You Only Live Once

credit: http://www.flickr.com/photos/49568889@N08/7684077336/sizes/m/in/photostream/

I’m a HUGE fan of Lonely Island. Came across this awesome music video titled YOU ONLY LIVE ONCE, feat Adam Levine and Kendrick Lamar (who?).

I love it because it makes fun of people who take risk a little too seriously (“Two words about furniture: KILLING MACHINES!!”).

But while we scoff at the idea that we should stop going to clubs because loud music is bad for your ears, it amazes me that so many young people adopt that very same mindset when it comes to investing.

Here’s an interesting thought: Investing in the stock market is risky in the short run, but it’s the safest investment you can have in the long run.

The stock market is risky in the short run

Let’s tackle the first half of that last para first. Check out the returns from the stock market’s five worst years, from Financial Ramblings:

  1. 1931, -52.7%
  2. 2008, -33.8%
  3. 1930, -33.8%
  4. 1937, -32.8%
  5. 1974, -27.6%

So yep, in the very short term, buying and holding stocks is risky. Based on what history tells us, you could lose as much as half of your portfolio in a single year – Investors sure as hell weren’t popping champagne in 1931.

But it kicks ass in the long run

But it’s a very different story when you’re holding stocks for long periods of time.

Jeremy Siegel (whose classes I used to crash in college to leech off his market insights – woot woot!) argued in Chapter 2 of his book Stocks for the Long Run, that with a sufficiently long holding period, stocks are actually less risky than bonds.

According to Wikipedia, “During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable.” Bonds, however, once fell as much as -3% per year below inflation.

In short, Siegel found that if you held stocks for 17 years or more, you never lost money even in the worst case scenario. 

Okay, so critics might claim that his findings are way too optimistic, and that the stock market’s prosperity in the 20th century may not necessarily repeat itself. But what’s the alternative? Investing in scammy gold buyback schemes?

The truth is, based on any historical record so far, the safest, and best, long-term investment for most young people has clearly been a diversified portfolio of stocks. Yes, even after you account for the stock market crashes in the past couple of years.

Young Heart, Run Free

And therein lies the awesomeness of being young and sexy – as young people, we have the luxury of having enough time. Enough time for a long career of earning money ahead of us. Enough time to hold on to our stocks without worrying about their fluctuations in any given day/month/year, knowing fully well that in the long run, we’ll come out on top.

So please. Stop getting intimidated by the stories of banks failing, and quantitative easing, and Justin Bieber’s Twitter account getting hacked. These are all short run risks (especially if you’re Justin Bieber), which are irrelevant if you’re holding out for the long term.

Take a little bit of risk in the short run to enjoy some awesomeness in the long run.

You only live once.

Image credit: TheOnyxBirmingham

Passive Investing: The Movie

Credit: http://www.flickr.com/photos/cheriejphotos/7158114527/sizes/m/in/photostream/It’s only 2 weeks into 2013 and I’m already swamped! These few weeks are absolutely packed for me, with work guzzling most of my brain fuel, and an upcoming work trip to Beijing. I’m also sticking with my 2013 goal schedule, as well as finding time to work on a free ebook (woot!) that will be making its way here soon, I promise!

So whenever life hits me with a gazillion things to do, I usually take things a little slower, kick back and do something chill like watch a movie. But because I’m a huge financial nerd, I get my kicks watching stuff like Passive Investing – an awesome 54-minute video on passive investing (duh) and why it rocks.

While there’re tons of books and articles written on the subject, I believe that this is the first time someone has made an entire documentary on it. The PF community has already been excitedly sharing it for a month or so now (yeah, I know, I’m a little late in the game.. my bad).

It features some of the biggest, badass (in a good way) names in the index investing industry, such as John Bogle, Kenneth French, William Sharpe, Burton Malkiel, and Rick Ferri. The production is pretty high quality, and there are summaries at the end of each chapter in case you get too distracted by the super strong British-newscaster accent.

