Tuesday, October 26, 2010
Benchmark for deduction - life insurance policy
I advise consumers to look at the benefit illustration for a whole life or investment-linked policy and check that the effect of deduction does not exceed 20% of the accumulated premium at the end of 25 years. This article explains why I chose 25 years as a gauge and how I derive the benchmark of 20%. It also give the benchmark for other durations. It is the SECRET that many consumers are looking for.
Pain of higher interest rate
Suppose you took a loan of $400,000 to buy a HDB flat and pay over 25 years at 2.6% interest. Your monthly installment is $1,780. If your family income (net of CPF contribution) is $4,500, the monthly installment takes away 40% of your income. You may think that it is still manageable.
Many people are paying 40% (or more) of their family income towards the mortgage payment. They use their CPF contributions and top it with their cash contribution.
What will happen if interest rate start to rise? Thirty years ago, borrowers were paying interest at 8% on their mortgage loan.
Let us just look at the impact of interest rate at 5% per annum. Your monthly would change to $2,250. This would represents 50% of your family income. The increase in interest rate will take away 10% of their net income. Can you afford this higher payment?
What happens when interest rate goes up to 7%? The monthly payment will jump to $$2,650. This will represent 60% of your income. The jump in interest rate from 2.6% to 7% will take away 20% of your income.
Will interest rate increase to 5%? Quite likely. Will it increase to 7%. Maybe. Some countries have interest rate at 10% or higher in recent years. Who says that this may not happen?
Lesson: avoid paying a high price for your property. make sure that the price does not exceed 5 years of your income. If your income is $4,500 a month, do not pay more than $270,000 for your property. Certainly, $400,000 is too much, and too dangerous!
Tan Kin Lian
Many people are paying 40% (or more) of their family income towards the mortgage payment. They use their CPF contributions and top it with their cash contribution.
What will happen if interest rate start to rise? Thirty years ago, borrowers were paying interest at 8% on their mortgage loan.
Let us just look at the impact of interest rate at 5% per annum. Your monthly would change to $2,250. This would represents 50% of your family income. The increase in interest rate will take away 10% of their net income. Can you afford this higher payment?
What happens when interest rate goes up to 7%? The monthly payment will jump to $$2,650. This will represent 60% of your income. The jump in interest rate from 2.6% to 7% will take away 20% of your income.
Will interest rate increase to 5%? Quite likely. Will it increase to 7%. Maybe. Some countries have interest rate at 10% or higher in recent years. Who says that this may not happen?
Lesson: avoid paying a high price for your property. make sure that the price does not exceed 5 years of your income. If your income is $4,500 a month, do not pay more than $270,000 for your property. Certainly, $400,000 is too much, and too dangerous!
Tan Kin Lian
The less you know about finance the better
Everywhere you turn these days, some bigwig policymaker is talking about
the importance of financial literacy education.
The only problem is, there’s a fair amount of evidence that a lot of what we do
to teach better financial habits, like courses in high school, doesn't work.
Maybe we should ignore real-world complexity altogether
and just teach people financial rules of thumb.
http://blogs.reuters.com/
The soft or confrontational approach?
A place for both the considered and the confrontational
Securities Investors Association (Singapore) with its softer approach
can rightly claim credit for its more recent achievements.
But it would be unfair to deny due recognition to those early trailblazers
whose style was more "confrontational" .
Narayana Narayana
Dealing with Wall Street
15 Inviolable Rules for Dealing with Wall Street
Those of you who have to interact with the sharks should learn the following rules:
Monday, October 25, 2010
CPF Life - Make it attractive
My student in SMU asked me, "Prof Tan, I find the CPF Life to be very complicated. It is so difficult to decide on choosing the four options, as they seem to work differently, with the DDA etc."
I agree with her views. I also find it to be difficult. I sent the attached article to the Straits Times two months ago, but they declined to publish it. In this article, I suggested how the Government can get out of the current mess that they have created.
I agree with her views. I also find it to be difficult. I sent the attached article to the Straits Times two months ago, but they declined to publish it. In this article, I suggested how the Government can get out of the current mess that they have created.
Retrenchment benefit for Singaporeans giving up their citizenships?
Contributed by DareToAct
When a company restructures, often times it hires new employees from other companies and retrenches some existing employees. When it does so, it pays these employees retrenchment benefits. Some unscrupulous companies try to move their employees around to "uninspiring" jobs and hope that the employees will just quit the company and find jobs elsewhere.
Most people will agree that Singapore is run like a company. Our cabinet ministers and senior civil servants are paid like corporate executives. When Singapore Inc was having growth problem after the Asian financial crisis, our government stepped up their foreign talent strategy and "recruited" many to join Singapore Inc. Those Singaporeans who lost their jobs due to the restructuring were urged to upgrade, retrain, redesign. From what I can gather reading newspapers and other media, it seems like many "employees" of Singapore Inc are not finding it easy to cope.
Maybe the government can consider this: pay retrenchment benefits to Singaporean who wants to "resign" from Singapore Inc. It allows those who think they can have a better life elsewhere to leave with a small sum of money (they deserved it as they have contributed to Singapore Inc's growth from 3rd world to 1st) so that they can settle better into their new "job". It is also good for Singapore Inc as the CEO can now spend time doing "unproductive" work like explaining policies to those who do not have the capacity to understand or worry about being fired at AGM.
It's a win-win, no?
DareToAct
When a company restructures, often times it hires new employees from other companies and retrenches some existing employees. When it does so, it pays these employees retrenchment benefits. Some unscrupulous companies try to move their employees around to "uninspiring" jobs and hope that the employees will just quit the company and find jobs elsewhere.
Most people will agree that Singapore is run like a company. Our cabinet ministers and senior civil servants are paid like corporate executives. When Singapore Inc was having growth problem after the Asian financial crisis, our government stepped up their foreign talent strategy and "recruited" many to join Singapore Inc. Those Singaporeans who lost their jobs due to the restructuring were urged to upgrade, retrain, redesign. From what I can gather reading newspapers and other media, it seems like many "employees" of Singapore Inc are not finding it easy to cope.
Maybe the government can consider this: pay retrenchment benefits to Singaporean who wants to "resign" from Singapore Inc. It allows those who think they can have a better life elsewhere to leave with a small sum of money (they deserved it as they have contributed to Singapore Inc's growth from 3rd world to 1st) so that they can settle better into their new "job". It is also good for Singapore Inc as the CEO can now spend time doing "unproductive" work like explaining policies to those who do not have the capacity to understand or worry about being fired at AGM.
It's a win-win, no?
DareToAct
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