COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

SCIENCE AND TECHNOLGY FACULTY BUILDING AND PROJECT MANGEMENT SIM UNIVERSITY SINGAPORE COR 167e: Managing Your Finances Tutor-Marked Assignment 01 Jan 2013 Presentation Student Name: Mohamed Ali s/o N Sarwar Student ID : B1210887 Tutor : Mr Kenneth Soh

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Question 1 We have an annual check-up to determine our health status. Likewise, we should also examine our personal financial statement to get an idea about our financial health status. (a) The Cash Flow statement gives us an idea how we arrived at our current financial state by looking at sources of income and expenditure during a period of usually a year. With this in mind, you are to collate your own financial data and construct your own Cash Flow statement for the period 1.1.2012 to 31.12.2012 by using the template as shown below:(15marks)

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Statement of Cash Flow

For the period 1.1.12 to 31.12.12 INFLOWS Active Income Gross salary and bonus (including employee CPF) Employer CPF contribution $46,000 $ 8,000 $ 0 $ 10,000 $ 500 $64,500 $30,000

Passive Income Home business Dividend income Interest income TOTAL INFLOWS OUTFLOWS Savings Fixed Outflows CPF for house mortgage Additional cash for house mortgage Car loan payments Insurance premiums Total fixed outflows Variable Outflows Tax Food Transportation Clothing Entertainment/vacation Medical/dental care Utilities/household expenses Miscellaneous Total variable outflow TOTAL OUTFLOWS NET INFLOW (SURPLUS) (Total Income Total Outflows) $ $ $ $ $ $ $ 0 2,500 3,500 500 1,500 150 5,000 $ 9,500 $ 0 $ 0 $ 2,500

$42,000

$ 3,000 $16,150 $58,150 $ 6,350

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

(b) The Personal Balance Sheet tells us the current state of our financial health at a specific point in time. You are to collate your own financial data and construct your own Personal Balance Sheet as at 31.12.2012 by using the template as shown below:(15 marks)

Personal Balance Sheet

ASSETS Cash Current account Savings account Fixed account Total Cash/Cash equivalent Invested Assets Stocks Unit trust CPF Savings Total Invested Assets Assets for Personal Use Residence Personal Property Car Total personal use assets TOTAL ASSETS As at 31 Dec 2012 LIABILITIES & NET WORTH $ 5,000 $ 30,000 $ 10,000 $ 45,000 $ 300,000 $ 25,000 $ 45,000 $ 370,000 NET WORTH $ 500,000 $0 $0 $ 500,000 $ 915,000 TOTAL LIABILITIES & NET WORTH $ 915,000 $ 910,500 Liabilities Credit Card balances Car Hire purchase Mortgage loan balance Total Liabilities $0 $0 $ 4,500 $ 4,500

(c) Based on your own Cash Flow statement and Personal Balance Sheet, you are to compute your own five (5) financial ratios and interpret your current financial health. (15 marks) S/No 1 2 3 4 5 Financial Ratio Basic Liquidity Ratio Debt Service Ratio Liquid-Assets to Net Worth Ratio Net Investment Assets to Net Worth Ratio Debt-to- Asset Ratio

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

S/No 1

Financial Ratio Basic Liquidity Ratio Cash/near cash monthly expenses = $ 45,000 (Total out flow 12) = $ 45,000 ($58,150 12) = $ 45,000 $4,846 = 9.29

Interpretation/Analysis My basic liquidity ratio is above the recommended level of three to six months that can sustain expenditure and considered very stable and sound. Perhaps my appetite for investments, private property, trust, bonds, investment insurance or passive income could be further explored, substantiated, considered and optimized in avoiding excess liquidity since I can be easily employed as a Site Supervisor in the booming construction market. Debt Service Ratio As this ratio is below 35%, it is Total annual debt repayments very sufficient, stable and annual take home pay healthy. I can positively and = $9,500 [($ 64,500 - $ 8000 conclusively discharge and (employer CPF) $ 10,000 relieve my monthly/annual debt (employee CPF) ] or loans with my current = $9,500 $46,500 monthly/annual take home = 0.2043 salary. = 20.43% Liquid Assets to Net Worth Ratio It did not meet the 15% minimum Cash/near cash net worth required thus intricate or binding = $ 45,000 $ 910,500 the possibility of being = 0.05 deadlocked in any complication, = 5% crisis or casualty due to the predicament or struggling converting liquid assets e.g. condo, trust, equities. It is unable or unlikely to sustain the serviceability of the assets. Net Investment Assets to Net Worth It slag and falls behind the 50% Ratio recommendation guideline. I Total invested assets net worth need to advance or make bigger = $ 370,00 $ 910,500 strides in order for adequate and = 0.41 comfortable progression towards = 41% my retirement funding. Debt to Asset Ratio As it is minimal and way below Total liabilities total assets the 50%, I am considered = $ 4,500 $ 915,000 financially stable and viable = 0.005 should my debts fall short, = 0.5% unsettled, overdue or in arrears.