So grab some popcorn, snuggle down on the couch, and enjoy 🙂

A caveat: While I agree with most of the concepts presented, I don’t fully agree with everything in the film. One of my biggest bugbears is their assertion that the Capital Asset Pricing Model (CAPM) is the “mathematical foundation of passive investing.” I won’t go into a snooty academic diatribe about the the flaws of CAPM here, but it suffices to say that you don’t need CAPM to hold in order to show that passive investing is still the best way to invest for most people.

Other than that though, the film is excellent. I also love how they display all the logos of actively managed funds throughout the film, subtly dissing the crap out of them without actually naming any names. It’s a little more subtle than my usual practice of pointing and loudly jeering at fund management ads displayed on the subway, causing people around me to move slowly away from me and whisper under their breath. I can only assume that they must be talking about how wise I am.

If you’re looking to learn a little bit more about passive investing but aren’t inclined to read a book, you could totally start here. It could be the most profitable 54 minutes you’ve ever spent. 🙂

Image credit: cheriej

The 2012 Cheerfulegg Review

Credit: http://www.flickr.com/photos/joka2000/80198350/sizes/m/in/photostream/All the blogs in the world are reviewing 2012 at the moment. In summary, the world didn’t end, Obama got re-elected, the Euro crisis didn’t blow up, and most importantly, Singapore saw a record number of sex scandals. And they said Singaporeans don’t have enough sex.

So I thought it’d be a good time to do a little personal review of my own. I got this idea off Chris Guillebeau’s framework on annual reviews, which he cites as probably the best decision he’s made in terms of working towards multiple goals simultaneously (He’s probably one of the most successful bloggers around, so there’s definitely something going on there).

So this post is the first of a 2-part series on annual reviews. In this post, I’ll review 2012 and what it meant for cheerfulegg.com and for parts of my own life. I’m basing it off Chris’ methodology, and if you haven’t done a 2012 review of your own yet, I highly recommend that you give it a try.

It involves answering 2 questions:

  1. What went well this year?
  2. What didn’t go so well this year?

Yeah, I know it sounds like one of those corny-ass “After-Action Reviews” that your company is so fond of doing – I thought it was pretty lame when I first read it too. But after spending an entire day reflecting on it, I got pretty surprised by the results.

So – enough preamble.  Let’s get started.

What went well this year?

(Please don’t take this section as a bragfest. I try to be as objective and transparent as possible in any reflection and including both the good and bad stuff)

*I grew and developed cheerfulegg.com to a level that I’m pretty happy with for its one-year existence. It’s probably one of my proudest accomplishments of 2012. An idea of what this blog has managed to achieve in the past year:

  1. 71 new posts, to grand total of 77 posts since it started in Dec 2011.
  2. A post that got featured on WordPress’s Freshly Pressed section, generating a record 16,000+ views for that month, and 220+ WordPress followers.
  3. A brand new “cheerfulegg.com” domain name
  4. A cheerfulegg VIP list, which grew to 85 subscribers within a couple of months
  5. Being accepted on blog aggregators theFinance.sg and PaperBlog.com

* I developed, followed, and refined a personal finance system. Writing a book about it really helped because it forced me to solidify the ideas. It isn’t perfect yet, but it’s at a point where I’m about 80-90% satisfied. Will be sharing more of it in some publications that I’m working on.

  1. I apologize if some of you were confused by my previous posts about multiple saving and spending accounts, sometimes with different names and purposes, etc.  It was all part of a process of trying it out and making improvements to make the final version simpler and more effective for everyone. Sometimes I just had to write about it here in order to crystalize the idea.

* I successfully achieved my saving and investing goals, entirely thanks to a system of automation I set up to take care of everything.

* I introduced fixed income and Singapore asset classes into my portfolio, adding a further level of diversification. Contemplating if I should add gold in the coming year (Its historical real returns aren’t the best, but it might be a good diversifier. Check out this blog for more details. I’m still thinking about it though).

*The markets have also been pretty kind to my portfolio this year, which was really encouraging for my first full calendar year in sticking with a passive, indexed-based investment style, which has worked out pretty well thus far.

