Teaching your little ones Personal Finance

For parents, especially those with young children, the art of educating them on appreciating the value of what money can do has to start from young. Why so? Call it the beauty of youthfulness — the young, unmolded minds is the best time to inculcate good values and habits. This is the phase of life whereby they can easily absorb the best of what their parents can offer to them, and for parents to set a good example and role model.

My daughter is ever-ready for her basket shopping!

Quite a fair bit of the adult population has trouble saving up each month. Personal finance, unlike family values, cultures, behaviours etc. is not something that is taught from generation to the next generation. And we haven’t moved on to investing yet. A fair bit of time in society is spent on teaching how to survive today; not tomorrow or even the long future ahead. The emphasis on survival for the future is always centered on a good education, a good job or setting up a good family.

However, the art of cutting down on expenses, living frugally and being thrifty, saving for a rainy day or even investing to make your money grow or last longer have to go hand-in-hand. I have always wanted to begin imparting personal finance education to my next generation. The only issue is I haven’t really put much thought into the long term lesson plan, which I am doing today.

For a young child, introducing financial concepts have to be fun, entertaining and interesting. They want to know what’s in it for them. When I was younger, my dad matched academic achievements versus monetary reward. The higher the grade attained, the greater monetary reward is given. Even schools recognised academic achievements with the Edusave award and scholarships. It isn’t like we had any use for the money back then (I didn’t spend it on material goods), but it feels good seeing your bank account increase in value.

I don’t have a clear outline, so I would probably spend quite a bit of time in penning out my thoughts.

To even begin with your child, one clear direction is to introduce money to your child. The first time that your child might possibly spend money independently by herself is in primary school. At primary one level, she would have to spend money on food during recess. Of course parents could introduce money at an even earlier stage, but minimally, the ability to count objects from 1 to 20.

We could start off with coins — $1, 50-cents, 20-cents and 10-cents. These are the most commonly used coins at her level. Similarly to make up $1,

DenominationNumber of coins
to make up a dollar
$11
50-cents2
20-cents5
10-cents10

And of course, the different ways to make up a $1, or for that matters, any amount below a dollar. To better appreciate finance-related matters, your child has got to be confident in numbers. You don’t have to be the best in Mathematics, but you definitely got to be reasonably sound with numbers, addition and subtraction. We would probably go more into details later on.

How did you get started for your child on money or finance-related matters?

Round-up for Jan 20

January was a good start to the new year. TOC had its first panelist on savings and investing of CPF on the 22 Jan. I even had the opportunity to discuss a fireside chat collaboration with the General Manager of Company X on savings and investments in Bangkok this coming Q3 (July/August). Similarly, a chance meeting with Centre Manager of Company Y Hong Kong intrigued him on a similar collaboration for the Hong Kong audience, possibly some time this year as well.

Personally, I enjoy engaging with like-minded people to understand the different circumstances that we are in, and on how to better maximise the financial resources for the commons objectives. I look forward to more of such opportunities.

January was a busier month, due to the beginning of a new year. Only had the time set aside for two events this January, namely

  • ETFs: Fact vs Fiction (14 Jan)
  • Investing and the future of your CPF in 2020 (22 Jan)

Let me learn from you, as much as you might learn from me. A quick round-up for January 2020.

Top 10 reads for January 2020

CPF Interests Update – For 2019 – 8934 views
CPF Balances Update – January 2020 – 1659 views
Why Investing early matters – 1438 views
*Update* to CPF Interests Update – For 2019 – 1193 views
Leveraging 5% interest on first $60,000 of combined CPF SMRA monies – 1022 views
What every personal investor needs to know – 592 views
Investing and the future of your CPF in 2020 – 433 views
ETFs: Fact vs Fiction – 404 views
Investment spending to increase by 14% for 2020 – 354 views
Regular Savings Plan Update – January 2020 – 320 views

Why I am unfazed by the 2019-nCOV market drop?

Ever since more confirmed nCOV cases started surfacing up globally last week, the equity markets have generally taken a beating due to uncertainty of the near future, especially stocks relating to tourism. Medical and medical supplies related stocks are up on the contrary, which was expected. Panic selling in the market, further depressing prices.

My portfolio has taken a hit as well, shaving off 7.7% of its value from the start of the new year. We don’t see this nearing the end as yet, and prices will expect to continue to fall further. However, I am still sleeping well at night. Why?

