Why most people end up being overinsured

Being sold an insurance plan that does not meet your needs is a common occurrence. Other than dragging down the amount available for your wealth building, overpaying for certain types of insurance might mean under coverage in other areas.

Here are some common reasons why people are over insured

1. Not being truthful – An insurance agent’s job is to ensure that you get sufficient coverage for your risk profile and they tend to do this in a hurry. Doing a needs assessment on the very first meeting without knowing someone well enough and expecting them to tell you squarely about their financial health is somewhat overly optimistic.

People are naturally egoistic or overly conservative. Can you imagine buying a income replacement insurance for someone who was not truthful about his income? Here is “the” one time where it literally pays to be honest. Expecting your insurance agents to work backwards, probe and piece your financial dots together, is akin to asking a hairdresser if you’d need a haircut.

2. Knowing who your dependents are – I would say this, if you are currently spending all of your salary on yourself – you have no dependents. If you give a small allowance to your parents whom would really be fine without you – you have no dependents.

A dependent is someone who would be unable to care for themselves financially should you not be there for them. For someone to be beholden to your income is some legit responsibility. You have to think really hard about this, otherwise you’ve just put a bulls eye over your head, where everyone is rewarded upon the insurance trigger event.

3. Not knowing a want from a need – This is a seriously wrong time to confuse wants and needs. People who base their monthly payouts on their current income in the case of disability are at real risk of overpaying for insurance. You should really be looking at your expenses plus cost of care. You are not going to be driving your car if you’re bedridden.

4. Forgetting your time horizon – Insurance agents are there to cover you through the various stages in life. Get affordable coverage for your current stage in life and review and add when you get older. Buying insurance while thinking of future children is foolhardy and a surefire way to overpay.

Conclusion

I’ve written about how important cash flow is to your financial life and wealth building journey. Over time, as your needs and circumstances change, it would be good to review and re-look your insurance plans, rather than thinking of the worst possible scenario at the outset.

Over paying for insurance early in your financial life can be a real drag on your ability to generate passive income. Don’t over insure to the point where you’ll be financially rewarded for triggering the insurance.

Lastly, insurance money is meant to supplement your wealth and ensure that your dependents downside are covered. Don’t mix insurance with investments.

Milestone: Achieving $100 in passive income per month

Projected monthly dividend income of SGD 122.91

I recently did a calculation and realized with the addition of Singtel during the February “correction”, I am on track to achieve at least SGD 100 per month. (I would like to place a disclaimer and mention that the projected dividends is calculated based on the dividend per unit from last year and is thus forms no guarantee of this year’s performance, but nonetheless, it is extremely gratifying to see something come out of 2017).

Though the overall unit value is small, this is still considered an achievement for my portfolio and a step towards my objective of saving 100% of my earned income. A rough calculation reveals that on average my expenses for 2017 was about SGD 700 per month. I am thus hoping to be able to reach this target before the house comes in 2021.

Some points of improvements.

1) Yield projection at 5.42% is relatively low – I attribute this to still retaining some legacy stocks which pay poor dividends, I have since changed my portfolio strategy after reading Kevin O’Leary’s book. The other reason, is that due to some recent contrarian plays I have bought into newer counters at distressed levels. As these stocks are facing cyclical headwinds today, I hope that they will have an opportunity to increase dividends in future.

2) Savings matter more than investments – At this early stage of the wealth building process, I realized that saving quantum’s do matter. As I wanted to keep my brokerage cost as close to 1% as possible, my average lot sizes generally kills off a month’s savings with every trade. Being unable to save more than SGD 3K a month is definitely hampering my ability to invest and thus I need to be even more strategic in my portfolio allocation.

Looking back at this journey, I know that it has been paved with sacrifices. Looking forward I know there are many more such sacrifices to endure. What keeps me motivated are small wins like today and my dedication to give my best.

Passive Epiphany

I have written a piece before on why I think the stock market has democratized wealth building, you can about read it here. Here is the back story of how I came to see investing as a source of passive income.