 What didn’t go so well this year?

* I severely underestimated the effort required to write a book. After spending the best part of August – November writing for three nights a week, I had a 82-page first draft, which was about 60% of my planned book. And I hated it.

It’s not terrible, but it certainly fell short of the vision I had for it as something fresh, engaging and different from the other “how to get your personal finances in order” books.  I’m still going to finish writing it, but I’m now humbled by the effort and the dedication a project like this requires. In the meantime, I’m headed back to the drawing board and I’m only going to ship it to you once I’m satisfied with it.

* I attempted to start some freelancing projects, which pretty much fell through because I couldn’t find an idea that suited me, or that I had enough time for.

* I got fatter this year. Fareals. A combination a dropping metabolic rate, a new job rotation that required me to sit at my desk for longer hours, and my focus on cheerfulegg.com and the book resulted in some serious weight gain. An exercise plan for 2013 is definitely in order. I also definitely didn’t sleep as much as I would have liked.

* I made a conscious decision to give up dance, at least for now, even though it was my entire life just 2 years back. I’ve been pursuing it as a passion for 12 years now, but I really  want to pursue new adventures with this blog and the book. With a full-time day job, it’s pretty much impossible to commit to writing AND dance at the same time after office hours. Still though, I get that twinge of longing whenever I watch YouTube videos.

 Possible goals for next year

I’ll talk more about these after I’ve finalized my plans for 2013, but 2 things that are definitely in the works are:

* Going back to the drawing board to redefine the book, interviewing people to really understand them and coming up with fresh, new ideas. Check out my room wall at the moment:

Ideation

* I now know that this is going be an ongoing process, and it might take several months or more than a year before I see some results. However, this isn’t going to stop me from shipping some stuff out for everyone who’s been waiting patiently for it.

* In the interim, I’m working on pushing out 2 mini-products in 2013 – which are a lot less complex, but still pretty damn awesome. Stay tuned for those 🙂

Happy 2013 everyone!

5 Surprising Truths About Investing in Real Estate

Singaporeans are absolutely crazy about property. Whenever I walk into a bookstore, I see shelves upon shelves of real estate investing books with pictures greasy men in business suits on the cover, wearing a big smile and screaming “I Got Rich Making Big Money Investing in Real Estate, AND YOU CAN TOO!!”

I hate those books. One day, I’m going to write a book with a naked picture of me on the cover, wearing nothing but a big smile and screaming “I Published a Book With A Picture of Me In a Birthday Suit, AND YOU CAN TOO!!” And I’m going to get the bookstores to stack ‘em right next to those damn real estate books.

I get really puzzled whenever I talk to someone my age about investing, and hear that they would rather “just invest in property”. Those greasy men in business suits can’t be that convincing, can they?

I’m probably going to piss off every single real estate agent in the world by writing this, but I can think of 5 reasons why real estate isn’t the best investment for young people:

1. Your first house isn’t an investment

Most people who buy a house more expensive than they can afford justify it by claiming that it’s an “investment”. Let’s be clear here – your first house is a place to live. It is NOT an investment. Even if your house rises in value along with every other house in the country, whatever you gained from selling your house would just go right back into purchasing another place to live in.

2. Property isn’t necessarily safer than the stock market

Most people think that property is “safer” that the stock market. But really, if you’re lumping ALL your savings into one house, how diversified is your investment portfolio, really? Compare that to investing in the Straits Times Index (STI), which immediately diversifies your investment into 30 stocks, each backed by a real, physical, blue-chip company.

By the way, you can lose money in real estate. Anyone remember 2008?

3. Property may not give you a better return than stocks

An SGX-led study showed that if you invested in Singapore property in 2001 and held it until 2010, you’d be worse off than if you had simply invested that same amount in the STI. Globally, stocks may or may not outpace real estate in any given year, but stocks have historically performed better than real estate over the long-term.

A New York Times article also described how real estate in the US has only barely managed to keep up with inflation, while stocks have risen comfortably above inflation for the past 200 years. As Yale economist Robert Shiller puts it, “from 1890 through 1990, the return of real estate was just about zero after inflation.”

