In this issue of Money Make Over, we shall look at two different lifestyles of a young army colonel and a news anchor woman; both of whom are more or less the same age and both have just started families of their own with young children. Starting a family is never easy on the wallet as we all know; mortgages, car loans, child care expenses and very soon college tuition fees and on top of that, you multiply everything by two if you have more than one child, which most couples do. At this stage in life, many couples don't have any money to make over! It is hard enough as it is making ends meet every month, trying to make sense of your personal finances can be a real challenge for many middle income people. But do not despair, with a bit of planning and clever debt management, things may not seem as daunting. Let's deal with the army colonel first.

The old saying about policemen's wives count bank notes and army wives count empty bottles is not quite true in the case of Col. Winn Vijitvartakarn because he does not drink, well not that much! and Col. Winn is more of an officer and a gentlemen than your typical army colonel. A grandson of Luang Vijitvartakarn, whose family has served in the armed forces for many generations. Therefore, in the case of Col. Winn, it was not really his choice to join the army but family tradition dictated otherwise. For a start, he did not graduate from Chulachomklae Military Academy , but he received a Master degree in computer science from American University in Washington D.C. and an MBA from Mary Mount University in Virginia . Given his educational background, he would have been more at home working for Microsoft or IBM rather than the computer department of the Thai Army. But that is all in the past now. The one thing that is true about the old saying regarding army wives is that their husbands' salaries are not very high. Although, I am not sure whether policemen's salaries are any higher, but the boys in Khaki uniforms tend to have a bit of a reputation of taking care of themselves. (No intention to offend any readers who are police officers!).

In the case of Col. Winn, he said jokingly that his salary is so low that he does not qualified for a credit card! In fact he carries a KTC credit card and the only reason why managed to get it, is because he was once a presenter for the company. This is a really sad reality about the state of our armed forces but that's life I suppose. Therefore, Col. Winn relies heavily on his wife when it comes to managing the family's investment portfolio, which is not untypical for many Thai couples. This goes to show who is the real “Kam Nun” when it comes to personal finances!

Current portfolio is divided into 60% stocks, 30% equity funds and 10% cash. Under any circumstances, this can only be described as a highly aggressive portfolio with 90% exposure to the stock market. Although, the couples are still relatively young (in their mid 30s) and can take greater risk because of the fairly long investment horizon but I still feel that they are taking on too much risk given their personal circumstances of having a second baby on the way and a big mortgage to pay. In fact, I was told later that it was only at the beginning of this year that they had increased their equity exposure to 90%; hoping for a repeat of last year's stellar performance, when the SET Index went up by 116%. Part of the money was supposed to go towards a down payment of their new house. Now that we are more than half way into the year and the market has gone down by 20%, things are not looking very promising for the couples. As a make over to their portfolio, I would recommend the followings:-

Equity : Reduce total equity exposure to about 40% (down from 90%). Although, normally I would recommend young people in their mid 30s with positive cash flow to keep their equity exposure to around 70% but in this particular case, I think 40% should be enough, given that they will have additional expenses when the second baby arrives and a mortgage payment for their new home will stretch their budget by quite a wide margin without any room for mistakes or emergencies from unforeseen events. Moreover, Col. Winn does not have positive cash flow so the couples rely very much on the wife's income. Given that their equity portfolio is not that big and both of them do not possess sufficient expertise nor the time to manage their equity portfolio themselves, I would suggest that 15% of the asset should go into an index fund (either SET Index or SET-50 should do just fine), another 15% into an actively managed equity fund and 5% should be diversified offshore through foreign investment funds (FIFs). Yes, for the first time, people with a relatively small portfolio can now diversify offshore through FIF. I strongly recommend this because not only will the overall risk of your portfolio be lower through international diversification, but the idea that you are not pin down in one country is highly appealing. Why stay in Thailand when there are other opportunities elsewhere? But in the case of Col. Winn, I think 5% exposure is the maximum limit.

