Yesterday, your boyfriend suggested that it is time to purchase a HDB flat as your matrimony home. Congratulations, this is the Singapore way of marriage proposal! I think you should also ask for a fine dinning at a French restaurant for this marriage proposal as well! Joke aside, getting married is a huge commitment. You will be committing to this guy for the rest of your life. You’ll also be committing to a huge debt known as the mortgage loan. A dream home is everybody’s wish. But a home is not complete without children. With children means responsibilities and of course another big ticket “item.” Before you know it, there isn’t much money left to spend for setting up this dream home. No worries, I have written this article for those who are planning for marriage. My aim of writing this article is to help couples plan for long-term basis. As for short-term big ticket items like that super romantic honeymoon – it is always well worth it because it will give you good memories for the rest of your life. Before we continue, let’s take a hypothetical couple as a case study for this article: Mr. Romeo and Ms Julie have an identical in age and salary:

The Fundamental – Cash Flow

The most fundamentals of financial planning is the Cash Flow which is simply Income Minus Expense. The Cash Flow must be positive on a long run otherwise there goes that dream home and your dream family. Financial planning for the family is to be summed up as follows:

Managing your Income

Your family’s income is the most precious assets to secure. The lost of this income and its future stream will be a disaster for you and your family. All financial plans assume an income. An income can be active or passive or combination of both. When you are at the beginning of your career, your income is mainly active income. When you approach retirement, your accumulated assets can be converted to generate perpetual passive income. In all cases, without income there is nothing much to talk about.

The question of whether the family should have a single or double income earner will arise. This is a personal decision for the husband and wife. Of course this is a premature topic to discuss at this point. But I’ll show you that regardless of the arrangement between you and your husband, there will only be one outcome.

The question of whether to have a single or double income earner in the family is always due to one reason: Who should take care of the kids? Should this be “outsourced” to others or one of the parents should stay at home to do that?

Let’s assume the couple decides the “outsource” option. This means that the children will be:
 

• Taken care by a domestic maid; or

• A childcare center; or

• The in-laws; or

• A combination of the above.

In all the above, “outsourcing” involves costs. After netting off cost and overheads associated with this outsourcing, the amount involved could be equivalent to at least half of a person’s salary. Children’s medical bills will also increase significantly if a childcare center is used. There are also other intangible sacrifices involved in “outsourcing” such as detachment in bonding between mother and child. This is also a “cost.”

Another option is for one parent to stay at home to take care of the children. This directly translates to a tangible lost of income. This is by no means an easy option because society does not recognize the economic value of a stay-at-home-mum (dad). Much of the tax incentives are aimed at working mothers.

Therefore, for either option the household income of a family is likely equal to the single income earner.

This income must be protected at all cost. If it is possible, this income should be maximized as well.

Income should be protected and maximized by:

• Ensuring good future career prospect by being in a growing industry; or

• Having a stable job in the civil service; or

• Continuing education and training to stay relevant in the industry; and

• Insuring one self’s against partial disability, major illness and death. More on insurance later on.
  

Income is a function of one’s qualification, experience and market forces. Sad to say, a minimum income is required in order to start a family. There are many ways to calculate the minimum income required. An easy way is to calculate the required retirement funding and work backwards how much pay one should have. We will touch on retirement savings later but for now the formula to obtain the minimum required income is:

For example, Mr Romeo figured that the combine annual savings for the husband and wife required is $12,000 and assuming a saving ratio of 25% (i.e. 25% of the income is set aside for savings) than the minimum required household income is 12000/25%= $48,000 a year. For those who cannot meet this requirement, it does not mean they cannot get married. They should, however, pay attention to their career prospects and have their income increased in the future through education, training and switching to another industry with better opportunities.

Managing Your Mortgage

The mortgage loan will probably be your largest and most expensive commitment. It is so large that it will affect your ability to retire and more importantly your affordability to procreate!

Financial practitioners generally agree that the loan installments should not exceed beyond 35% of your total income. The ratio of the amount of loan installment to your income is called the debt-to-service ratio.

Our Romeo and Julie decided that their debt-to-service ratio should be 25% based on a single income earning assumption. Their yearly installment will be:

Annual loan payments = 25% x 48,090 = $12,022.50 or average monthly $1001.88

It is best that the loan be borrowed under the HDB Concessionary scheme because:

• Interest is pegged at 0.1% above the CPF-OA interest rate; and more importantly

• Banks tend to be more enthusiastic in repossessing the flat in the event when there are difficulties in repaying the debt.
  

You should also take note of existing rules limiting the use of CPF-OA. These rules change frequently. You should consult the relevant websites to get the latest rules.

