Wealth Planning for Your Child’s Tertiary Education (Part 2) – Achieving the Financial Goal

This is part 2 of my second article written in the capacity of Solutions Specialist at Providend looking at wealth planning for children tertiary education. The article was first published on Providend website here:
https://providend.com/wealth-planning-for-your-childs-tertiary-education-part-2-achieving-the-financial-goal/

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In Part 1 of this article, we established a baseline financial goal for your children’s tertiary education. We now turn our attention to wealth planning for achieving this goal.

Inflation of Financial Goal

Based on the country selection (Singapore, Australia, United Kingdom, or United States) and academic field (medicine vs non-medicine), we have determined a baseline lump sum goal to set aside for tertiary education from our research data in Part 1.

By considering the inflation rates for tuition fees and living expenses, we projected the inflation-adjusted lump sum goal that you should aim for when it is time to send your children for tertiary education. The following graph shows the cost inflation for non-medicine courses in the 4 countries we cover:

We can see from the graph that the total education cost will inflate over time, approximately doubling in 20 years. Therefore, you would want to start planning for your children’s education fund early.

For overseas universities, there is an added uncertainty in the currency exchange rate. We won’t be able to predict the foreign currency movement in the future with certainty. So what you can do is to add a buffer amount to the goal for any possible SGD depreciation against the targeted foreign currency.

With so many moving parts, we know the targeted education fund amount is based on best estimates. You would need to review and revise the amount regularly to cater for changes in education needs, university landscape, inflation rates, and currency movement.

Creating a Financial Plan

After setting a goal to achieve in a suitable time horizon, you can create a financial plan using the following steps:

1. Assess your current financial situation
   Take stock of your current assets, liabilities, income, and expenses. Determine how much you can commit to your children’s education goals.
2. Calculate the required savings/investment amount in your children’s education fund
   Consider expected investment returns to determine how much you need to save and invest to reach your goal. Open a separate account to deposit the initial lump sum and set up a regular saving mechanism if necessary.
3. Select an appropriate investment vehicle
   Consider various investment options based on your risk tolerance, time horizon, and expected returns. Diversify your investments to manage risk and returns.
4. Monitor and adjust your plan
   Regularly review your financial goal amount and track your investment returns against your goal. If necessary, adjust your plan to cater for changing circumstances.
5. Consider professional advice
   If you are not comfortable about financial planning and investing on your own, consider engaging a trusted financial advisor to guide you in creating a plan based on your specific situation.

Risk Tolerance

An important factor that determines the appropriate investment vehicle is your risk tolerance, which is how much volatility you can tolerate in the investment. At Providend, we use a process of risk profiling to determine your willingness, ability and need to bear risk:

• Willingness to bear risk
  This refers to your emotional comfort level with uncertainty and the potential for loss. Your willingness to bear risk can vary depending on factors such as personal temperament, past experiences, and risk preferences.
• Ability to bear risk
  This refers to your financial capacity to absorb and recover from potential losses, and the ability to hold through the time horizon without having the need to liquidate your investment prematurely. Your ability to bear risk is determined by your personal financial health, such as having adequate emergency funds, sufficient insurance coverage and job stability.
• Need to bear risk
  This refers to the amount of risk you need to take to achieve your financial goal. Your need to bear risk is influenced by factors such as growth target, time horizon and desired level of return on investment. The higher the investment return you seek, the higher is your need to bear risk.

It is important to consider these 3 factors when assessing your risk tolerance and making decisions related to your financial plan and investment instruments. This will allow you to make more informed investment and cash flow decisions that are more likely to help you achieve your financial goals.

Case Study

Let us look at an example. Suppose you have 2 kids, who will be entering university 8 and 16 years later respectively. You plan to send them to non-medicine courses, one to a local university and the other to Australia. The following table shows the projected education costs based on our research data in Part 1:

The inflation-adjusted education cost is projected to be $126,400 and $575,300 when your 2 kids are starting their respective university courses. Let us assume that you can set aside $300,000 for their university education, and that your risk profile is assessed to be high risk.

