Finance Smiths

Review of our bank accounts

09.07.2016 by Finance Smiths //

Do you remember my post about the three day work week? The interesting thing is that my manager returned from maternity leave and is now on a three day work week. This is unusual in an accounting firm where there are revenue and client pressures.

I get to see and understand first hand how the three day work week functions from the perspective of my manager who is on it and me as the colleague of such a working mum. To be honest, it has not been going well for my manager and tensions have been running high in the team lately.

These type of flexible work arrangements are more common in Australia than Singapore. I can see how it works there because people are more used to it and are generally okay to adjust their schedules & expectations around such arrangements. It’s not easy but workable in Australia.

This does not appear to be the case in Singapore based on my observations. I would say it’s a lot more difficult for working mums to be on flexible work arrangements because junior & senior colleagues and clients are not adapting their schedules & expectations. It looks like we still have a long way to go and I hope it’s something we all strive towards to provide more support for working mums.

On a side note, it’s tough being on a three day work week if you have demanding revenue and client responsibilities. This is the case even if you have a strong support team to meet those pressures (assuming it’s not your own business because why would you want to be on a three day work week if so?!).

Which means the question is whether I am okay to accept less responsibilities and possibly do less value-adding work in exchange for a lower pay. I guess it still meets the requirement of having some form of professional and social engagement with lower stress levels.

I wonder how things will play out for my manager just to see whether the idea of the three day work week is even feasible in the long term in Singapore. Definitely hoping it works out for her!

Anyway, I reckon it’s time for me to go back to the basics of personal finance since I have been writing quite a bit about investments recently. I did a series of posts on which bank accounts to use in Singapore as expense funds, emergency funds and investment funds. It’s time for a review to see how they have been working out for us.

1. OCBC 360 Bank Account – Expense Funds

I have been increasing the balance in my OCBC 360 account recently from the cash position build up. Since I’m meeting the bonus interest requirements, I’m earning 2.2% pa on the total account balance with an additional 1% pa on the incremental account balance from month to month.

I don’t actively research on other competing high interest bank accounts or enquire with the various banks. I find the more efficient approach is to follow the personal finance bloggers in Singapore and their reviews of the bank accounts. You can see a real-life application of the considerations and comparisons that way.

That’s how I picked up on the BOC Smartsaver account. You can refer to this post from Jes on BOC Smartsaver vs OCBC 360. I seem to be reaching the same conclusion as Jes in that the OCBC 365 credit card is a strong motivator for why I will continue to stick to the OCBC 360 account.

Besides, I like OCBC’s online banking interface the most. Given the high volume of transactions and bank transfers in my OCBC 360 account, it’s easier to navigate them on a more user-friendly internet banking account.

2. UOB One Bank Account – Emergency Funds

It’s not as easy to meet the bonus interest requirements but still possible even without the salary crediting component. Watch out on navigating the UOB One credit card because it’s even more difficult. The effective interest rate I’m earning is 2.43% pa on the total account balance.

The volume of transactions and bank transfers in my UOB One account is low, which makes sense since I shouldn’t be utilising my emergency funds so often. Plus after jumping through the hoops and hurdles to meet the bonus interest requirements, I’m happy to just leave the account as it is.

3. CIMB FastSaver Bank Account or Other Bank Accounts with Deposit Promotions – Investment Funds

Since I have reached the maximum balances (to qualify for bonus interest) of S$60,000 for the OCBC 360 account and S$50,000 for the UOB One account, the excess cash is usually parked in the CIMB FastSaver account. Interest earned at 1% pa.

Banks such as Stan Chart offer deposit promotions (usually for two months) on normal savings accounts to try and draw fresh funds. It’s just a matter of transferring the excess cash into those accounts for the two months and withdrawing them out after the promotion ends.

I still have a POSB eSavings Bank Account but that’s for the monthly withdrawal of cash funds for the POSB Invest-Saver and paying off the POSB Everyday Credit Card. Then again, I just keep about S$1,000 in the account because of the low interest rate on it.

Anyway, I might do a review of our credit cards in another post, especially when they are closely linked to the bank accounts we open in Singapore. Besides, it’s always useful to re-evaluate whether any changes are required to our personal finance structure.

How we use CPF for housing

09.04.2016 by Finance Smiths //

I considered writing an Aug 2016 Financial Update post. However, not much has happened in the month since the Jul 2016 Financial Update. As long as the trend continues to be upward and positive, I’m satisfied with the progress.

I can provide a summary if it helps. The net worth has jumped more than the previous months mainly because of the performance bonus that I received. Our investment cash and cash on hand have increased by the same amount of S$4,000. Good to know this is becoming quite consistent.

