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Why do Rich get Richer while Poor Get Poorer?

By Dennis Ng

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Published: 02Sep2007
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Singapore just celebrated its 42nd birthday. One concern raised by Singapore's Prime Minister is the widening income gap between the Rich and the Poor.

If you look around, you may realize that there is a trend that the Rich Get Richer while the Poor Get Poorer. Why?

Actually Singapore is currently having one of its best golden years in history, with opportunities abound, it is possible for someone who is not Rich to BECOME Rich.

Can someone who is NOT rich become Rich? Yes, it is possible. One of the SECRETS why the Rich get Richer is that the Rich UNDERSTAND and USE Other People's Money (Financial Leverage).

How can you use Other People's Money (OPM) to become Rich? One possible way is to use good debt wisely.

The Good Debt that almost everyone has access to is a Housing Loan.

P.S. please avoid all bad debt. My definition of bad debt is any debt that you incur which you do not have a chance of making more money than the interest you pay is bad debt.

What is my definition of Good Debt? Good Debt is any debt whereby it is possible to get a higher return than the interest you pay on the Loan.

If you really think about it, Housing Loan is the CHEAPEST Loan anyone can ever get. Currently in Singapore, Housing Loan interest rate is 3% to 4%, while Car Loan is about 6%, Renovation Loan 8% and Credit Card 24%!

Actually, if one seriously think about it, it is very difficult for people to FAIL to beat Housing Loan interest rates. Why?

Imagine even if you know nothing about investing. Just putting money into Endowment savings plans gives you annual returns of about 4% over a 20 years period.

What about investing during crisis? Typically, a crisis comes by every few years and at least once in 12 years. During the last Asian crisis in 1998, DBS's share price was only $5, if someone only invest during a crisis when share prices are depressed, it is almost definite that the returns he earns will beat the interest rates charged on Housing Loans. Today, this person can easily sell off DBS's shares at over $20 (or 400% returns over 10 years or annual COMPOUNDED returns of 14.86%.

Let me show you an example:

A person has a $200,000 loan with 20 year loan period. Assuming he pays 4.5% interest on Housing Loan, total interest paid over 20 years is ONLY S$105,515.

If he has $200,000 Cash/CPF and use this money to earn 3.5% interest rate, in 20 years, total interest he earns would be S$168,453.20!!!

Because most people forget that Housing Loan interest is calculated on Reducing Balance Basis while your savings Compounds (interest is added on interest)!

I have to reiterate that from my observation the reason why many people end up retiring with a fully-paid house and little Cash/CPF are:

1. they commit to buy TOO big a house (more than they can afford).

2. they keep using their Cash to reduce/pay off their Housing Loan whenever they have excess cash on hand.

They would get ahead financially if they instead FOCUS on making their Cash/CPF work harder for them.

By doing so, it's possible for an average Middle Class Singaporean to accumulate S$1 million dollars by age 40.

Anyone who has excess Cash now I would advise you against using the money to reduce your Housing Loan outstanding. In my opinion, the next Global Financial Crisis can be 3 months to 2 years away and when the crisis comes, you would then realise it is very easy to make 50% to 200% returns on your capital. I've already shown you actual record of share prices in the previous Asian crisis to prove that it had happened before. The only question you need to ask yourself is when a crisis comes, will you have cash to invest then? You can move up from middle class to become Rich in the next crisis if you keep your excess cash instead of use it to reduce your loans now.

Dennis Ng is a Certified Financial Planner with 15 years of Bank Lending experience. He is known as a Housing Loan expert and often quoted in newspapers. He founded http://www.HousingLoanSG.com - a leading mortgage consultancy in Singapore. You can send him your comments to dennis@HousingLoanSG.com or call him at 65 6737 8801.

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