We can consider 2 portfolios[1], one for each child’s education fund. Portfolio 1 for child 1 is a balanced portfolio of 60% equity and 40% bond delivering 4.5% p.a. return. Portfolio 2 for child 2 is a 100% equity portfolio delivering 6.5% p.a. return.

The table below presents two portfolios in which the $300,000 is divided, along with a comparison to the portfolio values if the same capital is invested in a fixed deposit with a 2% p.a. interest rate:

We can see that the 2 portfolios proposed would be able to meet the financial goals you set for the 2 kids if your capital is invested in equities and bonds. If you choose to place your capital in fixed deposits, you will need larger capital, almost double the capital for portfolio 2 to meet its goal.

Conclusion

With the anticipated rise in education costs due to inflation, it is vital to include a children’s education fund in your wealth planning for the family.

The total cost of university education can range from $100,000 to $1 million in SGD today, depending on many factors such as country, university, academic field, degree level, inflation, and foreign currency exposure. It is not a small amount to set aside and requires a well-considered financial plan to achieve successfully.

Effective education planning entails careful consideration of your children’s education needs and thus the financial goal, which we examined in the first part of this article; and proactively formulating and managing a financial plan to achieve this goal, which we explored in the second part.

Neither the goal nor the plan are cast in stone. You need to regularly review the financial goal, to see if it needs to be adjusted to meet your children’s education needs during their formative years. You also need to regularly review the financial plan, to ensure the investment performance is on track to meet our goal. Should there be deviations in the goal and performance, you will need to adjust your plan accordingly.

In conclusion, planning for your children’s education is a proactive and thoughtful approach to securing a bright future for them. By understanding their unique needs, setting clear goals, making financial plans, and adapting the plans over time, you can be in a much better position to provide your children with the necessary foundation and opportunities to thrive academically, personally, and professionally.

– Footnotes –

[1] The returns of the 2 portfolios are stated for illustration purposes and would depend on the actual performance of the underlying assets.

Wealth Planning for Your Child’s Tertiary Education (Part 1) – Setting a Financial Goal

This is my second article written in the capacity of Solutions Specialist at Providend looking at wealth planning for children tertiary education. The article has 2 parts, and part 1 was first published on Providend website here:
https://providend.com/wealth-planning-for-your-childrens-tertiary-education-part-1-setting-a-financial-goal/

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For many Singaporean parents, sending their children to university is an important life goal. A good tertiary education gives their children a head start on their future career. As education costs are expected to increase in the future, it is important to plan and set aside a children’s education fund as part of their wealth planning for the family.

At Providend, we believe in supporting our clients to achieve their life goals by providing them with honest, independent, and competent advice. In the area of children’s education planning, we have put in many hours of research to examine the total cost of a university degree at both local and overseas institutions.

The total cost includes 2 main components, namely tuition fees and living expenses. This information will give our clients a rough idea of the amount they need to set aside for their children’s education fund. Once the amount is determined, they can add this financial goal to their wealth plan.

In this 2-part article, we will examine the cost of tertiary education in Part 1, and look at the financial planning aspect in Part 2.

Education Planning Philosophy

Providend’s planning philosophy is to first make life decisions before making financial decisions. Planning for children’s education is no exception. Therefore, we begin education planning by considering the following factors:

• Time Horizon: When will your children begin their tertiary education?
• Country Selection: Will you send your children to local or overseas universities? Which country if overseas?
• University Selection: Which university will you send your children to?
• Academic Field: Which course of study will your children go to?
• Degree Level: Which degree level will your children attain? Bachelor’s, Masters, or PhD?

You may not have definite answers for the above factors initially, but they set you thinking about your children’s education needs. These needs might be based on your wishes while your children are still young, and revised regularly according to your children’s characters, talents, interests, and inspiration during their growing up years.

Once the above factors are determined, we can estimate the amount you need to set aside.

