12 ways to spend that ﬁnancial windfall wisely · review your priorities such as much-needed home...

12 ways to spend that financialwindfall wisely

PUBLISHED JAN 21, 2018, 5:00 AM SGT

Instead of blowing that year-end bonus or profit from a collective sale,use it to clear debts or start an investment plan, advise experts

Lorna Tan Invest Editor/Senior Correspondent (mailto:[email protected])

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THE STR AITSTHE STR AITSTIMESTIMES

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With the year ahead of us, it is an opportune time to review our financial health, ensure that weare on track to achieve our goals and make necessary adjustments.

Buoyed by a booming economy, many are looking forward to a round of hefty salary incrementsand year-end bonuses.

Some of you might be on the receiving end of a handsome windfall, thanks to the unexpectedcollective sale fever that gripped Singapore last year. There were about 27 collective sales with atotal transactional value of more than $8 billion, up from $1 billion in 2016.

Financial experts say it is prudent to resist the tantalising temptation to splurge it all. Before yourush out to make a down payment on a new car or buy that two-carat diamond ring, think abouthow you can use this extra cash for even greater long-term gains and financial security.

"Take the opportunity to do a complete portfolio review and this should include your assets,investments, your loans and insurance policies. Apportion your bonus based on your needs forloan repayment, insurance, investment, and cash holdings which include funds for emergencies,"says Mr Brandon Lam, Singapore head of financial planning group at DBS Bank.

Review your priorities such as much-needed home renovations, family holidays or festivities. Alsoremember to top your Supplementary Retirement Scheme (SRS) account for tax savings, Mr Lamadds.

The Sunday Times highlights 12 financial tips for 2018.

1. Pay off debts with high interest costs Financial experts are unanimous when it comes to whichdebts almost invariably incur the highest interest costs. Focus on clearing off personal debts thatare costly to maintain, such as credit cards, which charge as high as 24 per cent a year.

The trouble with making just the minimum payment on your credit card bill, instead of paying infull each month, is that interest is charged on the principal sum owed. So if you have a $5,000debt against your card for a year, you could end up paying $1,200 in interest alone.

Bear in mind the so-called Credit Limit Management Measure has kicked in since Jan 1. It is aimedat borrowers with unsecured debt, such as personal loans or credit card debt, that exceeds sixtimes their monthly income. Banks will not be allowed to grant any increase in credit limits or anynew unsecured credit facilities to such a person if these cause his total credit limit to exceed 12times his monthly income. Affected borrowers can continue to use their existing unsecured creditfacilities.


To check your outstanding balances and credit limits with all the banks, you can buy a creditbureau report.

For those saddled with heavy debts, check out assistance schemes and repayment plans, such asthe Debt Consolidation Plan (DCP). Under a DCP, multiple debts are consolidated into a singleaccount so borrowers need to pay only a fixed monthly amount to one financial institution,making it easier for them to clear their debts.

Do not bother about investing until you have lowered your debt to a manageable level.

2. Kick-start a savings plan A windfall presents a good opportunity to kick-start a savings plan.Many people prioritise their monthly spending in this order: The biggest item is likely to be themortgage or rental, followed by car loan instalments, utility bills and food. They then scrape thebottom of the barrel to cover the monthly minimum on their credit card bills.

Try a different approach to monthly budgeting: Pay yourself first. Saving

just 10 per cent of your net pay is a good start to accumulating wealth

over time. This will force you to become more frugal and careful in your

spending as the other bills must still be paid. In fact, if you are fortunate

to get a pay rise, putting away the increment each month will go a long way

towards helping you achieve medium-or long-term goals.

#It is a good idea to review your portfolio once a year and consider

rebalancing your plan whenever you go through major life events, such as

getting married or having a baby.

#


Learn about investment products and strategies and start to invest – even in small amounts – regularly,advises DBS’ Mr Brandon Lam.


Try a different approach to monthly budgeting: Pay yourself first. Saving just 10 per cent of yournet pay is a good start to accumulating wealth over time. This will force you to become morefrugal and careful in your spending as the other bills must still be paid.

In fact, if you are fortunate to get a pay rise, putting away the increment each month will go a longway towards helping you achieve medium-or long-term goals.

Mr Vasu Menon, senior investment strategist at OCBC Bank, suggests setting some of your bonusaside into a savings account or time deposit, as unexpected events could hurt the economy or theindustry you are working in, and this in turn could dampen your job prospects.

"The peace of mind that comes with knowing you have sufficient funds to tide you over shouldyou lose your job is priceless," he says.

And if you do not have an emergency fund that can cover at least six months of your monthlyexpenses, your bonus can be used to start one. Aside from the risk of a job loss, the fund can alsohelp you to cover other unforeseen events such as unexpected medical expenses due to an illnessor temporary disability due to an accident, adds Mr Menon.


