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Sunday, February 26, 2017

Be mindful of these risks when investing in bonds

Lorna Tan
Feb 26, 2017

As with most forms of investment, you can lose part or even all of your capital when investing in bonds.

For instance, when an issuer defaults, it is unable to provide regular interest payments or return the original investment amount to the bondholder upon maturity. You as a bondholder may then lose all or a substantial part of your investment. Not all bonds are created equal, so do your own due diligence before applying to buy them.

In a nutshell, the higher interest rates offered by corporates are to compensate the investor for taking on higher risks, which include the credit risk of the issuer (risk of not being repaid if the issuer defaults), liquidity risk (risk of not being able to readily sell the bond and get back your investment proceeds at any time), and market risk (risk that interest-rate movements cause the bond to decrease in value).

Hence, it is prudent when investing to ask what could cause you to lose money and what is the maximum you could lose.

Here are five risk factors that can impact your bond investments.

Default risk can change due to broader economic changes or changes in the financial situation of the company or country.

A firm with poor credit fundamentals may go bust or default on its debt and coupon payments, and it is best for investors to be cautious of such companies.

Mr Vasu Menon, OCBC Bank's senior investment strategist, suggests checking out financials such as the firm's debt-to-equity ratio. This measures how much debt an issuer is using to finance its assets and operations.

"It is important to assess if a company is too heavily indebted. A company with too much debt may run into difficulties servicing its debt and may be forced to sell off assets or declare bankruptcy," he added.

"A ratio of less than 0.5 times would be ideal. However, there may be times when a company has a significant cash hoard, strong and positive operating cash flow and good business prospects, in which case, a ratio of more than 0.5 times would still be acceptable.

"However, even for such companies, ideally, the debt-to-equity ratio should not exceed one.

"It may also be advisable to compare the company's debt-to-equity ratio with its peers'. If the ratio is significantly higher, this would be a worrisome sign."

Another way of assessing the firm's financial health is to look at the balance sheet. If the company is suffering from a negative operating cash flow - it is spending more cash than it is generating - or has a low interest coverage ratio of less than 2.5 times, be wary.

Note that bond prices are affected by the perceived credit quality or probability of default of the issuer.

This explains why there are advantages to bond issues that have attained credit ratings as they provide a quick, independent and comparable assessment of an issuer's creditworthiness.

Ms Chung Shaw Bee, UOB's head of wealth management for the region and Singapore, said: "The rating is indicative of the issuer's ability to keep up with the expected coupon payment and to return investors' capital upon maturity. However, there are currently a number of bonds that are not rated."

Mr Daryl Liew, co-chair of the Advocacy Committee at CFA Singapore, said: "If the bond has a credit rating, then potential credit-rating downgrades would suggest that something is amiss."

This is why the Monetary Authority of Singapore (MAS) is encouraging bond issuers to obtain credit ratings for their bonds, as the rated issuances will improve transparency in the bond market.

Last November, the regulator announced incentives to offset the costs associated with getting a rating.

"Qualifying Asian issuances will be able to offset up to 50 per cent of one-time issuance costs such as credit-rating fees, international legal fees and arranger fees," the MAS told The Sunday Times. "Even as we draw Asian issuers to Singapore, we want to encourage these issuers to be rated... Rated issuers will be eligible for a larger grant quantum under the Asian Bond Grant."

A basic relationship that bond investors must note is that interest rates and bond prices move in opposite directions.

So if prevailing interest rates rise, you will likely see a fall in bond prices, and vice versa. If bond prices fall, you could experience a capital loss if you sell the bonds before maturity.

Mr Liew advises that it is important to have an outlook on interest rates when considering bond investing as this could dictate the kind of bonds you would prefer.

"For instance, in a rising interest-rate environment, investors may prefer to stick to shorter-duration bonds or floating-rate bonds," he said.

Mr Menon notes that interest rates are now at record-low levels and are likely to rise in the future, which could weigh on the price of bonds.

Upon maturity, bonds are redeemed at face or par value, meaning that the bond holder gets his principal back.

But what happens if you sell your bond before it matures?

Be aware that a bond's price will fluctuate with changing market conditions, including the forces of supply and demand in the secondary market.

For instance, if there are not many interested buyers of the particular bond, it means that it is not very liquid and it will be harder for you to sell or that you may have to sell at a loss before maturity.

