Monday, May 30, 2016

9.5% Interest On Savings Account? Good Or Bad For Us Now?

POSB which was known as Post Office Savings Bank in the past has the highest interest ever recorded at 9.5% on 1 August, 1981. How many of us were there during that time to remember this historical high interest rate era? For me, I was not born yet but history shows me how interest rates have moved from the past to now. With such high interest, I can only imagine how fast my money would compound and grow over time. But, do you know that with this kind of high interest, it is actually not that good for us also?

Will Higher Interest Rates Be Good Or Bad For Us?

One thing we would be interested to know is if high interest rate is good or bad for us? If we were living in the 1970s-1980s, higher interest rates may not be that bad for us in Singapore as most people do not have huge loans back then. Fast forward to now, most people have huge housing loans coupled with car loans and also student loans.

In the past, we could get a decent 4 room HDB flat for a family of 4 at just ~$50,000. If we take a loan for this $50,000 at an interest of 3% for 25 years, the total interest we would have paid is about $21,000. Now, to get a 4 room HDB flat would cost about $350,000 and more if in a mature estate. Let's suppose we take a $350,000 loan at 3% for 25 years, how much would be the total interest paid? The answer: ~$147,000.

I do not know if you think that $147,000 is a significant sum of money? To me, it does sound quite significant. If interest rates increase, it will have a much bigger impact to us in Singapore where a large proportion of the population has at least one housing loan.

On the other hand, high interest is good for people who have a lot of savings in the bank. In the 1980s, this announcement by POSB was common:

Announcement * POSB Has Raised Its Interest Rates On Savings * 7% p.a. On Deposits Up To $100,000 * 5%p.a. On Deposits In Excess Of $100,000 * All Interest Earned Is Tax Exempt.
Post Office Savings Bank, 1980s
7% interest on the first $100,000 is quite a lot of interest. You get $7000 for $100,000 of savings per year. From 1974 to 1986, interest n deposits was mostly above 5%. If you had a lot of savings back then, these 12 years would have been very good for you. Your money would have doubled without any work.

How interest rates affect our investments and life?


A rise in interest rates is a cost to businesses that have a lot of debt. Having to pay more for their debt will result in lower profits. This is something we need to take into consideration when we invest. On the other hand, businesses that lend money out such as banks will benefit from the rise in interest rates.


A rise in interest rates will cause prices of bonds to drop. Bond prices and yield are inversely related. Those who have bond funds in their portfolio should watch this space carefully as it is expected that bond prices will drop as interest rates goes up.

Bank Deposits

How about those of us who have savings in the bank? Yes increase in interest rates may mean that we will get higher interest in our savings with the bank but do take note it may be a slow progress as banks will not increase deposit rates fast. It is a cost to them and with banks in Singapore still cash rich, there is no apparent reason for them to increase it fast to attract more customers.

I have plotted out the comparison between SIBOR and the average bank's fixed deposit rate from the data by MAS. The SIBOR is a good benchmark for housing loan rates as most housing loans are on the SIBOR rate. The bank's fixed deposit rate is the interest we get if we put into the 12 month's fixed deposit. Recently, there are also housing loan package based on the fixed deposit rate which I will explain more in this post.

Click Image to Enlarge

Interest rates have fallen over the decade from 1987. It is still near zero currently. Some countries even have negative interest rates where they charge a fee if we put our money in the bank. This doesn't sound right does it?

I do not have the data of the SIBOR from 2013 to 2016 plotted on the chart but from records, the 3M SIBOR is at the 1% range now. Most banks have a spread of about 1% on the loan package so this means those who are on SIBOR loan packages are paying about 2% or more interest now.

The rise in SIBOR will affect most people in Singapore. Then the question is, how much can the SIBOR move? Let's take a look back in 2004.

Sibor started moving up in 2004, rising to above 1 per cent. It rose to a peak of 3.5625 per cent in the middle of 2006. There were 17 Fed fund hike increases by the Fed from June 2004 to June 2006, hitting 5.25 per cent in June 2006. The Sibor is closely correlated to the US Fed funds rate, so any expectations of a hike there would move interest rates here higher.