4. Costs will destroy a large chunk of your returns

If someone bought a house for $250,000 and sold it 5 years later for $400,000, most people would think, “Great! I made $150,000!” But they failed to account for all the associated costs that go along with it: Taxes, agent fees, commissions, insurance, maintenance, stamp duties, renovation costs, furnishing, etc, which would add hundreds, if not thousands, of dollars to your monthly bill.

Let’s not forget the interest you’ll have to pay on the housing loan you took out, which is easily in the ballpark of tens of thousands of dollars. For Singaporeans, if you use your CPF to purchase a house, you’d have to pay back the amount you “borrowed” from CPF, PLUS INTEREST (It stands at 2.6% today, but it’ll rise once interest rates go up. I totally see the rationale of this policy from the government’s perspective, but am I the only one who thinks this is a crappy deal from an investing standpoint?).

The costs I pay for investing in a low-cost ETF? A commission of $25, and an annual expense ratio of 0.3% (For every $10,000 invested, that’s like thirty bucks).

5. Mortgages screw with your psyche

“Hey, let’s use other people’s money to get rich!”… is what most people would tell themselves before taking on a huge-ass mortgage.

Dude, a mortgage isn’t something to scoff at. It’s as full-fledged and serious a commitment as… marriage. Things change once you’ve got the ever-present threat of a monthly mortgage payment hanging over your head. You start to see things differently. Mortgages cause people to become way more risk-averse, and less likely to do things like finding a better job, starting their own business, and investing, even though those options may help them to become financially better off.

Think of it as a Big Buy – Not an investment

I’m not saying that real estate is a bad investment. You can make money from it if you already have 1) a house to live in, 2) lots of spare cash, and 3) a strong portfolio and are looking to diversify your investments.

But most young people don’t fall into this category. Instead, we should see our first property as a really, really, really large purchase rather than an investment. Think of it as a great way to build equity and start a family. But please don’t delude yourself into thinking that you’re going to get rich from it. If you’re just starting out, you’d be better off focusing on building a sensible portfolio of stocks and bonds.

Agree/disagree? Leave a comment or send me an email at cheerfulegg [at] gmail [dot] com. I’d love to hear from you, especially if you’re interested in publishing my birthday suited book cover.

The Great Index Unit Trust Hoax

Whenever I check into a hotel, I get really fascinated by just how crazy expensive some of the items in the minibar are.

One time when I was on vacation, I felt a little hungry so I lumbered over to the minibar and pulled out a pack of cashew nuts – just the regular kind you’d find at any convenience store. Just to be safe, I checked the prices before I tore the pack open, and involuntarily yelled: “NINE DOLLARS FOR A PACK OF TWELVE NUTS?! ARE YOU OUT OF YOUR FRICKIN’ MIND???”

It’s absolutely crazy how people are perfectly willing to pay several times the price for the EXACT SAME PRODUCT – a product that they could have gotten much cheaper elsewhere. We see this everywhere: a Nike sneaker vs a non-branded one, Tropicana orange juice vs a house brand, and beer that costs $12 in a restaurant and $2.50 in the supermarket.

A pack of nuts from the minibar might do a little damage to your wallet, but it’s nothing compared to the damage a unit trust (also known as a mutual fund for my American friends) could do to your long-term wealth.

Costs Matter

I’m not even going to discuss actively managed unit trusts with their high management costs. Nobody takes those seriously anymore – There’s more than enough research that shows that as a whole, actively managed unit trusts are a terrible choice compared to index funds.  Check out here and here.

Today, I’ll just uncover a pricing anomaly I like to call The Great Index Unit Trust Hoax, which involves 2 unit trusts being sold to Singaporean investors. Both charge exorbitant amounts to essentially help you invest in portfolios that you could have easily put together yourself… at a fraction of the cost.

To Infinity… and Beyond!