Mr Menon said: "Poor trading liquidity could be one disadvantage of a bond. Bonds may sometimes not be as actively traded as stocks and this may pose problems for investors who need to sell their bonds urgently.

"If an investor is unable to find a buyer at the price he wants, he may be left with no choice but to sell at the price available, which could result in lower profits or even losses."

A bond is a contractual arrangement between the issuer and the bond holder. The terms and conditions governing each bond can differ significantly, and you should always read and understand the terms carefully before investing in any bond.

In addition, these terms and conditions may change if bond holders agree to alterations proposed by the bond issuer, said MoneySense, the national financial education programme.

One example is the call risk.

Some bonds have a callable feature that gives the issuer the option to buy back or redeem the bond before its maturity date. The issuer may want to do this particularly when opportunities arise for it to refinance at lower interest rates.

However, this may be unfavourable to you as a bond holder because you may not be able to re-invest in a product with equivalent interest payments.

Another example is early redemption risk.

Bonds may come with terms that allow the issuer or the bondholder to redeem the bonds prior to maturity under certain circumstances. You should take note of which party has the right to exercise the option and the circumstances under which it may be exercised.

For instance, the issuer may give itself the right to redeem the bonds before maturity for tax reasons.

Common types of bonds

Lorna Tan
FEB 26, 2017

You can invest in different types of bonds, depending on your objectives.

Common types include those issued by the Government or corporates and perpetual bonds. There are also bond funds or bond exchange-traded funds.

In recent years, retail investors have the option of investing in bonds issued by local firms such as Aspial Corp, Perennial Real Estate Holdings and Oxley Holdings. In September 2015, the Government introduced the risk-free and flexible Singapore Savings Bonds (SSBs), which come with guaranteed step-up interest rates.


The Government issues bonds as a form of borrowing to support spending. Such bonds are generally considered as having lower risk because they are backed by the credit of the Government, so default is unlikely.

This is why interest rates on government bonds tend to be lower than those of other issuers.

In Singapore, both retail and institutional investors can buy Singapore Government Securities (SGS) that are backed by the Government.

Unlike many other countries, the Singapore Government does not need to finance its expenditures through the issuance of government bonds as it operates a balanced-budget policy and often enjoys budget surpluses.


SSBs are designed specifically for retail investors as a low-cost and low-risk savings product. They are safe as they are issued and backed by the Singapore Government.

The longer you hold your bond, the higher your return. SSBs pay interest rates of 2 to 3 per cent if held for 10 years. Interest payments are paid every six months and, on maturity, you will get back your full principal amount.

There is no investment fee or charge, apart from the $2 fee levied by banks for application and redemption requests.

Although there is a 10-year tenure, SSBs provide a flexible redemption option so you do not have to decide at the start how long you want to hold them. You can get your funds back within a month, with no penalty and no capital loss.

Individuals can apply for and redeem SSBs through local bank ATMs, via OCBC OneWealth app or via DBS/POSB Internet banking channels.

You can apply for each Savings Bond issue with as little as $500, and up to $50,000. In addition, you will be able to hold up to $100,000 of SSBs at any point in time.

How are SSBs different from conventional SGS?

Firstly, SSBs are not tradeable while conventional SGS can be sold on the Singapore Exchange. However, this means that the prices of conventional SGS can change, depending on market interest-rate movements and financial market conditions.

So you may receive more or less than your invested capital if you sell your conventional SGS in the secondary market before maturity, said MoneySense, the national financial education programme.

Secondly, you can redeem the full principal amount for SSBs in any given month, without any capital loss. However, early redemption for conventional SGS is not available.

Finally, SSBs have a lower minimum investment amount and unit size of $500, compared with $1,000 for conventional SGS. Individuals can hold up to $100,000 of SSBs at any point in time, but there are no investment limits on conventional SGS.


Corporate bonds usually pay higher interest rates than government bonds because they generally carry more risk.

You can purchase corporate bonds listed on the SGX in the same way as you would buy equities, paying the normal brokerage fees.

While corporate bonds may offer better returns than savings and fixed deposits, note that you will be exposed to credit and other risks. You should therefore consider whether you are able and willing to bear a higher risk of default and risk losing part or all of your investment, in return for higher yields.


Perpetual securities are also known as perpetual notes, perpetual bonds or perpetual capital securities. They are hybrid securities that combine the features of both debt and equity. Some examples include those offered by the local banks and firms like Hyflux and Genting.