Education Research Methodology

The most recent education research we conducted was completed in April 2023. The main objective was to estimate the total cost of university education in various countries, universities, and academic fields.

Source of Research Data

Information on tuition fees and living expenses were retrieved from each selected university’s portal. CPI inflation data were taken from Singapore Department of Statistics (DOS) database[1] and World Bank database[2] for Singapore and overseas universities respectively.

Country Selection

The scope of our research covered universities in Singapore and other popular countries for Singapore parents. The top 3 overseas study destinations[3] we covered were Australia (AU), United Kingdom (UK), and United States of America (US).

University Selection

In each country, we chose the top universities in that country for conservative figures. Specifically, we selected all 6 autonomous universities[4] in Singapore, 3 universities from the Group of Eight[5] in Australia, 3 Universities from the Russel Group[6] in United Kingdom, and 3 Universities from the Private and Ivy League[7] in United States.

Academic Field

Since academic fields are very broad, we divided them into two general categories called medicine (including Dentistry) and non-medicine (Law, Business, Science, etc). The tuition fees for the courses under the non-medicine field do not generally deviate much to warrant further generalization into finer granularity.

Degree Level

We focused our research on undergraduate degrees. This is the first degree level for tertiary education, and it determines the duration for completing the whole programme. Anything beyond the first degree would mean additional years of study resulting in higher total education costs.

Tuition Fees

Tuition fees can vary widely across different universities and different academic fields. We used the 75^th percentile to arrive at a good representative figure for tuition fees while avoiding being skewed by extremely high tuition outliers.

Tuition fees generally increase yearly due to inflation. We retrieved historical tuition fees from each university’s portal as far back as possible and used them to calculate the average tuition fees inflation. This enabled us to estimate the projected tuition fees in future.

Different universities adopt different fee structures. Singapore universities offer a cohort-based fee system, where the annual tuition fees for students who matriculate in a specific year are fixed throughout the duration of study. For overseas universities, tuition fees are typically calculated per unit, per term, or per quarter, and the fees are reviewed and adjusted regularly.

The total tuition fees for the entire course would be annual tuition fees multiplied by number of years of study for Singapore universities, and the sum of inflation-adjusted tuition fees over the number of years of study for overseas universities.

Living Expenses

Each university portal presented this information in different ways. We ended up normalising the living expenses into categories, such as accommodation (hostel and utilities), food (campus meals with occasional dining out), personal expenses (basic lifestyle), transport (public transport with occasional taxi or private hire rides), study cost (books and stationery) and miscellaneous expenses.

We calculated the average annual increase in living expenses by averaging the past 30 years of CPI inflation rates. The total living expenses would be the sum of inflation-adjusted living expenses over the number of years of study.

Foreign Currency Exchange Rate

For overseas universities, both the tuition fees and living expenses were quoted in their respective currencies. We converted the foreign currency to the Singapore Dollar (SGD) using the exchange rate on 31 March 2023. The exchange rates used were 1 Australia Dollar (AUD), 1 British Pound (GBP) and 1 United States Dollar (USD) to 0.8895, 1.6410 and 1.3306 SGD respectively.

Key Findings in University Education Research

Based on the above research methodology, we present a summary of the total university education costs in various countries in the following tables:

Some key findings from the research data:

• The total cost of university education ranges from slightly under $100,000 to almost $1 million in 2023.
• The total cost of overseas university education is higher than that of local study, with United States being the costliest location, followed by United Kingdom, Australia, and Singapore.
• The total cost of a medicine course is higher than that of a non-medicine course, due to 2 factors, i.e., higher tuition fees and longer duration of study.
• Each university in each country have different inflation rates for their tuition fees and living expenses. The average inflation rates are 4% and 3% for tuition fees and living expenses respectively.
• On average, the total cost for Singapore university education has increased by 8% since our previous research done in May 2021.
• Over the same period, the total cost of overseas university education also increased in terms of their respective currencies, but the increases were softened in SGD terms as we saw a strengthening SGD against those foreign currencies.
• Specifically, we saw total costs for an Australia education reduced by an average of 4.5% amidst the backdrop of AUD weakened by about 15% against SGD.
• On the other hand, total cost for United Kingdom and United States education increased by an average of 5% and 6% respectively, while GBP and USD weakened by about 13% and less than 1% against SGD respectively.

