Elastic VS Inelastic

For many years now, whenever I shop for a pair of bermudas for casual wear, one of my concerns are always whether the waistband is elastic or inelastic. I always look out for bermudas that are elastic as I know if my waist line increases then there is more room for expansion. With elastic waistband I can eat more during buffets. If I put on wait I do not have to immediately run out and start buying new pants. If only somebody can design work pants that are also elastic yet look professional will be ideal. I can still remember the times when I bought Levi's jeans with waistline 32... today I struggle with a 38.. so elasticity is key in my choice.

In economics, whether the demand for an item is elastic or inelastic will determine how much price will affect the demand of it. Meaning if the demand for an item is inelastic, no matter how high the price the demand will still be there. Just like my bermudas if waistband not elastic then when waitline increase then will have to buy knew ones, no choice...

But of demand for a good or item or service is elastic then with increase in prices then demand will drop. Just like the case of my elastic waistband bermudas, if the waistline increase it does not matter I just have shorter strings to tie but still can wear for some time.

We have been taught that some of the things that has inelastic demand are cigarettes, alcohol, healthcare and probably funeral services. There probably are more but these are blatant examples. As you can see cigarettes have increased in price from a mere $3.50 in my first memory to about $11.00 today yet there is no lack of smokers. Same as alcohol and I do not have to say much about healthcare and funeral services.

But in Singapore, I have noticed that there are 2 other items that has also inelastic demand, cars and property. Its amazing how much people will pay for a piece of paper that is only valid for 10 years and you cannot even wipe your backside with after the 10 years. That piece of paper coast about $80,000 today. But when you ask the same people to set side $8,000 per year for the next 10 years for a potential return of 5% they think I am crazy.... 

$80,000 buying a COE, value after 10 years = $0

$8,000 set aside per year @ 5%, value after 10 years = $100,623

But of course I do agree that having a car is a necessity especially if you have kids and all.

I read about how LTA came up with the COE scheme and all because they use behavioural economics. Read all about the report here. They used chocolates as example to justify the need to charge for zoning of restricted zones and all. Chocolates and congestion what is the relationship!!?? The rationale is that if you have free chocolates, people will take the free chocolates but if you have to pay for the chocolates then less people will take.

The research have been done on a very shallow basis without taking into consideration of many other factors. For example the culture and tradition of Singaporeans. Singaporeans are still very much conscious about face and status. And 2 of the items that can fully express your status is a car and a big property or the number of properties you own.

I remembered that when I was younger my grandmother use to tell me in hokkien: more important to have big car then big house cos more people can see the car but not the house. 

So because of face many will still buy a car as a status symbol. And not any ordinary car but a big one. In Marketing there is something called the perfect price discrimination strategy, people like Toyota has come out with their luxury brand Lexus, so that they can capture all the market. On a budget buy Toyota, want to express status buy a Lexus. That is exactly how our COE is heading and yes that should be it.

But what I cannot fully comprehend is the need to have Motorcycle category. Ok so its a perfect price discrimination strategy so we also charge motorcycles but in the latest COE bidding it has been raised to $2700 up by 30%! Why? Are motorcycles now causing the congestion? But Tang relative to a car still cheap what? Yes but its the principal, the principal of COE is reduce congestion but motorcyclist taking less space on the road causing almost no congestion (unless in an accident) is slapped with higher COE? 

Ok I am somebody driven by principal and that is also why there is an internal struggle now for me to purchase a Sony PS4. I had chose to purchase a Sony PS3 in the past because they never charged for online gaming but the Xbox 360 did. But with the launch of the PS4 online gamers has to purchase a subscription.... contemplating switching back to PC....

Anyway, LTA should think out of the box to solve their congestions rather than just taking money.... unless they have already understood the inelasticity of Singaporeans car demands.

Matter of Life and Death

Many people have said that buying an insurance is not because someone is dead but more importantly there are people who are living. Over the past 2 weeks, I have seen and known of 2 deaths that has happened. RIP.

Its common for people to say RIP or rest in peace when deaths occur. The dead will rest in peace but will the living be in hell?

It is almost impossible for any families today to be earning only one income and having one income taken away unexpectedly is a nightmare for the living.

As an adviser, I have always advocated that financial planning be done as a family. And the usual exercise is done like this:

1. Ascertain total household expenses
2. Ascertain each income earners share of expenses
3. Ascertain how long will the surviving partner adapt to not having the other's income
4. Ascertain total amount of coverage needed for each income earner
5. Collate existing policies
6. Ascertain shortfall of coverage after taking into consideration of existing policies
7. Recommend solutions

With the steps taken above the surviving partner knows exactly what to do when an emergency happens. The surviving partner can be at peace financially knowing that the planning has been done.