I started working at the age of 28, not early by any standards. In fact at this age, most of my peers would have already have worked for a year or three. Thus to achieve financial independence, I knew I had to work smarter not harder than them.

That was when I started to look for ways to increase my passive income. I realized that investing in stocks was the easiest way to start. Unlike property and business which require either a large sum of money or a large amount of time both of which most people do not have. Stocks offer simplicity and liquidity.

ESBI quadrant made famous by Robert Kyosaki

I know most people would see the markets as a risky thing. But as the only certain thing in the market is volatility, to that I say “life is about managing uncertainty”. Just because you have that job today does not mean you wont be replaced tomorrow. In fact, I think that there is more to lose from being out of the markets than being in it.

There is no certainty that you will reap the rewards of your hard work at the end of the year. People who believe that putting in crazy hours at work is going to get you that A, probably have yet to wake up from the academic system. Unless, you are a key player, your bonus is probably already predefined. Even then, your managers are likely to be rewarded above you, this is how most people become jaded from working.

Now I am not against working hard or a having a long and distinguished career. I too hope to make something out of my economic life, but I want to do that on my terms. Doing the things I love and making an impact to my organisation. I might not make it all the way up to the top, but I would still like to contribute in a meaningful way. I want to be able to do this while still being responsible to my loved ones and ensuring that they too are not impacted by my career choices. To do so, i needed to be free financially free.

I hope this post has stirred up something in you. More important I hope you continue to wrestle with the idea and take a brave step forward. Investing is not a one street thing and there are many styles to it, but learn to confront your fears and reading and widening your knowledge base is something that everyone can aspire to.

Start being brave today!

Trip to Jiangxi, China

I just got back from China where I spent the last 5 days travelling along its 2nd and 3rd tier cities. I must say the level of economic progress that has been made since the last time I was here is absolutely astounding. The number of high speed rail lines has definitely made travelling during the festive CNY period a much more pleasant experience.

It also reminds me of the time when Singapore first became independent and mass industrialization was made to bring the country out of poverty and into the first world. The problems then were pragmatic ones, very much like in China today.

However, like any other society most Chinese people find investing in the stock market much more like a speculative venture than a real proxy for income generation. While I am no expert on A-shares, I think there is still much progress to be made in this aspect.

Back when Singapore became independent, the government of the day saw fit to divide the holdings of its then to be privatized national telecom to its citizens, through Special Discounted Shares. For me this is one of the most tangible ways to allow the average citizen to participate in the progress of society.

Personally, I believe that financial capitalism deserves a special mention in our progress as a country. No longer can we say that wealth is concentrated in the hands of a few tycoons. Open markets form yet another avenue for enterprising people to preserve and grow their wealth, while still being economically productive. The fact that every person has the right to participate in the economic progress that they see around them strengthens the case for the middle class and lessens their need on government handouts in old age.

Sure there is avenue for abuse and investors still have to be wary where to place their hard earned money. But there definitely are many other countries where the economic systems are not as robust, and the difference between poverty and the middle class is merely holding onto a job.

While many young Singaporeans can complain that their lot is tougher than their forefathers, I choose to say that this avenue is something that they did not have back then. Already, there are a few people who have successfully chosen to go down this route and I believe that this nascent population will only continue to grow.

Book Review: The Millionaire Next Door

The book is basically profiles of the typical millionaire household in America, what they do, think and how they accumulated their wealth. According to the book, the majority of millionaires did not inherit their wealth, but grew them within their lifetime.

While the book focuses on American millionaire households, I think there are also many parallels that we can draw in Singapore.

1. Our excessive approach to education as the primary means to getting rich. According to the book, higher educational attainment actually impedes people from getting rich as top professions commensurate with higher spending levels. Self made millionaires are more likely to run their own businesses and look like their employees, than hold an advanced degree and play golf.