Though perpetual securities have some bond-like features, such as coupon payments, they are not plain-vanilla bonds.

Firstly, perpetual securities do not have a maturity date.

Secondly, the issuer may, but is not obliged to, redeem them. If the issuer does not exercise the redemption option, you can exit your investment only by selling the perpetual securities in the secondary market. So you will be exposed to market price fluctuations and liquidity risks.

In some issues, it is also possible for the issuer to have the right to defer the coupon payments. In the event of a winding up of the issuer, holders of perpetual securities normally rank ahead of ordinary shareholders but behind other senior creditors for a share of the proceeds of sale of the issuer's assets.

If a bond is called or redeemed when prevailing interest rates are lower than at the time you bought it, you will be exposed to re-investment risks.

Lessons on bond investments

Lorna Tan
Feb 26, 2017

Bonds have better yields than bank deposits, are less risky than equities, but risks remain

The investing environment has been in good spirits so far this year, with global share markets hitting fresh highs.

Singapore's benchmark Straits Times Index (STI) is trending above the psychologically significant level of 3,000 points, making the local bourse one of the best-performing markets in the world this year.

This state of euphoria may have led investors to forget the spate of high-yield bond defaults that rocked the market last year, badly affecting investors in the process.

Local banks had their problems as well, with non-performing loans to the offshore and marine sector mounting up.

The Singdollar bond market has suffered five defaults since November 2015, representing $1.1 billion or 0.74 per cent of all bonds outstanding.

Before that, there had been no bond defaults here since 2009, but that changed with the string of collapses led by Trikomsel, then Pacific Andes Resources Development, Swiber, Perisai Petroleum Teknologi and Swissco. It goes to show that no investment, no matter how safe it may seem, is fail-safe.

The Sunday Times highlights some lessons on bond investments.

When you invest in a bond, you are effectively lending money for a period to the issuer - be it the government or a corporate - that issued the bond. In return, bondholders receive a regular stream of interest income, or coupon, throughout the life of the bond.

The coupon payment is usually expressed as a percentage of the principal amount, also known as the face or par value. Upon maturity, bonds are redeemed at face or par value, so the bondholder gets his principal back.
Mr Daryl Liew, co-chair of the Advocacy Committee, CFA Singapore, warns that investors, particularly retail ones, tend to focus on the interest rate or yield of a bond.

"While the yield is important, investors should also consider whether they are being fairly compensated for the risks in lending to the company. In this regard, comparing the bond against a peer group of bonds issued by companies in the same sector with a similar credit profile would be useful.

"Other important factors to consider include the duration of the bond and whether there are any special features in the bonds, like call provisions," he advises.

For instance, bonds from the same issuer with longer tenures tend to provide higher coupon rates. This is to compensate investors for holding them longer as the chance of default rises over time.

Mr Vasu Menon, OCBC Bank's senior investment strategist, says bonds offer investors an opportunity to diversify their investments. They also earn a better yield - through the bond's coupon payouts - than bank deposit rates, which are close to record lows.

"For prudence, investors should always maintain a diversified portfolio with some representation of bonds in their portfolios. Bonds are generally more stable than equities and therefore help to inject stability into an investor's portfolio.

"Most bonds are also... less risky than equities, in that you get the face value of the bond back at maturity if the company does not go bankrupt or default on its obligations.

"In contrast, if the share price of a company falls sharply, it can take a long time before it recovers and, even after many years, it may not recover fully and investors could end up losing a significant part of their initial investments."

Financial experts say there is no one-size-fits-all formula, as it depends on the individual's asset-allocation strategy based on age, investment horizon, risk appetite, financial situation and investment goals.

Mr Lim Say Boon, DBS Bank's chief investment officer, says: "For our medium risk appetite/tolerance clients - balanced investors - we recommend 30 per cent in bonds, 54 per cent in stocks.

"But for our highest risk appetite/tolerance clients - aggressive investors - we recommend only 3 per cent in bonds, 89 per cent in equities.

"The lowest risk tolerance clients - defensive investors - will hold more cash than bonds, 65 per cent for cash/money market instruments versus 35 per cent for bonds, reflecting the credit and liquidity risks of bonds."

Mr Lim Soon Chong, regional head of investment products and advisory at DBS, notes that the Singdollar retail bond market is still too small to support the needs of all investors and the external ratings culture is also not well entrenched.