Lets put into perspective:

Lets assume John and Mary is married. Their total household expenses is $2000. Yes I hear you.. its more than that but I use $2000 as an assumption.. can? I usually will breakdown these expenses into things like utilities, kids education, transportation, groceries, etc

Anyway, both of them contribute 50/50 to this $2000. Therefore the share of John is $1000 and Mary is $1000 towards the household expenses. After much discussion they feel that they will like to cover about 10 years of not having the other person around (this figure is an assumption and differs from every family).

With that using the simplest of calculation, we take $1000 x 12 x 10. Which means each of them should have a coverage of $120,000 covering each other so that in the case of premature death occuring the surviving partner will be at peace that there will be 10 yrs of $1000 per month (this calculation does not take inflation into consideration).

After going through their policies, Mary has an existing coverage of $50,000 and John has none (typical). Therefore, Mary should get $70,000 more coverage and John $120,000.

The solution that will be provided is dependent on what preference has each of them have. The few categories that can be considered are:

1. Term: high sum assured, low premiums, no cash value
2. Traditional whole life: higher premiums (pay premiums whole of life), lower sum assured, accumulated cash value
3. Limited pay whole life: highest premiums (pay premiums for limited time), lower sum assured, accumulated cash value
4. Investment Linked Whole Life: cheaper premiums than whole life plans, high sum assured, cash value determined by investments in funds.

Depending on what kind of plans John and Mary prefer, the solution will be presented. Affordability is also a factor that is contemplated here.

So these are the steps that will make the term RIP more meaningful. So sit your partner down, start taking out your policies (if you have a sensitive nose, be careful it usually dusty), collate your expenses, start talking to your partner about how long they will need to adapt not having you around. Do the simple calculations and see if you have any shortfall.

If its too much trouble, call me.. I do this as my job. And I assure you I do not charge.. yet. I can also email you a simple spreadsheet to help you do the above calculations just be you keying in all your figures. So email me, tngjinyau@gmail.com, it's free..

2014 Whats Your New Year's Resolution

Some days into 2014. Have you made your resolutions? Or these things ain't popular anymore? Anyway, I made mine. This year is about reaching out to as many people as possible and ensuring they have a basic knowledge of financial planning. And what better way then to reach out from here! So the first topic to share on is retirement planning since it was the last few things I shared on in 2013.

In my last post about the impossibilities to retire in Singapore. I mentioned about setting aside monies early for retirement. But how much? Where? Why? How?

To first answer the whys the where and how much will fall into place..

Then why? Well inflation is what u should be concerned about. My usual story of kopi o costing 50 cents 10 years ago and it costing about 90 cents today, inflation 4.13% per year for the past 10 yrs. So which means if inflation carries on at 4.13% the next 10 years. Your kopi o will cost $1.35 in 10 years time. Put that same 90 cents into a savings instrument of 0.05% returns, 10 years later it becomes $0.9045... cannot buy kopi o in 10 years time.

So if we put it into perspective. If your expenditure per month now is $1000 (not inclusive of holidays, car instalment, petrol, ERP, road tax, utilities, future kids school fees, phone bills, cable modem, cable tv, credit card bills...) and you intend to retire in 30 years time. Inflation is at 4%. You will need $3,244 per month at retirement. And based on our current life expectancy, you probably have another 20 yrs of retirement. Calculating very simply you will need $38,928 (not including more frequent visits to the hospital, medical bills, holidays, golf membership fees, high teas, property tax more than 1) per year for retirement. And to ensure this amount last for the next 20 years. You should have $778,560* at the point of your retirement.

Disclaimer
* this figure is based on you having expenditure of 1000 dollars now and no change in spending habits till retirement (scrooge!) with inflation rate at 4%. This does not constitue as a recommendation but a recommendation to call me.

The above calculation will answer how to plan for retirement.

How much to set aside will be dependent on where you put your monies. Leave it in a savings instrument that gives you 0.05% you will need to set aside $2146 per month to achieve $778,560 in 30 years time.

Put into endowment giving you 3% you will have to set aside $1324 per month.

Put into a medium risk investment giving about 5% you set aside $930 per month.

So where and how much will be dependent on your propensity to take risk. Not a risk taker set aside more in lower returns instruments. Risk taker take higher risk. But not all investment vehicles are sound. So enter with your eyes wide open.

So some of you may already have portfolios that may include many assets. Are those assets helping you to achieve your financial objectives? How risky are your assets or your strategy? Have you compiled your portfolio and determined their rate os return?

If you are an individual reading this please share with your friends. If you and a group of friends will want to learn more about detailed calculations for yourself, organise a group and email me. If you are an employee thinking a topic like this will be great for a self improvement talk in your office email me too. Tngjinyau@gmail.com

This is my first step achieving my resolution for the year. More importantly having a first step is an action. Have you actioned on your resolution? Is this years resolution the same as 2013.. if it is then action is what is lacking. Have a great 2014 ahead and stay tuned!