Exhibit A is the Infinity US 500 Stock Index Fund, which is supposed to help you track the return of the S&P 500. To accomplish this, it hits you with a whopping 0.98% expense ratio.  Now 0.98% may not sound like too much of a big deal, but try compounding that over 30 years and you’re talking about a difference of tens of thousands of dollars of extra cash that’s coming out of your pocket.

But hold on – there’s another, cheaper way for you to track the return of the S&P 500 on your own. You could buy an ETF from Vanguard, which gives you the EXACT SAME RETURN, while charging a mere 0.05% expense ratio. This makes the Infinity unit trust almost 20 TIMES MORE EXPENSIVE than the Vanguard ETF. Yeah, I know.

Home Sweet Home… For 4x The Price

Okay, I hear you say, so maybe that’s a problem unique to the USA.

Oh wait, it’s not.

Presenting Exhibit B, the patriotically-named unit trust MyHome Fund run by Singaporean asset management company Nikko AM. It invests in 1) an ETF tracking the Straits Times Index and 2) the ABF Singapore Bond Index Fund ETF. They’ll charge you a ridiculous expense ratio of 1.2% for all their hard work.

But wait! Did you know that you could totally log onto your online brokerage and invest in 2 ETFs which track the EXACT SAME THING for a fraction of the cost? Namely:

1. SPDR Straits Times Index ETF (SGX Ticker: ES3) – Expense ratio: 0.30%

2. ABF Singapore Bond Index Fund ETF (SGX Ticker: A35) – Management fee + trustee fee: 0.20% (I couldn’t find an exact figure for the total expense ratio on their website – those sneaky bastards – but it shouldn’t  be too far away from the sum of these 2 fees).

Total weighted expense ratio: 0.28%

Ta-daahh! You’ve constructed the exact same product, at a quarter of the cost. And that’s not taking into account sales charges, redemption charges, front-end charges, admin charges, and hire-an-attractive-banker-to-convince-you-to-part-with-your-money charges.

Do Yourself a Favor

My point here is to always, always, read the fine print. The finance industry loves to play down details like these because it means higher commissions for them – commissions that come right out of your pocket.

If you plan on investing passively, do yourself a favor and skip out on the unit trusts. You’re way better off buying the equivalent ETFs instead. Of course, there are a few disadvantages in buying ETFs (eg brokerage commissions, currency exposure, inability to invest in small amounts), but they can be easily circumvented (eg investing regularly using no-minimum commission brokers,  or in the case of the STI ETF, setting aside an amount every month until you can afford one lot). None of the disadvantages of ETFs justifies the tens of thousands of dollars you’re giving up in expenses if you invest in unit trusts.

It would be totally awesome if a reputable fund provider like Vanguard would set up an index fund in Singapore (are you reading this, John Bogle?), which would eliminate all the disadvantages in the para above, and yet charge a reasonable expense ratio that doesn’t require us to give up our first-born child.

In the meantime, stay smart and read the fine print. Save your money for those overpriced cashew nuts from the minibar. At least they’re tasty.

Using Systems to Dominate Learning (And Anything Else)

The MIT Challenge

Recently read a guest post by blogger Scott Young, who stunned the world by doing the impossible. Scott completed MIT’s notoriously difficult Computer Science curriculum, which usually takes bright MIT students four years to finish, in one year. Watch the TED talk on his MIT Challenge here:

To do this, Scott adopted a carefully constructed learning system that let him compress the concepts of a 4-year education into a short span of time. This wasn’t simply a matter of cramming for exams. Scott not only passed all the exams but also completed all the programming projects, which require a deep understanding of the material. How did he do it?

First, he watched all the lectures online to get a birds-eye view of the material. By watching the video lectures at 1.5x-2x the normal speed, he managed to go through a semester’s worth of lectures in a couple of days.

Next, he spent a lot more time developing insight and drawing connections. He’d first take a piece of paper and write the concept that he was trying to understand at the top. He then wrote out his own explanation, as if he was teaching it to someone else. When he came to a gap in his knowledge, he’d go back to the textbook or find it online. In this way, he systematically filled in all the knowledge gaps until he had a deep, complete, understanding of the material.

