21 Sep 2007, ST
By Chua Mui Hoong
A FEW months back, I was at a lunch with some people when the topic shifted to property and finances.
'I'm debt-free,' I said proudly. 'I know the property market is going to go up and I feel itchy to buy a place. But I don't like the idea of having another mortgage.'
The lawyer said: 'But why? Debt is good! Take up a mortgage! I love mortgages!'
I am the youngest child of immigrant parents, who imbibed the work-hard, save-money ethic of our China-born parents.
For years, a big chunk of my annual salary bonus went towards paying down my mortgage. Before I hit 35, the mortgage was paid up.
But recently, I've begun wondering if the work-hard, no-debt ethic I subscribed to in my youth is the smartest from a financial point of view.
With interest now focused on the Central Provident Fund and its rate of return, MPs this week pressed the Government to start a financial literacy programme so citizens know better how to manage their money.
There are things about finance I wish had known about when I was in my 20s, and stuff that I'm still trying to figure out today.
For starters: Is debt good, or bad?
My parents would say it's terrible. In my first 38 years, I also thought so.
Debt is what happens when you spend more than you earn and need to borrow to make up the difference. Or debt is for people with no money who need something to tide them over.
But nowadays I'm hearing that debt is good.
People talk about leverage - which is when you borrow money at a low interest rate, say 2 per cent, and you use it to buy something that gives you a higher return of, say 5 per cent.
Before you rush off to buy that Cartier watch on your credit card, I should add that there is good debt and bad debt.
Good debt is money you borrow to make more money. Bad debt is money you borrow to spend money.
The world is divided into two kinds of people: those with a high propensity to consume, and those with a propensity to save.
As the lawyer friend noted of his own propensity to consume: 'Credit card debt outlasted all the luxury goods I purchased.'
It is of course bad to get into debt for over-spending.
But the other type of people are not much better. This is the group with a high propensity to save, to whom salting away a little something from the monthly pay packet is second nature.
You would think saving is great. But the truth is, saving is pointless unless you put the money somewhere where it grows faster than inflation.
Otherwise you might as well have blown the money on that sports car and at least got psychic satisfaction from being seen at its wheel.
So, don't overspend your money, but it's okay to borrow money to make more money.
So there you are: a neat little maxim I wish someone had explained to me when I was 22.
Another maxim I wish I had known is this: When it comes to investing, never trust your feelings, your intuition, your gut feel, your 'sense of the market'.
Back in the heyday of the dot.com boom, I put $10,000 of my hard-earned savings into an Internet fund. The Internet is the trend for the future, I told myself. It is good to own stock in Net companies.
Within a year, it tanked.
'Mmm, it's cheaper, maybe I should buy some more,' I mused.
Luckily, wiser friends warned me: 'Don't throw good money after bad.'
When I finally switched out of that fund, it had sunk to about $3,000.
I consider the $7,000 I lost tuition fee for an expensive lesson: Don't invest based on 'trends' or personal sentiments.
When the biotech craze rolled around, I sniffed. No way was I going to buy into a narrowly focused sectoral fund based on 'trends' again.
The third thing I wish someone had told me is that 'investing' is not a big word.
I used to think 'investing' was what you did when you had saved up tens or hundreds of thousands of dollars. I was busy paying off my mortgage and so did not have that much surplus cash to 'invest'.
These days, I know that you can set aside as little as $100 a month and channel it into a diversified fund for investment.
The advantage of regular savings plans is that you spread out market timing risks. Some months you buy into a fund when it is high, some months when it is low. The risks average out, more or less, compared to if you plonk down thousands at one go.
If I had been smart enough to set aside just $100 a month from my 20s, and invested it in something that yielded 5 per cent, I would have nearly $45,000 20 years later, thanks to the power of compound interest.
In Singapore, financial literacy education is still in its infancy, with the Monetary Authority of Singapore and Singapore Exchange organising some programmes.
In Australia, the Financial Literacy Foundation was set up by the government in June 2005 to consolidate efforts in this area. It has a website, organises media campaigns, and supports training in this area.
Amid the plethora of pressing social issues demanding attention, it is easy to put aside the need to educate people about how to manage their own finances.
But as the debate on CPF changes shows, lack of knowledge creates misunderstanding. Ill-informed citizens make bad choices about their retirement options.
Financial literacy is an under-taught skill that will make more difference to the average Tan Ah Teck's life than learning the properties of sine and cosine.