With an estimated cost in 2023, we can project the amount needed based on the average inflation rates when it is time to send our children for university studies. This serves as the baseline financial goal of our wealth planning. In the next part, we will explore how to achieve this goal.

– Footnotes –

[1] DOS: https://www.singstat.gov.sg/find-data/search-by-theme/economy/prices-and-price-indices/latest-data

[2] World Bank: https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG

[3] AECC Global: https://www.aeccglobal.sg/blog/top-5-study-overseas-destinations-for-the-singapore-students/

[4] MOE: https://www.moe.gov.sg/post-secondary/overview/autonomous-universities/

[5] Group of Eight: https://go8.edu.au/

[6] Russell Group: https://russellgroup.ac.uk/about/our-universities/

[7] Private and Ivy League: https://www.uopeople.edu/blog/what-are-the-12-ivy-league-schools/

Living a Restful, Blessful and Meaningful Life!

In the beginning of 2021, I was invited by mothership.sg to participate in a video interview on the topic of “Discussion among 3 generations: What do Singaporeans think about work and retirement?“. Obviously I was the senior generation among the 3 participants, LOL.

The second topic in the interview was “Retirement should be _______”. My response was just 3 words: Restful, Blessful, Meaningful. We were given some time to ponder and prepare for the topics of discussion before filming the interview. Boy, I was surprised with the speed I came out with these 3 words when I was preparing for this particular topic.

All the 3 words are adjectives I chose to describe my ideal retirement lifestyle, and the words can simply mean full of resting, blessing and meaning respectively. Perhaps it was due to the obvious meanings of the words, that the video edit team chose to just display the words without any further description or explanation.

I wasn’t quite satisfied with just the 3 words. It felt somewhat hollow and I decided to put in more thoughts in search of deeper meaning. Soon I realized that while the words was meant to describe retirement lifestyle, they are equally applicable to life in general. Eventually, I expanded those words into a motto: “Living a Restful, Blessful and Meaningful Life!”

Let me describe the thought process with the 3 words and the motto.

Restful: According to the Cambridge Dictionary, the word Restful is an adjective used to describe something that produces a feeling of being calm and relaxed. One thing to take note though, don’t mistaken restful as just laze around doing very little, or even doing nothing. It is about doing things at rest, meaning without stress.

Blessful: I didn’t realize until I searched the word in many conventional dictionaries (e.g. Cambridge, Collins, Longman, Merriam-Webster, Oxford, etc.) that there is no such word. The only entry I found was on definitions.net, where Blessful is defined as a life full of blessing. I could have used “Blessed”, but it would be at odds with the other 2 adjectives in form (i.e. not ending with -ful). I decided to stick to “Blessful” (pardon my wilfulness and stubbornness).

Meaningful: The Merriam-Webster Dictionary defines the word Meaningful as an adjective for having a meaning or purpose. This definition might suggest that the synonym for Meaningful is Purposeful, but there is a difference if we delve deeper into the meanings. Meaningful is based on value system (value-driven), and purposeful is based on intention (goal-directed). I chose the former because I deem our value system can last a long while once established, but goal can change over times.

Life: The above 3 words are adjectives meant to describe a noun, which originally would be “Retirement”. Since I realized that the adjectives can equally apply to life in general, it became obvious to pick the noun “Life”.

Living: My wish for the described lifestyle is that it would last continuously for a life time. Hence, I have chosen a present participle form of the verb “Living” to begin the motto.