"For these reasons, we think the best approach for most individual investors - including affluent and individual retail investors here - is to invest in fixed-income collective investment schemes, for example, fixed-income mutual funds," he says. "These collective investment schemes tend to invest in a diversified pool of fixed-income securities and tend to offer better liquidity than individual bond investments."

Sunday, February 19, 2017

12 things gig workers can do to secure their financial future

Gig workers, such as those in food delivery and transport, often enjoy the freedom that comes from an unconventional job. But there is usually no certainty over when the next job will come.

Lorna Tan
FEB 19, 2017

Freelancers work in an environment of almost constant uncertainty - not knowing where the next gig is coming from.

That means it is important for these workers to put in place at least some level of certainty in the midst of all that other uncertainty.

Mr Christopher Tan, Providend's chief executive, advises that it is prudent for a self-employed person or freelancer to be prepared for emergencies, to set future goals and to run his business like a corporation.

Here are 12 things gig workers can do to secure their financial future.


It is advisable to set up an emergency fund that will cover you for six months of expenses if you lose your job. Independent or gig workers should probably set aside a larger emergency fund to help them fund 12 months of expenses, said Mr Vasu Menon, OCBC Bank's senior investment strategist.

"This is because with the economy going through challenging times ahead, regular freelance jobs may be harder to come by and the dry spells could last longer," he said. Last year, Singapore's employment growth rate hit a 13-year low.

Mr Tan's advice: The less certain your income, the more you need to set aside.

Mr Vincent Ee, managing director of Financial Alliance, cautioned that without regular employment income, it is difficult to get bank loans for housing or cars.

"A self-employed person should focus on accumulating enough cash reserve in order to meet high deposit payment for housing or other big purchases. Perhaps prior to becoming self-employed, one should consider having his home loan properly restructured before it is too late."


Reviewing healthcare insurance needs is one of the first things independent workers should do, given the rising cost of medical care.

"Unlike full-time employees, such workers do not enjoy medical benefits for hospitalisation expenses. So it is imperative that they protect themselves by buying hospital and critical illness insurance plans," said Mr Menon.

Mr Tan advised that as a gig worker does not have medical benefits, he should ensure that he has a suitable medical contingency plan, so that in the event of a medical crisis, he will be able to afford good medical care as well as replacing any lost income.

Mr Brandon Lam, the Singapore head of financial planning group at DBS Bank, noted that if such a worker wants the option of treatment in a private hospital, staying in a higher-class ward or additional coverage, he should check out the integrated shield plans managed by a private insurer.

This is in addition to the coverage offered by MediShield Life for all Singaporeans and permanent residents, where the benefits are calculated based on the costs in Class B2/C wards in a public or restructured hospital.


Mr Menon noted that as we become older, some of us may fall ill more frequently, develop chronic illnesses or get injured while exercising.

Such illnesses and injuries may require outpatient medical treatment which is typically not covered by many medical insurance plans.

"Without employee medical benefits, independent workers ought to look for ways to reduce outpatient healthcare costs. To manage outpatient medical costs, independent workers can do some advance research to seek out medical practitioners who impose lower charges for consultation and medications.

"Alternatively, for chronic illnesses, consider seeking treatment in government outpatient clinics, where Singaporeans can enjoy significant subsidies," Mr Menon said.


For independent workers who are key breadwinners supporting a family or other dependants, it is especially important to buy life insurance, said Mr Menon.

"This is because with an irregular income stream, you may not be able to save enough to leave behind sufficient financial resources for your dependants if you pass away prematurely. If you find whole life insurance plans costly, you can consider term plans which are more affordable," he advised.

Mr Lam recommends that a simple rule of thumb to assess the amount required for life and disability insurance is to calculate how much you need per month to support your family.

"Take that amount and multiply it by the period that your family needs in order to continue with their current lifestyle, such as until your children graduate from university. You'll need to take inflation into consideration.

"You also need to include any outstanding liability to repay if you do not have other insurance to cover them," said Mr Lam, adding that an alternative method is to multiply annual income by 10.

For gig economy workers who are always on the move, such as drivers and delivery workers, where the risk of accidents may be higher, they should consider topping up their protection with personal accident insurance, said Mr Lam.

Number of months of expenses gig workers should cover with the emergency fund they are setting aside.