By Chua Mui Hoong
A FEW months back, I was at a lunch with some people when the topic shifted to property and finances.
'I'm debt-free,' I said proudly. 'I know the property market is going to go up and I feel itchy to buy a place. But I don't like the idea of having another mortgage.'
The lawyer said: 'But why? Debt is good! Take up a mortgage! I love mortgages!'
I am the youngest child of immigrant parents, who imbibed the work-hard, save-money ethic of our China-born parents.
For years, a big chunk of my annual salary bonus went towards paying down my mortgage. Before I hit 35, the mortgage was paid up.
But recently, I've begun wondering if the work-hard, no-debt ethic I subscribed to in my youth is the smartest from a financial point of view.
With interest now focused on the Central Provident Fund and its rate of return, MPs this week pressed the Government to start a financial literacy programme so citizens know better how to manage their money.
There are things about finance I wish had known about when I was in my 20s, and stuff that I'm still trying to figure out today.
For starters: Is debt good, or bad?
My parents would say it's terrible. In my first 38 years, I also thought so.
Debt is what happens when you spend more than you earn and need to borrow to make up the difference. Or debt is for people with no money who need something to tide them over.
But nowadays I'm hearing that debt is good.
People talk about leverage - which is when you borrow money at a low interest rate, say 2 per cent, and you use it to buy something that gives you a higher return of, say 5 per cent.
Before you rush off to buy that Cartier watch on your credit card, I should add that there is good debt and bad debt.
Good debt is money you borrow to make more money. Bad debt is money you borrow to spend money.
The world is divided into two kinds of people: those with a high propensity to consume, and those with a propensity to save.
As the lawyer friend noted of his own propensity to consume: 'Credit card debt outlasted all the luxury goods I purchased.'
It is of course bad to get into debt for over-spending.
But the other type of people are not much better. This is the group with a high propensity to save, to whom salting away a little something from the monthly pay packet is second nature.
You would think saving is great. But the truth is, saving is pointless unless you put the money somewhere where it grows faster than inflation.
Otherwise you might as well have blown the money on that sports car and at least got psychic satisfaction from being seen at its wheel.
So, don't overspend your money, but it's okay to borrow money to make more money.
So there you are: a neat little maxim I wish someone had explained to me when I was 22.
Another maxim I wish I had known is this: When it comes to investing, never trust your feelings, your intuition, your gut feel, your 'sense of the market'.
Back in the heyday of the dot.com boom, I put $10,000 of my hard-earned savings into an Internet fund. The Internet is the trend for the future, I told myself. It is good to own stock in Net companies.
Within a year, it tanked.
'Mmm, it's cheaper, maybe I should buy some more,' I mused.
Luckily, wiser friends warned me: 'Don't throw good money after bad.'
When I finally switched out of that fund, it had sunk to about $3,000.
I consider the $7,000 I lost tuition fee for an expensive lesson: Don't invest based on 'trends' or personal sentiments.
When the biotech craze rolled around, I sniffed. No way was I going to buy into a narrowly focused sectoral fund based on 'trends' again.
The third thing I wish someone had told me is that 'investing' is not a big word.
I used to think 'investing' was what you did when you had saved up tens or hundreds of thousands of dollars. I was busy paying off my mortgage and so did not have that much surplus cash to 'invest'.
These days, I know that you can set aside as little as $100 a month and channel it into a diversified fund for investment.
The advantage of regular savings plans is that you spread out market timing risks. Some months you buy into a fund when it is high, some months when it is low. The risks average out, more or less, compared to if you plonk down thousands at one go.
If I had been smart enough to set aside just $100 a month from my 20s, and invested it in something that yielded 5 per cent, I would have nearly $45,000 20 years later, thanks to the power of compound interest.
In Singapore, financial literacy education is still in its infancy, with the Monetary Authority of Singapore and Singapore Exchange organising some programmes.
In Australia, the Financial Literacy Foundation was set up by the government in June 2005 to consolidate efforts in this area. It has a website, organises media campaigns, and supports training in this area.
Amid the plethora of pressing social issues demanding attention, it is easy to put aside the need to educate people about how to manage their own finances.
But as the debate on CPF changes shows, lack of knowledge creates misunderstanding. Ill-informed citizens make bad choices about their retirement options.
Financial literacy is an under-taught skill that will make more difference to the average Tan Ah Teck's life than learning the properties of sine and cosine.
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