The financial planning consists of 6 steps that help you take a “big picture”

look at where you are bow, what you may need in the future and what you
must do to reach your goals.

Question 1

You are to navigate through “Consumer Zone-The Library-Consumer Guides-

Planning for your Family’s Financial Future” hosted by Life Insurance
Association at www.lia.org.sg and make your own notes on the following:

a) Identify the 4 steps to prepare a Monthly Cash Budget. (8 marks)

b) Using your own example, outline the differences between “Needs” and
“Wants”. (4 marks)

c) You are to construct your own Monthly Cash Budget by referring to the
Template shown on page 8 of “Planning for your Family’s Financial
Future” guide and
(12 marks)
I. State Your Total Monthly Saving Goal and the time frame to
achieve it
II. Identify which expense items that you would like to reduce
(4 marks)

d) Outline the 6 major areas of Financial Planning (12 marks)

Answer 1
a) In preparing a Monthly Cash Budget, the 4 steps identified are:

1. the creation of a list of one’s entire monthly income (what he/she

earns in a month)
2. the creation of a list that juxtaposes one’s targeted expenses (what
he/she plan to spend on) vis-a-vis all other monthly expenses (what
he/she will spend on). If some of the expenses are not incurred
monthly, they should then be prorated accordingly.
For example, if he/she paid $110 for the acquisition of the television
license at the beginning of the year, this is equivalent to a
breakdown of $9.17 per month.

3. the setting aside of a fixed amount of savings every month. A

reliable rule of thumb would be for one to set aside an emergency
fund that is equivalent to six months of one’s salary and

4. the constant revision and eventual adherence to the Monthly Cash

Budget in a disciplined and diligent manner.

b) “Needs” may be defined as something that a person have to have, while

“Wants” may be referred to as something that a person would like to have.
The basic human needs form the base of Maslow Hierarchy of Needs
which resonates with my needs such as a roof over my head for shelter,
sufficient food and water in order to remain healthy, clothing for warmth
and comfort. In contrast, my wants are more outlandish namely; to own a
lavish house, wear designer clothing and shoes, have buffet meals at
posh hotels.

c) MY FAMILY PLANNING BUDGET

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 Monthly Income

Average monthly take home pay (includes dividends,

interest, rental income, and cash profit from selling $ 3440
shares)

Monthly Expenses Using Cash (Priorities: 1 – needs 2 – wants)

Actual Targeted
expenses expenses Priorities
($) ($)
Fixed Expenses 1740 2140
Savings 200 500 1
Mortgage repayments (cash)/ Rental payments NA NA 1
Conservancy and property taxes 90 90 1
Insurance NA 100 1
Income Tax NA NA 1
Children’s education 200 200 1
Allowances for parents and children 900 900 1
Maid 350 350 1
Transport 200 150
Car loan repayments NA NA 1
Motor insurance and road tax NA NA 1
Car park fees NA NA 1
Petrol and maintenance expenses NA NA 1
Public transport 200 150 2
Utilities and house maintenance 650 550
Utilities bills 350 320 1
Home telephone 50 40 2
Mobile phone 50 40 2
Cable TV & Internet 200 150 2
Food and necessities 500 400
Groceries 200 200 1
Eating out 100 50 2

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Clothing and personal maintenance 100 50 2
Health and medical 100 100 1
Miscellaneous 250 200
Tour and family outings 100 60 2
Entertainment 50 40 2
Hobbies and sports 50 40 2
Others 100 60 2
TOTAL 3440 3440

I. Monthly saving goal setting is S$500 with a time-frame of 30 days to

achieve.

II. There are 3 forms of expenses that I would like to reduce in my Monthly
Cash Budget namely; (1) eating out, (2) tour and family outings as well as
(3) entertainment as these are mainly wants rather needs.

d) the 6 major areas of Financial Planning can be detailed as follows:

1. Cash Flow Management refers to how one apportions his/her income

vis-a-vis his/her daily expenses, and how one set aside adequate
monies and other assets in anticipation of future financial milestones.

2. Risk Management can be regarded as one of the most crucial areas

of financial planning. Essentially, it means ensuring that one has
enough family income in the event of unforseen circumstances such as
pre-mature death, disability or illnesses.

