Singapore just celebrated its 42nd birthday. One concern
raised by Singapore's Prime Minister is the widening income
gap between the Rich and the Poor.
If you look around, you may realize that there is a trend
that the Rich Get Richer while the Poor Get Poorer. Why?
Actually Singapore is currently having one of its best
golden years in history, with opportunities abound, it is
possible for someone who is not Rich to BECOME Rich.
Can someone who is NOT rich become Rich? Yes, it is
possible. One of the SECRETS why the Rich get Richer is
that the Rich UNDERSTAND and USE Other People's Money
(Financial Leverage).
How can you use Other People's Money (OPM) to become Rich?
One possible way is to use good debt wisely.
The Good Debt that almost everyone has access to is a
Housing Loan.
P.S. please avoid all bad debt. My definition of bad debt
is any debt that you incur which you do not have a chance
of making more money than the interest you pay is bad debt.
What is my definition of Good Debt? Good Debt is any debt
whereby it is possible to get a higher return than the
interest you pay on the Loan.
If you really think about it, Housing Loan is the CHEAPEST
Loan anyone can ever get. Currently in Singapore, Housing
Loan interest rate is 3% to 4%, while Car Loan is about 6%,
Renovation Loan 8% and Credit Card 24%!
Actually, if one seriously think about it, it is very
difficult for people to FAIL to beat Housing Loan interest
rates. Why?
Imagine even if you know nothing about investing. Just
putting money into Endowment savings plans gives you annual
returns of about 4% over a 20 years period.
What about investing during crisis? Typically, a crisis
comes by every few years and at least once in 12 years.
During the last Asian crisis in 1998, DBS's share price was
only $5, if someone only invest during a crisis when share
prices are depressed, it is almost definite that the
returns he earns will beat the interest rates charged on
Housing Loans. Today, this person can easily sell off DBS's
shares at over $20 (or 400% returns over 10 years or annual
COMPOUNDED returns of 14.86%.
Let me show you an example:
A person has a $200,000 loan with 20 year loan period.
Assuming he pays 4.5% interest on Housing Loan, total
interest paid over 20 years is ONLY S$105,515.
If he has $200,000 Cash/CPF and use this money to earn 3.5%
interest rate, in 20 years, total interest he earns would
be S$168,453.20!!!
Because most people forget that Housing Loan interest is
calculated on Reducing Balance Basis while your savings
Compounds (interest is added on interest)!
I have to reiterate that from my observation the reason why
many people end up retiring with a fully-paid house and
little Cash/CPF are:
1. they commit to buy TOO big a house (more than they can
afford).
2. they keep using their Cash to reduce/pay off their
Housing Loan whenever they have excess cash on hand.
They would get ahead financially if they instead FOCUS on
making their Cash/CPF work harder for them.
By doing so, it's possible for an average Middle Class
Singaporean to accumulate S$1 million dollars by age 40.
Anyone who has excess Cash now I would advise you against
using the money to reduce your Housing Loan outstanding. In
my opinion, the next Global Financial Crisis can be 3
months to 2 years away and when the crisis comes, you would
then realise it is very easy to make 50% to 200% returns on
your capital. I've already shown you actual record of share
prices in the previous Asian crisis to prove that it had
happened before. The only question you need to ask yourself
is when a crisis comes, will you have cash to invest then?
You can move up from middle class to become Rich in the
next crisis if you keep your excess cash instead of use it
to reduce your loans now.
----------------------------------------------------
Dennis Ng is a Certified Financial Planner with 15 years of
Bank Lending experience. He is known as a Housing Loan
expert and often quoted in newspapers. He founded
http://www.HousingLoanSG.com - a leading mortgage
consultancy in Singapore. You can send him your comments to
dennis@HousingLoanSG.com or call him at 65 6737 8801.
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