From 2007 to 2014, the Sibor begun its 7 year fall. It rose again recently in 2015 and is expected to rise further on expectations the Fed fund rates will rise again. The federal reserve in the US raised interest rates just recently and is expected to raise interest at least another 2 times this year. The next rate hike may be as early as June in a few weeks time.

Watch Out For Your Home Loan Instalments

Over the past few months, many people have emailed me and said that they receive letters from the bank informing them that their home loan instalment has increased. What can they do about it?

The easiest way is to refinance and find a lower interest rate package. The best is we should go for fixed rates at least for the next 2-3 years. The last interest rate spike was from 2004 to 2006 which lasted for 2 years only. If we see from historical trends from the previous chart I plotted out, most of the spikes in interest rates lasted only about 2-3 years.

However, the problem with fixed rates is that it is higher than variable rates which may not be as attractive. The alternative to fixed rates is to go for a variable rate package pegged to the fixed deposit rate. Not all banks offer this option though. It is interesting to note that when SIBOR spiked from 2004 to 2006, fixed deposit rates remained mostly unchanged.

We cannot guarantee that fixed deposit rates will be unchanged in the next round of interest rates rise so if you are considering to go for a fixed deposit mortgage loan, it is better to go for a no lock in package. This means you can still switch out anytime in the event if the rate really increases.

Now, the issue is with so many banks in Singapore to choose from, which is the one that offers the best loan package and if you go to the bank, the staff from the bank will definitely say his or her's is the best one.

I've come out a solution for all readers of my blog. I will personally advise you if you are interested to get the best loan package regardless if its for a new property you're going to purchase or for your existing property which you want to refinance. I have the rates of all the banks in Singapore and will help you compare for the best housing loan package for your individual needs. Select one of your enquires below to fill in a contact form and I'll get back to you shortly:

Is the increase in interest rate affecting you in a good or bad way? We can be prepared for this and even take advantage of it. Rates are near zero now and the only way for it to go is up. 

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Tuesday, May 24, 2016

Do Not Focus On Investing If You Want To Be Rich

Over the years, I've received many emails from young readers that they want to learn how to start investing. Most will want to invest because they want to make more money or think it will make them rich. I too started with this mindset but I've come to realise that if we really want to grow our wealth, investing should not be the main focus. What should we focus on instead?

Should we focus on budgeting and saving? If we think about it, how much can we save if we scrimp on that $10 a week? Let's do some simple calculations, $10 a week is $40 a month which is $480 a year. That isn't a lot of savings indeed.

How about investing? If we can get 10% return on a little savings of $10,000, it is $1000 a year. Is this a lot of money? Furthermore, 10% investment return is quite a lot and not easy to sustain for the long term.

Don't get me wrong. I'm not saying that budgeting and saving or investing is not important. It is important but there is one key factor which will make budgeting and saving and investing much easier. This key factor is INCOME.

Why is income important? A person who earns $1000 can never save $1000 but a person who earns $5000 can easily save $1000 or more. The more income we have, the easier it is to save money without compromising too much on our lifestyle. A larger savings for investment will make a big difference on our returns on investment. If we invest $100,000, 10% return is $10,000 a year. This is a significant sum of money. Let's compare a person who has $10,000 investment capital vs a person who has $100,000 investment capital:

Person A Person B
1$10,000 $100,000
2$11,000 $110,000
3$12,100 $121,000
4$13,310 $133,100
5$14,641 $146,410
6$16,105 $161,051
7$17,716 $177,156
8$19,487 $194,872
9$21,436 $214,359
10$23,579 $235,795
11$25,937 $259,374
12$28,531 $285,312
13$31,384 $313,843
14$34,523 $345,227
15$37,975 $379,750
16$41,772 $417,725
17$45,950 $459,497
18$50,545 $505,447
19$55,599 $555,992
20$61,159 $611,591
21$67,275 $672,750
22$74,002 $740,025
23$81,403 $814,027
24$89,543 $895,430
25$98,497 $984,973
26$108,347 $1,083,471
27$119,182 $1,191,818
28$131,100 $1,310,999
29$144,210 $1,442,099
30$158,631 $1,586,309

