Seven Cures for a Lean Purse

I was listening to a BBC programme 2 days ago and the subject of discussion was whether self-help books are any good. Some listeners said it changed their lives, while an equal fraction commented that these books are utter rubbish and full of crap.

The Richest Man in Babylon by George Classon is not exactly a self-help book but rather one that shares the “secret” of how an ordinary person can become, simply put, rich. Aunty Scroogey recommended me this book donkey years ago. I’ve read it, and listened to it over and over again on audio, and right now, its my daughter’s favourite night time story (I’m totally serious). Here’s an excerpt.

This is one of my favourite part/chapter of the story:

7 Cures for a Lean Purse

1. One-tenth of what I earn is mine to keep
2. Budget thy expenses
3. Make thy gold multiply
4. Guard thy treasure from loss
5. Own thy dwelling
6. Insure against future income
7. Increase thy ability to earn

This few liners sounds simple but takes discipline to follow through. The philosophy behind these seven cures have been used many times in other finance related self-help books. If you are looking to rearrange your undesirable financial position, look no further.

Multiple Sources of Income

“A horse cannot gain weight if not fed with extra fodder during the night; a man cannot become wealthy without earnings apart from his regular salaries” ~ Chinese proverb

The Auntie prefers public transport to having her own vehicle to travel around. Why so? Because not only do you, NOT have to drive your own car, you actually get to hear / see amazing things on the buses and trains, such as comments like “Whoa!!! I wish I can be Li Kah-shing’s god-son, then I won’t have to worry about the rest of my life.” Yeap, I did hear such a thing before.

Aunty Scroogey can’t think of any ways to turn you into Li Kah-shing’s god-son or god-daughter, but I can breakdown the big picture and explain in laymen terms how people like him get to where they are, and perhaps from there, you could strategize and brainstorm a financial path for yourself to walk. Let’s, for a moment, examine how did Li Kah-shing himself get to the stage where he need not worry about the rest of his life? Well…. he built multiple streams of income. Same goes for people like Wee Cho Yaw and Robert Kuok. What do I mean by that? Quite simply, these people do not just depend on one source of income.

Take Wee Cho Yaw for example, what business do you think he is involved in? Many of you would say banking, being that he is the Chairman of United Overseas Bank and the largest shareholder of the bank. However, the story doesn’t end there. If you dig around a little bit more, you’ll find that the guy also has a substantial stake in and controls property company UOL Group Ltd (in which the Pan Pacific and ParkRoyal hotels are part of), diversified corporation Haw Par Corp Ltd, real estate developer Kheng Leong Co. (Pte) Ltd just to name a few.

What about Robert Kuok? His business interests are wide ranging, stretching from the sugar trade to oil palm production to Shangri-la Hotels to property development to publishing, and the list goes on. As for Li Kah-Shing, the list is almost endless – telecommunications, real estate, port operations, energy, infrastructure, life sciences, retail, etc. And oh, did I forget to mention that he owns Aunty Scroogey’s favourite personal store, Watsons?

How about yourself? Do you only depend on only one source of income? What happens when that source collapse? What do you fall back on? It takes time to see the fruit of your labour, so start thinking of building up alternative sources of income NOW, if you haven’t done so. Afterall, the 3 men mentioned above did not build their various sources of cashflow overnight either. Aunty Scroogey’s role is not to spoon feed you what you should be doing, but rather to get you thinking so that you will start to take some actions. Only you yourself will know what you are good at doing and what suits you best. And most importantly, have fun while you are at it :)

A Gift from the Heart

I call this art piece “Bull Terrier in Orange”.

Aren’t you awed by how creative my naming techniques are?

More important to me than its name is knowing how the birthday girl will love and treasure this hand made gift, no matter how lop-sided I had sewn her dog to be. Sorry. Sewing straight has never been, and may never be, my forte. Besides, its boring. :)

A tale of 2 properties

With all the buzz about property measures these days, where does that leave us in terms of property investment? Auntie Scroogey shall partly answer that question by telling you a tale (it’s a true story by the way) about 2 properties.

I’m sure you must have heard before, from older folks or otherwise, that when it comes to buying property, it’s all about location, location, location. Indeed, at any given point in time in the property cycle, the single largest determinant of property price is its location.

In the 1970s, there were 2 brothers who each bought a property. The older brother bought one in Nassim area, while the younger brother bought one in District 15 East Coast area. Both have roughly about same size living area, both are freehold properties, both were brand new properties at that time and both were bought at around $100,000 (which was rather substantial back then). Fast forward it to 4th quarter in 2010, the Nassim piece is worth circa $6-7 million while the East Coast property is valued at $2.5 million.

Why the drastic difference? That’s because the Nassim area is closer to town (almost in town itself). In land scarce Singapore, a good, strategic spot is almost as valuable as striking gold. In addition, the area has grown much in importance as the country progresses.