3. Investment Planning involves the devoting of one’s assets in diverse

financial instruments in order to meet one’s investment goals as well
as to grow one’s wealth.

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 4. Retirement Planning postulates the accumulation of one’s wealth
during his/her working years with the aim of achieving financial
independence upon retirement.

5. Tax Planning is aimed at minimising one’s taxes via the utilisation of

various tax benefits and incentives available to him/her.

6. Estate Planning forms the final phase of Financial Planning; it allows

one to transfer his/her assets to his/her beneficiaries with minimal
disruptions, liabilities and estate taxes.

Question 2

You are to navigate through “Consumer Zone-The Library-Consumer Guides-

Your Guide to the Nomination of Insurance Nominees 2009” hosted by Life
Insurance Association at www.lia.org.sg and answer the following questions:

a) Briefly describe the differences between Trust and Revocable Nomination

(6 marks)

b) Explain how Trust and Revocable Nomination differ under the following
circumstances: (12 marks)
I. Payment of Policy Proceeds
II. When a Nominee Dies before the Policyowner
III. Revoking a Trust and Revocable Nomination

Answer 2

a) When a policy owner makes a Trust Nomination at the time of

purchasing a policy or at any time after the policy has been activated,
he/she will lose all rights to the ownership of the policy. This meant that

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 all proceeds (living and death benefits) from the policy will be chanelled
to the nominees he/she named. While the policyowner is still required
to service the premiums for the policy, all the benefits of the policy are
given to the nominees named by the policy owner. However, if the policy
owner makes a Revocable Nomination, he/she will still exercise his/her
full rights and ownership over the policy. This meant that he/she can
modify or nullify a nomination at any time without needing the consensus
or prior notification of the nominee or nominees. In this case, only the
death benefits from the policy will be chanelled to the nominees while all
the living benefits will be given to the policy owner.

bI) Payment of Policy Proceeds

The Trust Nomination requires policy owners to notify his/her insurance

company and submit the relevant Trust Nomination Form in order to
ensure the nominees receive the benefits from the policy. When these
criterions have been fulfilled, all benefits from the policy, encompassing
both living and death benefits, will be released to his/ her nominees.

If the policy owner had nominated a trustee other than him/herself, the
proceeds can also be paid to his/her trustee. If the policyowner named
him/herself as the sole trustee, the proceeds will be paid to the nominees
who are 18 years old and above and to the parents/legal guardians (who
are not the policy owner) of the nominees below the age of 18 years of
age.

On the other hand, the Revocable Nomination requires the policy owner
to notify his/her insurance company and submit the completed Revocable
Nomination Form in order to ensure the nominees receive the benefits
from the policy

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 In this case, the policy owner will enjoy the living benefits as stipulated in
the policy. This may be in the event that the policy owner be stricken with
a critical illness. On his/her death, the remnants of his/her death proceeds,
if any, will be paid directly to the nominees named by the policy owner.

If any of the nominees are below 18 years of age, the proceeds will be
paid to the parent or legal guardian.

bII) When a Nominee Dies before the Policyowner

In the Trust Nomination protocol, should a nominee die before the policy
owner, his portion of the policy proceeds will be chanelled to the
nominee’s estate.

Whereas, in the case of the Revocable Nomination, if there is only one

nominee named, a revocable nomination will automatically be nullified
upon the death of the nominee. A revocable nomination will automatically
be nullified upon the death of all the nominees should there be more than
one nominee.

All the deceased nominees’ shares will be added to the surviving

nominee’s share of the death benefits should there be one surviving
nominee.

However, each deceased nominee’s share will be added to each surviving

nominee’s share proportionally to each surviving nominee’s initial share
should there be more than one surviving nominee. This amount is
calculated corresponding to formula prescribed by the Insurance
Nomination Law.

bIII) Revoking a Trust and Revocable Nomination

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 With regards to revoking one’s Trust Nomination, the individual is required
to complete and submit a prescribed Revocation of Trust Nomination
Form by getting the written consent of a trustee who is not the policy
owner, or of every nominee. The policy owner must then notify
his/her insurance company promptly before submitting the completed
Revocation of Trust Nomination Form.

In the Revocable Nomination protocol however, since the policy owner

retain the full rights and ownership over the policy, he/she may remove
his/hers existing nominations and nominate new beneficiaries at any time.
The policyowner will have to inform the insurance company. Then, the
policy owner has to complete the Revocation of Revocable Nomination
form and submit it along with the names of the new nomination to be
included.

