Start investing when you start to work. Know your assets, liabilities, and equity.

siekitchen@gmail.com
3 Jul 2021

As a working person, it is important to understand your assets, liabilities, and equity (i.e., A=LE). Let us look at the following examples.

Assets

Intangible assets

We start of with this asset.

Your qualification/skill is your intangible asset. It allows you to earn revenue via service contract with your boss, i.e., through job or freelancing. To be relevant, it is important to continue your education (aka lifelong learning). That way, you don’t make your intangible asset ‘obsolete’.

However, invest in education should be decided based on the cost-benefit analysis (CBA). Benefit should outweigh the cost. Select relevant and value-added courses that will help you to improve your intangible assets. It MUST NOT be a ‘trophy qualification’.

Real property

Real property is a good asset in Singapore. It is subjected to capital appreciation (i.e., value increase/decrease by market demand).

If the asset is bought by a home loan (i.e., mortgage or debt), then the asset is a mix of liabilities + equity (L+E). The bank co-owns the property. As you repay the loan, you reclaim more equity over your property.

The expenses that you pay for your property are the property tax, bank interest on loan, conservancy charges or monthly maintenance fees.

In comparison to rent, paying a housing loan is an ‘investment’ (plus expense/interest). You pay for the ‘equity’ over time. In contrast, if you pay rent, it is entirely your expenses (without return). In countries where the property market is constantly in over-supply, property is considered a risky investment.

The challenges to buy a property are the significant down-payment, one-time transaction costs, renovation/furnishing costs, and securing loan.

Car

Car is not an asset, unless it brings revenue, e.g., when you are ‘moonlighting’ as a Grab driver. There is no capital appreciation (increase in value), except depreciation. The depreciation value can be above $10k per year. Other expenses involved in owning a car are interest, petrol, maintenance, parts replacement, etc.

Liabilities

Loans

Loans are derived from Education, Property, and Car purchases.

Property loan can help to grow your asset (dependent on its capital appreciation). It can be a loss if there is a glut (i.e., over-supply) that caused depreciated value.

Education loan helps improve your intangible asset and allow you to generate revenue (i.e., salary/service fees).

Car loan can be used to generate revenue (or ‘cost recovery’) if you use it in gig economy of ‘shared rides’. Else, it depreciates rapidly.

Equity

Property

As you repay your mortgage, you start to increase your equity over that property. The final asset value depends on market demand. If there is uptrend, you earn profit from its capital appreciation.

Summary

The above is an example of your assets, liabilities and equity. Everyone starts off with intangible assets and sometimes liabilities such as education loan. But over time, you should be able to reduce your liabilities and improve your equity. The more asset you accumulate, the higher their values appreciate, the more you keep your equity.

Other assets that I did not mention are in share-holding (i.e., equity market), starting your own business, other investments, and insurance that protects your asset/health. Insurance is a liability if it is short-term, but some are structured to have lower expenses/premium over longer-term commitment. It is important to start your insurance policy early, especially if you want to start a family and have several liabilities under your belt.

Advice from other gurus

  • Grow your asset
    • intangible asset (i.e., your qualification/skill)
    • invest part of your salary
      • knowledge acquisition, e.g., books, courses
      • share-holding or investments that has at least 1% p.a. return (e.g., saving bonds, insurance savings plan)
      • once you have sum for down-payment, invest in property
    • assets to consider
      • shares
      • property
      • intangible assets (yourself)
  • Reduce your liabilities
    • get into loans that have better benefits/returns, e.g., property or continuous education
    • avoid loans that don’t add value. If you must own a car, wait until your asset grow and you can afford to draw out from your growing equity.
  • Manage your expenses
    • it is good to spend money to improve your well-being. This is considered as maintaining your ‘intangible asset’ (or mental health), but don’t overspend and accrue credit card debts.
    • understand your recurring expenses. If there are ways/alternatives to reduce these expenses, do it.
    • consider implementing ‘cost-recovery’ if your expenses are too high, e.g., car debt repayment can be offset by moonlighting as grab driver to earn revenue. If this is property repayment, consider renting out a room to a colleague to offset the monthly home loan repayment.