In case you’re thinking that the nearer to town it is, the higher the property price, well…… think again. A quick check with records of resale HDB transactions indicate that in 4Q2010, a 3-room HDB flat in Jalan Besar / Veerasamy Road (about 10 mins walk to Bugis MRT) transacts for low $4xx psf while over at Holland Close/Drive, the same size unit transacts at least $5xx psf during the same period, with the higher floors registering $6xx psf. Both HDB units have 2 bedrooms and 2 bathrooms.

What accounts for the difference in this case is the appeal of the location. No doubt the former is located closer to town area, it is the latter’s proximity to the upmarket, exclusive Holland estate that allows it to command a higher premium.

So if you were to invest in a property, which area would you choose considering capital gains potential, rental yield and your budget?

Gold ‘Overdue’ for Drop, Rice will Rise

Aunty Scroogey came across this while doing some homework for investments in commodities. Have a look.

Source: http://www.bloomberg.com/news/2011-01-13/gold-overdue-for-drop-after-decade-of-gains-rice-to-rally-rogers-says.html

Gold ‘Overdue’ for Drop, Rice Will Gain, Rogers Says
By Whitney McFerron – Jan 13, 2011

Gold is “overdue for a rest” and probably will fall after a decade of gains that sent prices to a record, said Jim Rogers, the chairman of Rogers Holdings who predicted the start of the global commodities rally in 1999.

While gold “may go down for awhile,” the metal is “going to go over $2,000 in this decade,” Rogers, who owns gold, silver and rice, said today during a presentation to business executives in Chicago. Gold touched a record $1,432.50 an ounce in New York on Dec. 7. The price closed today at $1,387.

“I’d rather own rice,” Rogers said. “I’d rather own something that’s more depressed than gold.”

Agricultural commodities are “going to boom” as demand increases in developing markets, primarily in Asia, he said. All commodities will be supported by the weakening dollar, which is losing value because Federal Reserve Chairman Ben S. Bernanke is “printing money” by buying Treasuries in an effort to shore up the U.S. economy, Rogers said.

“Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

Rogers said he doesn’t own shares in U.S. companies and is short U.S. long-term treasury bonds. The Chinese renminbi may provide “almost sure profits over the next five to 10 years,” he said.

“In the future, it’s the stock broker who’s going to be driving the cabs,” Rogers said. “The smart stock brokers will learn to drive tractors, and drive them for the farmers, because the farmers will have the money.”

While still on the subject of Jim Rogers, here is what he says about MBA : http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_625042.html

Absolute Value vs Relative Value

Wow! Without realizing it, it has been 1.5 years since Aunty Scroogey’s first post in this blog as a guest columnist. The Aunty hopes that all her readers out there have picked up a thing or two about financial matters from her blog posts. But remember, doing homework on your own is important if you want to make faster progress in your financial education.

Given that it has been 1.5 years of basic training, it is about time that you should start to venture into something more intermediate, starting this year. For a start, as serious investors, you should be looking at relative values instead of absolute values like most laymen do. If you’ve been following my posts since the early days, you would have an idea of relativity in the context of expenses versus spending power. Looking at relative returns as an investor is somewhat similar.

Let me give you an example. Mr & Mrs FPN sold their property, which they bought for $2 million 5 years ago, for $2.3 million. On the other hand, Mr & Mrs SQW sold theirs for $750,000. They had bought the property for $500,000 5 years ago as well. To make matters simple in this illustration, let’s ignore transaction costs. So which couple had a better return? Most laymen will say its Mr & Mrs FPN, as they earned a profit of $300,000 while Mr & Mrs SQW’s profit was only $250,000. Well, these are absolute values. If you are serious about being a serious investor, this is NOT the way you should be assessing your investments.

Assuming both couples made a downpayment of 20% on their respective properties, it worked out to $400,000 for the FPN couple and $100,000 for the SQW couple. Assuming uniform funding costs for both couples, it means that Mr & Mrs FPN registered 75% return on their capital. What about Mr & Mrs SQW? Well, the returns worked out to 2.5 times their capital or a whopping 250%!!! So, who did you think have a better return from an investor’s perspective?

Just as whether an item is cheap or not is relative to earning power of the person in question, whether you have good returns is relative to the capital that you have to put up to acquire the investment. If you’ve always been looking at absolute values to judge your investments, it is perhaps time to have a change of mindset. What better time to do so than to start doing it in the new year?

Homework: Google and understand the meaning of CAGR, which stands for compound annual growth rate. When and how do you use this ratio?

Tax Planning

As the saying goes, there are 2 things in the whole that’s inevitable. Death and taxes.

Around this time of the year, Aunty Scroogey gets very busy with tax planning. Sometime in March 2011, we would all be doing our tax filing for YA2011. Note that YA2011 is for income earned in 2010. At times, you will hear news about people getting heavy penalties for tax evasion. Aunty Scroogey wonders why they need to evade tax when there are 101 ways to minimise your tax payments LEGALLY.

