How to accumulate 1 million?

Do you ever have the dream to become a millionaire or you aspired to retire rich as a millionaire? That's not a dream. It is certainly achievable through good financial planning. But, you have to start early. As early as possible and let the magic of compounding does its work.

Let's say you are not that investment savvy. You can still invest in a global diversified equity portfolio. If you are more adventurous, investing in Asia equity portfolio might do the job faster.

How does it work? First, you need some patience. Second, start investing now at fixed amount regularly. The following example illustrates that a person with initial amount of $2,000, investing $500 per month, for a period of 35 years at the rate of return 8%(common to equity portfolio) would be able to get 1 million dollars. If you start at the age of 30, you should be able to retire rich at 65 years old. If you are lucky enough and picked a good fund, you might be able to achieve that way ahead of time.

Is foreign currency account a good deal?

Today I had a casual chat with one colleague. He mentioned that he intends to open a foreign currency account to earn a higher interest rate. I did a quick check on the interest rate of this type of account. Following is a quick summary(6 months rate):

Pound - 4.925%
Aussie - 7.045%
Kiwi - 8.145%

Sounds tempting right? The interest rate is so high. What if I convert my Sing dollar to Kiwi dollar and deposit for 6 months? Woh la, I got the high interest. But, what is the catch here? You are subjected to foreign exchange rate risk! What if Sing dollar strengthen further after 6 months? The interest you earn might not cover the exchange rate loss you suffer.

So, remember, everything has a price. Forex market is subject to high volatility.

2008 Singapore budget

2008 Budget was announced yesterday. To many and my disappointment, the personal income tax rate was not reduced. Looks like I still have to strive hard to cope with the inflation pressure.

The focus is again turn to low income group, with measures to help them to cope with high inflation.

Brief summary of change

• Personal income tax rebate of 20%, up to $2000
• No estate duty
• Bursary scheme for lower income student
• Bonus for National Lifelong income scheme
• Growth dividend
• Other top ups

CPF changes for investor 2008

In year 2008, new changes would affect the Singapore CPF scheme. There are a few important points to remember for investor using the CPF money.

Existing rule:

Under CPF OA
100% investible in FD, Singapore Government Bond, Unit trust, ETF, Fund management account
35% investible in Stock, REIT, Corporate Bond
10% investible in Gold, Gold ETF

Under CPF SA
100% investible in FD, Singapore Government Bond, Selected Unit trust & ETF

*Note: It doesn't make sense to invest in FD, because the FD interest is lower than CPF.

From 1 Jan 2008:

• SA interest would be pegged to 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%
• Additional 1% interest paid on first 60k of combined balance, with up to 20k from OA. The interest would go into SA
• Unit trust which under CPFIS scheme, expense ratio cap
• Higher risk – 1.95
• Medium to High – 1.75
• Low to Medium – 1.15
• Lower risk - 0.65

From 1 Apr 2008:

• First 20k in OA and first 20k in SA cannot be used for investment
• CPFIS agent bank fee can still be drawn from account even though OA balance is below 20k
• Existing OA and SA investment holding is not affected

For detailed information, please refer to CPF FAQ.

>> There is nothing much we could do with the new rule, except to live with it. I believe if invest prudently, the unit trust portfolio should be able to deliver return more than 10% a year. The extra locked in amount actually do no good to the savvy investor.

Personal finance part 2 – Protect what is important

The next step to do is to have protection in the form of insurance.

Why everyone needs protection? One is bound to have dependent like parents, husband/wife or children. If one is the bread winner of the family, what would happen if disaster strike? Even you are single, what happen if unfortunate event like permanent disability happen? When that happens, would you have enough financial resource to cope with it?

If you don't have any policy, suggest you find an insurance agent to access your insurance need. Typically people would get insurance for

• Death
• Permanent disability
• Critical illness
• Hospitalisation

Get yourself enough cover. You can go through the calculation with insurance agent. Nowadays, Singapore insurance agents have morphed into financial planner/adviser. There are two types of adviser. One is tied to the insurance company, another type is from independent financial planning company. Depends on your preference, an ethical adviser won't just push product but to access your need. Typical insurance product like whole life insurance, endowment plan or investment linked insurance.

Seriously I don't like whole life plan, endowment plan or investment linked plan. I would advocate buy term and invest the rest in unit trust. What happen when you buy a whole life plan? The premium is split into two parts. First portion used to pay the term premium, another portion is used for investment. The investment portion is the part which they used to return you the premium after 20 years. But generally, the investment return for whole life policy is low, around 3-5%. A term insurance should be cheap and have a bigger coverage.

Rule 2 - Buy enough insurance coverage

In the next part, I would discuss about investment.

***Updated 26 Sep 2008

Personal finance part 1 – Building the foundation

After I graduated from the university, one of the first few finance/investment books that I read is Robert Kiyosaki “Rich dad, Poor dad”. Many people have read that and benefited from it. However, the degree of benefit depends on whether how well do you understand or believe the concept. If you always think, well, I got such little capital, that's not for me. Then, how can you become financial independent?

The concept is actually not new. There is this book called “Richest Man in Babylon” which is much earlier and talking about the same thing. In the old days in Asia, the term “financial planning” is unheard of. Nowadays, people get more wealthy and more aware of this concept. Government is also actively promote it. Despite the wide promotion of financial planning concept, I noticed that only some of my friends practice that. So, I intend to highlight some fundamental things that you should be doing for your financial well being.

Build a solid foundation, no matter at what stage of life you might be. If you are already following the rules, congratulations. If you still don't know anything about it, quick, get started now.

First, let's start with book keeping. Open a note book or excel sheet, start writing down your monthly income and expenses. Observe how much you earn and where do you spend money each month. Notice the expense amount required to support your lifestyle. Keep your expenses low.

Rule 1 – Keep 6 times monthly expenses aside and don't touch it.

This would become the rainy day's fund to protect you against unexpected job loss, misfortune or any unexpected. A good place to park the fund would be at fundsupermart Cash fund or Lion Capital Money Market fund. I don't advocate putting in fixed deposit which offer pathetic interest. As least the money market fund is very low risk and earn good interest. Another plus point is you can cash out within a few working days. Some people might choose to split between the FD and money market fund.

Look at your income and expenses, see whether can you increase the income or reduce the expenses? To increase the income, one has to find different way to achieve it. Other than the part time job which many companies don't allow, you can generate some passive income from other sources. For the expenses, try to cut down on the unnecessary things. Things like impulse buying, excessive personal indulgence can be reduced. Every dollar spent is an opportunity lost. But that does not mean that you need to stop eating, watch movie or travel. It just simply means spend within your means. Best way is to have a budget to control, how many shopping trip you go a year or how many restaurant meal you eat per month.

At this stage, you have the rainy fund set aside, income and expenses made clear. It is pretty solid now.

*** Updated 26 Sep 2008