Proper Usage of Credit Card

In this post, I am going to share with you my views on how Credit Cards (CC) should be used and how to get the most out of the CC available in the market now. This post is particularly useful for young adults who have just started working and have financial commitments such as part time school fees, insurance payments etc.

For someone who is applying for a CC for the first time, the minimum criteria to qualify is an annual salary of SGD30K (before deducting CPF) and has worked for at least 12 months. That's a basic salary of SGD2.5K a month if you are still calculating. The best way to sign up for a CC is to be approached by a salesperson at roadshows as there will be many perks and free gifts to entice you to sign up. The hassle of form filling is also taken care of by the eager salesperson. Free gifts range from luggage, umbrella to free cash credited into your new credit cards if you satisfy certain criteria. As someone who has worked in the line of sales before, I understand their hard work and since it comes at no cost to me, I am always willing to let them earn that commission for serving me.

I will not be comparing the pros and cons of various credit cards as there are simply too many variants in the market. Do your own due diligence and find out which ones are the best suited for your needs. All I will cover is how you should use the credit cards so as to avoid chalking up huge amounts of debt, and some tips on how you can get discounts that you would not enjoy if you had paid cash.

I will also elaborate on how I managed to earn interest on free float through a combination of mechanisms made available by a certain bank in Singapore. Free float is basically money that you can use which does not belong to you. In business terms, it is known as account payable, and it is essentially interest-free debt. I first touched on the topic of utilizing such free float in the article about My Investment Strategy.

MY CREDIT CARD RULES

1. Only Buy What You Can Pay Fully In Cash

This might sound counter-intuitive, like why would you even use credit if you have the cash to pay for something? The rationale is very simple, if you can't afford something at the moment, you don't deserve to own it. Just because you can afford it, doesn't mean you have to buy it. CC does not entitle you to buy something because you can pay for it at a deferred date. Instead, use this rule to stop yourself from falling into the trap of overspending. If you follow this rule, you can avoid becoming a CC slave while benefiting from the Free Float that comes with it.

2. Always Pay Your Bills in Full

Most CC usually only ask for a minimum payment of SGD50, depending on how much you have spent. It is always tempting to just pay the minimum and let the balance roll over to the next month. But bear this in mind, the amount of debt that you roll over does not just disappear, instead it gets snowballed into a bigger sum based on the interest rate that the bank charges. You end up paying more than what you have spent. If you had followed the first rule, this should not be a problem for you. Compounded interest is a wonderful thing if it is working for you, but it becomes a nightmare when applied to your debt. This is the number one cause of young people chalking up huge amounts of debt that they cannot pay off no matter how much they earn.

3. Do Not Chase After Rewards and Perks

Some CC have a minimum spending requirement for you to attain certain perks. Weight the benefit against the amount of money that you have to spend in order to qualify. Don't justify spending to receive that little extra reward, the money you refrained from spending is actually worth more than the cash back or points that you can earn. Let these rewards and extra perks be a side dish that you can do without, they are good to have but not worth the while spending for.

4. Go For Interest-Free Installment Plans

When making big item purchases, it may be difficult to stick to rule number 1. So here's a good news: Some big item expenditure comes with interest-free installment plans. Most schools would have arrangements with banks to offer students installment payments on their school fees, and some big time furniture stores also have interest-free installments to entice consumers to shop with them. Some CC even offer free installments that can break up the payment up to 6 months for participating merchants automatically when you make a purchase.

If you are familiar with the concepts of finance, you would be aware that debt diminishes over time in an inflationary environment. And if you have been hearing how inflation is eating away your savings, it is not so bad to turn the tables around for inflation to eat away your debt.

Personally, I made use of interest free installments for my school fees and insurance payments. If you have bought insurance before, you will know that you can choose to pay your premium by an annual amount or by monthly installments. The monthly installment offered by insurance companies come at a higher cost as compared to the annual amount. But what I did was, I opted for an annual amount and my CC broke the annual payment down into interest-fee installments for me. Not only do I save on the cost of delaying payment, I can also earn extra interest on the money that I do not have to pay to the insurance company yet.


