Year-End Bonuses

Last week's Sunday Times, there was this article that feature how some Singaporeans are planning to spend their year-end bonuses. This comes from the back of the recent announcement on the amount of bonuses civil servants can expect to get. (For more information, check out the article here)

With this in mind, I would like to offer my own opinions of how you should spend your year-end bonuses as a reference. Please take this advice at your own risk. :)

1) Credit Card Debt

If you have outstanding credit card debt, it would be advisable to clear them first and as much as possible. The reason is because of the high interest rate charged, a whopping 24% per annum and do note that it is compounded daily which means the daily interest is 0.066%. (Refer to Section 3f) Let's do some calculation here. Assuming you owe $100 at the start of Jan 1, you would have owed a total of $113 at the end of Jun. Take note that this amount has not even take into account any charges and fees that the bank would put in depending on your payment behavior. So first and foremost, I would recommend that you pay down your credit card debt as soon as possible.

2) Credit Line

If you have outstanding credit line, this would be the next place you use your bonuses on. Credit line is similar to a credit card only thing is you are immediately charged interest when you draw money from it. So although the interest is low about 17% per annum, the compounding effect starts immediately. And again depending on your payment behavior, the existing interest rate can change and new charges added to it.

3) Renovation Loan, Mortgage or Term Loan

Next on the line is these three types of debt. For these types of loans, it can be tricky as they may have many terms and condition if you want to pay down the principal or terminate the loans early. My advice is to ask the respective product managers and inquire about these terms and condition before deciding where to use your bonuses to pay down the principal.

4) Financial Literacy

Before you start making investments after you have paid down any debt, it is strongly advisable that you invest a small sum of your bonuses on increasing your financial literacy level. Spend some money to attend seminars and buy books to read up on the current trends and types of investment. Have a better understanding of how it works, what are the cash inflows and outflows and also when these cashflows occur. Having a good understanding would help you to make a more informed decision on how to invest your year-end bonuses which you have used a year long period of sweat and quality time with your friends and family to exchange it.

5) Investments

After you are familiar with the respective investment products, it is time to 'dip your toes' a bit and 'dive in' when you are confident. Most importantly have fun during the process and also take note of your emotions when you are investing.

Taking Housing Loans

Taking Housing Loans is a must especially when we would like to own our dream home. But owning a home can be a nightmare if you do not do proper homework and become burden with housing loans.

Before you go out and look for your new home, you should first look at the available financial resources that you have. You can take the following steps:

1) Assess your financial resources and decide how much you can come up with to service your housing loans per month, assuming you have to service the loan for a period of more than 10-20 years.

2) From that amount that you have come up with, use only 60-90% as a gauge of how much you can really come up with to service your housing loans. For instance, at the end of first step, you calculated that you can service the housing loan with $1000 per month, and assuming you are very risk averse, that means you can only use $600 to service a loan per month.

3) Next go out and have a look at the housing loan packages available that allows you to service it with $600 (from the example) per month. From the housing loan package that you have selected, you can now see how much you can borrow.

4) From how much you can borrow and how much you have set aside for the 20% you need to pay upfront, you can now go out and look for the dream home that would fit that budget.

For more information on housing loans, please click here.

Beating Inflation

The top headlines in most newspapers these days are high inflation rates. Most countries are experiencing historically high inflation rates. Causes of inflation rates are because of commodities prices like rice, flour and most importantly oil.

Usually if inflation is caused by commodities, the poor and middle level income would be greatly affected. In Singapore, inflation rates are predicted to be between 5-6%. Such rates would greatly erode the purchasing power of your deposits, even if it is left in a fixed deposit which is earning between 1-2%.

Commodities like all other investment tools are subject to business cycles, thus it is important to take that in your consideration when planning your personal finances. To beat inflation and ensure that your retirement nest egg, it is important that you keep your money invested in the relevant investment tools. Which tool is relevant depends on your investment horizon.

For the immediate reality, it is very important to plan your budget carefully. Have records of your household expenditure for the month. Such records would inform you which are experience the highest inflation.

At the end of the month, when planning your budget, have a look at which area of expenditure would have increased greatly, in this case, would be your food expenditure. Have a closer look at this area and see what changes you can make to bring the expenditure down.

In the long run, try to build another source of income, preferably passive source or increase your financial literacy level and start investing.

For more information on Planning your Budget, please click here.
For more information on Investment tool, please click here.