Use your bonus to start an emergency fund that can cover at least six months of expenses, if you donot have one yet, says OCBC’s Mr Vasu Menon.


MoneySmart.sg editor Mark Cheng recommends opening more than one savings account to savemoney more effectively to meet daily, short-term and long-term goals. "For long-term savings,pick an account that offers better interest rates for you to store and grow your cash... An accountfor short-term goals is something to consider as well," he says.

3. Earn more interest for 'loyalty' savings accounts In the past few years, several banks haverolled out "loyalty" programmes for customers to earn higher interest rates and enjoy directmonthly cashback capped at a certain amount, when they can fulfil some criteria like regularbanking transactions, card spend, investments, and/or salary crediting.

These include the Bank of China SmartSaver, DBS Multiplier account, OCBC 360 account, POSBcashback bonus programme, and UOB One account.

4. Spend your bonus wisely One factor that comes into play is the life stage that you are in.Naturally, a couple planning to get married or a middle-aged couple with children will look attheir bonuses differently from someone who is nearing retirement.

"The first may allocate more cash towards a grand wedding or honeymoon, or even set asidemoney to make the down payment on their matrimonial home. The middle-aged couple mayhave a longer-term plan in mind, and keep the money for their children's tertiary education. Somemay even use the money to settle their debts, like a mortgage, if they are working towards beingdebt-free as soon as possible," says Mr Menon.

Those nearing retirement, on the other hand, may treat themselves to a holiday abroad, providedthey have been diligent in building their retirement nest egg.

If they are still planning for their retirement, then they should probably use the bonus to meetthis objective, like contributing to their SRS account which can yield attractive income taxbenefits, or investing the money into a less risky product that can yield decent returns, he adds.

5. Top up CPF accounts To maximise your nest egg or that of your loved ones, consider toppingup Central Provident Fund (CPF) accounts so as to leverage attractive interest rates andcompounding.

6. Kick-start an investment plan Financial experts advise wannabe investors to map out theirinvestment time horizon, determine a realistic timeframe versus liquidity needs and decide whichasset classes are the most appropriate.


When constructing a portfolio, asset allocation and diversification is key, says HSBC’s Mr Cameron Senior.


Once a holistic financial plan is in place, you will have a framework in which to make futurefinancial decisions, which include knowing how best to optimise your windfall.

To understand the power of compounding interest, use the simple "rule of 72" to calculate howlong a sum will take to double. If the investment return is, say, 10 per cent, then it would takeslightly longer than seven years for an initial investment of $10,000 to double to $20,000. Thenumber of years is calculated by dividing 72 by 10, that is, the rate of investment return.

Mr Lam's advice is to start by learning about investment products and strategies and begin toinvest - even in small amounts - regularly.

If you have sufficient risk appetite, you could adjust your portfolio to higher risk - more exposureto risky assets - by overweighting your investment capital in shares versus in bonds or deposits.But you should always make sure you can afford the losses in worst-case scenarios. Insufficientloss tolerance can affect your morale and judgment so you should always stay within yourtolerance limits. "It is always encouraged to start with a regular savings plan. With a disciplinedapproach to savings or investment, the commitment is fixed regularly and yet takes advantageduring market volatility through dollar cost averaging and achieving diversification," Mr Lamsays.

The POSB Invest-Saver is one such regular savings plan investing in an exchange-traded fund. Itis suitable for consumers who are thinking of investing for better returns but may not have a hugecapital, want to potentially grow their long-term savings for their children or their own retirementfunds and are looking to diversify their portfolio.

7. Review your investment portfolio When constructing a portfolio, asset allocation anddiversification is key, says Mr Cameron Senior, head of wealth and international at HSBC Bank(Singapore). This is because it is very unlikely that a single asset class will deliver the highestreturn all of the time. Therefore combining different asset classes in a portfolio can diversify therisks and improve returns over the longer term.


When refinancing a loan, ensure the total amount saved from doing so exceeds the cost, such as pre-payment penalties, says OCBC’s Ms Phang Lah Hwa.


"The start of a new year is always a great time to review your investment portfolio. Not only wouldyou have a sense of market sentiments given most governments and financial institutions wouldbe providing their outlook for the year... (but) you would also have a clearer view of key lifechanges that will affect you in the year ahead," he says.

Furthermore, review and rebalance your plan as personal circumstances change. It is a good ideato review your portfolio once a year and consider rebalancing your plan whenever you go throughmajor life events, such as getting married or having a baby.

Mr Senior suggests investing into multi-asset funds as these are typically structured to providesustainable returns and ride out market volatility given their exposure to different asset classes,industries and geographic regions. Such funds are one of the more cost-effective ways for retailinvestors to gain access to diversification benefits, he adds.

