Grinding to farm money

If you are familiar with computer games, you will know the terms "farmer" and "grind". Basically, you grind -- brainlessly and boringly kill mobs to earn gold coins -- coin by coin. After a few weeks or months, you accumulate enough gold to buy or upgrade equipment, so that you can fight high level mobs to earn more gold and so on and so forth. A person who continuously does that is sometimes called a farmer because he farms gold coins, and supposedly loses out on the story of the game play.

If you were associated as gold farmers in any game, I am going to guess that you can live with some grinding -- really really boring stuff of saving money every day, tracking expenses every month, ensuring you run a surplus every year, and forcing yourself to save if you forgot to save -- with your sheer will power silencing any procrastination that you have.

I was one such farmer, but I was more of a trader, where I buy goods low during weekdays and resell them higher during weekends when demand is higher, but I can grind.

What I grind:

1. Record income and expense daily, monthly and yearly (14th year)
2. Desk-bound job, email warrior, telephone mistress (11th year)
3. CPF Special Account top-up -- transfer $7000 every year (2nd year)
4. CPF OA to SA transfer -- transfer max to SA every year (3rd year)
5. Medisave Account top-up for daughter -- $1000 every year (1st year)
6. SRS contribution -- transfer max every year for 10 years (3rd year) $12750 previously, now $15300
7. Monthly investment budget -- $3000 every month for 5 years (3rd year)
8. Read a financial report -- at least 1 every month (3rd year)
9. Learn french -- read french every week (2nd year)

Achievements:

1. Next year Jan, after I make my last CPF Special Account top-up to claim $7k tax relief, I will reach the Minimum Sum or Full Retirement Sum (FRS). => I have 2 things less to grind... Phew. 

... but it will be replaced with 1 new grinding task: repay mortgage loan with OA balances until loan is cleared.

This is a very boring post about the boring tasks of a farmer.

High Interest Savings Account

I have been switching bank accounts for the higher interest rates. I am still using UOB One, and Bank of China (BOC) SmartSaver, CIMB Fast Saver to earn interests. I had also created a Hong Leong Finance Fixed Savings account because it pays 1.7% for a 6-month fixed saving, but it's only for 6 months, so I see it more as a Fixed Deposit. My OCBC 360 account is still lying around because I still have some GIRO payments tied to it and I pay 3 bills to get 0.5% on the min balance of $3000.

Assuming you have a salary credit of >= $2000, spend $500 on credit card, and pay 3 bills and

A. have <= $60k, the best account is Bank of China 2.35% on the first $60k balance.

B. have ~ $110k, the best account is Bank of China 2.35% on the first $60k balance, and then balance in CIMB Fast Saver 1%.

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Assuming you have a salary credit of >$2000, spend $1000 on credit card, and pay 3 bills and

C. have ~ $110k, the best account is  Bank of China 2.35% on the first $60k balance, and then balance in
UOB One 2.43% for exactly $50k. You need to make GIRO arrangements for the 3 bills to qualify for the UOB One conditions. BOC doesn't require you to set up GIRO, so you just pay the same 3 bills, $30/bill just to clock the bill payments. The extra money just adds credit to those bills.

D. have ~ $160k, option C + CIMB Fast Saver 1%

E. have >=$260k, option D + Singapore Savings Bond (SSB) 0.91% for 1st year that increases over 10 years for SSB-JAN17 (effective rate 2.18%) up to $100k.

F. if you still have money, house your balance in CIMB Star Saver 0.8%.

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For options A to F, if salary credit of >= $6000, Bank of China 2.75%.

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If you can't meet all the requirements, here are the best accounts for each category:

• salary credit of >$2000 only, the best account is OCBC 360 1.2% on first $60k
• spend $500 on credit card, the best account is UOB One 1.6% on exactly $50k
• pay 3 bills, the best account is CIMB Fast Saver 1% on first $50k

You can tell that it pays to read and do some homework.