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Question 2 The Monetary Authority of Singapore, in their annual report, forecast that inflation for 2013 could be between 3.5 percent and 4.5 percent and it is driven by higher consumer, housing and car prices. In 2013, MAS maintained that they are going to stick to the policy of an appreciating Singapore dollar to combat inflation. Most Singaporeans are worried about inflation and the best way to hedge against inflation is to invest in property. Upon graduation, you immediately bought a 430 sq ft apartment, a Shoebox apartment, in the suburb area for $750,000. (a) To assist you in finding out the monthly installment payment, you can navigate through Calculators/Games Total Interest Calculator hosted by CPF Board at www.cpf.gov.sg using the following information:(10 marks) Description Loan Amount Loan Repayment Period Interest Rate of the Loan 1st Year Interest Rate of the Loan 2nd Year Interest Rate of the Loan 3rd Year Interest Rate of the Loan 4th Year Amount $250,000 25 years 3.5% 3.5% 3.5% 3.5%

You are to attach the sample printouts of your calculations as follows:Yea r Detailed Workings Opening Interest Monthly Total Total Cumulative Cumulative Closing Loan Rate Instalmen Interest Principal Interest Principal Loan t

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Detailed workings - 1
Year Opening Loan Balance Interest Monthly Total Total Cumulative Cumulative Closing Loan Rate Instalment Interest Principal Paid Interest Principal Balance Payment Paid for the for the year payment payment year 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.56 1,251.55 1,251.56 1,251.55 1,251.56 1,251.55 1,251.56 1,251.55 8,648.45 8,421.89 8,187.26 7,944.27 7,692.66 7,432.09 7,162.25 6,882.85 6,593.46 6,293.80 5,983.48 5,662.14 5,329.35 4,984.73 4,627.87 4,258.28 3,875.57 3,479.22 3,068.80 2,643.78 2,203.67 1,747.85 1,275.87 787.06 280.90 6,370.27 6,596.83 6,831.46 7,074.45 7,326.06 7,586.63 7,856.47 8,135.87 8,425.26 8,724.92 9,035.24 9,356.58 9,689.37 10,033.99 10,390.85 10,760.44 11,143.15 11,539.50 11,949.80 12,374.94 12,814.93 13,270.87 13,742.73 14,231.66 14,737.70 8,648.45 17,070.34 25,257.60 33,201.87 40,894.53 48,326.62 55,488.87 62,371.72 68,965.18 75,258.98 81,242.46 86,904.60 92,233.95 97,218.68 101,846.55 106,104.83 109,980.40 113,459.62 116,528.42 119,172.20 121,375.87 123,123.72 124,399.59 125,186.65 125,467.55 6,370.27 12,967.10 19,798.56 26,873.01 34,199.07 41,785.70 49,642.17 57,778.04 66,203.30 74,928.22 83,963.46 93,320.04 103,009.41 113,043.40 123,434.25 134,194.69 145,337.84 156,877.34 168,827.14 181,202.08 194,017.01 207,287.88 221,030.61 235,262.27 249,999.97 243,629.73 237,032.90 230,201.44 223,126.99 215,800.93 208,214.30 200,357.83 192,221.96 183,796.70 175,071.78 166,036.54 156,679.96 146,990.59 136,956.60 126,565.75 115,805.31 104,662.16 93,122.66 81,172.86 68,797.92 55,982.99 42,712.12 28,969.39 14,737.73 0.00

1 250,000.00 2 243,629.73 3 237,032.90 4 230,201.44 5 223,126.99 6 215,800.93 7 208,214.30 8 200,357.83 9 192,221.96 10 183,796.70 11 175,071.78 12 166,036.54 13 156,679.96 14 146,990.59 15 136,956.60 16 126,565.75 17 115,805.31 18 104,662.16 19 20 21 22 23 24 25 93,122.66 81,172.86 68,797.92 55,982.99 42,712.12 28,969.39 14,737.73

