Finance Smiths

Personal finance apprentices-in-training

Average monthly passive income hits S$1,000

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I have decided to sneak this post in before it gets to Sep. After all, this is a long journey to financial independence and it’s important to celebrate milestones to keep ourselves going. Our average monthly passive income for the year has finally crossed S$1,000 at the time of writing. FYI, it’s going to drop below S$1,000 once Sep comes around but oh well. A win is a win.

Just thinking about what that means is putting a smile on my face! Somehow, our investment and cash management strategies are starting to work out after plugging away at them for so many years. We have been slowly increasing our interest and dividend income earned but it’s hard to see the progress on a month to month basis.

It becomes significant when you make the comparison on a 2 year basis from the time we spent working in Melbourne, Sydney then Singapore. In 6 years, we have committed several errors, learnt many lessons and made much progress financially.

Which is why our advice has always been not to be afraid of taking risks and making mistakes. They come hand in hand with moving forward in your life because you can’t make progress otherwise. We should also try to encourage each other because financial freedom is a goal we can all achieve in our own way.

Anyway, May and August are our big dividend months due to us owning a lot more Singapore Exchange (SGX)-listed semi-annual dividend paying stocks. It results in spikes in our average monthly passive income thus allowing me to write self-congratulatory posts like this.

We have been trying to smooth out our dividend income by investing in some SGX-listed quarterly dividend paying stocks and London Stock Exchange (LSE)-listed quarterly distribution index ETFs. We would prefer the dividend income to be more regular and it’s already starting to show with a small jump in passive income every alternate month.

I also realised our monthly interest income is starting to increase slightly. This makes sense as we have been building up our cash positions from consistently saving a portion of our monthly salary income. The Singapore and global equity markets have been quite flat recently and there aren’t many buying opportunities.

The same goes for the Singapore property market. Rents have fallen but prices are sticky downwards. Although the employment market is worsening in Singapore, there are still enough jobs around to provide people with holding power to support the prices for now.

This actually works out for us. With each month, the overexposure to real estate (real property and REITs) gets corrected slightly from the allocation of our savings to cash and ETFs. Our housing loan is tied to the 3-month SOR, which has fallen slightly and the payments continue to remain manageable.

By the way, we track our entire net worth (all of our assets, liabilities, income, expenses and associated website links to pull in relevant information) on Google Sheets. Essentially, we have one spreadsheet with many tabs full of data, charts and analysis that is maintained online. That’s how we track our overall financial progress in case you are wondering.

I just remembered I started a series on why you should use Google Sheets and how you should use Google Sheets for personal finance management. Really should get back to working on it. Anyway, it’s a fine balancing act now and we just have to wait for time to pass for rebalancing to happen. I hope everyone had a good weekend and is ready for the new work week!

Distribution/Dividend Reinvestment Plans (DRPs)

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I know I have been slow with this but better late than never. Congrats to Joseph Schooling for winning Singapore’s first Olympic gold medal. It’s a fantastic achievement and something to be proud of for Singapore!

On the other hand, I feel both happy and sad for the Malaysian badminton players in the Olympics. They came so close to winning their first Olympic gold medal for Malaysia and I hope their hard work & efforts will pay off in Olympics 2020.

Sigh. It hurts to watch Lee Chong Wei lose his third consecutive Olympic badminton final and receive a silver medal. I reckon he is the most deserving Malaysian athlete to win the first Olympic gold medal for Malaysia but it is not to be this time round.

Anyway, that’s enough of a sporting update from me and I’m going to write about how August is a big distribution/dividend month for me instead. I noticed this after looking at the Dividends Upcoming and Collected sections of my SGXcafe portfolio. Always nice to see passive income flowing in.

As the amount of distributions/dividends received increase with the size of my portfolio, I have started to consider whether it’s worth participating in the available Distribution/Dividend Reinvestment Plans (DRPs). These refer to plans that allow unitholders/shareholders to automatically reinvest distributions/dividends to accumulate more stock without paying brokerage fees.

Especially with the recent changes to the brokerage fees of the Standard Chartered Online Equities Trading Platform in Singapore. In summary, there are now minimum brokerage fees to be charged for each trade and they are SGD/USD/GBP 10 on the SGX and LSE markets for Personal Banking Clients (i.e. Non Priority Banking Clients) like me.

Considering how aggressively Standard Chartered Bank (SCB) had been marketing this Online Equities Trading Platform as the only one with no minimum brokerage fees in Singapore, this turnabout was disappointing at best.

To implement a Dollar-Cost Averaging (DCA) approach with index ETFs effectively, it’s important that brokerage fees are as low as possible. Where I could invest small cash amounts previously to take advantage of market dips in times of uncertainty, I’m now forced to use larger cash amounts and have to wait for bigger market drops. It’s annoying but I will just have to adjust my investing strategy.

This also means that picking up small numbers of units/shares via the DRPs is a more viable approach now and definitely something worth considering. There seems to be no easy way to find out which of the stocks I invest in offer such DRPs other than monitoring the actual distribution/dividend corporate announcements or waiting for SCB to inform me about them.