Keep your total debt payment below 35 per cent of your estimated yearly income.

Guaranteed interest rate a year earned in CPF savings in the Ordinary Account . Make full use of the CPF schemes and interest rates to build your nest egg.

Percentage of their income that gig workers should aim to save when they can as their income streams are unpredictable.


Mr Tan advised that as income can be uncertain, it is important to reduce debt levels as much as possible.

"Keep your total debt payment below 35 per cent of your estimated yearly income.

"If possible, reduce this amount even further. You can do this by being prudent. Live a simpler life, avoid overextending just to buy a house or car," he said.

Mr Lam suggested regularly tracking your liabilities. "If you are taking a home loan, consider a loan that is of the right size for you vis-a-vis the maximum that you are eligible to borrow."


Unless you are a savvy investor, make full use of the CPF schemes and interest rates to build your nest egg.

Mr Lam noted that your CPF savings in the Ordinary Account earn a guaranteed interest rate of 2.5 per cent a year, while savings in the Special Account and Medisave Account earn a guaranteed minimum interest rate of 4 per cent a year. The first $60,000 of your combined CPF balances, of which up to $20,000 comes from your Ordinary Account, earn one percentage point more.

Mr Tan suggests that self-employed workers make voluntary CPF contributions of up to $37,740 a year.

"The amount will be spread across the Ordinary Account, the Special Account and the Medisave Account. In this way, you put yourself into a tax-efficient 'forced-saving' mode to save for your mortgage payments, retirement and even medical sinking fund," he explained.


Do CPF top-ups into your Special Account if you are able to afford it, so that you can benefit from the compounding effect of the higher interest rate, said Mr Tan. This will allow you to accumulate your savings faster and achieve your retirement goal earlier.


Mr Tan recommended setting up a budget to intentionally park savings meant for retirement and children's education. It is equally important to have the discipline to keep to the budget to control your expenses.

Mr Menon said that for employees with a more predictable income stream, it is recommended that they save at least 10 per cent of their monthly income.

"However, for independent workers whose income streams are unpredictable, they should aim to save even more when they can - perhaps at least 20 per cent of their income to meet their medium- to long-term needs like paying for their children's tertiary education and funding their own retirement."

Mr Ee advised creating a structured savings plan similar to that of a private pension scheme. This is because without CPF contributions, the self-employed person is way behind in terms of saving.

Those who are self-employed should save at least 20 per cent of their income and make maximum contributions ($15,300 for Singaporeans) per year into the Supplementary Retirement Scheme account.

Also, managing cash flow is key to those who are self-employed.

"With irregular income, the self-employed may easily mismanage their cash flow. It is important to consciously keep the fixed expenditure low. Unmatched financial commitment creates immense stress for the self employed," Mr Ee said.


Ms Chung Shaw Bee, the regional and Singapore head of wealth management at UOB, said that for investors without regular income, it is important to build up various sources of passive income to supplement their earned income.

This can be rental income from investment properties, dividend yields and payouts from instruments like stocks, bonds, unit trusts, annuities and insurance savings plans that are staggered.


Mr Tan recommended setting aside an amount on a yearly basis for personal learning and development. This will ensure that you remain relevant in an uncertain world so that you can continually earn an income and possibly increase your income.


Set aside part of your revenue as retained profits so as to give you the option of expanding your business if desired or to cope with business contingencies without affecting your own income or savings, said Mr Tan.


Continue to network with people from diverse backgrounds to suss out business opportunities and stay relevant in a world that is changing, added Mr Tan.


Sunday, February 5, 2017

Nine money habits to adopt in the new year

Lorna Tan
Invest Editor/Senior Correspondent

Feb 5, 2017, 5:00 am SGT

Now's the best time to review your financial health and make some changes if necessary

The start of Chinese New Year is a good time as any to take a closer look at our money habits and make any needed changes.

It is similar to the age-old Chinese tradition of doing a massive spring cleaning of the house before the new year. Every corner has to be cleaned to remove and drive away bad luck. And part of the custom involves replacing old things that are thrown out or given away with new items to signify a fresh start.

Here are nine money habits that have been rewarding for me.


This is an opportune time to review my portfolio. After all, financial experts advise us to review our investments every six to 12 months.

I would have already received my banking and financial statements for the past year to give me an idea of how my investment portfolio has performed.

