MOHAMEDALINSARWAR_TMA01

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

SCIENCE AND TECHNOLGY FACULTYBUILDING AND PROJECT MANGEMENT

SIM UNIVERSITYSINGAPORE

COR 167e: Managing Your Finances Tutor-Marked Assignment 01

Jan 2013 Presentation

Student Name: Mohamed Ali s/o N SarwarStudent ID : B1210887Tutor : Mr Kenneth Soh

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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)

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Statement of Cash FlowFor the period 1.1.12 to 31.12.12

INFLOWS

Active Gross salary and bonus $46,000Income (including employee CPF) Employer CPF contribution $ 8,000PassiveIncome Home business $ 0 Dividend income $ 10,000 Interest income $ 500

TOTAL INFLOWS $64,500OUTFLOWS

Savings $30,000

Fixed Outflows

CPF for house mortgage $ 9,500 Additional cash for house mortgage $ 0 Car loan payments $ 0 Insurance premiums $ 2,500 Total fixed outflows $42,000

Variable Outflows

Tax $ 0 Food $ 2,500 Transportation $ 3,500 Clothing $ 500 Entertainment/vacation $ 1,500 Medical/dental care $ 150 Utilities/household $ 5,000 expenses Miscellaneous $ 3,000 Total variable outflow $16,150

TOTAL OUTFLOWS $58,150

NET INFLOW (SURPLUS) (Total Income – Total Outflows) $ 6,350

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(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 SheetAs at 31 Dec 2012

LIABILITIES & NETASSETS WORTH

Cash LiabilitiesCurrent account $ 5,000 Credit Card balances $ 0Savings account $ 30,000 Car Hire purchase $ 0Fixed account $ 10,000 Mortgage loan balance $ 4,500Total Cash/Cash equivalent $ 45,000 Total Liabilities $ 4,500

Invested Assets Stocks $ 300,000Unit trust $ 25,000CPF Savings $ 45,000Total Invested Assets $ 370,000

Assets for Personal Use NET WORTH $ 910,500Residence $ 500,000Personal Property $ 0Car $ 0Total personal use assets $ 500,000

TOTAL LIABILITIESTOTAL ASSETS $ 915,000 & NET WORTH $ 915,000

(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 Financial Ratio1 Basic Liquidity Ratio2 Debt Service Ratio3 Liquid-Assets to Net Worth Ratio4 Net Investment Assets to Net Worth Ratio5 Debt-to- Asset Ratio

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S/No Financial Ratio Interpretation/Analysis1 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

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.

2 Debt Service RatioTotal 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%

As this ratio is below 35%, it is very sufficient, stable and healthy. I can positively and conclusively discharge and relieve my monthly/annual debt or loans with my current monthly/annual take home salary.

3 Liquid Assets to Net Worth RatioCash/near cash ÷ net worth= $ 45,000 ÷ $ 910,500= 0.05= 5%

It did not meet the 15% minimum required thus intricate or binding the possibility of being deadlocked in any complication, 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.

4 Net Investment Assets to Net Worth RatioTotal invested assets ÷ net worth= $ 370,00÷ $ 910,500= 0.41= 41%

It slag and falls behind the 50% recommendation guideline. I need to advance or make bigger strides in order for adequate and comfortable progression towards my retirement funding.

5 Debt to Asset RatioTotal liabilities ÷ total assets= $ 4,500 ÷ $ 915,000 = 0.005= 0.5%

As it is minimal and way below the 50%, I am considered financially stable and viable should my debts fall short, unsettled, overdue or in arrears.

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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 AmountLoan Amount $250,000Loan Repayment Period 25 yearsInterest Rate of the Loan 1st Year 3.5%Interest Rate of the Loan 2nd Year 3.5%Interest Rate of the Loan 3rd Year 3.5%Interest Rate of the Loan 4th Year 3.5%

You are to attach the sample printouts of your calculations as follows:-

Detailed WorkingsYear

OpeningLoan

InterestRate

MonthlyInstalment

TotalInterest

TotalPrincipal

CumulativeInterest

CumulativePrincipal

ClosingLoan

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Detailed workings - 1 Year Opening

