How To Get Your Personal Finances In Order

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Read this before you re-finance your home.

One of the most important decisions a homeowner will have to make when deciding to re-finance their home is whether they want to refinance with a fixed mortgage, an adjustable rate mortgage (ARM) or a hybrid loan which combines the two options. The names are pretty much self explanatory but basically a fixed rate mortgage is a mortgage where the interest rate remains constant and an ARM is a mortgage where the interest rate varies. The amount the interest rate varies is usually tied to an index such as the prime index. Additionally there are usually clauses which prevent the interest rate from rising or dropping dramatically during a specific period of time. This safety clause provides protection for both the homeowner and the lender.

Advantages of a Fixed Option

A fixed re-financing option is ideal for homeowners with good credit who are able to lock in a favorable interest rate. For these homeowners the interest rate they are able to retain makes it worthwhile for the homeowner to re-finance at the new interest rate. The major advantage to this type of re-financing options is stability. Homeowners who re-finance with a fixed mortgage rate do not have to be concerned about how their payments may vary during the course of the loan period.

Disadvantages of a Fixed Option

Although the ability to lock in a favorable interest rate is an advantage it can also be considered a disadvantage. This is because homeowners who re-finance to obtain a favorable interest rate will not be able to take advantage of subsequent interest rate drops unless they re-finance again in the future. This will result in the homeowner incurring additional closing costs when they re-finance again.

Advantages of an ARM Option

An ARM re-finance option is favorable in situations where the interest rate is expected to drop in the near future. Homeowners who are skilled at predicting trends in the economy and interest rates may consider re-financing with an ARM if they expect the rates to drop during the course of the loan period. However, interest rates are tied to a number of different factors and may rise unexpectedly at any time despite the predictions by industry experts.

A homeowner who can predict the future would be able to determine whether or not an ARM is the best re-financing option. However, since this is not possible homeowners have to either rely on their instincts and hope for the best or select a less risky option such as a fixed interest rate.

Disadvantages of an ARM Option

The most obvious disadvantage to an ARM re-financing option is that the interest rate may rise significantly and unexpectedly. In these situations the homeowner may suddenly find themselves paying significantly more each month to compensate for the higher interest rates. While this is a disadvantage, there are some elements of protection for both the homeowner and the lender. This often comes in the form of a clause in the terms of the contract which prevents the interest rate from being raised or lowered by a certain percentage over a specific period of time.

Consider a Hybrid Re-Financing Option

Homeowners who are undecided and find certain aspects of fixed rate mortgages as well as certain aspects of ARMs to be appealing might consider a hybrid re-financing option. A hybrid loans is one which combines both fixed interest rates and adjustable interest rates. This is often done by offering a fixed interest rate for an introductory period and then converting the mortgage to an ARM. In this option, lenders typically offer introductory interest rates which are extremely enticing to encourage homeowners to choose this option. A hybrid loan may also work in the opposite way by offering an ARM for a certain amount of time and then converting the mortgage to a fixed rate mortgage. This version can be quite risky as the homeowner may find the interest rates at the conclusion of the introductory period are not favorable to the homeowner.

Understanding CPF

A lot of people that I have talked to seem to have very limited knowledge of a place that they have most of their money at, the CPF. Most of us take it like its a saving account for buying flats and so for

Central Provident Fund (CPF) is a comprehensive social security savings plan that provides working Singaporeans with a sense of security and confidence in their old age.

Working Singaporeans and their employers make monthly contributions to the CPF and these contributions go into three accounts:

• Ordinary Account - the savings can be used to buy a home, pay for CPF insurance, investment and education.
• Special Account - for old age, contingency purposes and investment in retirement-related financial products.
• Medisave Account - the savings can be used for hospitalisation expenses and approved medical insurance.

More info on contribution rates can be found here.

The real amount you need for retirement

Ever thought of how much do you need for your retirement?

Below table is extracted from CPF. it shows an estimation of how much you would probably need to have when you retire.

Many after looking at the table would say

“1 or 2 million would definitely be enough for me, but how am I ever going to have that much money?”

Fret not, the simplest thing to do is to talk to a financial planner and work out a solution together.

Why do we need to plan?

Have you ever wondered what will happen if

you suddenly lose your current job
you met with an accident which leaves you unable to work for months or worse permanent
your wife informs you that you’re going to be a father with a big grin
you need a bigger house as your child is grown old enough not to sleep in your bedroom

Will you have enough money to overcome all these little setbacks in life?

Planning your finance does not plan only for those foreseen expenses and should also involve planning of those “what if” situations.

However knowing the importance of personal financial planning, many people will still come up with “reasons” like

“Aiyah, we are not rich enough to do financial planning. We do not have that much money to make such grand plans for our future anyway.”

“Planning is difficult and time consuming, I don’t have the time.”

The truth is the tighter your budget is the more you’ll need to micro-manage your income/expense.
Planning of your finance is NOT difficult at all, it can starts as simple as managing personal cash flow to knowing exactly how much we need for later part of our life. eg. marriage, child’s education, retirement etc.

it can be as simple as the 4 steps below,

1. Assess your current financial situation.
2. Set your financial goal.
3. Plan how you’re going to achieve your goals.
4. Follow through what you have planned.

You are strongly advised to a financial planner to further enhance your plan in knowledge extensive areas like risk management, investment planning, tax planning, estate planning etc.