One exercise is to tabulate the dividends I have received from my stocks into an Excel spreadsheet and use it as part of my analysis.

Even though I adopt a buy-and-hold mentality when it comes to long-term investments, a rebalancing of the portfolio may be required so that it meets the original risk and return objectives.

I look at the price movements of my investments and consider the weightage of each one in the portfolio. Am I exposed to more risk? These could come in the form of specific sectors or even currencies.

As market conditions are volatile, risks will continue to prevail. As an investor with a lower risk appetite, I sleep better at night by investing in blue-chip companies with established business track records, sustainable business models and stable dividend yields.

This is vital as it means the firm will be able to ride out difficult times and still continue to provide dividends.

Diversification - in terms of sectors and geography - is key for any investment portfolio.


While we have short-term obligations to fulfil, we should approach financial planning with a long-term perspective.

Experts have worked out the probability of getting positive returns against the number of years that investors stay invested. Research shows that the longer the investment holding period, the higher the probability of positive returns and the greater the expected return.


I keep my retirement goals in sight at all times and this includes looking out for tools to achieve passive income flows during my golden years.

These include blue-chip stocks, retail bonds, preference shares, investment properties, Singapore Savings Bonds, Supplementary Retirement Scheme (SRS) and annuities.

One set of tools that I have featured extensively in my articles is the Central Provident Fund (CPF) schemes. For most of us, the CPF is an essential component of planning for retirement so it pays to understand the details in order to gain maximum benefits.

Even financial experts - local and foreign - are impressed with the attractive risk-free interest rates of our CPF accounts.

If you have the means, consider depositing spare cash into your CPF Special Account to build up your nest egg faster. The first $60,000 earns an extra 1 per cent interest, so you earn 5 per cent to be compounded until you turn 55. This assumes that the rate remains unchanged.

And if you are above 55, consider topping up to the Enhanced Retirement Sum of $249,000, to boost your nest egg so as to enjoy higher cash payouts for life after retiring.


It is standard financial advice during ordinary times to have sufficient cash set aside to cover at least six months of your monthly household expenses for a rainy day.

With the ongoing market volatility and uncertain employment situation, having six months may not be enough. This is because we should cater for contingencies such as a pay freeze, a pay cut or an unexpected job loss. Last year, layoffs hit a seven-year high with 19,000 people getting retrenched or having their contracts aborted.

How much is enough? It depends on how risk-averse you are, your life stage and your financial commitments and liabilities. A good rule of thumb is to save up to 12 months of your monthly expenditure.

This means that if your monthly expenditure is $2,000, a buffer of up to $24,000 would be a good amount to keep in a deposit account.

Check out savings accounts such as Bank of China SmartSaver, DBS Multiplier, OCBC 360 and UOB One Account, where you can park your cash and still earn interest of up to 3.55 per cent a year, subject to terms and conditions.


The key word is "realistic". I consider this the most basic money tool to control my finances because a realistic budget that is adhered to will go a long way towards helping me achieve my goal of financial freedom.

I do not track every cent but I have a general idea of my monthly expenses by keeping receipts and checking them against my credit card bills and banking statements. This keeps my budget regularly updated, and I know where the money goes and how much is left over. It also helps to guard against fraudulent online transactions. As the designated family holiday planner, I manage the travel budget as well.

And as I move closer towards retirement, part of my goal is to pay off the mortgage and be debt-free.

Generally, I review my budget every six months. It is also prudent to do so when your circumstances change, such as when you receive a pay raise, a windfall or inheritance, or when you have a new addition to your family.


My family has several whole-life plans that were bought many years ago and once a year, I would take the opportunity to track the plans' surrender values. This is to provide me with an updated view on whether I would like to unlock the cash or leave it until a later life stage.

At least once a year, it is also prudent to keep an eye on the family's protection needs, including healthcare and term life insurance. And don't neglect the mundane stuff such as home contents insurance, and travel insurance when you go overseas.

I do not track every cent but I have a general idea of my monthly expenses by keeping receipts and checking them against my credit card bills and banking statements. This keeps my budget regularly updated, and I know where the money goes and how much is left over. It also helps to guard against fraudulent online transactions.


One habit related to budgeting is to adopt a disciplined approach to saving, by paying into your own personal bank account first. Better still, if this process is automated.