Loan Balance

Interest Rate

Monthly Instalment Payment

Total Interest

Paid for the year

Total Principal Paid

for the year

Cumulative Interest payment

Cumulative Principal payment

Closing Loan

Balance

1 250,000.00 3.50 1,251.56 8,648.45 6,370.27 8,648.45 6,370.27 243,629.73 2 243,629.73 3.50 1,251.56 8,421.89 6,596.83 17,070.34 12,967.10 237,032.90 3 237,032.90 3.50 1,251.56 8,187.26 6,831.46 25,257.60 19,798.56 230,201.44 4 230,201.44 3.50 1,251.56 7,944.27 7,074.45 33,201.87 26,873.01 223,126.99 5 223,126.99 3.50 1,251.56 7,692.66 7,326.06 40,894.53 34,199.07 215,800.93 6 215,800.93 3.50 1,251.56 7,432.09 7,586.63 48,326.62 41,785.70 208,214.30 7 208,214.30 3.50 1,251.56 7,162.25 7,856.47 55,488.87 49,642.17 200,357.83 8 200,357.83 3.50 1,251.56 6,882.85 8,135.87 62,371.72 57,778.04 192,221.96 9 192,221.96 3.50 1,251.56 6,593.46 8,425.26 68,965.18 66,203.30 183,796.70

10 183,796.70 3.50 1,251.56 6,293.80 8,724.92 75,258.98 74,928.22 175,071.78 11 175,071.78 3.50 1,251.56 5,983.48 9,035.24 81,242.46 83,963.46 166,036.54 12 166,036.54 3.50 1,251.56 5,662.14 9,356.58 86,904.60 93,320.04 156,679.96 13 156,679.96 3.50 1,251.56 5,329.35 9,689.37 92,233.95 103,009.41 146,990.59 14 146,990.59 3.50 1,251.56 4,984.73 10,033.99 97,218.68 113,043.40 136,956.60 15 136,956.60 3.50 1,251.56 4,627.87 10,390.85 101,846.55 123,434.25 126,565.75 16 126,565.75 3.50 1,251.56 4,258.28 10,760.44 106,104.83 134,194.69 115,805.31 17 115,805.31 3.50 1,251.56 3,875.57 11,143.15 109,980.40 145,337.84 104,662.16 18 104,662.16 3.50 1,251.56 3,479.22 11,539.50 113,459.62 156,877.34 93,122.66 19 93,122.66 3.50 1,251.55 3,068.80 11,949.80 116,528.42 168,827.14 81,172.86 20 81,172.86 3.50 1,251.56 2,643.78 12,374.94 119,172.20 181,202.08 68,797.92 21 68,797.92 3.50 1,251.55 2,203.67 12,814.93 121,375.87 194,017.01 55,982.99 22 55,982.99 3.50 1,251.56 1,747.85 13,270.87 123,123.72 207,287.88 42,712.12 23 42,712.12 3.50 1,251.55 1,275.87 13,742.73 124,399.59 221,030.61 28,969.39 24 28,969.39 3.50 1,251.56 787.06 14,231.66 125,186.65 235,262.27 14,737.73 25 14,737.73 3.50 1,251.55 280.90 14,737.70 125,467.55 249,999.97 0.00

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)

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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 Gross salary and bonus $46,000Income (including employee CPF) Employer CPF contribution $ 8,000PassiveIncome Home business $ 0 Dividend income $ 10,000 Interest income $ 500

TOTAL INFLOWS $64,500OUTFLOWS

Savings $30,000

Fixed Outflows

CPF for house mortgage $ 9,500 Additional cash for Investment property $ 7,509 Car loan payments $ 0 Insurance premiums $ 2,500 Total fixed outflows $49,509

Variable Outflows

Tax $ 0 Food $ 2,500 Transportation $ 3,500 Clothing $ 500 Entertainment/vacation $ 1,500 Medical/dental care $ 150 Utilities/household $ 5,000 expenses Miscellaneous $ 3,000 Total variable outflow $16,150

TOTAL OUTFLOWS $65,659

NET INFLOW (DEFICIT) (Total Income – Total Outflows) -$ 1,159

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Personal Balance Sheet (Revised)As at 31 Dec 2012

LIABILITIES & NETASSETS WORTH

Cash LiabilitiesCurrent account $ 5,000 Credit Card balances $ 0Savings account $ 30,000 Car Hire purchase $ 0Fixed account $ 10,000 Mortgage loan balance (PA) $ 4,500Total Cash/Cash equivalent $ 45,000 Mortgage loan balance (IA) $246,843 Total Liabilities $251,343Invested Assets Stocks $ 300,000Unit trust $ 25,000CPF Savings $ 45,000Investment Property $ 750,000Total Invested Assets $1,120,000

Assets for Personal Use NET WORTH $1,413,657Residence $ 500,000Personal Property $ 0Car $ 0Total personal use assets $ 500,000

TOTAL LIABILITIESTOTAL ASSETS $1,665,000 & NET WORTH $1,665,000

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S/No Financial Ratio (Before)

Financial Ratio(After)