TAKING ADVANTAGE OF FREE FLOAT

A certain bank in Singapore is currently offering an interest rate of up to 3.05% per annum (p.a) for normal deposits in their savings account. As I do not benefit from promoting this bank, I shall not mention the bank name. I do not know how long this promotion will last, but as long as it exists, I want to get the most out of it. There are no minimum holding period in the savings account, unlike fixed deposit. Meaning, you can freely deposit and withdraw the balance at will without suffering any penalty to the interest rate. But there are 3 simple criteria that you must satisfy to qualify for the 3% interest.

1. You must credit at least SGD2,000 of your salary into that savings account every calendar month. That's a minimum salary of SGD2.5K before CPF deduction.
2. You must use that savings account to pay 3 bills. Any bill, including CC bills
3. You must spend at least SGD400 on any one of that bank's CC that you hold, cumulative if you have more than one CC with that bank

The first criteria is easily attained if you are earning more than SGD2.5K a month and you don't have to worry about it once it is set up with your HR. As for the second criteria, if you want to satisfy the third criteria, you would naturally have at least 1 CC bill to pay. 2 other bills can be your phone bill and your household's utility bill. The last criteria is not really hard to achieve if you use a CC for all the necessary expense you will incur in a month.

Unfortunately, the maximum deposit limit that can earn the 3.05% p.a interest is SGD50,000, anything more would only earn the base rate of 0.05%. So for me and my girlfriend, we both have an account where we would be able to earn interest up to SGD100K. 3.05% p.a interest on SGD50K is SGD1,525 a year; or SGD127 a month. Not a bad return compared to the rest of the saving accounts out there.

On top of earning interest from this account, I have various CC with cash back rebates ranging from 1% to 6%, each with their accompanying conditions. Other than schools fees and insurance payments, all my other spending are discounted because of the cash back which is not available if I am paying by cash. 

To illustrate, say for example my total school fees of SGD20K over a period of 1 and a half years. The school is not allowed to collect the full sum in one shot, so school fees payment is automatically broken down to semesters. Each semester is 3 months and there are 6 semesters in total. So I would have to fork out roughly SGD3.3k every 3 months.

If I had to pay in cash, I have to set aside SGD1.1K from my salary and the money would be gone every 3 month. If I do not have the savings account nor use the CC for installment payment, my total cash outlay is SGD20K.

Alternatively, if I set aside SGD1.1K every month into the savings account from Jan 2013 to June 2014, and make SGD3.3K payment via 12 month installment with 3.3% cash back on March 13, June 13, September 13, December 13, March 14, June 14 (CC bills paid only on the following month), the nett amount that I pay, after deducting all the cash backs and interest earned on the free float, is SGD18,932.05. I saved a total of SGD1,067.95 via interest and cash backs, equivalent to 5% discount on my school fees that I would not have if I paid in cash. Below is the table working of how this figure is obtained, feel free to email me if you wish further clarifications.

As you can see, CC can be a very useful tool to help us achieve great savings when well used but it can also cause us to be burden with huge debt if not used wisely. Taking time to learn more about CC and how it can benefit you will do more good than harm to you and your financial future.

Thank you for reading, I hoped you have enjoyed reading as much as I have enjoyed sharing. If you like my article, do follow me and share it so that more people can enjoy it too.

Applied Value Investing

On 7th & 8th March 2015, I attended an Applied Value Investing Workshop conducted by Mr Peter Lai Hock Meng and Mr Puah Soon Lim. Through this course, I have picked up many useful tools for screening stocks, and also found the answers to my question of measuring management quality. From this course, many new ideas came to me where I seek to execute them.

Because of the new tools that was made available to me, I was motivated to pick up a new skill that I already knew existed, but was too lazy to learn. This new skill allows me to automatically pull all the data that I need from the internet, which I would be able to plug into my spreadsheets. This will save me thousands of hours, mega joules of effort, and kilo tonnes of sweat. This new skill is known as Web Scrapping and I have accomplished it using Excel Macro VBA.