Once you budget for the loan installment, you can calculate the maximum amount of loan you can afford. This automatically translates to what kind of flat you should look at – be it new or resale flat; 4 or 5 room flat. Given the loan installment, you can calculate the loan amount by the use of a financial calculator or by Excel sheet. Here is how you can calculate using an Excel sheet:

Our Romeo and Julie decided to take advantage of the HDB Concessionary loan. For prudent planning, they assumed a 4% interest. The loan period is for 30 years. The theoretical maximum loan they can borrow is: PV(4%/12, 12*30, - 1001.875,0,0) which is equal to $209,853.98. This figure is practical for a new flat although not necessary possible for a resale flat because it depends on location.

Romeo and Julie decided that they would loan 80% of the flat’s purchase price as loan with the balanced 20% paid in cash. Thus, their purchase price (or valuation price whichever is lower) is $209,853.98/80%=$ 262,317.475. They will have to top up 20%* 262317.475 = $ 52,463.495 upfront from cash/CPF-OA. For purpose of simplified calculation, legal fee, housing agent’s fee and stamp duty were not factored in.

Managing Your Insurance

Expenditure due to insurance can be expensive if not planned properly. Due to the complexity of insurance planning, many couples found themselves “trapped” when they fall into the tendency to buy “junk insurance” products. “Junk insurance” products are those which:

• That does not meet one’s needs OR

• If it does meet one’s needs, there exists a significantly superior alternative.
  

However, in the first place why should anyone set aside a budget for insurance? Insurance are needed for the following reasons:

Purpose of Insurance for Married Couple

There are three principles in insurance and these are as follows:

Many people are attracted to the benefits of the insurance products and they try to fit these to their needs. This is the wrong way of purchasing insurance. The right way is to identify the needs and look for the solutions.

Many years ago when Julie was 24 years old she met a competent independent financial adviser (IFA) who helped identify her needs. At age 24 her needs were:

• to secure a protection that reimburse hospitalization bills,

• pays for major / critical illness and

• Compensate for lost of income due to occupation disability.
  

The following were the recommendation based on this needs-analysis (when she was last age 24):

Mr. Romeo only realized the importance of insurance planning recently and on persuasion from Ms Julie made an appointment with this IFA. At this point, his needs were similar as Ms Julie’s. However, there is a likely chance Mr. Romeo may become a sole bread winner of the household. Thus he will need an additional term insurance of $1.2 million which is calculated by the opportunity cost due to lost of salary over the next 25 years (= 48,090x25= $1.2 million) assuming a discount rate of 0% for simplified calculation.

Mr. Romeo’s insurance portfolio (bought at an older age at last age birthday 30)

Take note that Romeo’s premium for whole life policy is $1,000 more than Julie’s. Partly this is due to gender differences but more significantly is because he is getting the insurance a much older age. Thus, getting insurance when young can save a significant amount in premium.

With the above insurance portfolio in place, the couple will be able to have the peace of mind to start a family.

Managing Savings

Most financial practitioners recommend at least 10% of one’s income into savings. The percentage amount of one’s income set aside for savings is called the Saving Ratio.

Our Romeo and Julie decide that they want to have a saving ratio of 25% for long-term investment for their retirement funding. Again assuming a single income earner family, such a saving ratio translates to 25%x48,090=$12,022.5 of annual savings. But is this saving ratio enough? For the purpose of calculation, they have to consult their trusted IFA. Their IFA calculation is as follows:

From the IFA’s calculation, they will need $11,283 of annual savings to retire. This is equivalent to 23.5% of the couple’s income. Thus, Romeo and Julie’s desire to saving 25% of the household income is sufficient. The breakdowns of the saving components are as follows:

Since CPF-SA and CPF-Medisave are earning a risk-free interest rate, they should consider investing into higher risk unit trusts for the $6,192.50 component assuming their risk profile permits it. 
 

So how does the Cash Flow look like for our Romeo and Julie? The Cash Flow table looks like below:

The Cash Flow is now complete.

• A quarter of the household goes into mortgage;

• A quarter into insurance premiums;

• A quarter into savings and long-term investments and

• A quarter goes into expenditure.

The budget for the family is indeed tight but not impossible. For calculation purpose we had made conservative assumptions and these are:

• The single income earner. Many couples prefer dual income earnings. The budget will look great for a dual income family.

• No provision for increment. If there is going to be an increment, the amount set aside for savings will increase in the future.

• No provision for higher bonuses.

• A 4% per annum mortgage interest rate. Currently at this point of writing it is 2.6% per annum.

If you have read up to this point, you will realize that financial planning for marriage is not trivial but not difficult. With some attention and time to focus on it, it is not an impossible task. You can always hire a financial planner to do this for you. But after reading this article, I am sure you already know most of the things you will need to do. Follow this plan and you will do well (financially) in your marriage. Just make sure you ask for a great honeymoon before you start your life long journey.

Happy planning!

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The author of this article, Mr.Wilfred Ling is a licensed financial adviser and Associate Director with Promiseland Independent. He can be contacted at This email address is being protected from spam bots, you need Javascript enabled to view it .