The ETF and Other portfolios have risen slightly but the Share portfolio has dipped. There was a spike in the dividend income and a small increase in the interest income. This can be attributed to owning the ETFs and shares for a longer period of time that qualifies for the recent round of dividends and the recent build up of our cash positions.

That’s enough talk about our assets. What I will try to do in this post is write about how we address our liability problem, specially the mortgage. I’m not worried about our personal and property tax liability because minimal changes indicate no significant drops in our salary income and apartment value.

As for the credit card liability, it should reduce slowly over time as we try to control our spending. However, I expect it to plateau eventually because it represents our costs of living and there is always going to be a minimum base level. Given how our savings rate is hovering slightly above 40% , I’m wondering whether this has already happened.

Anyway, these other liabilities pale in comparison to our housing loan liability. I have written related posts before on whether buying a private condo was a mistake and how we view our CPF – OA to be used for housing instead of retirement.

The fact of the matter is we have a S$2,800 housing loan payment to be made for the private condo every month. No point debating whether we should have bought a HDB or whether the private condo is affordable. The key decision for us is what should be the split between CPF – OA and cash for the monthly housing loan payment of S$2,800. This is how we work it through.

1. What is our monthly allocation to the CPF – OA from the total employee and employer contributions?

S$6,000 (Individual salary) * 23% (Allocation rate) * 2 (Both of us) = S$2,760

As long as both of us continue to work, S$2,760 is credited into our CPF – OA every month.

2. Do we intend to rely on CPF – OA for retirement?

We intend to use the CPF – OA only for housing. This means that the funds in the account will either be fully used for the first residential property or a second property. Hence, we are not relying on the COF – OA for retirement.

3. Are we okay with a build up of CPF – OA as a form of emergency funds for housing?

Given how we were not working in Singapore for the first few years of our careers, our CPF – OA balances are small compared to our peers. Even if we use the entire allocation of S$2,760 to make the monthly housing loan payment of S$2,800, we would still have to draw down another S$40 from the CPF – OA. Over time, our CPF – OA balances will be wiped out, which is not good.

Therefore, we decide to build up our CPF – OA to have a buffer of about 1 year of housing loan payments (S$2,800 * 12 = S$33,600). This will require us to use cash in addition to the CPF – OA to make the monthly housing loan payment of S$2,800 for a while.

Besides, if we are both retrenched, we figure it would take one of us about a year to find a new job to have new contributions flowing into the CPF – OA.

4. What is the current interest rate differential?

Interest rate on housing loan: 2% pa

Maximum interest rate on cash savings: 2.4% pa

Interest rate on CPF – OA: 2.5% pa

You can see how it would make sense to have the CPF – OA hold the 1 year emergency funds (S$33,600) for housing instead of a high interest savings account.

5. How should we split the cash and CPF – OA components of the housing loan payment?

The discussion above leads to this analysis of how much cash to use for the monthly housing loan payment of S$2,800.

We want to build up the 1 year emergency funds in the CPF – OA (S$33,600) quickly while we still have cash flow and no significant obligations.

Cash payment: S$1,800

CPF – OA payment: S$1,000

Total monthly housing loan payment: S$2,800

Monthly increase in CPF – OA: S$1,760

Estimated time to meet goal: 19 months (close to completion at time of writing)

Once we meet this goal, we are okay to adjust the proportion to use more of our CPF – OA for the monthly housing loan payment and just let the balance grow more slowly.

6. Is it okay to have the CPF – OA balances grow so slowly?

In our case, we are okay to have our smaller than average CPF – OA balances increase slowly because they are not meant for retirement. However, we do regular cash top-ups to our CPF – SA for tax relief and occasional transfers of the performance bonus from our CPF – OA to our CPF – SA.

This is to try and grow our CPF – SA at a quicker rate to make up for the slow growth rate of our CPF – OA. As you can see, we do quite a bit of analysis when it comes to using our CPF for housing as the considerations and actions can have implications down the road.

How we index invest every month

09.01.2016 by Finance Smiths //

I have written a number of index investing posts in the past few months – Start index investing, Choose equity ETFs & bond ETFs and Build an ETF portfolio. It was early days for the blog and I didn’t write them in a lot of detail. Plus my first self-hosted blog got shut down one weekend (I never figured out what happened) and I was still feeling hesitant with my second attempt.

As I start to develop my interest in writing, the length of my posts has increased and I hope the additional detail/opinions have been useful. However, given my focus on the index investing strategy, I realised that I haven’t really explained how we do it every month. This post should give you an idea of what we actually do to execute the index investing strategy each month.