There may be minor rounding differences in the calculation

(b) Assume that your family members supported your idea of buying an apartment and they managed to raise $500,000 for you to purchase the apartment. For the balance loan amount, you borrowed from Supreme Bank for a period of 25 years with a monthly payment derived from Q2(a) above. The outstanding loan amount as at 31.12.2012 is $246,843.00. Based on the additional information, you are to outline how the Shoebox Apartment purchase will impact on your financial ratios as shown below and comment on your own financial health:(15 marks)

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Therefore, loan repayment for the period 1.1.2012 to 31.12.2012 = $250,000 $246,843 = $3,157.It shows 6 months of mortgage has been paid. The total installment paid for the year 2012 is $1,251.56 x 6 = $7,509.36.

Statement of Cash Flow (Revised)

For the period 1.1.12 to 31.12.12 INFLOWS Active Income Gross salary and bonus (including employee CPF) Employer CPF contribution $46,000 $ 8,000 $ 0 $ 10,000 $ 500 $64,500 $30,000

Passive Income Home business Dividend income Interest income TOTAL INFLOWS OUTFLOWS Savings Fixed Outflows CPF for house mortgage Additional cash for Investment property Car loan payments Insurance premiums Total fixed outflows Variable Outflows Tax Food Transportation Clothing Entertainment/vacation Medical/dental care Utilities/household expenses Miscellaneous Total variable outflow TOTAL OUTFLOWS NET INFLOW (DEFICIT) (Total Income Total Outflows) 8 $ $ $ $ $ $ $ 0 2,500 3,500 500 1,500 150 5,000 $ 9,500 $ 7,509 $0 $ 2,500

$49,509

$ 3,000 $16,150 $65,659 -$ 1,159

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Personal Balance Sheet (Revised)

ASSETS Cash Current account Savings account Fixed account Total Cash/Cash equivalent Invested Assets Stocks Unit trust CPF Savings Investment Property Total Invested Assets Assets for Personal Use Residence Personal Property Car Total personal use assets TOTAL ASSETS As at 31 Dec 2012 LIABILITIES & NET WORTH $ 5,000 $ 30,000 $ 10,000 $ 45,000 $ 300,000 $ 25,000 $ 45,000 $ 750,000 $1,120,000 NET WORTH $ 500,000 $0 $0 $ 500,000 $1,665,000 TOTAL LIABILITIES & NET WORTH $1,665,000 $1,413,657 Liabilities Credit Card balances Car Hire purchase Mortgage loan balance (PA) Mortgage loan balance (IA) Total Liabilities $0 $0 $ 4,500 $246,843 $251,343

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

S/No

Financial Ratio (Before)

Financial Ratio (After)

Basic Liquidity Ratio Cash/near cash monthly expenses = $ 45,000 (Total out flow 12) = $ 45,000 ($58,150 12) = $ 45,000 $4,846 = 9.29 Debt Service Ratio Total annual debt repayments annual take home pay = $9,500 [($ 64,500 - $ 8000 (employer CPF) - $ 10,000 (employee CPF) ] = $9,500 $46,500 = 0.2043 = 20.43% Liquid Assets to Net Worth Ratio Cash/near cash net worth = $ 45,000 $ 910,500 = 0.05 = 5%

Basic Liquidity Ratio Cash/near cash monthly expenses = $ 45,000 (Total out flow 12) = $ 45,000 ($58,150 12) Taken from CPF = $ 45,000 ($4,846 + $1,251.56) calculator = $ 45,000 $6098 = 7.38 Debt Service Ratio Total annual debt repayments $1251.56 x 12 annual take home pay = ($9,500 + $15,019) [($ 64,500 $8000 (employer CPF) - $ 10,000 (employee CPF) ] = $24,519 $46,500 = 0.5273 Mentioned above as = 52.73% outstanding amt as Liquid Assets to Net Worth Ratio 31 Dec 12. Cash/near cash net worth = $ 45,000 ($ 1,665,000 ($246,843 + $4,500) = $ 45,000 ($ 1,665,000 - $251,343) = $ 45,000 $1,413,657 = 0.0318 = 3.18% Net Investment Assets to Net Worth Net Investment Assets to Net Worth Ratio Ratio Total invested assets net worth Total invested assets net worth = $ 370,00 $ 910,500 =($320,000 + $750,000) $1,413,657 = 0.41 = $ 1,120,000 $ 1,413,657 = 41% = 0.7923 = 79.23% Debt to Asset Ratio Debt to Asset Ratio Total liabilities total assets Total liabilities total assets = $ 4,500 $ 915,000 = $ 251,343 $ 1,665,000 = 0.005 = 0.151 = 0.50% = 15.1%