Adding the article (“a”), the coordinating conjunction (“and”) and the punctuation marks (“,” & “!”) to the above 5 words, the motto “Living a Restful, Blessful and Meaningful Life!” was born.

The life motto can actually apply to the spirit, soul and body in our life, but I would only focus on its application to the personal wealth management aspect of my life in this post.

Restful: As far as my investment is concerned, I’m moving towards a restful approach by leveraging on others to manage my portfolio. Over the years, I have reduced my individual stock holdings and adopted a Core Satellite Portfolio Investing (CSPI) strategy. I constructed portfolios with core holdings in global equity funds and several satellite funds in selected asset classes, themes, regions and sectors. I spent time keeping abreast with trends, performing regular portfolio reviews, adjusting portfolio composition triggered by trend changes, and rebalancing portfolio allocation to the target levels. I leveraged on fund managers and robo-advisors to manage the nitty gritty details in my investment portfolio.

Blessful: I really feel blessful with the current investment environment. There are so many instruments available for investment and trading, such as stock, bond, commodity, CFD (Contract for Difference), ETF (Exchange Traded Fund), unit trust, forex, futures, options, crypto, etc. The cost of investment and trading has gone down tremendously to reasonable levels, e.g. zero cost unit trust platforms, low cost brokerages, low expense ratio funds, etc. The proliferation of financial bloggers, YouTubers and educators has raised the general financial literacy level, and I for one surely benefited from their sharings. I’m blessed to have friends in my circles whom I can tap on their strong knowledge in diverse areas of expertise.

Meaningful: I find it meaningful to get involve with the personal finance communities. I learnt from others who share their views and experiences in response to people seeking advice to their financial situation. Some questions and sharings opened my eyes into areas I had never thought of. I also shared my own views and experiences, and many a time I learnt in the process from others’ responses, comments, feedback, clarification, and further questions. I felt that my effort was worth it when people thanked me for my sharings had helped them. Such appreciation and recognition are precious! Best of all, I grew in my very own financial literacy through it all.

Coincidentally, I just found out that Ohio University had an article on Seven Word Life Motto. It describes a process to develop your life motto in seven words. It is interesting that my ad hoc process just happened to come out with an exactly seven word life motto! Seven is a number of perfection to Christian, and this life motto surely felt like a Godsend to me.

The Concept of Compounding

Disclaimer: This post is just for educational sharing purposes. Please do your own due diligence on any products mentioned in this post.

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There is a quote on compounding attributed to Albert Einstein:

Compound interest is the eighth wonder of the world.

However, Quote Investigator has found no substantive evidence that Albert Einstein (and many others this quote was attributed to) had said it after conducted extensive research.

Nevertheless, the concept of compounding is indeed an amazing wonder behind the principle of successful long term investing.

To illustrate why compounding is such an amazing wonder, let me put forward a question:

Would you rather have a penny that doubles everyday for a month, or $1 million up front?

Many uninitiated people would likely choose to take the $1 million. After all, how much can 1 penny double to in 30 days? They would be surprised that the penny would grow to more than $5 million by day 30, all due to the amazing power of compounding.

You may read an article on this question at the following link:
https://thecollegeinvestor.com/17145/would-you-rather-have-a-penny-that-doubles-each-day-for-a-month-or-1-million/

What is Compounding?

An Investopedia article on the topic of compounding described it as:
https://www.investopedia.com/terms/c/compounding.asp

Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time.

We can see from the description that there are 2 kinds of compounding in investment:

1. Compound Interest (compounding due to earning from interest)
2. Compound Growth (compounding due to earning from capital gain)

Through my involvement with the 1M65 and Seedly communities, I realized most people has no problem understanding compound interest, but some are having trouble understanding how compound growth works.

Compound Interest

An Investopedia article on Compound Interest defined it as:
https://www.investopedia.com/terms/c/compoundinterest.asp

Compound interest (also known as compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

The formula for Compound Interest is:

Bank fixed deposit (FD) account would be one such asset that generate compound interest. For example, lets say we invest $10,000 in a 12-month 2% p.a. FD and let it auto roll for 3 years.