2. Lifestyle inflation means people are more likely to maximize their realized income rather than unrealized income. It also states how realized income increases taxes paid and produces low portfolio value as compared to unrealized income.

3. “Money is the most renewable resource” – this quote underlines the essence of the book. For most working people with high incomes, the belief in this is the leading cause of their consumption habits. Thus so long as you are working, everything seems fine, however when time runs out, the illusion disappears and the fact that you were in fact trading “time for money” rears its ugly head.

The E-book is available on the NLB app

I think this book should be on the must read list of everyone who aims to be financially free. The step-by-step unraveling of how the rich behave and what they do would bring a new perspective towards your wealth building journey.

Lastly, this book should also be on the reading list of parents who want to raise financially literate children. The key issues behind why children born into rich households are unlikely to do as well as their parents are also written here. Unsurprisingly, it has more to do with the parents than the children. 

Anyone who believes in the Chinese saying “富不过三代” or that “wealth does not last beyond the third generation” would definitely find something useful here. 

Portfolio Update: Singtel

I picked up Singtel during the recent sell off, just as it reached new lows. I think the last time it was at this price was somewhere in 2013. 

Like Comfortdelgro, Singtel is a diversified business with associates across many Asian countries. Like most conglomerates, it’s hard to put down in a blog post everything about its business. However, what I like about it is are changes in its core business. From one of being a vanilla telco to offering more digital business solutions. As with Singpost, their pivot to the new economy is a positive step and has the potential to be a large driver of its earnings in the future.

Where I differ

While I do agree that the entry of a fourth telco has the potential to erode earnings of Singtel, I think it is premature to over anticipate the extent of the impact. In fact, I would be more worried if MyRepublic had gotten the license instead as foreign mobile operators have thrown in the towel before.

Initially, I had wanted to wait for the entry of TPG this coming December. I have a feeling that the market would place it at a discount then as telco price wars are a slugfest to nowhere. But as Singtel’s strategy is more towards providing a premium connection for businesses and consumers who value low downtime, I think it would be tough for TPG to erode its margin.

What helped

The announcement to increase its stake in Bharti Telecom the parent company of Bharti Airtel also coincided with the market correction, which I think played a role in the sell off. As with others, I did not like that the funds were being used to pay off debt, however the more than 5% drop in share price since last week was also unwarranted.

It’s divestment of Netlink trust means its sitting on cash at the moment, undeployed cash is a non-accretive asset and the stock price has reflected this by not rising after the Netlink IPO. Singtel has mentioned that the bulk of the cash would be used to acquire spectrum rights. This I hope refers to the future 5G network, that would be a gamechanger to how we think of and use the internet.

Portfolio sizing and future thoughts

Like Comfortdelgro, Singtel is an old economy stock but pays a meaningful dividend. Sensing an opportunity, i queued at SGD 3.42. At this price, based on a 20% discount on its past dividend, I think I would still get north of 5% yield at least for this year.

I also made it a point to allocate only a small position in the stock to hedge against future price fluctuations. Given the current exuberant climate, these defensive stocks are more likely to be cast aside, then placed on a pedestal. Will continue to monitor.

Being human in a market crash

Any observer of the market would know that we faced a correction crash this February. It started on Friday and is continued its rampage today. The DOW went from record highs to post the largest single day drop in its history, all 1,600 points worth of it.

So much for history being made.

Some credited the steepness of the crash to the design of the algorithms used by algo-traders. While that might be true, most analysts were already predicting that a correction was on the cards. It’s surprising that for something so well studied and so rewarding to study, we have yet to find a better way of valuing an asset beyond the theory that the “present value of an asset, is its future cash flow”.

For myself, corrections are always a time of opportunity. Judging by the present carnage, most prices are at what they were 2 months ago, if they continue falling, prices could get yet cheaper. So long as we continue to remember to take a long term perspective of the market, we can avoid behaving like a computer and more like a human being.

Till then save often and invest well!

Why I chose to top up my CPF-SA with cash?