1. POSB Invest-Saver

I included the link to the POSB website that provides detailed information on what is the POSB Invest-Saver. Here is a summary:

Regular Savings Plan (RSP) that allows you to invest into the Nikko AM Singapore STI ETF (G3B) and/or ABF Singapore Bond Index Fund (A35)
G3B and A35 are Exchange Traded Funds (ETFs) listed on the Singapore Exchange (SGX)
Via a monthly GIRO arrangement that can be applied for on internet banking
Minimum monthly investment amount of S$100
1% sales charge per transaction for G3B and 0.5% sales charge per transaction for A35

Since my wife has a DBS/POSB ibanking account, it was easy to set up the monthly GIRO arrangement online for the POSB Invest-Saver to carry out these automatic transactions:

S$300 is withdrawn on the 12th for G3B (or the next business day if the 12th is a non-business day)
S$100 is withdrawn on the 24th for A35 (or the next business day if the 24th is a non-business day)

These will be the purchase prices for the POSB Invest-Saver:

Average purchase price calculated on the 13th for G3B (or the next business day if the 13th is a non-business day)
Average purchase price calculated on the 25th for A35 (or the next business day if the 13th is a non-business day)

Now that the Stan Chart Online Equities Trading Platform charges minimum brokerage fees, the POSB Invest-Saver has become an even better way to accumulate small numbers of these ETFs every month.

Essentially, the S$400 is our minimum monthly investment amount. It keeps us vested in the Singapore stock market and takes away the emotion from dealing with market volatility and timing. This is how we ensure our ETF portfolio continues to grow every year by having constant inflows that outweigh any drops in the value.

I have mentioned previously on this blog about using Google Sheets for personal finances and SGXcafe to track our Singapore share portfolio. After every transaction for G3B and A35, we update the Google Sheet and SGXcafe portfolio for the number of units bought, purchase prices (including transaction costs) and total number of units held.

2. Dollar-Cost Averaging (DCA) using the Stan Chart Online Equities Trading Platform

We use this platform to invest in the SPDR Straits Times Index ETF (ES3) listed on the SGX and various global equity & bond ETFs listed on the London Stock Exchange (LSE).

Global Equity ETFs (LSE)

Global Bond ETFs (LSE)

You can see on the Portfolios & Asset Allocation page how I have grouped the ETFs into: Singapore Equity, Global Equity, Europe Equity, Emerging Markets Equity, Developed Asia Pacific Equity, US Equity, Singapore Bond and Global Bond.

If you click on the links above to the ETFs and look at the holdings of each ETF, you will notice an overlap in the holdings of some of the ETFs. This is caused by me trying to invest into each major geographical region and the whole world separately. I would have reduced the number of types of ETFs I was buying if I had another chance to reconstruct the ETF portfolio to simplify things. But I will have to stick to this set up for now.

In a month with falling stock markets, we purchase significant amounts of these ETFs every time the prices drop below our last purchase prices by 5%. We don’t try to catch the bottom of the cycle, we just keep buying them on the way down. This is the expansion phase of our ETF portfolio where most of the growth actually happens.

When the stock markets are flat in the month, we purchase small amounts of the ETFs at around our last purchase prices since the prices are hovering around the same level. This is more of an accumulation phase for our ETF portfolio since there is still growth but at a much lower rate.

In a month with rising stock markets, we make minimal purchases of these ETFs at higher prices and are okay to sit out most times since they can exceed our last purchase prices by quite a bit. There is barely any growth in the ETF portfolio at all during this phase.

Subsequently, we update our Google Sheet and SGXcafe portfolio for purchases of ES3 and only the Google Sheet for purchases of the LSE ETFs. These updates again relate to the number of units bought, purchase prices (including transaction costs) and total number of units held.

I know applying the traditional DCA approach requires us to continue buying the same amount of ETFs regardless of market conditions. You could say we are applying a modified DCA approach with an element of market timing.

Reasons are simple. We have a large enough investment portfolio that provides us with some passive income and jobs with decent salary income. This is how we can build our cash positions and wait because we can afford to.

By starting the index investing strategy relatively young with sufficient active and passive income buffers, we understand there are many more market cycles ahead of us. There is no need for us to rush and we just have to be patient for the buying opportunities to arise.

Why should we worry about cash being a drag on our portfolio returns when we have such a long investment horizon and the willingness & readiness to utilise it when required?

As you can see, our index investing strategy does require us to monitor the markets (just quick price checks on a weekly basis) since you sometimes get enough market movement to warrant investment actions on our part. It’s not difficult to execute but requires the discipline to wait and be patient.

Which is why it helps to have professional & social activities to keep myself occupied. And even a personal finance blog to write about my interests and remind myself about our index investing strategy. This is also how we can ignore the noise from the financial news and not let them influence our investing decisions.