Getting SRS tax relief for $153,000 and get back $400,000 tax-free!

I was searching online but could not find an answer to my question: How will I receive dividends if I have bought stocks with money from my Supplementary Retirement Scheme (SRS) account?

It is definitely NOT paid to your usual Central Depository (CDP) GIRO account, so you will not have usable cash. The dividend paid shows up as cash available in your SRS account balance, which can be re-invested in more stocks!

Next is the question on what is exactly taxable when we were to withdraw the SRS money at 62?

Dividends are taxed at source (Corporate Tax) and Singapore does not have Capital Gain Tax, BUT when the dividends and capital gains are paid back into the SRS, it will be taxable... I hope I am wrong, but it seems to be that way. Given such a situation, it means that one will probably stop contributing to SRS once the available balance is close to $400,000, based on current tax rates, or whatever the minimum taxable income is when we are 62. $400,000 is the current tax-free break-even point. You can read the detailed illustration on the IRAS page.

Based on a contribution cap of $15,300/year from 2016, an investment horizon of 10 years (provided you start by 37 years old) will easily get back $400,000 (with dividends (5% yield) reinvested and a conservative 0% capital gain included.) If you are 37 years old this year, you are in luck! If you are younger, you probably don't even need to contribute for 10 years.

Saving your first $100,000 could be easier than you think!

After I graduated and started on my first job, I did some calculation in a spreadsheet to extrapolate my salary after 5 years. All was rosy until I actually received my increment letter - $144 or  6% of my then $2,400 salary. Bonus was 1.5 months, which was considered relatively good in the company. I typed the numbers into the spreadsheet and I decided to find another job after looking at the projected number after 5 and 10 years.

Working backwards, I calculated how much increment I would need year on year to achieve a salary of an arbitrary $7,000 after 10 years. $7,000 was the 90th percentile from the Department of Statistics Income distribution curve then. 10% year on year increment was needed to achieve that from a $2,400 starting pay.

Every year I calculated how far I was away from my required increment. When the "extrapolation" numbers looked unfavourable, with a heavy heart each time, I make my move.

Every year, every day, every hour, every second, I make sure that every single action I did was contributing towards building relevant skill sets to increase my market value.

I would not recommend this approach of job hopping as its detrimental to the economy, but I thought I should share some ideal examples for the fresh grads jumping into the market. The starting pay is VERY important. It is your bargaining power for the next hop and future hops. I regretted not bargaining for more.

More importantly, saving your first $100,000 could be easier than you think! Once you hit that milestone, I am sure you are all set for more milestones.

Poly Grad (F) 5% Inc

Poly Grad (F) 10% Inc

As you can see, a 5% increment and 10% increment will result in 50% difference in pay after 10 years.

In this example, you can see that the amount one can save is also a lot, just based on a 5% increment, which is closer to the market average, provided your company pays you 3 months bonus a year. What this means is that if your company pays you less than 3 months bonus, and you think you are capable of getting more, then you are probably better off hunting for a more generous employer.

I had also put a very reasonable monthly expense of $900. If you save less than what the spreadsheet says, it is CERTAIN that you will not save the projected amounts. Simple.

I had also done up the same tables for different starting average pays for poly grad M, uni grad F and M just for completeness. Make the right step!

Poly Grad (M) 5% Inc

Poly Grad (M) 10% Inc

Uni Grad (F) 5% Inc

Uni Grad (F) 10% Inc

Uni Grad (M) 5% Inc

Uni Grad (M) 10% Inc

How much have I earned and lost?

How much have I earned and lost from shares?

This lady is a few years younger than I am and she asked me this question over a casual lunch.

Hmm... I probably earned $50,000 and lost $30,000, so a $20,000 nett profit could be a close estimate over the past 10 years. These are realised profits and losses. The unrealised losses were much more during the 2007 and 2009 "crashes".

