HDB unit will most likely substantially increase in value by the time you are allowed to sell it. So if you're sure you know exactly what type of place you want to stay in for at least the medium term, then a HDB unit is probably a good idea (if you qualify for it in the first place).

5) Nonetheless, the benefit of renting a place is that you will have the flexibility to change the location/size of your dwelling as your own needs change. For example, should you get sent overseas long term, there is no need for you to worry about servicing mortgages anddealing with tenants. Or you might want to rent a tiny place in the heart of Orchard Rd, and then shift to a larger place in Seng Kang once you start having kids.

6) Don’t buy a car if you can help it, coz in Singapore, it’s just way too costly in terms of depreciation and upkeep costs. (See article) Calling a cab is still far cheaper than owning a car when you factor in things like parking, ERP and time wasted finding parking.

Ok, that was quite a mouthful. Now must put disclaimer: "The above listed information does not constitute financial advice and should not be relied upon as such." I do not claim to be an expert and I would certainly welcome any comments and objections. It's only through talking more about these things that everyone gets a better idea of what's going on.