At the end of year 1, the FD account is credited with $200 ($10,000 x 2%) and grow to $10,200.

At the end of year 2, the FD account is credited with $204 ($10,200 x 2%) and grow to $10,404.

At the end of year 3, the FD account is credited with $208.08 ($10,404 x 2%) and grow to $10,612.08.

In other words, the previous year interest is added to form the new principal in the current year, exhibiting a compounding effect that increases the principal at a faster rate in subsequent years.

The essence of Compound Interest is that there is an increase in the principal. Once interests credited, they are ours and they enlarge our principal.

Compound Growth

When an asset doesn’t generate interest, but instead grow its asset value, the compounding effect is achieved by capital gain, and this is known as Compound Growth. The measure of the asset’s growth rate is known as Compound Annual Growth Rate (CAGR):
https://www.investopedia.com/investing/compound-annual-growth-rate-what-you-should-know/

Compound annual growth rate, or CAGR, is the mean annual growth rate of an investment over a specified period of time longer than one year.

The formula for CAGR is:

A common asset that generate compound growth is stock that doesn’t give dividends. For example, Warren Buffett’s investment vehicle Berkshire Hathaway (ticker BRK.A) had never paid any dividends since IPO in 1980. The 10-year snapshot taken from the monthly chart of BRK.A on TradingView shows that its share price grew from $126,559.88 on 31 Aug 2012 to $421,308.00 on 31 Aug 2022:

Based on these prices, we can compute the CAGR of BRK.A to be (421308/126559.88)^(1/10)-1 = +12.8% p.a. One would realize from the formula that CAGR would be different if we compute based on different beginning and final values across different periods with different number of years in between.

Unlike Compound Interest asset where there is an increase in the principal, we still hold the same number of shares in Compound Growth asset, and the share prices keep changing. One moment we see the shares gained +10% since we bought them, the next moment it may even turn into losses. This kind of uncertainty leads some people into asking the following questions:

• My shares don’t give dividends nor additional units. How does compounding work with no increase in my holdings?
• How do I secure/realize the capital gains from the compound growth of my shares?
• Is it advisable to sell my shares to realize the gain now and buy back later to participate in the next phase of growth?
• If I sell now, what if the share price continues going up and I’m not able to buy back at a price lower than my sell price?
• If I don’t sell now, what if the share price tanks and my capital gain is diminishing or even turning into loss?

A common theme under all the above questions lies in the fact that compound growth is unrealized until we liquidate the investment. Some even called it an illusion.

So, how does compounding work with no increase in our holdings? To answer this question, lets look at what determines the share price. Here I present a quote from Warren Buffett:

Yes, ultimately share price is determined by the value of the underlying business, both the top line (revenue) and bottom line (profit). There will be short term fluctuation of share price, but it will reflect the fundamental business value of the company in the long run.

When a company is profitable, they can either pay out some portion of the earnings as dividends, or plough back the earnings into developing more products, creating better product mix, expanding business into more regions, etc. to grow their business. The latter case is where compounding happens, earnings is used to grow the business value further, generating more earnings to be ploughed back again, and the cycle repeats itself.

To benefit from compound growth, one key factor is the time horizon in holding the asset (Time in Market). Trying to sell high buy low along the way (Timing the Market) proved to be difficult to do consistently for most people.

The essence of Compound Growth is that there is an increase in asset value, but not the units of the asset. Hence, CAGR will change from time to time as the asset value can keep changing over time subject to market supply and demand forces.

Compounding Assets

Lets take a look at some common assets and determine whether it is a compounding asset, and if so, identify the kind of compounding effects they exhibit.

Central Provident Fund (CPF)

This is obviously an asset with Compound Interest. CPF interests are computed monthly and credited yearly. When interests are credited, it increases the principal in CPF accounts, meaning the compounding effect is happening yearly.