Fixed Income: right now the couples don't have anything in bonds nor corporate debentures, therefore I would suggest that part of the proceeds from their equity portfolio should go into short-term fixed income funds (35%) and long-term fixed income funds (5%) respectively. There 2 reasons for being over weighted in short-term funds, the first being that they will need to set aside a big portion of their savings for a down payment on their new home and secondly, interest rates are likely to move up rather than remain constant, therefore, 5% exposure in a long-term fund should be adequate. Moreover, given the small size of their portfolio, mutual funds are the only realistic option for the couples.

Property : Once the house is finished, it will make up quite a large part of the overall portfolio. Due to lack of information, my guess is about 15%. However, the couples will not be getting any rental income from the property because it is being built for the wife's parents to live in. But long term appreciation of the land (just off Rama 9 road) itself should be quite promising. Col. Winn has another house on Sukhumvit Soi 24 where the couples currently live.

Cash : As a rule of thumb, 5% cash level or 6 months worth of living expenses, which ever is lower, should be adequate, especially now that several bankers have come out to say that Thai interest rates may not follow the US Federal Reserve's lead due to ample liquidity in the local market.

College Planning :Although, the couple's first son is only 3 years old but if they have plans to send the child for further study in the US , where both the parents were educated, it is crucial that they set up a college plan immediately. After all, they only have 15 more years before the first child will be off to college and the second child will follow closely 3 years behind. College tuition fees will be the biggest expense item for the couple in the foreseeable future if they want their children to have the kind of education they had. According to my estimate, they will need in excess of Baht 15 million to send both children to a good school in the US . Luckily, the couple may have gifts or inheritance from the grand parents, otherwise, they will have to improvise by sending their children to local universities instead.

Debt : Right now the couple is debt free but not for long. Mortgage on their new home will be a major drain on the cash flow. Therefore, it is important to keep monthly installment below 30% of the couple's income. Col. Winn has only one credit card but his wife has 4. Personally, I feel that having two cards is more than adequate and make sure that these are the ones that waive their annual fees. Moreover, credit cards' loan can be a real killer if you fall into the debt trap due to their high interest rates.

Retirement Planning : Being in uniform, Col. Winn is a member of the Government Pension Fund (GPF). When he first joined the army 8 years ago, that was the last year before the armed forces switched from pension schemes to GPF (defined contributions), which is a good thing because if you think army's pay is low, their pension scheme is worse! By being in a GPF, at least real money is being invested and thus far, the track record has been highly respectable. As a supplement to the couple's retirement savings, I would suggest that both of them invest in Retirement Mutual Funds (RMF) in order to take advantage of the Baht 300,000 tax deduction and I would recommend that they choose equity funds because they have in excess of 20 years investment horizon.

Life Insurance : Last but not least, life insurance is a must for young families. Although, Col. Winn does not have one but he is covered by the army's group insurance. Besides, he's a computer engineer and does not get sent to the front line, therefore, his risk profile is much less than a typical soldier. His wife and son have annuity life cover, which I would recommend that they switch to a term life instead. A 3 years old boy does not need a life insurance but the father does. I would recommend that both Col. Winn and his wife take out a 20-year term life insurance where premiums will be lower and the sum insured will be greater than other types of policy. This is crucial to many middle income families where they can not afford any interruption to their cash flow. In addition, some sort of a health insurance rider should also be attached to the main policy. The main idea is to use life insurance purely as a risk management tool and keep the investment portion separate.

The second real life story for our Money Make Over column could not be more different from that of Col. Winn, Khun Cholpansa Narula (Hunny), 27, is a news anchor woman for an English news channel “Newsline” on channel 11. She works 3 days per week from 22:20 until 23:10 h. Therefore, this would not be your typical 9-5 kind of job and it requires English speaking skills. Khun Hunny, as she likes to be called, went to an international school and received her bachelor and master degrees from ABAC and Ramkamhaeg universities respectively. Khun Hunny supplemented her income by taking on additional jobs as a TV presenter for SET in the City programme with Family Know How Co., Ltd. and other companies as well. Thus, the break down of her income is 30:70, as in 30% of her income is derived from monthly salary and 70% from additional income, which is quite different from many of us who rely solely on monthly salary and may be some bonus (depending on how generous the boss feels!). Being a TV presenter is a dream job for many people. Not only does it pay quite well but you enjoy a certain freedom without having to sit behind a desk from 9-5 and get to meet or interview interest people, some of them VIP. It goes without saying that to be successful in this profession, it helps to be beautiful! Or if you are a guy, being handsome does not hurt. After all that's what show business is all about, even news readers need to have the look as well as literacy skills. However, Khun Hunny reiterated that TV presenters and “Pretties” at trade shows are two different professions. Being a “pretty” at a Motor Show, all you have to do is stand there and … well, look pretty, but being a TV presenter, requires journalistic skills to drive home what viewers expect to hear.

