Wouldn’t it be great if someone could pay a portion of your monthly home loan installments for you?
Unfortunately, most of us aren’t lucky enough to meet such a kind-hearted soul. Thus, we need to depend on ourselves.
However, there is a limit to how many hours we can work a day, so who or what else can we depend on to pay for our bills?
The cash in our bank account of course! This pool of money is often neglected and it shrinks every year due to inflation!
The only way to grow your money is by investing it!
To generate additional sources of income for your loan, high liquidity is one of the most important features of an investment. High liquidity basically means that your investment is able to convert to cash quickly.
Here are 6 forms of investments that will give you the liquidity and income that you need.
1. Growth Stocks
Growth stocks are issued by companies whose earnings and sales are growing faster than the average companies in the same industry.
Most growth stocks give little to no dividends as they prefer to reinvest in the company to grow it even further. Thus, investors mainly profit from capital gains.
How do capital gains work?
For example, let’s say you bought a share of Company A for $10 and you sold it at $15. Your profit of $5 is your capital gain.
Investing solely on growth stocks can be quite risky as the stock’s share price depends heavily on investor’s growth expectation of the company and the company’s actual growth rate.
If the actual company’s growth rate doesn’t meet investor’s expectations, investors will lose confidence of the company and the share price will likely fall. If the company continues growing and performs better than what investors expects, the share price will shoot up.
That’s when you can sell your stocks, take profit and use it to fund your loan.
2. Dividend Stocks
Dividend stocks are issued by companies that pay dividends frequently.
How do dividends work?
For every stock you own, you are paid a portion of the company’s earnings.
For example, let’s say if you own Company B’s stock that pays investors 5 cents per share quarterly, you would have gotten 20 cents (5cents x 4quarters) a share annually!
That may not seem a lot but if you own thousands of shares from different companies, all these dividends could add up and you could eventually make enough to cover your monthly loan instalments!
Check out this site for the list of dividend stocks in Singapore!
3. Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) is a type of security that invests in real estate.
They act like unit trusts, where funds are pooled together to purchase financial securities such as stocks and bonds. But for REITs, funds are specifically used to purchase real estate.
There are 3 types of REITs
1. Equity REITs
Equity REITs invest in properties.
Income is derived from renting out the property that the REITs purchased.
2. Mortgage REITs
Mortgage REITs invest in property mortgages.
Income is derived from the interest when they loan out the money to real estate owners.
3. Hybrid REITs
Hybrid REITs are a combination of Equity and Mortgage REITs.
They invest in both properties and mortgages.
REITs have plenty of advantages compared to owning an actual property.
Did you know that REITs are required to distribute at least 90% of their taxable income each year to enjoy tax transparency treatment by IRAS?
Dividends from REITs are also tax-free, whereas rental income is taxable if you own an actual property.
Furthermore, REITs are traded on the stock exchange which means you can sell your REITs any time! Whereas if you wanted to sell your property, you have to incur more costs, time and hassle!
These benefits make REITs more attractive to own than an actual property!
4. Index Funds
Index funds are a subset of unit trusts/mutual funds that track the market index such as the Straits Times Index (STI).
Index funds are considered passively managed funds as they don’t actively buy and sell securities, that is why they have lower fees than actively managed funds.
Fund managers of index funds try and replicate the holdings of the index. For example, if an index fund tracks the STI, it will hold the same weighting and the type of stock that the STI holds.
Index funds also provide a great way to diversify your investments.
A good example of an index fund would be Regular Savings Plans from banks.
Some examples of Regular Savings Plans would be POSB Invest-Saver, OCBC BlueChip Investment Plan, POEMs Sharebuilders Plan and Maybank Monthly Investment Plan.
Check out this article for the comparison of all the regular savings plans!
5. Exchange-Traded Funds (ETFs)
Exchange-Traded Funds is a subset of index funds that are just traded on the stock exchange.
Some examples would be the SPDR Straits Times Index ETF and Nikko AM STI ETF.
One downside of ETFs compared to Index Funds is that brokerage fees applies for each transaction. Just like buying and selling a stock in the stock exchange. Thus, if you were to invest monthly, you would incur hefty transaction fees!
Besides brokerage fees, ETFs give you the same benefits of an index fund such as diversification of your funds and low management fees.
6. Actively Managed Funds
Actively Managed Funds is a subset of unit trusts/mutual funds where the fund manager actively buys and sells securities of the fund in an attempt to beat the performance of the market index such as the STI.
Actively managed funds charge higher fees than Index funds and ETFs as more transaction costs is incurred when they actively buy and sell securities.
Despite higher fees, most actively managed funds don’t perform as well as an index fund. However, there are exceptions to this.
Some actively managed funds perform better than index funds depending on the skills of the fund manager.
Actively managed funds can be accessed through online platforms like Fundsupermart, Dollardex and Poems or they can be accessed through financial intermediaries like banks and insurance companies.
Some investment plans from insurance companies have perks such as a lump sum of money to offset these management fees and could also provide a crucial leverage on your investment!
Meeting your monthly home loan obligations can be difficult at times, thus it’s important to invest your money and generate a stream of income out of it.
Investing has been around for hundreds of years and it’s one of the only proven methods where you could make your money work for you.
If you don’t have the time or expertise to invest, it’ll be wise to hire an expert to invest for you, preferably an Investment Advisor/Financial Advisor.
Remember, the best time to plant a tree was 20 years ago, the 2nd best time is now.