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COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

S/No 1

Financial Ratio Basic Liquidity Ratio

Before Purchase

After Purchase

Comments

9.29

7.38

Debt Service Ratio

20.43%

52.73%

Liquid Assets to Net Worth Ratio

5%

3.18%

Net Investment Assets to Net Worth Ratio

41%

79.23%

Debt to Asset Ratio

0.5%

15.1%

The basic liquidity ratio is still above the recommended three to six months and considered healthy. There is substantial increment which resulted in the ratio being driven above 45% hence considered unhealthy as there is likelihood of insufficient fund or net income to make regular arrears or debt payment. Since the ratio has decreased the cash/near cash worth is low constituting to low net worth. As it has increased to more than the recommended healthy mark of 50%, the investment plan has improved with the purchasing of the unit towards the capitalisation for my retirement. Even though the ratio has increased fairly, it still below 50%, thus considered solvent and able to meet the liabilities as they fall due.

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COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

Question 3 You are to navigate through Consumer Zone The Library Consumer Guides Your Guide to Investment Linked Policies and Consumer Zone Getting the Best Deal Tips on Insurance Products hosted by the Life Insurance Association at www.lia.org.sg and (a) Describe the difference between ILP and Traditional Whole Life, Endowment and Term Policies. (15 marks)

Differences
Investment Linked Insurance Plans (ILPs) - It encompasses a blend of protection, security and investment provision. Certain proportions or ratios of the premiums are assigned for the units purchased via investment link account. Traditional whole Life, endowment & Term Plans - 100% of the premiums are thrown in or entrusted in the insurers recommended or concurred fund. The fund is usually recommended and well suited to the disposition, term and currency of the insurers overall financial This account is usually open through liabilities. participated respective agencies, institutions or banks where the The performance of the fund will not premiums/funds will then be located. The only rely on the investment performance performance of these units and overall but in conjunction with other investment can then be monitored or determinants such as claims status and tracked by means of daily publication of records which are more or less than those unit prices. assessed, forecast or projected and the disbursement and overhead amount or value. - It does not offer and issue guaranteed - There are two sections or grouping of monetary values or cash returns. The benefits; guaranteed and noninvestment fluctuation and risk is usually guaranteed. The insurer undertakes the borne and conveyed by the insurer as it investment liability and exposure for the was originally designed according to the guaranteed benefits. On the other hand, risk preference and appetite (high, for non-guaranteed benefits such as medium, or low risk) of the insurer. dividends, yields and bonuses ties to the overall performance of the insurers participating portfolio and fund. - The cash value of the purchased units - Whole life and endowment plans allocated may be retracted with possible assures a guaranteed minimum sum charges imposed such as administrative after certain years or cycles the or surrender charges. Early annulment premiums have been settled and paid. and revocation would usually render or Incidentally, premature dissolution or 12

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

lead to tremendous loss and the cash termination may render huge costs, thus refundable or returnable may be lower resulting in lesser payable value than than actual premiums paid. the total arrears paid as they are specifically designed for long term duration. Term plans do not possess surrender value as it is meant for specific period, duration or term. - No dividend, benefits, gratuity, gains or - For selected whole life and bonuses are expected, payable and endowment plans, dividends and obligatory. bonuses may be harvested and issued basing on the insurers gains or surplus. It may not be guaranteed unless otherwise declared or officiated by the insurer, then they mature and transform into guaranteed additions to the plans. For term plans, bonuses and dividends are not applicable as they are bounded by protection coverage only and not connected or related to any investment/savings fundamentals. - Able to top up using riders and supplements and on monthly or annual basis. - It prohibits variation and flexibility for the insurance coverage, other charges and investment as they are wrapped and cumulated together. They are not differentiated and highlighted, disclosed and represented in the Policy Agreement and Product Summary.