After that, I decided to compile a year-on-year income "report" to track how much I had earned and lost over the years. It took me quite a few days to dig through my archives of spreadsheets that I had used to track my income and expenses and reading them reminded me of how I evolved my spreadsheet format and investment "strategy" if I could borrow that term to represent my exploratory journey.

We all love visuals, so I decided to make one too.

Year-on-Year income breakdown

I cannot remember when I exactly started buying shares, but it was probably in 2001 or 2002 when I was school and I remembered it was after getting my first exam results. I realised that I was in the bottom half of the bell curve and will need to look for alternative sources of income to make up for my shortfall in income compared with my peers with much better grades (who will likely get a head start). I am a pessimist, and still am. I did work hard for my four years in school but I was still below the curve when I graduated.

Shares appeared to be an "easy" option because there was an online platform, you spend a few seconds to click to buy and sell, and then you make money. It sounded like the perfect early retirement plan. That was the nirvana I was seeking. That drove me. On hindsight, it was no where close to easy. It is sheer hard work learning, cash flow management, and patience.

In 2002, China Initial Public Offering (IPO) stocks were the "hottest". Every IPO was a 100% hit. It is a definite 10% gain and sometimes as high as 300%. I made quite a bit of what the industry calls "kopi lui" or coffee money. I profited $10 to $100 each trade. I use the term trade because I bought and sold usually within a few days.

When US waged war against Iraq in 2003, stock markets rallied. Oil companies stood to benefit from higher oil prices because it was perceived that the Iraqis will have to stop digging and selling oil to fight the war. It sounds comical, but that was how it was perceived. The actual supply shortage from Iraq to cause a supply crunch is debatable.

When SARS hit in 2003, the market "semi-crashed" and IPO fever died down. As I was riding on speculation fever, many of these China stocks fell and I clocked my losses. That could be said to be my first burn -- speculation.

The market started to pick up in 2005 when HDB changed their housing policy to allow PRs to buy flats, and foreigners to buy condominiums (condos). That created the demand for HDB upgraders to mass market condos. Previously, foreigners were only allowed to buy certain walk up apartments, or high-end luxury condos. In Singapore, people called the phenomenon "Boom Town Charlie".

In China, there was a construction boom, and all property stocks were hot and speculative. Those shares that were hot in pre-SARS era had mostly been delisted by then, and new batches of China IPO shares flooded the market. I made kopi lui again.

My second burn happened in 2007 -- over-exposure. Warren Buffett launched his war chest to buy out the US banks while I sucked my thumb with no war chest. I started to build my war chest.  I counted my blessings to be able to live to watch the Lehman Brothers trickle unprecedented impact across all stock markets. To be honest, I still feel that the Lehman Brothers was not that big a deal, but it was the sensation it caused that trickled fear into every household worldwide -- who will be next?

Ben Bernanke became an overnight celebrity. There was a cartoon drawn about him sitting in his airplane and flinging out wads of cash. Quantitative Easing (QE) made it into case studies of many Economics textbooks. To date, I think QE is the most daring invention, after fractional banking. In those days, I call QE a damping function. In physics, a damping function is one that gradually slows you down to a halt instead of an sudden stop.

In 2009, there was another "semi-crash" because of fear of QE money disappearing and that markets were inflated by invisible demand created by QE. Round 2 of QE came in to save the day. This time round, I launched my war chest and made handsome profits. I will forego a short-term profitable stock than spend my war chest in peace times. This milestone also marked my recovery of past losses, and I decided that I need to change my strategy to increasing the proportion of income from dividends.

So the high-level strategy was (and still is):

1. Buy shares that give at least 4% dividend yield. For riskier shares, I give myself higher margins of at least 6% yield. Every share must have at least 4%, so that I don't need to track every share to the last $1 of income.
2. Buy IPO shares and sell on target price. Generic target price is at least 20% above cost price to get a return of 4 years dividend income to hedge against the risk of another market downturn. Not all IPO shares can yield such capital gain, hence #1 applies as well.
3. Build up war chest of at least $100,000, which is also to be used to apply for IPO shares as well to get higher allotment.
4. Track shares with consistent and good dividend income and wait for the "right" price -- which is the price that gives me at least 4% yield (inclusive of forecast performance).