I am so excited to develop a powerful system that will execute my ideas of fundamental stock analysis, and bring my investment strategy to the next level. After my system is developed, I would be able to deliver quality analysis of company on a more timely and consistent basis. So stay tuned.

Below is my parting article.

Value investment is basically finding undervalued stocks to take advantage of price-value discrepancies of the market, in order to make a profit when the market corrects. Because the key concept here is to wait for the market to correct, time is critical for value investing. At times, even Warren Buffett might be wrong in picking "undervalued" stocks. But in value investing, you can easily be right more times than you are wrong . And when you are right, the returns would be better than most people because value investing does what most people would not dare to do.

Value investing is dependent on the Rate of Return (r) and also the number of Period (n) with which the rate of return can be sustain. These 2 factors combine to become a powerful concept called Compounding. I have never seen snow, but I know that if a snow ball is allowed to keep rolling in snow, it will get bigger and bigger, and the rate that it gets bigger increases exponentially. In case you are not aware, there is an autobiography of Warren Buffett that is titled The Snow Ball.

Through the course, I learnt that only less than 0.5% of the market participants are value investors, while the majority are speculators (>95%). This is despite the proven track record of Value Investing, beating not only benchmark indexes, but speculators over the long run. I have given this phenomenon of "Value investing not being well adopted despite it's proven success" some thought. I realized that there is an irony with the concept of value investing.

The irony of value investing is that young people have time but do not have the capital, patience and knowledge to start value investing; old people on the other hand, have capital, patience and knowledge, but do not have time to produce impressive compounded returns.

Young people usually do not have sufficient capital to make outsize earnings even with high rate of returns, like a tiny snow ball that just started rolling. And they do not have the patience to wait, especially in this era where everything is measured in nanoseconds. Young people demand immediate results. The aspect where time is needed to show result is what puts many young people off. The allure of quick returns from speculation becomes irresistible.

Old people on the other hand, after suffering setbacks from impatiences over many years, the experience they have gained made them more readily appreciate the beauty of value investing. If they have been prudent in their younger years, they would have accumulated a sizable capital base to start investing. But until longevity or immortality becomes reality, the morbid truth is that they would no longer be able to generate huge returns as compared to someone who had started earlier.

To illustrate an example that Mr Lai had given to us as a closing speech, imagine there are 3 man: Albert, Bernie and Charlie. All of them are hardworking fellow who started working at 21 years old and retired at 60. All of them are able to invest at a return of 4% return every year without fail. However, the 3 of them have different outlooks on saving for retirement.

Albert started investing the moment he received a salary and has not stopped until he no longer have an income at 60 years old. He invested $5,000 every year ($417 a month) and also all his returns from the previous year's investment back into his retirement investment. But he did not withdraw a single cent from his investment until he was 80 years old. His investments continued to grow at 4% a year every year.

Bernie also started investing at the same age as Albert, and he put int the same amount as well. However, he stopped putting in money every year after he was 40 years old. Luckily, he left all his savings to continue growing at 4% until he was 80 years old.

Charlie on the other hand, did not realise the importance of savings and investing until he was 41 years old. But by then, he was earning a high salary, and thus able to put aside $10,000 a year, double the amount of what Albert and Bernie had been investing. He too stopped putting in money when he retired, and continued to leave his investment to grow at 4% a year until he was 80 years old.

Let's look at their retirement nest egg when they are all 80 years old:

At 80 years old, Albert was able to accumulate a little over $1 million, and became a millionaire. Surprisingly, although Bernie only invested half of what Charlie had invested, he was able to accumulate more retirement savings than Charlie. This simple illustration goes to show how powerful compounding can be when one has the time and discipline to see it through.

I hope you had enjoyed reading my article as much as I have enjoyed sharing. If you would like to examine the above illustration in detail, I leave my workings below. Thank you for reading and see you again soon. :)