Insurance Savings Plan

In recent years, insurance companies began to offer insurance savings plans. Some examples are:

• Singlife Account
• Etiqa GIGANTIQ
• Dash PET

When Singlife Account was first launched in March 2020, they offered an attractive 2.5% crediting rate for the first $10,000 in the account and garnered 40,000 downloads within the first month of release (according to this report). With such successful launch, a few insurance companies followed suit with their own brand of insurance savings plans.

Insurance Savings Plan is an asset with Compound Interest. Its interests are credited monthly, therefore the compounding effect also takes place monthly.

Cash Management Solution

Another popular asset are cash management solutions offered by robo advisors and brokers:

• StashAway Simple / Simple Plus
• Endowus Cash Smart Secure / Enhanced / Ultra
• Syfe Cash+
• MoneyOwl WiseSaver
• SquirrelSave MoneyBox
• Moomoo Cash Plus
• Tiger Vault

StashAway Simple was the first cash management solution launched in November 2019, offering a projected rate of 2.1% p.a. (refer to their StashAway Simple announcement). Many more such products appeared subsequently.

If you read through all the marketing pitch on these kind of products, you might go away with a misconception that they are simple interest-bearing products, similar to bank deposits. Naturally you would think these are Compound Interest asset.

But if you dig a little deeper, you will realize that all of them invest in cash funds (e.g. money market funds, enhanced liquidity funds, short term bond funds, etc.). These are investment products (albeit the lower risk type), not deposit accounts. As all investment come with risk, cash management solutions are not capital guaranteed, and you may suffer losses when you need to withdraw cash.

Therefore, Cash Management Solution is an asset with Compound Growth. Its compounding is based on an increase in the asset value.

Dividend Stock

This kind of asset exhibits both Compound Growth and Compound Interest. The former comes from share price increase (or negative growth if share price decrease), and the latter comes from scrip dividends.

With Compound Interest, the principal is the number of shares owned, and the interest is the scrip dividends given and added to form the new principal for subsequent scrip dividend payouts.

As a side note, if the dividend stock investor opt for receiving dividends in cash instead of scrips, the principal remains the same and there is no compounding effect on the number of shares in the holdings. This is known as Simple Interest, in contrast to Compound Interest.

Exchange Traded Fund (ETF) / Unit Trust (UT)

Exchange Traded Fund (ETF) and unit trust (UT) has become popular investment instruments these days as the fund houses and distribution channels had been driving down the cost of investment to a reasonable level. The investment cost includes Total Expense Ratio (TER) charged by the fund house and brokerage/management fees charged by the distribution channel.

There are 2 types of ETF/UT, the distributing class and the accumulating class. The former would pay out dividends in cash, and the latter would re-invest dividends collected from its underlying shares. Both are Compound Growth assets, but the distributing class is having Simple Interest and the accumulating class is having Compound Interest.

Key Takeaway

• Compounding is a key success factor in long term investing.
• Compounding can happen through interest (Compound Interest) and/or capital gain (Compound Growth).
• The essence of Compound Interest is an increase in the principal.
• The essence of Compound Growth is an increase in the asset value.
• Be patient and give your asset time to compound and grow at an increasing rate.

On the last bullet point, I leave you with another quote from Warren Buffett on Patience:

My Personal Wealth Review and Planning in 2020

In 2020, the COVID-19 pandemic struck, the S&P 500 index suffered the fastest 30% sell-off in its history, and the world went into a fury of chaos and lockdowns. In the midst of such calamity, I set out to do a review on my personal wealth and began to crystalize a financial plan moving forward.