Costs incurred to hawkers

Study on the above topic will help most hawkers. For example, cost components for average hawker stall and other information conducted by Ministry of Trade and Industry (MTI) is important (ref. 1).

It suggested that raw material played the most cost for average hawkers, whereas rental contributed about 12% and utility at 9.3% (both at 21.3%).

Fig. 1 Cost component of average hawker centre (dated 2015; ref. 1)

As mentioned previously, the average cost of rental is $1500 with a range of $5 to $5000 (as offered bids; ref. 2). If a business operates daily without rest, then this translates to $1500/30=$50 per day from rental. Assume 12% rental cost is true, then total cost is $50/0.12 = $416. If daily total cost is true, then the cost of utility and rental would be $416 * 0.21 = $87.36. If raw material is approximately 60%, the cost is $416 * 0.6 = $250. Daily, a hawker would be spending $337.36. The rest is manpower and other service fees at approximately 20% (which is variable, because manpower could be business owner’s fixed salary and other service fees are variable).

To break-even, a business needs to achieve $337.36. If a bowl of product is $3, then the business owner needs 113 bowls per day. Subsequent bowls would be operating profit.

If I am to start a business in a location selling a dish, I will first determine the following:

  • Average footfall in the location per day (and especially compared during weekends)
  • Average peak time per day in hour.
  • Number of competitors
  • Average price of similar product around the location
  • Seats available
  • Parking area
  • Type of customers, e.g. workers, students, or other market segment.
  • Other marketing strategies.
  • Operations consideration, e.g. storage, freezers, footprint (sqm), process area (or kitchen), payment method (cash or cashless), and stall service provider (their efficiency), stall hygiene level (study the NEA awarded hygiene level, should be above Silver level; ref. 3)

Reference

  1. Examining the cost drivers of hawker food prices by MTI (https://www.mti.gov.sg/-/media/MTI/Legislation/Public-Consultations/2015/Examining-The-Cost-Drivers-of-Hawker-Food-Prices/fa_1q15.pdf)
  2. Hawker stall rental using bidding system is flawed (https://siekitchen.com/2020/05/16/hawker-stall-rental-using-bidding-system-is-flawed/)
  3. New food hygiene recognition scheme to replace existing grading system (https://www.channelnewsasia.com/news/singapore/new-food-hygiene-recognition-scheme-to-replace-existing-grading-10446030, 19 Jun 2018)

Hawker stall rental using bidding system is flawed

Bidding is a competitive process where contenders (i.e., bidders) express the price they are willing to pay for the item presented (with ask price). Anyone who expressed the highest bid price wins the item.

Singapore National Environmental Agency (NEA) is entity that offer the tender for bidders to express their highest price for monthly stall rental (ref. 1).

Bidding is susceptible to spikes and outliers, e.g. a lady who bidded $10,028 per month for a hawker stall to sell drink. According to NEA, the average price is $1,500 within a range of $5 to $5,000 (ref. 3). This would mean that the rental is $1,500 +/- 20% or from $1,200 to $1,800. So, the $10k monthly rental is considered very high for a drink stall.

The bidding process is also susceptible to those bidders who are out to win the bid and then sublet or assign the winning at higher price to others (in order to profit). NEA said they ensured that sublet and reassignment are not allowed, but did not elaborate how they will monitor and control this practice. I guess it would require stall operators to report this to the authorities.

For more information refer to ref. 4.

Reference

  1. NEA tender notice (https://www.nea.gov.sg/corporate-functions/resources/tender-notices)
  2. Bidder ends deal on record $10,028 monthly rental bid for Chomp Chomp hawker stall (https://www.straitstimes.com/singapore/10028-monthly-rental-bid-for-chomp-chomp-hawker-stall-highest-in-3-years-bidder-walked, 30 Aug 2018)
  3. NEA adopts transparent tender system for hawker stalls (https://www.nea.gov.sg/media/readers-letters/index/nea-adopts-transparent-tender-system-for-hawker-stallshttps://www.nea.gov.sg/media/readers-letters/index/nea-adopts-transparent-tender-system-for-hawker-stalls)
  4. Information for stallholder (https://www.nea.gov.sg/our-services/hawker-management/information-for-stallholders)