Third, he went through practice problems with the solution key in hand. He’d check his work question-by-question, getting immediate feedback for every question he did. Compared to other students who might have to wait weeks before they got back their graded assignments, Scott’s system gave him a tight feedback loop which dramatically improved his effectiveness.

As Scott wrote in a guest post describing his journey: “…the method you use to learn matters a lot. Deeper levels of processing and spaced repetition can, in some cases, double your efficiency (emphasis mine). Indeed, the research in deliberate practice shows us that without the right method, learning can plateau forever.”

In short, Scott wasn’t studying harder; he was using a system to study smarter.

The Power Of Systems

Scott’s MIT Challenge forms the premise of the book I’m currently working on: That adopting the right systems can help you to achieve much, much more than the average individual.

You can use systems to create a desirable habit, deliver happiness to people, get fitter, be more productive, negotiate better.. pretty much anything you want to achieve in life.

Most people don’t know how to improve their own lives because they rely solely on “trying harder”. How many of us make New Years resolutions to go to the gym more often, only to fail miserably before February comes around? How many of us resolve to be more productive at work, but end up online shopping and Facebook stalking before lunchtime? And how many of us resolve to saving and investing more this year, only to have all our extra cash wiped out by a year-end vacation?

Instead of trying harder, applying systems is infinitely more effective. Here’s why:

1. Systems remove the need for “willpower”

The trouble with willpower is that it’s easy to lose steam. We burn out. John Tierney, coauthor of Willpower: Rediscovering the Greatest Human Strength, describes willpower as a finite resource that runs out just as easily as a fuel in your car tank. Systems, on the other hand, take control away from you. They force you onto a certain path so that you don’t have to use willpower. It sounds counterintuitive, but we’re more likely to be successful at something when we are willing to hand over control to a system.

2. Systems are much simpler to follow 

If you’re trying to lose weight, think about the barrage of information out there on weight management. Hundreds of articles and blogs give handy “tips” and nuggets of advice, but they’re often conflicting and confusing. A system, on the other hand, is based on rules. Step 1, 2, 3. Go to a personal trainer and he’ll tell you exactly what you need to eat, how to exercise, and all that jazz. You don’t have to think – all you need to do is stick to the system, and you’ll succeed.

3. Systems are smarter

Think about Scott Young’s system for accelerated learning. It’s a simple formula, but it’ll save you a lot of time and effort when it comes to studying. Think about how much easier it is to set up a GIRO standing instruction that automatically helps you to save every month, instead of putting in time and effort to “save harder”. Finding the right system can help you to do things a lot more efficiently and effectively than most people.

Viewing the world from a systems perspective

Systems are effective, more so than many of us realize. That’s the premise of this blog, as well as the upcoming book. So far, I’ve showed you how to use systems to improve your savings and investments, find the right types of insurance, and spend more efficiently on the things you love. The book will delve a little more deeply into the psychology of saving, spending and investing, and will describe more detail on the systems that will help you tackle your personal finances.

You start to see things differently once you look at life from a systems perspective. Large challenges suddenly don’t seem so daunting anymore, and possibilities start to open up.  Are there any problems that you’re currently stumped by, but could possibly be solved by applying a system? I’d love to hear from you, even if you haven’t found a solution yet. Leave a comment, or send me an email at cheerfulegg@gmail.com.

Cheers 🙂

How to Hide Money Like a Criminal Mastermind

Let’s do a little role play. You are an international criminal mastermind, wanted by the authorities in 14 countries. Your crime ring has prospered, earning you an obscene amount of money. You could buy over a small country (or attend a Mitt Romney fundraiser) if you wanted to. You’ve also covered your tracks well. The police have got nothing on you, so they’re targeting the easiest piece of evidence they can find – your money.

Tipped off by your trusty financial advisor, you move your money in small parts to a secret bank account in the Cayman Islands. By the time the police crack open your “official” bank accounts, they can’t find anything to charge you with. So once again, you escape scott-free… and tax-free.