Most can agree that the extra 1% interest from CPF savings is a low hanging fruit that most young Singaporeans should be reaching for. What they disagree on, is how to achieve this. 

Should we be depositing cash or transferring from OA-SA? Having already met my CPF-SA Target. I would like to pencil down my thoughts on this.

1. Bring down mortgage payments to a healthy level

Reducing liability and making loans work for you is always a smart move. I know some would advocate stretching out home loans to maximize the low interest rates on a housing mortgage. But that makes sense only if your mortgage is at a comfortable level. By comfortable, I mean when the monthly OA contribution from your salary is able to cover 80-100% of the mortgage payment.

As I had bought a place with a convenient location, (i.e. expensive), the mortgage payment was high relative to my OA contribution. If I had transferred from the OA to the SA, this would mean I was less able to reduce the principal on the loan, which translates into a higher monthly mortgage payable. This would be like saving water when the bush is burning. A mortgage which takes only 80-100% of your current OA contributions means future salary growth would automatically improve your cash position.

So Yes, not transferring from the OA-SA meant I was potentially losing the 1% free interest from the CPF board per month. So here was what I did next…

2. Setting aside a retirement account apart from investments

I do recommend setting aside a separate retirement fund from your investment fund. First, we will never be certain if our investments will always make money. Second, my intention for my investment fund is to generate a continuous cash flow in the future. This means, I hope never to draw down on this fund.

Not transferring from the OA to the SA meant that I did not have a free ticket to boost my SA quickly. I did this step by step over a 3 year period. I did so while investing and reducing my tax payable. 

Being a little older than my peers and due to outstanding loans, I decided to prioritize contributions to my SA before my investment portfolio. Only towards the third year did I put in more into my investment fund as compared to SA.

Started work for half a year in 2015, paid down my loans in 2016, full force in 2017

Looking back I would advise to start with increasing your monthly SA contribution via monthly top ups rather than what I did. Investing is something that takes time to pick up and I see the above graph as me not learning anything in 2015.

In conclusion

Anyone who is into FI would be driven by their own motivations. I chose the top up route as I wanted financial security in retirement, while paying down the house. It was a conservative choice, but my own nonetheless.

At the end of the day should you not use cash to top up your SA, be sure that the alternate use of it would be in assets of other kind which can generate you a positive return. 

Why bank savings alone not bring Financial Independence?

Typically when people start on their personal financial independence journey, they would begin with looking for the best bank interest rates. That’s great if you are looking to pay off loans or just about to start on an emergency fund. But I think it’s dangerous to just stop there.

Why interest rates should not interest you

Firstly, as a rule, i do recommend setting aside a 8-12 month emergency fund and frankly to that end, having a savings account which garners 2-3% interest per annum would not hurt either. But beware the hoops you have to jump through, high interest savings account that require a minimum spend above your typical monthly spend usually results in you being worse off overall.

Your primary job, after setting aside your emergency fund, is to find out how to exceed the interest rate on your bank savings account. This mean making your bank’s interest rate your investment hurdle rate. In other words, you should not invest in something, if it’s going to be giving less than the interest your bank is paying you to leave your money there. This relates to my post on income investing.

Banks are businesses too

I understand how people can be averse to taking on risk. Somehow as humans, we enjoy the certainty that a bank balance brings. But banks are also service providers, they do not share your interest in your money and will therefore not work harder to ensure you get paid first.

That is why keeping your money in an fixed deposit or in a checking account would mean you are effectively loaning it to the bank, to allow them to make more from money borrowed from you. Would it not therefore be better if you owned part of that bank? Especially so when they trade at a discount?

Conclusion: Focus on Yield, not interest

It’s not difficult to see how yield and interest can be confused at the beginning. While both means getting a return on your money, interest received as “loan” to a bank means you are not maximizing the yield that you could otherwise obtain on your assets.

In the long term, proper care of your finances and not turning it onto autopilot mode will mean mitigating risks and achieving far superior outcomes.

Till then, Spend Less, Save well and Invest often