With this strategy, it also meant that I had to adjust my portfolio to dump those that have met the target price and I don't intend to hold, in order to free up cash to fulfill #4.

I am still adopting this strategy, but I introduced some "governance" of apportionment to "manage risks". At peace time, shares should not exceed 50% of my portfolio (which includes cash, fixed deposits, future income for the next 3 months). For me (a pessimist), a comfortable proportion is 25% shares, to allow for gradual build up when opportunities in #3 or #4 arise. In addition, condition #3 is triggered when the market index drops by at least 30% in a week.

The thrill from kopi lui doesn't excite me anymore. Dividend income is taxed at source and exempted from personal income tax, at least while one remains a Singaporean.

In the spirit of knowledge sharing and learning, I don't mind sharing how much I had earned and lost, and you can even work backwards to calculate how small/big (relatively) my portfolio is, just as long as you don't ask me for money or free meals. :P.

Structured Deposit vs Fixed Deposit

Although the names "Structured Deposit" and "Fixed Deposit" differ by just a word, the two are slightly different deposit instruments.

Assessment	Structured Deposit	Fixed Deposit
Protected by Deposit Insurance Scheme up to S$50k, aggregate of all accounts for each person with the bank, if bank becomes bankrupt (insolvent)	No	Yes
Capital Guaranteed (provided capital held till maturity and bank does not become bankrupt)	Yes	Yes
Early Withdrawal	No pro-rated/market interest, fees may apply	Market interest, e.g. 0.05% for savings rate
Interest Income	Guaranteed for the tenure	Guaranteed for the tenure
Tenure	5 years	renewable every 1 or 2 years
Reasonable Interest Rate per annum (as at 9 Feb 2015)	2%	1.3%

The fundamental difference is that structured deposits are not protected by the the Deposit Insurance Scheme if the bank becomes bankrupt, which puts it in the same category as Investment products. While we can have "faith" in the bank, the difference in returns of 0.7% may not warrant taking the risk, especially if you are not filthy rich. By filthy rich, I mean, you have money in different banks and have fully utilised your deposit insurance quota in different banks, and you are fine with taking the risk.

The Deposit Insurance Scheme protects the end consumer by requiring banks to pay the central insurer a sum based on the amount of deposits they hold, such that if the bank becomes bankrupt, the insurer would pay each depositor with the bank, the amount of savings held in the bank, up to S$50,000. Only savings deposits and fixed deposits are protected by this Scheme. The purpose is to avoid a rush of withdrawals if the bank enters a cashflow crisis, which would further worsen the problem. Read more about it from the Singapore Deposit Insurance website.

Personally, being risk-adverse, I prefer to open a few bank accounts and save up to $50k in each bank. At least, when I need some cash to apply for an Initial Public Offering (IPO) or buy some shares on the stock market (when the price is favourable), I will have some cash on hand. As I also like liquidity and flexibility, I dislike deposit tenures that have lock-in periods more than 12 months.

If you expect interest rates to rise year on year, all the more you will like the flexibility to renew Fixed Deposits every year.

Why I am not convinced of a market crash anytime soon

To the potentially 95% of the singapore population who are not well-versed with financial knowledge and economics theories, reality, what they hear from their friends and read from media will probably be source of truth.

I realised that there is a lack of really layman explanations behind the speculation of market crashes, beyond that notion of "there is a report predicting a crash". Therefore, I endevour to explain why I am not convinced of a market crash anytime soon. To balance the argument, I will summarise the crash advocate position first.

The crash advocate predicts a crash is coming on the following key observations:

1. Oil prices had fallen by 60% in the last 6 months.
2. US, EU, Japan debt had been rising faster than earnings.
3. China's development growth had been slowing.
4. Loan interest rates had been suppressed for more than 10 years and it must go up one day (and that day could trigger the crash)
5. Eloba, Syria, terrorists, etc.