Question 3

You heard about “Structured Deposits” over the media and you are interested
to know about it. You navigate through “Publication - Consumer Guide -
Investment Know How - Common Investment Products - Making Sense of
Structured Deposits” hosted by MoneySense at www.moneysense.gov.sg,
answer the following questions:

a) Briefly explain what is a Structured Deposit and its main characteristics

(6 marks)

b) Identify the 4 factors to consider before investing in Structured Deposits

(12 marks)

c) List the 3 types of Structured Deposits (6 marks)

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Answer 3

a) A structured deposit is basically a combination of a deposit and an

investment product; the returns of the investment product are reflected by
the performance of a number of underlying financial instruments. These
financial instruments usually include market indices, equities, interest
rates, fixed-income instruments, foreign exchange or a combination of
these.

Structured deposits have some distinctive features and characteristics

that are unique from traditional deposits. Structured deposits have
variable returns, and in some cases, variable maturities as well.

Variable returns - Structured deposits in general, provide the possibility

of higher returns compared to fixed deposits. However, one should
exercise caution in balancing this possibility of higher returns vis-a-vis the
risk of variable returns. In some cases, you may even get lower or no
returns at all.

Variable maturities - Structured deposits have periods of maturation that

may span from anything that is as brief as 2 weeks to something as
lengthy as 10 years. This essentially means that the policy owner may not
withdraw his/her money for other purposes before the policy matures.
Some structured deposits include a clause that allows the bank to redeem
or withdraw the deposit before the maturity date for reasons specified in
the terms and conditions of one’s contract. Where a structured deposit is
retrievable, one can expect to receive, at a minimum, the full value of
one’s principal premium paid. Depending on the circumstances at hand,
this early redemption feature may benefit the policy owner. For instance, if
you wish to utilize your money for any reason, you can get back your
principal (and possibly, additional returns) as soon as the redemption

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 occurs. You may, however, be exposed to a re-investment risk; a risk that
involves the investment of one’s money in a relatively low interest rate
environment when interest rates are dipping.

In view of the market conditions and one’s specific investment goals, a

structured deposit may or may not be a good strategy to invest one’s
money in. One should always seek the counsel and opinion of one’s
financial adviser to explain the risks and returns of the product as it is
subjected to the varying market conditions.

In addition, structured deposits are not covered under the Deposit

Insurance Scheme as compared to that of the fixed deposits made by the
policy owner.

b) The 4 factors to consider before investing in Structured Deposit are:

 Liquidity - Consider one’s cash flow and health as the money invested
will be locked away for a considerable period of time. Early withdrawal
though, may result in loss of part of one’s returns and/or principal premium
paid. Make sure that there are sufficient savings set aside before one
decides to invest in structured deposits.

 Risks – One also has to determine one’s risk appetite for these products.
Structured deposits are generally more risky than normal fixed deposits.
One should understand the risks involved and be fully prepared to counter
the possibility of a worst case scenario. One should always seek the
advice of one’s financial adviser to assess one’s risk appetite and
management.

 Returns - As mentioned earlier, structured deposits are dependent on a

number of underlying financial instruments and varying market conditions
such as market indices, equities, interest rates, fixed-income instruments,

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 foreign exchange, or an amalgam of these. Hence, one should understand
how the performance of these instruments may affect the returns on one’s
deposit. A point to note is that the past performance if these financial
instruments may not necessarily reflect its performance in the current or
future markets.

 Terms and Conditions – One should always read the terms and
conditions and other forms of documentation linked to the structured
deposit closely before making any decision on the policy that they would
like to commit to. Again, seek the counsel of one’s financial adviser in
order to provide clarity about the product at hand. Never buy anything you
do not understand clearly.

c) 3 types of Structured Deposits are:

i) Equity or Bond-linked which are connected to stocks, or a basket

of stocks, as determined by the issuer. These deposits may
also be connected to an equity index (for example, the S&P 500)
or a group of indices.
Bond-linked deposits are connected to bonds (for example,
Singapore Government Securities).

ii) Interest rates-linked deposits are usually linked to a formula that

is pegged to a specific floating interest rate (for example, the
Singapore Interbank Offer Rate).