I examined my overall financial portfolio from 2 aspects:
1) Portfolio Allocation
2) Cash Flow

8 Categories of Portfolio Allocation

1) Ready Cash Fund
– target at 3 months of expense budget
– need to replenish regularly
– no hurdle rate to cross
– main consideration is high liquidity
– main vehicles are bank accounts

2) Emergency Fund
– target at 1 year of expense budget
– set and forget unless needed for emergency
– set 2% p.a. hurdle rate to account for inflation
– also prefer high liquidity
– combination of insurance savings plans, fixed income investments

3) Healthcare Fund
– target at prevailing Basic Healthcare Sum (BHS) in MediSave Account (MA)
– interest rate at 4% p.a.
– complement with Integrated Shield Plan (ISP) and MediShield Life / ElderShield / CareShield Life (MSL/ES/CSL)

4) Insurance Fund
– Surrender Value (SV) of insurance policy
– set 3% p.a. hurdle rate
– combination of whole life and endowment plans

5) Retirement Fund
– target at prevailing Full Retirement Sum (FRS) in Retirement Account (RA)
– interest rate at 4% p.a.
– combination of Special/Ordinary Account (SA/OA) withdrawals and CPF LIFE payouts

6) Property Fund
– target at 30% of combined Property/Investment/Trading Fund
– set 4% p.a. hurdle rate
– aim for both capital gain and cash flow (rentals)

7) Investment Fund
– target at 60% of combined Property/Investment/Trading Fund
– set 6% p.a. hurdle rate
– aim for both capital gain and cash flow (dividends)

8) Trading Fund
– target at 10% of combined Property/Investment/Trading Fund
– no hurdle rate to cross, but aim for 12% p.a.
– speculative play, aim for cash flow, but prepare to lose all

2 Categories of Cash Flow

1) Pay Cheque
– intended for needs
– e.g. daily expenses, insurance premiums, loans, tax, bills, transport, medical, etc.

2) Play Cheque
– intended for wants
– e.g. tithes, travels, indulgence, investment, trading, charity, etc.

3-Bucket System

The above 8 categories of Portfolio Allocation are grouped under 3 buckets of funds:

1) Expense Bucket (3-Month Rolling Expenses, Replenish Regularly)
– Ready Cash Fund

2) Emergency Bucket (12-Month Expenses plus Medical & Legacy Needs)
– Emergency Fund
– Healthcare Fund
– Insurance Fund

3) Investment Bucket (Income & Growth, Feed Expense Bucket)
– Retirement Fund
– Property Fund
– Investment Fund
– Trading Fund

Personal Notes

1) Insurance Fund
– main consideration for insurance should be based on protection/legacy needs, rather than Return On Investment (ROI)
– need healthcare/hospitalization insurance to cater for growing medical expenses
– diminishing life insurance needs once we achieve self-insurance with wealth
– Surrender Value (SV) can be considered potential capital for Emergency Bucket and/or Investment Bucket
– monitor ROI of Annual Surrender Value Increment over Annual Premium Paid for consideration of whether and when to surrender the policy

2) Property for Own Stay
– property for own stay is not considered as an asset/investment, but rather a liability (mortgage loan, renovation, maintenance, property tax, etc.) from a cash flow perspective, unless we rent out some rooms with rent covering monthly expenses
– the property’s Mark-to-Market (MTM) value can only be realized on sales, and has to deduct the outstanding mortgage settlement, property agent fees, stamp duty, etc.
– when we sell the property, we will need to buy another property to stay
– if we manage to sell at high valuation, we will probably end up buying the next property at high valuation as well, unless we manage to pick up undervalued property, or downgrade, or rent for the next stay
– main consideration for selecting our own residential property should be convenience, comfort and affordability, rather than ROI
– we can think of HDB flat as a 99-year rent for a roof over our head
– we can unlock tail-end lease value by Lease Buyback Scheme (LBS)
– there are certainly undervalued property in the market, but just like stock picking, we really need to understand property selection well to pick the right property at the right location with the right price to be profitable as an investment

3) Core Satellite Portfolio Investment (CSPI) Strategy
– Core Portfolio investment are strategic, static, global, diversified and long term
– Satellite Portfolio investment are tactical, thematic, geographical, sectoral and mid term
– as a contrast to CSPI, trading are typically speculative, trend following, statistical, risk managed and short term