Assuming person A and B both invest and compound their money at 10% yearly, at the end of 30 years, person A who started with only $10,000 has $158K while person B who started with $100,000 has $1.58 Million. This example shows that our investment capital makes a big difference.

With this, rather than just focusing on investing, wouldn't it be important to focus on our income as well? The more income we have, the easier it is to accumulate a bigger investment capital assuming we are prudent with our money.

The first $100K savings is important. As seen in the calculation above, a person who has $100K compounded at 10% would have 1.58 Million. Even if its just 8%, it would also be close to a Million dollars in 30 years time.

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Monday, May 16, 2016

Having A More Secure Financial Future Not Only By Saving And Investing

I started working 5 years ago as a fresh young polytechnic graduate after serving my NS. To be honest, my starting pay was not very high, it was below $2000. Today, fresh young polytechnic graduates are getting higher pay than 5 years ago. It was reported that the graduating class of 2015 who landed full-time jobs were hired on a median monthly salary of $2,100.

In my short 5 years of working full time, I've seen my fair share of complaints from my colleagues and friends that their pay is low, career progression is slow etc. I have seen more foreigners coming in, taking up management positions. There will always be feelings of unfairness among Singaporeans when it comes to the rights of us as citizens.

Then, there is also chatter about unions in Singapore. That the unions do not do much and they support the government. The National Trades Union Congress (NTUC) is our union in Singapore and has over 60 unions affiliated under its umbrella.

The 1st of May, which is also known as May Day or Labour Day is celebrated in many countries as a traditional springtime festival or as an international day honoring workers. This day seeks to honor the hard work which workers put in. Many workers in various countries stage protests because they feel that they are being treated unfairly. But how is it like in Singapore?

I have mentioned in my previous blog posts that increasing our income is important. Planning for our financial future is also important as we really do not know what will happen in the future. We can be retrenched and lose our jobs the next day. Besides focusing on growing our money, setting aside emergency funds etc, there are other factors which I think is very important to have a more secure financial future.

I always think that I am very fortunate to live in Singapore. Besides having a safe and peaceful environment, we also have many opportunities to learn and grow and fulfill our dreams. Let’s see the opportunities we can grab hold of to have a more secure financial future for ourselves.

A Cautious Outlook Ahead

On May day this year, Prime Minister Lee Hsien Loong made his speech at the May day Rally. You can read more about it as reported on Straits Times and other news portal here and here. A big part of PM Lee's speech was to address the concerns in this current economic outlook and how the government is working together with the labour movement to cope with the issues ahead.


As we all know, many countries are still experiencing slowdown including China while Europe and the US are still struggling to recover. Unemployment is high in many countries and youth unemployment is worrying as well.

PM Lee said that a person from the Singapore Port Workers Union told him that there was one day when for two shifts out of three, PSA's Tanjong Pagar Terminal did not receive a single ship. There is certainly a slowdown in the marine, oil and gas industries which will cause many workers to lose their jobs.

With the cautious outlook and headwinds ahead, the government will deal with changes in three areas namely:

1. In our industries
2. In our jobs
3. In our workforce

You may have heard many of your friends are buying things online now such as on Taobao. Taobao is an online retailer website owned by Alibaba and is the world's most valuable retailer. However, it does not have any physical shops or own any stocks.

Airbnb is now the world's largest accommodation provider but it does not own a single property!
Uber is the world's largest taxi firm but it hardly owns cars.

The industries around the world are definitely changing and if we don’t change the way we do business, we will definitely fail. Look at past big companies such as Kodak or even Nokia. They get taken over by companies who embrace change and technological advancements.

