Thursday, December 24, 2020

Personal Update #2 : Personal Finances

The second instalment of my personal update is on my Personal Finances. This will not be a detailed discussion of my investments as I prefer to talk about the investment portfolio after the New Year on the Dr. Wealth Blog. 

Very briefly, my general investments did not move much as I had to survive a crash and then enjoy a brief "V-shaped" recovery after March 2020.  Dividends took a serious hit this year, but expenses were reduced, so the year turned out to be so-so in the end. 

I guess, in the grander scheme of things, I was in the luckier spectrum of Singaporeans, being able to channel close to 100% of my earnings back into the investment portfolio and was able to exploit the cheap brokerage fees and margin interest rates of Interactive Brokers. While I felt that it was more prudent to retain my traditional broker, all subsequent investment income was channelled into my new IBKR account. 

The better lessons in personal finance came right at the year-end after I was able to round up my earnings of 2020 and estimate my tax liability for 2021. While you can argue that I have a happy problem, I foresee a hefty tax bill next year (largest I ever experienced in my professional life). 

Sadly, as I have been reinvesting my earnings, I ended the year without a lot of spare change and had to look for spare cash to fund my SRS account - I was barely able to scrounge up $15,300 to max out my SRS this week. (Whew !)

There was some regret on my tax manoeuvres this because I did not understand CPF well enough.

Initially, my belief was that making a voluntary contribution to CPF would not result in tax advantages for folks who report taxes as sole proprietors as documented on the website. But as it turns out, this applies only to employees who already contribute to CPF from their salaries. As a sole proprietor, you can volunteer up to $37,740 of your earnings to reduce assessable income. The money will be distributed between all the CPF accounts, so part of this can be used to pay off your mortgages. 

In 2021, I will stop trying to manage my taxes at year-end. Instead, I will make it point to set aside 20% of my earnings into legal tax reduction schemes :

  • The first priority is to max out my SRS contributions to $15,300. 
  • The second priority is to them put up to $37,740 into my CPF account across my OA, SA and MA accounts.
As I'm older than my wife, I can always get the money out when I am 55. 

This way I will be able to get ERS or about $271k into CPF Life at a later stage in my life. 

2021 is already beginning to shape up as a tough year as my course sales have not fully recovered yet and likely to lag unemployment statistics in Singapore. Committing so much to SRS and CPF would be quite a burden and may even require some contributions from my dividend income.

Anyway, this note should be useful for middle-aged readers who run a business. 

I probably would not be able to enjoy a holiday until 2022. 


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