There’s
a fine line between optimism and stupidity. Of late, too
many Singaporeans (home owners especially) have failed to spot that
line. And it’s not just property buyers: On a daily basis, Singaporeans
wipe out their savings on stock trading, tuition fees, or investment
schemes less stable than Charlie Sheen. In this article, I look at the
most common forms of over-investment:
$120k in stocks, $50 million in property, but Excel? Sorry, no budget.
What is Over-Investing?
In
personal finance, over-investing means putting more money into an asset
(whether it’s a house, stocks, ungrateful son, etc.) than the asset is
actually worth.
In terms of psychological appeal, it’s a very easy misstep. Our brains are wired to assume
anything worth doing is worth over-doing,
so even veteran investors fall for it. But let it get too far, and
you’ll compromise your financial security. Typical sources of
over-investment are:
- Renovations
- Rental Properties
- Tuition
- Trading Seminars
- Private Transport
I heard time is money, so I blew my life savings on these.
1. Renovations
Renovations
are a substitute. Because a new house costs too much, a do-over is the
next best thing. It’s like how I buy expensive jeans to make up for
being fat. (
Shut up, it works if I say it does).
A combination of shows like
Renovaid and cheaper reno loans are also taking effect. Elton Koon, a general contractor, mentions that:
“Last
time only private housing, like (owners of) bungalow or semi-D, will
call designers. Today a lot of HDB flats also like to have design.”
That smell is because it has to double as my kitchen.
According
to Elton, the most popular renovations involve walk-in wardrobes, “open
concept” layouts, and kitchen islands. In fact, Elton’s last project
was a HDB flat in Woodlands, which racked up a bill of over $45,000.
Come on. Is it
that important to
squeeze a walk-in wardrobe into your HDB bedroom? It’s not as if more
floor space for a bigger bed would be less attractive. And the
tremendous cost involved (some can reach $12,000 – $18,000) are just
excessive.
When the median cash over valuation (COV) in your area
is $30,000, a renovation fee of $45,000 is a serious over-investment.
Any appreciation in property value is chewed up by that extra cost. But
if you must do it, at least get the cheapest renovation loans; try sites
like
SmartLoans.sg.
2. Rental Properties
I’m
not just referring to shoebox flats. I’m referring to the crazed desire
for rental income, which has rookie investors buying property on a
whim. There are two impressions at work here:
- Home loans are cheap, so forget playing it safe. As long as I make the monthly repayment, I don’t care.
- Rental income is predictable
First off, home loan rates are
low. This is different from
cheap.
Home
loans can be low compared to loans in 1998. They can be low compared to
HDB rates. But they are never cheap as in baseline, “value meal at
McDonald’s” cheap.
Cheap = Something you can buy with
trivial effect to your finances.
There are plenty of places with low rent in Singapore.
Just
because home loan rates are low, that doesn’t mean you should
get presumptuous. We’re still talking 15 or 30 year loans, with
repayments that chew up much of your income. Nor are the rental incomes
predictable. If
oversupply grows, for example, or a global financial crisis forces ex-pats to head home, rental income may fall far below loan repayments.
In the event of decreased rental income or vacancy, your rental property is worth far less to you than you’re paying for it.
3. Tuition
Beyond
a certain point, tuition just becomes a waste of money. It should be
simple to evaluate: Put the money in, see if results improve. No
improvement? Get someone else. Otherwise, leave it as is.
But that’s not how Singaporeans behave. If they aren’t hiring
multiple
tutors for the same subject, they’re piling on repeat tuition sessions.
The assumption seems to be: “One session a week good, three sessions a
week better”.
Mrs. Ng, a tutor who teaches A-Level Chemistry, disagrees:
“I
always tell parents there’s no point hiring me for so many sessions a
week. Between twice a week and three times a week, there’s no
difference. Beyond that I’m just helping with homework.”
Does this story also involve returning wallets and misbehaved students? Because I’ll stab you.
And what about multiple tutors for the same thing?
What,
if one tutor improves the results by 10%, three tutors will rack it up
by 30%? Is that how we think it works? Take a closer look. I think
you’ll find that improvement remains fairly static, tied to the work of
the
best tutor, rather than multiple tutors.
Hire the good one; the rest are not a paying investment.
4. Trading Seminars
Oooh,
look, a trading seminar that teaches you how to make a million bucks.
Or another entrepreneurship talk, or motivational speaker.
I’ll
let you in on a secret. These seminars don’t really sell information.
They sell a temporary buzz.
You go there to have people yell in your
ear, real loud, that YOU CAN DO IT MAN. Then you come out all fired up,
make plans and phone calls, and give it up a week later.
Then you see another seminar in the papers…etc.
I know I can succeed, because I’ve paid well-dressed people to tell me I can.
There
are real seminar addicts out there, who invest anywhere from $800 –
$2500 a month on these things. Apart from the “high” of a pep talk, few
of them can translate their investment into actual dollars.
The next
time you go for one of these, check your bank book two or three months
later.
Is there any extra income you can attribute to the seminar? Or have things mostly stayed the same?
Look,
if all you want is a pep talk, send me $20 and your address. I’ll send
you a recording of an applauding audience, and scream your name onto the
backing track. Or just
follow us on Facebook, and we’ll update you on any trading courses that actually work.
5. Private Transport
Your car, your van, your bike, whatever. You know that most vehicles can
only depreciate right? Unless you’ve got something that’s going to be vintage, you’re just wasting money on any upgrades.
Wow, I sure get to places faster now I have this car. Almost three minutes faster.
Even
with “classic” vehicles, you might be spending more on maintenance than
you’ll ever get back.
To keep a car running past the 10 or 15 year
mark, you need skilled mechanics, a workshop worth of tools, and a lot
of luck. And even if you do keep it working, the sale price may not
cover the years of care and effort.
An even greater waste is the
use of body kits or engine mods. These can wreck your insurance claims,
raise maintenance costs, and add dubious value in a resale. This isn’t
Need for Speed: You’re
driving a glorified cart to work and back, not a race car. Tuning it is
like buying a donkey and trying to race it at the Turf Club.
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