1 Basic Liquidity RatioCash/near cash ÷ monthly expenses = $ 45,000 ÷ (Total out flow ÷ 12) = $ 45,000 ÷ ($58,150 ÷ 12) = $ 45,000 ÷ $4,846 = 9.29

Basic Liquidity RatioCash/near cash ÷ monthly expenses = $ 45,000 ÷ (Total out flow ÷ 12) = $ 45,000 ÷ ($58,150 ÷ 12) = $ 45,000 ÷($4,846 + $1,251.56) = $ 45,000 ÷ $6098 = 7.38

2 Debt Service RatioTotal 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%

Debt Service RatioTotal annual debt repayments ÷ annual take home pay= ($9,500 + $15,019)÷ [($ 64,500 - $8000 (employer CPF) - $ 10,000 (employee CPF) ]= $24,519 ÷ $46,500= 0.5273= 52.73%

3 Liquid Assets to Net Worth RatioCash/near cash ÷ net worth= $ 45,000 ÷ $ 910,500= 0.05= 5%

Liquid Assets to Net Worth RatioCash/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%

4 Net Investment Assets to Net Worth RatioTotal invested assets ÷ net worth= $ 370,00÷ $ 910,500= 0.41= 41%

Net Investment Assets to Net Worth RatioTotal invested assets ÷ net worth=($320,000 + $750,000) ÷ $1,413,657= $ 1,120,000 ÷ $ 1,413,657= 0.7923= 79.23%

5 Debt to Asset RatioTotal liabilities ÷ total assets= $ 4,500 ÷ $ 915,000 = 0.005= 0.50%

Debt to Asset RatioTotal liabilities ÷ total assets= $ 251,343 ÷ $ 1,665,000 = 0.151= 15.1%

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Mentioned above as outstanding amt as 31 Dec 12.

Taken from CPF calculator

$1251.56 x 12


S/No Financial Ratio BeforePurchase

AfterPurchase

Comments

1 Basic Liquidity Ratio 9.29 7.38 The basic liquidity ratio is still above the recommended three to six months and considered healthy.

2 Debt Service Ratio 20.43% 52.73% 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.

3 Liquid Assets to Net Worth Ratio

5% 3.18% Since the ratio has decreased the cash/near cash worth is low constituting to low net worth.

4 Net Investment Assets to Net Worth Ratio

41% 79.23% 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.

5 Debt to Asset Ratio 0.5% 15.1% 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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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)

Traditional whole Life, endowment & Term Plans

- 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.

This account is usually open through participated respective agencies, institutions or banks where the premiums/funds will then be located. The performance of these units and overall investment can then be monitored or tracked by means of daily publication of those unit prices.

- 100% of the premiums are thrown in or entrusted in the insurer’s recommended or concurred fund. The fund is usually recommended and well suited to the disposition, term and currency of the insurer’s overall financial liabilities.

The performance of the fund will not only rely on the investment performance but in conjunction with other determinants such as claims status and records which are more or less than assessed, forecast or projected and the disbursement and overhead amount or value.

- It does not offer and issue guaranteed monetary values or cash returns. The investment fluctuation and risk is usually borne and conveyed by the insurer as it was originally designed according to the risk preference and appetite (high, medium, or low risk) of the insurer.

- There are two sections or grouping of benefits; guaranteed and non- guaranteed. The insurer undertakes the investment liability and exposure for the guaranteed benefits. On the other hand, for non-guaranteed benefits such as dividends, yields and bonuses ties to the overall performance of the insurer’s participating portfolio and fund.

- The cash value of the purchased units allocated may be retracted with possible charges imposed such as administrative or surrender charges. Early annulment

- Whole life and endowment plans assures a guaranteed minimum sum after certain years or cycles the premiums have been settled and paid.

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http://www.lia.org.sg/


and revocation would usually render or lead to tremendous loss and the cash refundable or returnable may be lower than actual premiums paid.

Incidentally, premature dissolution or termination may render huge costs, thus resulting in lesser payable value than 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 bonuses are expected, payable and obligatory.

- For selected whole life and endowment plans, dividends and bonuses may be harvested and issued basing on the insurer’s 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 or replenish your investments on daily, regular and ad-hoc mode or basis.

- Able to top up using riders and supplements and on monthly or annual 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.

- 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.

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(b) State the 5 main points about Tips on Insurance Products. (10 marks)

The 5 tips on the insurance product are:

i) Take up insurance sooner rather than later

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

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intention to cancel and void and nullified and request for a refund. You may be 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

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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 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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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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http://www.sdic.org.sg/

http://www.lia.org.sg/

http://www.cpf.gov.sg/

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