Prepaying your mortgage vs. investing
Interestingly, I wrote about this something back in June as I was going into On9 Systems full time.. Had a discussion over dinner at Dempsey Hill with some friends and the question came up again as it seemed that by making extra payments, the loan term would get shortened. Is there a good way to determine this? There is just such a calculator that can help in the link below. Guess everyone had different financial situations and resources but think we’re still got to stick to the 30 year loan for now. Guess I’ll review on an annual basis just to see where we are.
How do you build your emergency fund?
Its taken awhile but have finally attained my goal of building an emergency fund of a years worth of expenses for us. I’ve read about many ways to do so but The Digerati Life gives a pretty good summary of 5 different ways. #3 would be something we belong to currently and #4 something to move towards. I sincerely hope none of my friends are using #1 since 24% per annum on late charges is really like gambling your money away.
#3 Using a standalone cash account separate from your investment portfolio: the traditional Emergency Fund
Link to 5 Different Ways To Build An Emergency Fund » Silicon Valley Blog About Money
Good question if you own a home – Pay mortage or invest?
Our home is a modest 4-room HDB flat we purchased a year and half ago. Not wanting to overstretch ourselves financially, I insisted on getting a place we could easily afford versus just barely affording and maxing out all our CPF contributions for the loan repayment. I’m pretty much of the opinion that with the crazy prices of homes now, it’s silly to engage oneself with a HUGE loan just for the potential of selling it for profit many years down the line. Its like gambling with being bankrupt or being rich eventually. Of course, if one has the funds to pay off mortage loans for 2-3 years before a purchase, please go ahead and get even richer 
Back to our home, with HDB’s 2.6% interest on a 30 year loan, it definitely makes it also a lot easier to shell out the $657 in loan repayments every month. At this amount, even if one of us should need to take a break from working, the other wouldn’t have any problem supporting the loan. Taking into consideration this figure and our cashflow, I’ve also set aside an additional $300 a month towards the repayment of the loan. After about a year and a half, I’ve been wondering about whether to keep it invested in a higher yielding instrument (have yet to find something suitable) or to quickly make a lump sum payment (Dad advises against it).
Is it better to invest or to prepay a mortgage? Neither answer is wrong — there are advantages and disadvantages to both.
Source: Ask the Readers: Is It Better to Invest or to Prepay a Mortgage? ∞ Get Rich Slowly
After doing some reading on the topic, I came across a great research article at Get Rich Slowly that mentions the various advice from financial planners. For my own case, liquidity is rather important as running On9 Systems is pretty much like having a kid who needs the occasional big expense/investment. Kinda funny how couple of years back, I wouldn’t really be thinking so much about finances whereas nowadays, everything goes into Microsoft Money I guess the best option would be to save (more), make sure emergency funds are well stocked for both of us and to try not to make big ticket purchases for the time being (like getting a car or even moving to a bigger place).
How to know how much you will save?
I’ve been setting up about $300 a month towards repayment of our flat and was wondering based on an interest rate of 2.08% (Maybank iSAVvy Savings Account), what would the savings be at the end of 5 years? This link just has the right tool to do the job (Link to Saving for a Goal Tool).
Total payments = $300 * 12 * 5 = $18,000.00
Total amount after interested (monthly compound interest) = $18,952.02
Of course, an instrument with a higher interest rate would be even better so shall keep a lookout for something that isn’t too risky
Which Should You Choose: Joint or Separate Finances? ∞ Get Rich Slowly
Any system in which the partners are open about their money habits is a good one. Ultimately, it comes down to this: Do what works for you.
Source: Which Should You Choose: Joint or Separate Finances? ∞ Get Rich Slowly
Pretty interesting read over at “Get Rich Slowly” on joint or separate finances for couples. In our case, Yh and myself started out having a joint account that we both agreed to contribute a fixed amount each month that could be used to finance various purchases (especially for our wedding and home last year).
We actually had the account open when we were dating (around Jan 2005) as I had learnt a very good tip from an ex-colleague at NEC. That having a joint a/c makes it easier to spend on stuff when we do things together since we will both have to think about the purchase and not have one person feel like they are constantly paying for things.
Its been 2 years since and I’m glad we had such a system when we didn’t have to dig too deep into our own pockets to finance the furniture and wedding stuff. Now that we’ve finally completed our last installment, it’s time to channel some of the savings towards a higher interest account. (Maybank’s iSAVvy Savings Account is a good choice).
Dave Ramsey Says ‘Drive Free, Retire Rich’ ∞ Get Rich Slowly
I guess most of us reach a stage where getting a car to get around seems necessary. I’ve also been hit by the bug (tiny way) since am running around for meetings a lot more but then when I do the finances, it seems rather silly to pay 3.5% interest of a car finance loan when we still have a house loan (with a concessionary rate of 2.6%) to pay off?
Seeing as how my preferred car would be the Honda Civic, that would mean a loan of at least $65k at a repayment of $731/month for 10 years at 3.5% (Total interest paid of about $22k!). The good thing is I abhor debt so there goes the plan to get a new Civic.
Drive Free, Retire Rich explores the impact of carrying a car payment, and offers ideas on how your money can be used more wisely.
Source: Dave Ramsey Says ‘Drive Free, Retire Rich’ ∞ Get Rich Slowly
Link : Drive Free, Retire Rich
So what’s the other way I can get around without relying on public transport? Looking at the article referenced by Get Rich Slowly, Dave Ramsey offers a novel approach to car purchase. By investing the amount intended for a car, one can save on interest payments until such a time the amount saved can pay for a car entirely! And by keeping up these payments to oneself, the interest earned could potentially fund future car purchases. Seems rather interesting concept but than also means having to squeeze out $731 to invest. Time to do some math!
Budgeting work sheets: Emergency fund work sheet
Have always thought that a good estimate on how much to save in an emergency fund would be along the lines of 3 x monthly salary. The link below takes a little step futher by detailing the needs per month and coming up with a more reasonable figure. Guess its always a good idea to be prepared!
My emergency fund requirements
Mortgage/rent for one month ________ x 3 = $___________
Auto loan for one month ________ x 3 = $___________
Utilities for one month ________ x 3 = $___________
Transportation for one month ______ x 3 = $___________
Groceries for one month ________ x 3 = $___________
Other debts for one month _______ x 3 = $___________
Total amount for emergency savings account = $___________