Another perspective for the same observations is that

1. Consumers will enjoy cost savings directly from fuel and indirectly from fuel-dependent industries, such as freight/logistics (e.g. postal and courier services), transport (e.g. air tickets, train tickets, taxis), construction, power generation. The savings from every consumer when multiplied by the consumer equates to liquidity that could potential be fed into the retail market, assuming that people still have their jobs and are not afraid to spend.
2. Debt has risen to a point where I think they do not intend to repay the amount. The likely philosophy held by these decision makers is to keep printing money until nobody dares to take your money. If the banker, politicians, voters all are not too bored about their debt, then why should we be bothered by something beyond our control and reasoning? So what if they go bankrupt? The US government stopped functioning for a few weeks and nothing was impacted.
3. China sucked all the resources out of the earth over the past 30 years, and will continue to do that as long as there are mouths to feed. There are also developing regions in Asia, Middle East and Africa, except that hey are not big enough to make their growth look significant on a worldwide scale. So what if China's growth is slowing? Will that massive population still need to eat and live?
4. Loan interest rates had been kept low because of the incessant money printing by major central banks -- US, EU, China, Japan. Each round of printing by a major economy creates some psychological effect and perception that they would need to also print or risk their currency get inflated. In layman terms, every major economy is trying to suppress their currency exchange rates to make it "cheaper" for overseas customers to buy their products, to make their income look higher for the same unit of goods they are trying to sell. Broadly speaking, countries that do not print will have their currency appreciate against those that print. For example, for every 1 yen decrease against the USD, Japan Uniqlo's profits increase by 1 billion yen. Uniqlo sell sames the same units of goods, same number of retail, employees, etc. but see it's profits rise when their home currency drops. Another way to see this is that the Japan central banks is encouraging their Japanese businesses to expand overseas to benefit from the depressed currency. Unfortunately, global expansion does not work with that logic.
5. What can happen, may happen, but we should not speculate when specific events would happen.

Why I am not convinced of a market crash anytime soon

1. Singapore is very reliant on global markets for income, and has a higher risk than her neighbours that had substantial domestic markets. However, the Singapore government also has paid a group of highly paid ministers and intelligent economists and fund managers. The most we can do is to have faith in them and that the amount of taxpayers money invested in their education and career insures us with good governance and some insurance against crashes. At least, there has been a track record of fat yearly budget surplus that makes everyone drool with envy.
2. Bank deposit insurance will prevent a rush to withdraw cash and hasten a crash in the event of bad sentiment. Banks have to maintain a percentage of capital to operate to minimise the risks of over-leverage (i.e. borrowing beyond your income means).
3. Population is still growing, although at a slower rate, and is intentionally planned to grow to 7 million in 2030. Population growth is the fundamental driving force for any economy. More people -> More mouths to feed -> More housing needs. Ask yourself whether housing price will be lower in 2014 or 2030.
4. Historically, crashes will crash the stock market indices by 50% within a week. Anything around 5% is a just a correction and not a crash. After it drops by 5%, it rebounds by 5.5% to return to the same position it was at before the drop. In absolute terms, the amount could be the same, but when you take the percentage against a smaller base, the percentage is higher. Simple arithmetic. Just take statistics with a pinch of salt. Same goes to all the reports about housing resale indices seeing a large drop in growth percentage. For example, you grow at 2% in 2013, then you grow at 1% in 2014, so the sensationalised report says 50% drop in growth in 2014.
5. Historically, crashes happen after really steep increases. Hence, seeing a few drops here and there just means a crash will not happen so soon.

Happy worrying. 

Disclaimer: This is just my personal interpretation and is not to be taken too seriously. You may choose to believe the more qualified "analysts", "economists", etc. My objective to explain in more layman terms.