The current dips in the market have little to do with the company’s fundamentals, but more of external macroeconomic factors. As long as you are vested in high quality companies, the current situation is a passing one, and I believe it is not the real bear market or recession.

In fact, the dips that we are seeing today present buying opportunities for the long-term investors. This is one of the times where you should actually be increasingly vested, rather than bailing out. Prices are getting cheaper. Bargains are to be sought.

As markets head downwards, the masses as a norm heads towards panic-stricken mode. The savvy investors however, start to prep entering the markets by tapping onto their warchest. Similarly, I am getting increasingly thrilled or euphoric as the chart terms it as prices head down.

I thought the above chart was interesting. Every action that we take as well as other factors could be mapped on the domain of level of control versus the importance of each factor in reaching long-term investment goals. By understanding this, you could probably spend more efforts in the areas where there is higher impact as well as allowing you to chart your way.

It isn’t all gloom and doom in a market down. In fact, this is the time where the savvy would be beaming with joy and seize the day. Time to look out for some market pickings!

Where’s your Ferrari?

Many of you would have seen this cheeky conversation between a smart alec who doesn’t smoke versus a smoker. The smoker spends quite a sizable sum of money over years on cigarettes — an opportunity cost. To the Genius non-smoker, the money that you have not spent on cigarettes, where is your Ferrari then?

The money, if had been saved and invested by not carrying out certain actions in life, could have translated into something bigger over time, due to the beauty of compound interest.

In all honesty, many of us are very similar to the Genius. I don’t smoke, don’t drink and don’t buy branded luxury goods. What have we actually done with the money we had “supposingly put aside” over the years”? So where is my Ferrari?

I had my fair share of fun in my younger days. I liked fast cars. I love them sleek. The fact is this, even if you have a huge sum of money set aside from not smoking nor drinking, don’t get a Ferrari.

I thought it would be nice to share from my own personal experience of owning a sportscar and the learning points from it, mostly negative.

  • Cost Of Car
  • Interest Cost
  • Road Tax
  • Car Insurance
  • Parking, ERP & Petrol
  • Servicing

COST

Selling Price – $70,000
Transfer Fee – $11.00
Insurance premium – $3,959
Monthly Installment – $1,068
Agreement Fee – $800
Less Hire Purchase loan – $42,000 – 5.5% x 48mths

My Lotus Esprit Turbo HC was a 1988 baby. At the time of viewing, it probably haven’t been run for at least a year. The sales price was then $70,000 with 4 years of COE left. It was still cheaper than getting a new sportscar, but I really didn’t have much of a clue of the subsequent costs that came along or would come along with ownership. I was too focused on cost price. I didn’t carry out my due diligence and a comprehensive overall research.

INTEREST COST

I didn’t pay in full, 50% was still a good sum of money. I was on an in-house loan of 5.5% for $42,000 in 4 years. For that rate, I probably paid out almost 25% of the loan amount in interest cost.

ROAD TAX

For vehicles of more than 10 years old, I had to pay a road tax surcharge on top of your vehicle’s original road tax. In short, it was a good $2,000 every 12 months.

CAR INSURANCE

The first year insurance premiums was almost $4,000. I managed to search for a cheaper alternative from the second year onwards for $1,200.

PARKING, ERP AND PETROL

Needless to say, it is a petrol-guzzling machine. It would require a full top-up of about $120 once a week. That makes it almost $500 in a month or $6,000 in a year. Parking and ERP are probably a rough estimate, considering the amount that I top-up into my cashcard each month. $100 is a good gauge, or $1,000 a year.

SERVICING

Servicing is the killer here. It wasn’t just about regular maintenance to keep it running, but older machines do break down more frequently. Once it goes down, it could be out of the show from weeks to even months. The issue now is that more and more mechanics are working on modern vehicles using high tech diagnostics equipment. They are less familiar with the older mechanic vehicles, whereby troubleshooting is more laborious and manual. On a rough guage, it cost about $5,000 yearly.

OVERALL COST FOR 4 YEARS OWNERSHIP

DetailsMonetary Cost
Cost Of Car$70,000
Interest Cost$9,200
Road Tax$8,000
Car Insurance$7,600
Parking, ERP & Petrol$28,000
Servicing$20,000
Total Cost$142,800
Average Annual Cost$35,700

In summary, $142,800 in total was spent, which could have translated into something bigger over time, if it had been saved or invested properly.