Jobs are changing

Jobs will change as industry transforms. With current technological advancements going at even faster pace, we need to be prepared that our jobs may be replaced and the skills we have now will become obsolete. For those who are at risk of losing their old jobs, they can get help to make the transition by reskilling and upskilling. NTUC provides training courses which you can find out more below. This is unique as very few countries actually have trade unions providing courses for the workers.

For example, the ICT sector is growing currently and will need a lot of workers in this industry. The government set up the Tech Skills Accelerator to train Singaporeans so they can be matched to these jobs. It is estimated that there would be as many as 30,000 new jobs in the ICT sector by 2020.

I was in a seminar 2 weeks ago listening to the technological advancements which will happen from now to 2020. It is a big WOW as I listen to the speakers. Our current mobile internet connectivity is amazing with 4G speeds of up to 450 Mbps. We will have 1 Gbps speed very soon and even 20 Gbps speed with 5G coming in 2020. 5G is a key technological advancement which will make automation and smart cities a reality. This is also a project which the Singapore government is embarking on. With automation, many jobs will be replaced. For example, I heard they can even automate hospitality and construction sectors. A worker can control a machine in a construction site located in another country using real time robotic hands with haptic feedback to sense the pressure and force of the digging work. A cleaner can control several robotic cleaning machines in a control room without having to do the manual work. All these will certainly replace manual labour and it is timely to retrain these workers so they can continue to be employed and even get a higher pay in the future.

It was announced that NTUC will partner with NTU to support mid career workers, including PMETs, to learn new skills. Currently, NTUC has been partnering with the Polys and ITEs for trainings. NTUC intends to raise $50 Million to work with Universities and the government has decided to support by matching $3 to every $1 which NTUC raises. This means $200 Million more in the NTUC Education and Training fund. This is how our trade union is different from other countries where we focus on the bigger picture instead of the now.

The partnership with NTU will focus on short courses to help working people keep up with technology and industry development. NTUC will expand the programme to more universities in time to come. Courses will include digital electronics, molecular genetics and enterprise and innovation which are key growth sectors to come. SkillsFuture credits can be used to offset course fees, and NTUC members will enjoy an additional subsidy of up to $250 a year under the Union Training Assistance Programme.

With jobs changing, I think it is necessary for us to have more skills on hand so that not only we will stay employable but our income will also increase. This is important in having a more secure financial future. Imagine if we lose our jobs and can't find another job because our skills become obsolete, how much impact will it have on our life and finances?

Workforce is Changing

Lastly, the workforce is also changing with times. In Singapore, more than half of the workforce are PMEs (54%). By 2030, it will be two-thirds. The labour movement needs to adapt to meet new needs and stay relevant. The needs of workers are changing. Therefore, for unions to stay relevant to workers, they need to expand their services. This also includes growing their networking because this is something that workers are interested in, networking for better opportunities.

Not only will unions provide collective bargaining, they will also provide other services such as career counselling, networking, skills upgrading etc. As more of us progress better in our careers, it is important to network and explore more opportunities. I think this is a very good move and a platform for us to develop further. Furthermore, the labour movement will be exploring a pay-per-use model with PMEs instead of their usual pay-per-month model. This is also disruption as the traditional operating model of unions is broken down to meet evolving needs of the working people.

To me, Singapore has a unique model where businesses, unions and the government can work closely together to ensure a more sustainable economic environment for its people. Taking care of workers' rights and balancing it with the long term view of the economic structure has always been tricky. I think that there are certainly opportunities in Singapore as long as we work hard for it. If we want to increase our income, we have many opportunities to upgrade our skills. We also have opportunities to learn new skills so as to boost our employability and make us more relevant to the industry needs. No longer is the working environment the same as 20 years ago. We have to embrace change and be prepared. Having another skill on hand will help when we realise our current skills become obsolete. Losing our jobs can be a very painful experience. Are you prepared for a more secure financial future ahead?

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