- Able to top up or replenish your investments on daily, regular and ad-hoc mode or basis. It allows variation, flexibility and elasticity to modify your level of insurance coverage, other charges and the purchase of units as they are separated and not clustered or bundled creating better transparency. They are also highlighted, disclosed and represented in the Policy Agreement and Product Summary.

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COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

(b) State the 5 main points about Tips on Insurance Products. The 5 tips on the insurance product are: i) Take up insurance sooner rather than later

(10 marks)

Purchase or procure insurance while you are in your youth and in good shape and peak condition. It is even better if you are covered while still in the womb. Premiums are much lower when you are a baby and escalate higher when you advance in age and debilitated. It further alleviates if your health condition deteriorates. For health or life related insurance products, you may not be offered or eligible due to age ceiling and certain pre-existing chronic illnesses or diseases. Some may require you to undergo their own in house check ups before signing up for a policy. ii) 14 day free look period

Every insurance company allocate, confer and grant a 14 day window period or free look period to provide ample time for further consideration if any. It usually commences of the sign up date or receipt date of the policy portfolio. During this duration or interval, you may review or scrutinise the policy and fine prints to check and ascertain that it fulfil and fit in your requirements and requisite. However, should you made up your mind or conclude to give up, abort or withdraw, you need to write in officially to inform the insurance company of your intention to cancel and void and nullified and request for a refund. You may be 14

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

required to pay for the medical check up and tests carried by the company. In addition, you may encounter or suffer a deficit or loss for investment policy if the unit value or price has fallen drastically from the purchased value or price. iii) Enhance your policy with riders

You can also view or evaluate and consider attaching or reinforcing supplementary, additional or riders coverage, aid and ameliorate to boost and intensify the coverage of your insurance policy with a minimal amount. There are several insurance riders to opt from. For instance, you can include a rider that propose and allows: Disability disclaimer or waiver of fee or premium, whereby should any mishap occur and render you disabled, incapable or even handicapped for continued prolonged and sustained duration of time, payment of premiums automatically lapsed and ceased Accidental death benefit, which grants you extra or additional assistance and benefits in the case or occurrence of death and bereavement resulting from casualty, fatality, mishap or accident. Family income benefit, which assures, guarantees and undertakes to provide your family with monthly income if you die unexpectedly or prematurely.

iv) Choose a health insurance plan with guaranteed renewal

It is advisable and viable to select or pick health insurance plan that offers and provide guaranteed coverage as long as your premiums are duly paid. Certain 15

COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

insurance products and portfolios permits insurers to amend or modify the benefits, rates or other terms, details and conditions to tailor made to each individuals needs and circumstances during the renewal period. v) No need to buy several medical expenses policies

With medical expense insurance, the overall privileges and benefits you will enjoy are confined and limited to your actual expenditure or cost payment. Some policy holders are also barred from double claim. Thus, there is no necessity to undertake or sign up more than one medical expense policy. (c) Describe the role of Singapore Deposit Insurance Corporation (SDIC) (5 marks) The role of Singapore Deposit Insurance Corporation (SDIC) is to govern and manage the Deposit Insurance Scheme as well as Policy Owners Protection Scheme (PPF Scheme) in Singapore. This organization is an association limited by guarantee under the Singapore Companies Act. It is subjected and obligated to the Minister in charge of the Monetary Association of Singapore (MAS). Its missions and main objectives are to accumulate premium handouts and contributions from Deposit Insurance (DI) Scheme members, advocates the DI Fund, restitute and recompense insured depositors and inform and initiate the public on the DI scheme. In addition, it also gathers and accumulates levies from PPF Scheme members, administer the Policy holders Protection Life Fund as well as Policy Holders Protection General Fund, prepare and disburse claims and compensation settlements and payments. It also highlights and emphasize on public awareness on the PPF Scheme. ________________________________________________________________

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COR167e (TMA01) - MANAGING YOUR PERSONAL FINANCES (MOHAMED ALI B1210887)

References: 1) Chan Kheng Ping, Patrick, 2011. Managing Your Personal Finances, Singapore. McGraw-Hill Education (Asia). 2) CPF Website. Retrieved on Jan 30, 2013, from www.cpf.gov.sg, Total Interest Calculator. 3) Life Insurance Association, Singapore. Retrieved on Jan 30, 2013, from www.lia.org.sg. 4) Singapore Deposit Insurance Corporation. Retrieved on Jan 30 2013 from www.sdic.org.sg.

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