Ownership of virtually anything gives us a sense of security. The feeling of having ‘stuff’ to one’s name is oddly satisfying. We all want to own things; it’s only human nature to be materialistic. But having cash on hand is crucial, if not more important than possessions.
Nevertheless, there are many reasons as to why we want and even feel the need to own things.
For most of our parents, it’s to sleep well at night. Knowing that even if the economy were to collapse the next day, we are not worried about sleeping on the streets or eating grass. That’s the more down-to-earth mindset most Singaporeans have.
But there are also another group of people, not just in Singapore, who own things for the sake of attention. As human beings, we need to feel validated and acknowledged by the people around us. And what better way to get validation and acknowledgement than owning a fancy car and branded apparel? Who cares if I have to pay for credit – that’s a problem I’ll have to worry only at the end of every month.
Everyone has their own possessions. Anything we bought or inherited is considered an asset. All assets have value, though not fixed and differs across individuals and markets. The value of any given asset also changes over time, for better or worse.
Herein lies the problem about assets: the value is not fixed and appreciates or depreciates over time. Arguably, the value of cash is the same, too, because of the fluctuations of currencies.
But cash is accepted across the world, unlike assets. Assets are required to be converted to cash in most cases. Thus, someone with $100,000 in cash would be in a better position than someone with $100,000 in pure assets, especially in unexpected situations.
Don’t confuse assets with liabilities
Most people commit this common mistake: purchasing an asset by taking up a loan, thinking it is ownership. They fail to see that they’re taking on a liability rather than owning an asset. House, car or TV can only be considered an asset we own after we’ve paid off the loan if we took up one.
We might have the keys to our HDB flat, but if we are unable to pay off the housing loan, we would need to give the keys to the government or the bank who gave us the loan. As long as we still have the debt on our shoulders, our house will continue to be a liability.
Our houses are not necessarily assets
However, even after paying off our housing loan, our first house is not necessarily an asset and definitely not an investment, at least not anymore.
There is a good reason why most Singaporeans think a house or piece of property is one of the most no-brainer investments. Most of our parents – the baby boomers – would make a decent profit if they were to sell their houses now. A landed property or HDB flat in the past cost merely a fraction of today’s prices.
But now, as shown in the graph above, inflation and the housing price index are experiencing slow growth, which by the way, are correlated. As with most (if not all) developed countries, the rate of economic growth is naturally slower than when any country is developing.
It’s easier for any country to boast double-digit growth when their economy is small. When opportunities from the rest of the world saturate in one or a few countries, naturally growth will be exponential. China is a great example – double-digit growth was the norm until recent years as they grew to the world’s second largest economy. Now, growth is relatively smaller just because of the sheer size of China’s economy.
Singapore’s government recognises Singapore’s difficulty in achieving growth now and in the future too. As such, inflation will be slower, and housing prices will continue to face pressure. The chances of buying a house now and cashing out five or ten years later are a lot lower than in the past.
Don’t underestimate loans and debts
Other than a housing loan, we take up loans to buy other consumer-related products, such as cars and expensive household items. Of course, it feels and looks good to have a car to drive, a comfortable massage chair to rest in, while watching a huge television screen.
But just like a housing loan, as long as we haven’t paid the full price of anything we have, all of those items are nibbling at our bank accounts.
According to ValuePenguin, whose statistics are based on “combined data from the Department of Statics Singapore and other government agencies”, annual personal loans are hovering above $50,000 as of 31 December 2016, up from just slightly above $20,000 a decade ago.
Considering the median gross monthly income from work (including employer CPF contributions) of full-time employed residents is $4,056 in 2016, a $50,000 personal loan doesn’t seem huge.
But consider the interest over time. Also, if the indebted person pays the debt with 20 percent of his or her monthly salary, it would take 63 months or more than five years. Allocating 20 percent of a $4,000 monthly salary is considered optimistic; if the person pays with just 10 percent, it will take more than ten years, exclusive of interest.
We still need cash to live
Even then, with a fully-paid house, cash is important for a comfortable life. We wouldn’t want to be in a similar position like these “asset rich but cash poor” retirees.
That is why we advocate the importance of having an emergency fund or a “war chest” as some Singaporeans might put it.
Regardless whether we’re earning $2,000 a month or $10,000 or even more a month, having savings and an emergency fund stashed away in a liquid bank account is the most important measure everyone should take.
Before thinking about luxury, we must first ensure our survival. Even then, we must think of ways of growing our money even while we’re sound asleep at night. That’s how we can ensure the security and comfort of our loved ones.
We’re holding an investment seminar this coming 16th September 2017 (Saturday), where investment experts who had been through multiple economic cycles will share their insights and advice.
They’ll be covering topics on personal finance, macroeconomics and investment strategies to help retail investors make more shrewd decisions especially in the current uncertain and volatile economy. Click on the button below to learn more and grab your early bird tickets before 16 August 2017. See you there!
P.S. Don’t forget to enter promo code “SHARES10” for a $10 discount!