So the whole point of this article, even if you have quite some money, do consider being frugal or thrifty, and opt for a cheaper car if required to. Consider a second-car or lower cc car.

In addition, there are definitely cheaper and efficient modes such as the bus and train. Even calling for a taxi or transport hailing once in a while would not be overly taxing on your budget.

Consider this: You are actually giving up a lot of your future spend, if you make unnecessary big spends now. This also includes your property purchase, luxury goods and fine dining. Do consider if your purchases are worth it. As for myself, the experience was worth it, just not the cost. DYODD.

Leveraging 5% interest on first $60,000 of combined CPF SMRA monies

I must admit that I like certain aspects of our provident fund and I enjoy “hacking” it; what I really mean leveraging on its benefits. The movement to do cash top up and let power of compounding your child’s SA from young is gaining popularity in recent times. Some parents are doing it as a form of forced savings, some others hopped in to follow the crowd. However, I thought it was important to know why you are doing what you are doing.

Some of the common questions parents often ask me is

  • Why am I topping up my child’s CPF account?
  • Am I robbing her chance of tax relief at higher tax bracket in future?
  • How much should I top up my child’s CPF?
  • Why not invest her monies in other investment instruments?

I have to qualify that CPF is only one of several savings-cum-investment strategies we have for her. She has her own Portfolio (Child’s): a Regular Savings Plan (RSP) in joint-name with myself, ad-hoc equities investment under my charge, endowment plan and even Peer-to-Business lending. Each of these have their own associated risks, but at a young age and a long time-frame ahead of her, she is able to diversify and also take on higher risks investment instruments. She is consistently vested, and while she has her own warchest, she spends time in the market and not timing the market.

Mr Loo Cheng Chuan, Founder of 1M65 movement, put it across very simply for the CPF: You may hate the system, you may dislike the government, but you must learn to love their money. I quote what I have written in my guide for CPF 101.

Extra 1% Interest is currently paid on the first combined $60,000 balances (with up to $20,000 from OA). The order of extra interest earned is RA (including CPF LIFE premiums), OA, SA then MA. Extra interest earned on the OA will go into the SA or RA to enhance retirement savings.

All Singapore Citizen babies born on or after 1 January 2015 are eligible for the enhanced MediSave Grant for Newborns (MGN) of $4,000. Which means that, all SG babies start off with zero dollars in their OA and SA but $4,000 in their MA. What this essentially mean is that the first $60,000 for SA and MA could potentially earn 5% interest per annum!

Assume a child’s parents does a cash top to her SA from the day she was born, such that combined SA and MA is $60,000. 5% of $60,000 is effectively $3,000 yearly. The interests earned over the course of 55 years could potentially earn up to $165,000. In reality it would be lesser, as she most probably have a balance in her OA account whereby up to $20,000 would earn only 3.5%.

But we get the idea. One of the essence in creating wealth is interest on interest. The magic and effect of compounding interest is really felt when an individual starts early. At 5% for the first $60,000 in SA and MA, parents can potentially ramp up their children’s forced savings 55 years down the road just by making small but consistent contributions today. The hack really is to leverage on this extra 1% interest by allowing them to reach this $60,000 as soon as possible.

I have to take a step back and agree that only some parents would have both the ability and willingness to dump $60,000 at the start to be locked up for 55 years, myself excluding. However, being parents and role models to our children, I am of the view that we should sift out, learn, pass on and leverage the investment knowledge onto the next generation. A more logical approach is to make small, consistent contributions over the years. It should be steps that are comfortable, not amounts that you would be stressed over with or lose sleep on having food for end of the month.

My contributions to my child’s CPF account is a modest amount — probably means I just have to cut back on one or two expensive family meals each month. But I recognise the long-term benefits of what this 5% means as she grows up and at the same time ramping up the monthly contributions from $100 to $200.

With regards to robbing the chances of saving on tax when she grows up, this is my perspective. I do not see it an issue to reach Full Retirement Sum (FRS) as early in life as possible. Once she forms her financial safety net at a young age, the interests on SA will continue to grow even after FRS is reached from contribution. She would have lesser worries on having not enough monies at retirement age, but could then invest her surplus OA monies and take on higher risks.

There are many ways to save on tax. SRS alone would constitute at least $15,300 in today’s context. In fact, earning more money is a happy problem. However, the more important thing is to create that comfortable foundation whereby you can continue to build up wealth on.