Khun Hunny's current portfolio comprises of 30% stocks, 15% equity funds, 55% cash and 2% property. Once again, at the age of only 27 with positive cash flow (she claims that her saving rate is 50%, which is pretty amazing given the age of consumerism that we live in today), I would recommend that her equity can be as high as 70% because she has over 30 years investment horizon. She likes to invests directly in the market in order to get hot IPO stocks but she also invests in mutual funds. However, given the size of her portfolio, I still think that she will be better off investing through mutual funds. Those “elusive” hot IPO stocks are great fun in a bull market but most brokers tend to allocate the lion share of the IPO cake to big investors with multi-million Baht volume or large institutional investors like mutual funds. Therefore, my recommendation is to get rid of the individual stocks and out 25% of the portfolio into either SET Index or SET-50 funds, 25% in an actively managed equity funds by using M&W Stars Rating as a buying guide and 5% offshore via FIFs.

Cash holding of 55% is way too high for someone with positive cash flow like Khun Hunny. Therefore, I would give the same recommendation that 5% or 6 months worth of living expenses, which ever is lower, should be adequate. Instead 23% of her asset should go into Fixed Income Funds . A 18% vs 5% split between short and long-term funds respectively should do quite nicely. The main aim for the fixed income portion is principal protection in times of rising interest rates. The best case scenario that one can hope for from fixed income funds this year and next is about 2% which is peanuts when compared to the average long term return from the SET. Therefore, the main growth driver of this portfolio will come from equity not bonds but the 23% exposure should add stability to the overall portfolio should we run into a nasty bear market surprise. Similar to Col. Winn, due to the small size of Khun Hunny's portfolio, fixed income mutual funds are the only realistic option for her.

College Planning : Although, Khun Hunny is only 6 months pregnant but it does not hurt to get an early start in setting up a college fund, especially if she wants overseas education for her child. Even if she does not send her children overseas, college tuition fees at her old school, ABAC, costs 3 times as much as state universities like Chula and Thammasart. Therefore, college planning should not be taken lightly because according to my estimate, Khun Hunny will need in excess of Baht 0.5 million to order to send her first child to same school as she did. And if she decides to have more than one child, then the maths become quite simple on how much college tuition fees will be.

Debt : Right now Khun Hunny has a 30-year mortgage to take care of. Like all good daughters, she has to look after her elderly mother. The house is in her name but she lives with her husband and she lets her mother stay in the house. As a rule, it is important to keep monthly installment below 30% of one's income. Khun Hunny carries 4 credit cards but no debt. She keeps them purely for promotional campaigns of the different card companies.

Retirement Planning :Being self-employed, she has already put money into 2 flexible Retirement Mutual Funds (RMF) in order to take advantage of the Baht 300,000 tax deduction. Although, I have nothing against flexible funds but I still would recommend equity funds because Khun Hunny has about 28 more years before she can take her money out of the RMF account and besides flexible funds are notoriously difficult to manage well in real life.

Life Insurance : Khun Hunny has a life policy with the biggest life insurance company in Thailand . My advice to her is similar to Col. Winn and his wife, she should take out a 20-year term life insurance where premiums will be lower and the sum insured will be greater than other types of policy, plus some sort of a health insurance rider to the main policy.

Overall, Khun Hunny's personal finances are in pretty good shape. She is one of those “ultra” modern women where she decided to keep her maiden name after marriage and all her financial assets are kept separate from that of her husband's. In this way, they are not “officially” married which is a smart move given that 1 in 5 couples in Bangkok end up being divorced and probably another 2 out of 5 couples are thinking about it!