For instance, I have a Giro arrangement where a portion of my income is channelled to another savings account which I do not touch. Increase this portion when your income goes up, such as when you have pay increments or annual bonuses.


To accumulate my savings, I avoid impulse buying, whether online or at physical stores, eat at home and consolidate purchases.

Growing up in a low-income family, I have learnt to enjoy simple pleasures and I avoid splurging on wants. Outside work, my time is spent with the family, doing church work, reading, movies and exploring park connectors on my trusty mountain bike.

When I do spend in a big way, it would be for investments that will contribute to my retirement goals, as well as for family meals and holidays to grow the precious memory bank.


The start of the year is a good time to consider schemes that can help reduce your tax burden.

The Retirement Sum Topping-Up (RSTU) Scheme lets you build your retirement savings and enjoy tax relief by topping up your own CPF accounts or those of your loved ones.

In total, you can enjoy tax relief of up to $14,000 in each calendar year if you make cash top-ups for yourself, and your parents, parents-in-law, grandparents and grandparents-in-law.

You can also do this for your spouse and siblings, but only if they are handicapped or if their income did not exceed $4,000 in the year preceding the year of the top-up.

However, you can enjoy tax relief for cash top-ups to your own or your recipient's Retirement Account only up to the current Full Retirement Sum (FRS), which is $166,000 effective from Jan 1 this year. Cash top-ups beyond the current FRS will not be eligible for tax relief.

Another tool is the SRS, which provides disciplined savings to accumulate retirement funds. It also helps cut your personal income tax, as you can claim relief on SRS contributions up to the maximum annual sum of $15,300 for Singaporeans and permanent residents, and $35,700 for foreigners.

Do note that a new personal-relief cap of $80,000 per year of assessment will take effect from the Year of Assessment 2018. This cap applies to the total amount of all tax reliefs claimed, including any relief on cash top-ups made under the RSTU Scheme and SRS, made on or after Jan 1 this year. This means individuals who are already hitting the personal-relief cap - even before taking into account the RSTU and SRS reliefs - will get no tax relief for these contributions.

So, evaluate whether you would benefit from tax relief on your cash top-ups and make an informed decision accordingly.

I wish all readers a healthy and prosperous Chinese New Year... Huat Ah!

Head for financial freedom the barefoot way

Feb 5, 2017, 5:00 am SGT

Lorna Tan
Invest Editor/Senior Correspondent


By Scott Pape

Wiley/Paperback/ 264 pages/$31.95
Available at major bookstores


The Barefoot Investor

In The Barefoot Investor, Scott Pape provides nine "barefoot" steps to help you achieve financial freedom.

Written in a reader-friendly manner and peppered with interesting anecdotes of real-life people, the money management book is about getting a plan in place so that you can devote the best years of your life to the things that give you meaning and purpose.

An international bestseller, the book was first published in 2004 and has been extensively updated. This is its latest edition, printed in November last year.

Pape himself had lost his Australian home in a bush fire in 2014. In this book, he recounted what he did next to get back on his feet.

He went as far as providing scripts on how to converse with finance providers to negotiate and get a better deal on your debts and fees.

The steps in the book serve as a guide on how to pay off your mortgage and debts, and build a financially secure life. And you do not need a huge salary to achieve it. After all, it is not how much you earn but how much you save.


1. Just like any life goal, being financially free requires a strong commitment. Pape wants his readers to make a commitment to becoming a little wealthier each day.

2. Start a financial plan by dividing your income into three buckets - "blow" (expenses and some splurge money), "mojo" (safety money) and "grow" (long-term wealth). Put your money on autopilot by channelling your income into these accounts automatically. Pape recommends opening the "mojo" account with $2,000.

3. Go for cheaper investment funds with low fees, and sort out your insurance by determining your need for coverage and compare costs among insurers.

4. Regain control of your life by paying off your debts. This is where you can use your spare money into eliminating debts fast. His advice is to use debit and not credit cards.

5. It is generally cheaper to rent a home instead of owning one. But remember to save and invest the difference.

6. The book offers tips on buying a home, such as the importance of saving the 20 per cent deposit and checking on availability of government grants. The book's advice is to borrow less than what the bank will lend you. The repayments should generally be less than 30 per cent of your take-home pay, it says. And if you are planning on having kids in the next five years, factor in the drop in income and the rise in costs.

7. Buying an investment property is not the only way to make money in property. You can also buy property shares.

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