8. Assess insurance needs Have a thorough audit to assess your insurance plans and cover. Ifboth areas are lacking, you could consider using part of the windfall to pay for the cost of anyadditional insurance coverage.

However, do ensure that any additional regular premiums are affordable and sustainable.

9. Refinance home loans if it results in savings The rising Singapore Interbank Offered Rate(Sibor) has prompted major local banks to raise their home loan rates since November and it islikely that Sibor will continue in an upward trajectory, says Mr Ee-Qiang Baey, head of mortgageat MoneySmart.sg. At the same time, those who want to sign on to a new fixed deposit-linkedhome loan rate are also faced with price hikes.

Refinancing - switching to a loan package that offers lower rates - is a great alternative for thosewhose lock-in periods are ending. However, says Ms Phang Lah Hwa, head of consumer securedlending at OCBC Bank, do ensure that the total amount saved from doing so exceeds the cost,such as refinancing fees, legal fees and pre-payment penalties or if you are able to secure anadditional facility if required. She cautions that interest savings will diminish in a rising interestrate environment.


More home owners tend to perform capital repayment to reduce their loan amount at the start of the year,probably using their bonus or savings, says DBS’ Ms P’ing Lim.


"Most home loan packages come with lock-in periods of two or three years, and there are penaltycharges for redeeming the loan early. Hence, you should refinance your loan only if the savingsfrom the new loan package are significantly greater than the penalty charges," she says. "After thelock-in period, you can choose to refinance with another bank or reprice the loan with theexisting bank, if the cost of switching and the new offering yield savings compared to the existingpackage."

Ms P'ing Lim, DBS' head of deposits and secured lending, says other options to manage yourhome loan commitments include right-sizing your loan amount via capital repayment orlengthening your loan tenor.

She has observed that more home owners perform capital repayment to reduce their loanamount in the beginning of the year, probably using their bonus or savings.

"This is a good practice to reduce your financial commitment especially if these are spare fundswhere you are unable to get a yield higher than your loan rate. Generally, we advise home ownersto use cash instead of CPF funds since CPF pays at least 2.5 per cent and the funds could be usedfor retirement or for a rainy day," she adds.


When picking a credit card, look for one with perks that match categories you typically spend in, saysMoneySmart.sg’s Mr Vinod Nair.


Regardless of interest rate trends, Ms Lim advises anyone with a housing loan to set aside fundsas a buffer against interest rate hikes or any unforeseen circumstances.

"Ideally, home owners should set aside some savings in cash, CPF funds or liquid assets that canbe used to pay their monthly instalments for the next two years. This gives them sufficient time torestructure the loan or even sell the property should they run into any financial issues," she says.

10. Beware of credit traps when stepping up expenses When spending your windfall, ensure itwill not increase your overall monthly expenditure. Do not fall into the trap of making newacquisitions that will be paid by instalments which, when added up, might exceed the originalwindfall - this would eat into other savings.

The fastest way to build your savings is to maintain your regular expenditure when your incomerises and to save most of your annual bonuses.

11.Look out for credit cards that best suit your needs With the wide selection of cards and theirreward schemes, it is no wonder that some people are confused as to which is the best creditcard. The truth is that there is no perfect card, but there is usually one that matches a certainlifestyle, says Mr Vinod Nair, chief executive at MoneySmart.sg.


With the right credit card, cardholders might actually generate more savings with their usual purchases, saysDBS’ Mr Anthony Seow.


He recommends that people first identify their spending categories. Banks have partnershipswith various retailers to bring shoppers the best savings with their purchases.

The next step would be to look at the card's rebate limit. A high cashback rate may appearattractive at first glance, but it is usually capped at a certain point. Lastly, shoppers should findout the minimum spending to qualify for rebates - they should ensure that they are comfortablewith spending that amount each month.

Mr Anthony Seow, DBS' head of cards and unsecured loans, says that with the right credit card,cardholders might actually generate more savings with their usual purchases. "Customers canenjoy card benefits such as discounts, cashback rewards or miles on all their purchases. ThePOSB Everyday Card, for example, offers up to 6 per cent in cash rebates on purchases atmerchants such as SPC, Sheng Siong, Watsons, StarHub and SP Group.

"For those who love travelling, DBS Altitude Card offers the fastest way to earn air miles with upto 3 miles per $1 on your purchases, and points never expire," he says.

It is also prudent to take a close look at the various card fees first. These include annual fees, latefees and interest levied on outstanding debt, says a Maybank spokesman.

12. Live a little While bonuses may be a windfall, pay increases should be viewed as a bufferagainst inflation, says OCBC's Mr Menon.


$ Refinancing a home loan – working out the sums

For those who have addressed their immediate savings and retirement needs adequately, treatyourself a little. After all, your bonus is something you have worked hard for and you deserve toenjoy some of the fruits of your labour, he adds.


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