The awesomeness of tax-advantaged accounts

Death and taxes are the only 2 sure things in life (That, and the fact that you can never find your keys when you’re late for work on Monday morning).

You can’t escape the first, but you can totally lower the second… legally. You may not have a secret Cayman Islands bank account, but the governments of the world, in their benevolence, have offered the next best thing: tax-advantaged accounts.

I’ll talk about tax-advantaged accounts for Singaporeans, or people living in Singapore, in this post. Americans, you already have more than enough information out there on your tax-advantage accounts – Google it. (Hint: Sign up for a 401k and contribute enough to max out your employer match. You guys are so lucky).

Singaporeans – you have a little-known account called a Supplementary Retirement Scheme (SRS). The SRS is sort of like a beautiful exotic girl who’s been hidden on an island. She’s got a weird-sounding name, not many people have heard of her, but she’s got huge… benefits.

The photographer claims that the girl just *happened* to walk into the shot and he just *happened* to press the shutter. Honest!

Why the SRS is awesome

1. It gives you tax-benefits

Think of the SRS as your own secret tax-free bank account for you to stash a whole bunch of moolah in. Every dollar you contribute into that bank account reduces your taxable income by a dollar.

So if your tax rate is 7%, contributing $12,750 a year effectively saves you $892.50 in taxes every year. Ta-dahhhh, you just earned your next weekend getaway vacation! You’re welcome.

It’s purely voluntary, meaning that you can contribute any amount you like, up to a cap of $12,750 a year (Yeah, the government realizes how awesome this is too, so they’ve gotta put a limit on how much you can screw them over by not paying taxes).

 2. It boosts your investments

What are you gonna do with all that money you’ve put into it? Don’t be a kuku and just leave it sitting there (remember my post on Don’t Save For Retirement?). Instead, invest it – preferably in a couple of index-based ETFs – and let your money grow absolutely tax-free.

There’s also a hidden benefit to investing that cash. By not paying $893 in taxes, that means that you’ve earned a guaranteed 7% return on your $12,750 for that year (ie: if you invested that $12,750, your investment would have had to grow by approximately 7% just to match the tax savings).

If you can resist the temptation to withdraw your investments till you’re 62, you’ll only be taxed for 50% of the prevailing tax rate. That may seem annoying at first, but ask yourself:

Would you rather pay 1) a 10% tax on $100,000, or 2) a 5% tax on $1,600,000? (Hint: The answer is option 2).

Sure, option 2 entails you paying more in taxes, but it also means that you have ONE POINT FIVE MILLION DOLLARS to play with after tax. Paying more tax is a good thing – it means you’re richer. By not paying tax initially and deferring it till the end, you’re effectively allowing your whole amount of cash to work harder for you. 

3. It’s flexible on withdrawals

Unlike CPF, you’re allowed to withdraw your cash pretty much anytime you like.  It’s meant to be kept till you’re retired, but if you really need the cash before you’re 62 you’ll have to pay a 5% penalty and get taxed for 100% of the rate (The penalty is waived if it’s withdrawn in the event of death or medical cases). It’s annoying to have to pay those, but at least you still get access to it if you really need it for an emergency.

“What are we gonna do tonight, Brain?” “The same thing we do every night Pinky… Try to open a TAX-ADVANTAGED ACCOUNT!”

How to set up your own criminal mastermind account

1. Contact any one of the three local banks (DBS / OCBC / UOB) to set up an SRS account. If you already have another savings account with those banks, you probably won’t even need to visit the branch – just download the application form from their websites. If you’re Singaporean, all you need is a copy of your NRIC.

2. You won’t even need to make a claim in your annual tax return – it’ll be automatically done for you through your SRS operator. Yay to #FirstWorldAwesomeness 🙂

3. If you’re a foreigner living in Singapore, the contribution cap is different, but all of the above apply to you too. You’ll also have to submit an annual IRAS declaration form.

And finally…

Congratulations – you’ve now embarked on your journey towards being a world-class, financially-savvy criminal mastermind. So if you’ve got nothing to do tonight, maybe you can try to TAKE OVER THE WORLD!