So what are the tax planning tools that AS uses? For today, I will discuss about 2 of them.

1) CPF cash top-up
(A) If within 2010, you or your employer make a cash top-up to your CPF account, this top up amount qualifies for tax deduction when you are filling returns for YA2011. For example, if you top-up $3,000 in cash, this will shave off $3,000 from your taxable income. The top-up money will go to your Special Account, which earns interest at a rate of 4% p.a. – not bad as a risk free investment and if you were to ask yourself which bank in Singapore will pay you that kind of rate for term deposit. However, the top-up amount is capped at $7,000, which means that even if you make a top-up of $10,000, your tax deduction still stands at $7,000.

(B) Separately, you also qualify for tax deductions if you were to make a cash top-up to the CPF accounts of your family members such as siblings, spouse, parents or grandparents. To qualify for tax relief for cash top-ups for siblings/spouse, the sibling/spouse must have either (i) earned $4,000 or less or (ii) is handicapped.

So, a combination of (A) and (B) above would have helped to shave a total of $14,000 off taxable income, if conditions are met. For details, please refer to the CPF website (www.cpf.gov.sg). In order to effect the top-up, download the relevant form from the CPF website, fill it up and send it in together with your cheque. It’s that simple!

2) Tax deductible donations
The second method is more straightforward and there is no cap. It was announced in Budget 2009 that for all donations which presently qualify for double tax deductions, made in the calendar year 2009, would temporarily qualify for 2.5 times tax deduction. For eg, if you donate $100, then $250 is shaved off from your taxable income that year.

To encourage greater charitable giving in Singapore as the economy recovers, the MInister for Finance has announced in Budget 2010, to extend the tax deduction of 2.5 times for another year for donations made during the period from 1 Jan 2010 to 31 Dec 2010. As to whether it will be further extended, we will need to keep a lookout during Budget 2011, or check the IRAS website from time to time (www.iras.gov.sg). Also, to check specifically what type of cash donations qualify for the tax deduction, check the taxman’s website as well!

Adequately Insured

Up till now, Aunty Scroogey have not really talked much on the subject on insurance, as she is no expert in this area. But what Aunty Scroogey does know is that one needs to be adequately insured and make projections into the future based on worst case scenarios.

There are so many different types of insurance – life policies, endowment plans, fire insurance, motor insurance, maid insurance, mortgage insurance, hospitalisation plans, etc – so how do you make sure that you are adequately insured? Answer: by reviewing your policies on a frequent basis.

If you think that you’ve already bought a policy when you first started working, and that you are properly insured since then, how wrong can you be! And you’re probably not alone in this way of thinking, there are hundreds, if not, thousands of folks who think the same. Our financial and insurance needs change as we go through different parts of our life cycle. Perhaps the last that you bought a policy was after the birth of your eldest daughter, now that you have 3 kids instead of 1, the amount of coverage probably calls for an increase or additional policies.

Or that you could be someone who decided to have an early retirement. Previously, your medical and hospitalisation needs were met by your company’s generous medical budget, but now that these benefits are no longer available to you, you might want to re-look at the hospitalisation plan you’ve purchased 5 years ago and see if it is comprehensive enough given your change in employment status.

Or that you have just bought your dream home together with your spouse. A mortgage insurance is certainly a must, to ensure that your spouse is able to service the remaining mortgage should something happen to you. In the event that your spouse decides to sell the property, having a mortgage insurance also ensures that he/she is able to hold the piece of real estate in a depressed market and wait till property prices recover. In short, he/she would be able to sell by choice and not by forced circumstances.

Not surprisingly, insurance is one of the most neglected issues in most people’s lives. If you are not sure whether you are adequately insured, perhaps it’s time to catch up with your financial planner soon.

Capital Recycling

For a while, Aunty Scroogey has been pondering how to explain the concept of capital recycling in an interesting way so that readers will not fall asleep while reading the article. This week, something interesting happened in the corporate scene which got Aunty Scroogey really excited because this is the perfect case study to highlight the aforementioned concept.

Let me start by telling you a story. Once upon a time, in a land not so far away, there was an old man who bought a pharmaceutical company from 2 of his cousins. The old man worked hard at growing his business and when he died, handed it over to his son, who brought the company to even greater heights. This son, in his old age, in turn passed the business to his 2 sons, Mal and Shiv. The 2 brothers did very well in managing the business, and led the company to become the biggest pharma company in the country. A few months before the collapse of Lehman Brothers in 2008, the 2 brothers sold their 34.8% stake in the company to a Japanese pharma giant for circa US$2.4bn.

