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:
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:
- Rental Properties
- Trading Seminars
- Private Transport
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.”
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.
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.
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.”
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.
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.
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.
What do you tend to over-invest in? Comment and let us know!
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