Generally, REITs and Business Trusts usually offer DRPs and I reckon this is a good way to increase their asset allocations slowly in my share portfolio without actually using my investment cash. The problem is that my asset portfolio is over weighted on real estate now and I’m hesitant to add to my positions. Maybe when it’s more balanced in the future?

OCBC Bank offers DRPs and I’m kicking myself for not participating in it earlier in the year. I’m planning to increase my exposure to the Financial Services industry in my share portfolio as I believe it will continue to be one of the main drivers of economic growth in Singapore. And this goes beyond just the banking sector.

Given the increasing demand for healthcare services due to an aging population and general decline in health from the modern lifestyle, it was good to know that Raffles Medical Group offers DRPs as well. I only have a small portion of healthcare stocks in my share portfolio and I would like to grow this more aggressively.

I know what I’m saying sounds counterintuitive to my focus on index ETF investing. It’s just that index ETFs don’t offer DRPs and I can’t get excited about nothing. After all, this discussion is more in the context of DRPs and less about the utilisation of my investment cash.

Jul 2016 Financial Update

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I have updated the net worth, asset portfolio, passive income and savings rate pages on my blog. It’s a monthly exercise that takes about 30 minutes to complete and gives us a good financial snapshot.

What’s fascinating is that since we started tracking our finances in 2015 and showing them on the blog in 2016, all these monthly static financial data points are coming together to form financial data trends!

We start to observe the impact of lifestyle inflation, efforts to increase income & reduce expenses and changes in asset allocations. It’s difficult to pick up on such trends until you have sufficient financial data to work with. I highly recommend everyone to start tracking these four components monthly for a better financial picture. It’s amazing how much information you can glean!

Since I’m doing monthly financial updates, general comments will be provided on the progress of each component. There will be less detail but I will make sure to highlight any significant financial impact events.

Net Worth

Our net worth has finally crossed S$100,000. If you think getting to S$100,000 of asset portfolio value is tough, this one is harder from having to factor in your liabilities. For 2016, our net worth has been growing at about S$10,000 every month.

This can be attributed to three monthly factors – reduction in mortgage principal of S$2,000, cash on hand & investment cash growth of S$4,000 and retirement contributions of S$4,000.

After paying rent for a number of years in Australia, it’s nice to know we are now making monthly housing loan payments to our own apartment here in Singapore and building equity. This is especially the case when we have some flexibility in reducing these monthly housing loan payments if required.

In the event of job loss or medical emergency, it’s possible to draw down more or all of our CPF – OA to make these payments for a year. This is the most powerful feature of CPF – OA in my opinion and allows us to avoid cash drain during such a difficult time. This is also why we only view our CPF – RA as retirement funds and contribute additional cash to it whenever we can.

The monthly cash on hand and investment cash growth of S$4,000 has become more consistent due to the low investment activity. At a minimum, our cash on hand increases by S$2,000 if we end up using the S$2,000 of investment cash in the equity markets.

The monthly S$4,000 of retirement contributions from our employers and us as employees help to build up our CPF, which is technically a retirement fund scheme. However, this is how we view the allocations to and purpose of each account. CPF – OA for housing, CPF – RA for retirement and CPF – MA for healthcare. Think of CPF as a financial planning tool rather than a retirement tool and it will make more sense.

Asset Portfolio

There was a run-up in the equity markets and it has stayed quite flat recently. As you can see, the increase of S$8,000 from Jun 2016 is mostly from the S$4,000 of cash on hand & investment cash growth and S$4,000 of retirement contributions.

I have been hesitant to invest any more cash than necessary in the equity markets other than the small regular purchase of ETFs to keep us vested. It’s not a good time now to be aggressive with our investments but we don’t believe in keeping ourselves out of the equity markets as well.

As long as we can achieve gradual growth of the asset portfolio, it means our slow and steady approach is working. The strategy might change over time but we are okay to stick with it for the time being.

Passive Income

The average monthly dividend & interest income for 2016 so far is about S$800. The dividend income distribution is uneven due to most of the shares paying dividends semi-annually. The good thing is that the increasing size of the ETF portfolio (whereby dividends are paid quarterly) should help to balance things up.

The interest income distribution is more even with small spikes due to coupon payments from corporate bonds. The aim is to increase the average monthly passive income every year until it can cover our current average monthly expenses (everything included) of about S$8,000. It’s an ambitious goal and we have a very long way to go. Of course, the plan also includes reducing our average monthly expenses over time to make this goal achievable.

Savings Rate

Our monthly savings rate used to be 30+% but is now fairly consistent at about 40% from efforts to reduce expenses. Ideally, I would like this to be 50% but I don’t see this happening unless we make some long-term structural changes to our spending.

It might be possible if we can find ways to increase our salary and passive incomes but it’s probably more effective to work out how to reduce expenses further at this stage. Expense management is one of our weaknesses but we have to keep trying!