At this point in time, you might be thinking that this fairy tale is rather interesting and the brothers are ‘lucky’. Well, this is not a fairy tale; it is a real life story. The 2 brothers mentioned are Malvinder Mohan Singh and Shivinder Mohan Singh, who used to own and manage Ranbaxy Laboratories Ltd in India, before they sold it to Daiichi Sankyo around mid-2008. It wasn’t by a stroke of luck that they decide to sell the company – it was by vision (if you are interested in details, google to read more).

The 2 brothers got their stake in Ranbaxy largely by inheritance, and assuming that there is no debt repayment involved, you might be thinking that US$2.4bn is a neat sum for them to sit pretty for the rest of their lives.  But they didn’t stop there. Instead they recycled their capital into areas that they knew well. Through their other company Fortis Healthcare, Mal and Shiv went on to buy 10 hospitals from a competing hospital group (Wockhardt) in India, and in March 2010, bought a 23.9% stake in Singapore listed Parkway Holdings Ltd from private equity group TPG Capital.

Word has it that the other major shareholder of Parkway, Khazanah – Malaysia’s equivalent of Temasek Holdings – was comfortable working together with TPG but not Fortis (for details, please google to find out more), thereby leading it to make a public offer at S$3.78 a share to raise its stake to 51.5% in Parkway. This was met with Fortis’ counter offer of S$3.80 a share. Khazanah in turn made a subsequent offer of S$3.95 a share, thus putting the bidding war to an end when the Singh brothers decide to cash out at that price. So, in less than 6 months since they bought their stake, how much did Mal and Shiv profit? A cool S$116 million. If you’ve always wondered why the rich gets richer, this is one reason why. Aunty Scroogey has earlier written about it here.

Exercise 1: Take a minute to think about this – If you’ve just sold an asset, what would you have recycled your capital and profits into? Most people have no idea, because they do not take the effort to educate themselves financially. Worse still, would you have dump the whole sum of money into setting up a business you are new to (erm… miracles do happen sometimes, but most of the time, they don’t), or even use it to buy a non-productive item such as a car? And most importantly, don’t forget to apportion it in the Big Money way lest you lose track of the amount spent.

Exercise 2: Mal and Shiv use Singapore as a base for their companies to become a pan-Asian healthcare leader. Indeed, being in Singapore, we are well-positioned to take advantage of the Asian growth story in the years to come. How are you preparing yourself to be a part of, and to take advantage of this in the next 3, 5, 10 or even 30 years? Or are you another one of those folks who just sit and complain about how things have become more and more expensive?

Think about it. Yes, do your own thinking and researching. This column is not about giving you the fish, it is about teaching you how to fish.

Share Trading Account

Like we’ve said before, this column is written especially for people who are new to financial planning. And just like learning martial arts, we start from Ground Zero. On and off, Aunty Scroogey gets asked by friends and colleagues at the supermarket on procedure for opening a share trading account, so this is what we will go through today.

Mainly, the important thing is to decide on a brokerage firm. The 3 local banks each have their own brokerage arm, eg DBS Vickers http://www.dbsvonline.com/English/index.asp, UOB Kay Hian http://www.uobkayhian.com.sg/ and OCBC Securities http://www.iocbc.com/. If you maintain your operating bank account with any of these 3 banks, you might wish to consider using its brokerage arm. Apart from these, there are also other independent brokers such as Phillip Securities http://www.poems.com.sg/.

You will also need a Central Depository http://www.cdp.com.sg/main/index.shtml account (or CDP for short) for clearing your trades. When you are at the brokerage firm to open your account, your broker will open a CDP account for you at the same time, if you do not already have one. The brokerage firm will also allocate daily buying and selling limits based on your income level. For example, if your limit is $5,000, the total value (not the number of shares) of your purchase per day shall not exceed that amount.

One very important thing that you might wish to consider when opening your share trading account is to link the share account to your bank account so as to facilitate settlement via GIRO. After doing a trade of shares denominated in Singapore dollars, you need not follow up with payment manually if your account has been linked. Otherwise, you would need to make a point to remember to send in a cheque or do an internet banking/ATM transfer to pay for the shares you have purchased. Settlement period is typically 3 days. If the due date (T+3) falls on a Singapore holiday, settlement will be made on the following market day. If shares are not settled within the settlement period, they might be forced sold.

At time of opening your share trading account, you might also wish to consider applying for an online log-in. Brokerage charges for DIY online trading are usually lower than calling your broker on the phone to do a trade. For details of fees and charges, refer to websites of brokerage firms mentioned above. You should also go through a list of their FAQs to have a better idea of the share trading procedure.

By the time you walk out of the brokerage firm, you are almost done. Log-in and password will be mailed to you separately and your account will be ready in a few days’ time.
Opening a share trading account is the easy part. The difficult part is deciding on what shares to buy, when to buy and at what price. That is another topic for another day.

Live well,
Aunty Scroogey