The formulas used for such deposits may portray a number of

features. Instead of being directly connected to the specified
interest rate, your returns may be inversely related i.e.
when the specified interest rate falls, you may get better

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returns. Such products may be called "inverse
floaters" or "reverse floaters".

The payouts on such deposits may also increase at some pre-

determined markers in time if the deposit is not claimed by
the issuer.

iii) Credit-linked deposits are not connected to the performance of a

financial instrument, but rather the advent of what is
regarded as a "credit event" (for example, if a specified
company becomes insolvent or defaults on its loans).

Question 4

Your friend shared with you about the “Lease BuyBack Scheme”. You are
interested to find the answers for the following questions by navigating through
“Home Owners – Monetisation Options – Lease BuyBack Scheme” hosted by
HDB at www.hdb.gov.sg:

a) Describe the workings of the Lease BuyBack Scheme (10 marks)

b) Buying a property is the single biggest asset in our lifetime. With the help
of “Calculators & Games – Loan Repayment Calculator Period and Total
Interest Calculator” hosted by CPF at www.cpf.gov.sg, answer the
following questions based on the given assumptions:-
* Approved Housing Loan of $800,000
* Monthly Instalment Amount of $3800
* Interest Rate of 4%

(i) loan repayment period (attach a print screen of the

calculation) (4
marks)

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 (ii) total interest payable (please attach your detailed working
printout) (4
marks)

Answer 4

a) Under the Lease BuyBack Scheme, HDB will:

 Purchase the remaining lease period left of the flat ; and
 Disburse $10,000* subsidy in addition to the unlocked housing
equity; and
 Give $5,000^ out of the total amount unlocked, to the household as
an upfront lump sum cash payment. The remainder will be used to
purchase an Immediate Annuity from CPFB to provide a monthly
stream of income for life for the elderly lessees.

* Those who had previously owned a 4-room or bigger flat would

receive a subsidy of $5,000.

^ The upfront lump sum of $5,000 will be used to offset the

outstanding loan in the first instance. The cash payment received will
be dependent on the amount used to pay the outstanding loan.

The household members attached to the Lease BuyBack Scheme will then have
to continue to stay in their flat, for a period of 30 years; the remaining number of
years after HDB purchases the remaining lease period of the flat.

The amount of monthly income that an elderly household stand to receive from
the Lease BuyBack Scheme will be dependent on a number or criterions such
as:

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  the market value of the flat;
 the duration left in the lease;
 the amount of outstanding loan on the flat; and
 the age and gender of the elderly owner(s) in the flat

In the case of a 3-room flat, which has a remaining lease of 70 years and a
market value of $236,000, HDB will purchase the remaining 40 years of the lease
at $104,000 and provide a top-up of $10,000 in Government subsidy. From the
$114,000, a total amount of $5,000 will be paid up front. This leaves $109,000
remaining to purchase an Immediate Annuity from CPFB that yields a monthly
payout for life as follows:

Monthly payout from $109,000 (figures are indicative):

Monthly Payout from

62 yrs old 65 yrs old 70 yrs old 80 yrs old
Immediate Annuity*

$600 -
Sole Male Flat Owner $520 - $550 $550 - $580 $780 - $820
$640

$540 -
Sole Female Flat Owner $480 - $510 $500 - $530 $680 - $720
$580

Male and Female Joint $570 -

$500 - $530 $530 - $560 $730 - $770
Flat Owners** $610

* Monthly payouts are shown in ranges as the monthly payouts that a LBS
household receives under CPF LIFE may be adjusted yearly to take into account
factors such as the revised CPF interest rate and changing mortality rate in the
country. This payout range is based on CPF interest rates of between 3.75% and
4.25% and does not represent the lower and upper limits of the payouts.

** The Immediate Annuity amount of $109,000 is divided equally between the

joint owners falling in the same age group. The payout shown is the sum of the

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amount that each household will obtain for as long they are alive.

This is an illustration of the above example:

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bi) Loan Repayment Period

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bi) Loan Repayment Period

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bii) Total Interest Payable

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bii) Detailed Workings

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Bibliography:

http://www.lia.org

http://www.cpf.gov.sg

http://www.hdb.gov.sg

http://www.moneysense.gov.sg

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