The early phase of your young adult life involves getting started in working, earning income.
It also involves some big milestones that young adults have to come to terms with in Singapore.
You need to apply for a BTO HDB flat early because it will take some time (3-5 years) to build.
Once you get the keys to your flat, you have six months to register to be married. Most couples usually bundle the traditional wedding together.
For some couple, they plan to have the baby within the first 2 years.
This is the script.
Financially, the challenge is that these milestones do cost a fair bit of money.
I would have thought that how to navigate and tackle the financial and non financial side of these milestones would be out there. Your seniors and friends who experienced this would have shared your experience.
But some of my friends, it seems, are finding it a challenge with the financial aspects.
I have never:
- Applied for a BTO flat
- Got Married
- Did a Renovation
- Give birth to a baby or made one
I do know a little about money.
So today I am going to bring you through my thought process after looking through my peers, my younger peers go through this and a step by step way to plan for this financially.
This will serve as the blueprint I can passed to some young adults who are trying to make sense of this.
The Important Concept
Before we get start, there are some of the philosophies that you should keep in mind when thinking about planning for this financially and how you should think about this:
- These steps will work to plan for milestones that are close together but also if they are spaced out. This is not just for wedding, baby and home renovation
- The goal is always to live a life within your means. This means not to live a life that as a couple you are unable to service
- You are matching your cash inflows (typically your job) with the two main categories of outflows: your annual expenses to live a life and the cash outflows required for these early financial milestones
- If your cash inflow is too little that cannot support your cash outflow, reduce your cash outflow
- If your annual expenses to live a life is too much relative to your cash inflow, you will not have enough to meet these milestones
- If you have too wild of a requirement for the milestones, you need to severely reduce your annual expenses to live a daily life or you need more cash inflow. Otherwise you need to reduce your requirements
- This plan is to provide clarity on
- What and how much you need
- When you need and how much
- Whether you can conservatively meet those needs financially
- It does not provide clarity on the non financial aspects
- If you are financially constrain, you need to negotiate with yourself, your spouse and your family to tweak your plan
- Always iterate through these steps to come up with a viable plan. The plan will not be right at the start
Step 1. Identify your Milestones and Find out how much you Need for your Milestones
In order to accumulate for the near term milestones in your life, you got to list them out.
The table above is a good example of the cash outflow that is required for the next 4-5 years. These are the common milestones for a couple, but perhaps in different order.
- What are the milestones
- Research and then reflect on how much you need for each milestone
- When you wish these milestone to happen versus realistically when they could happen
With this you can find out the total amount you require for the next 4 to 5 years.
Research and find out conservatively how much you need. You can do a few things. Find out from friends and seniors who are more experienced. What are the items and how much they cost. This is so that you are comprehensive, but also don’t over and underestimate too much. A few people would just approach the vendors that provide these services and that is not always the best approach. Most want to earn as much money from from and thus would not come from the cost optimizing angle.
The above table is just an example. Your mileage may differ.
Step 2. Draw a Cash Flow Timeline
The above table shows you what items and how much they cost.
However, it is not very useful to visualize how much you need at various points in time.
You can draw a line on a piece of paper and plot out where each of the milestones will fall in place. Or you could put them in table form.
In the above table you can see the cash flow for the next 5 years. It will show the cash outflow that you require for the various milestones you have identified.
In this step we first aggregate the cash outflow you identified previously.
We can see that the major cash outflow will be in 2020 or 2.5 to 3 years away.
Step 3. Figure out how much cash flow both of you will bring in
As a couple, both of you should be working. There are the rare few that only one party is working.
In any case, we will need to estimate conservatively going forward how much cash flow you will have to
- fund these milestones
- use as annual expenses
Suppose both of you starts off with $3,000 in gross salary with 2 months bonus.
Your annual gross salary is $3,000 x 14 x 2 = $84,000.
But that is not your cash flow, since part of this is contribute to the government.
Your cash inflow is thus $84,000 x 0.80 = $67,200.
This is a conservative estimate. This assumes for the next 5 years both your salary do not grow, or get cut. In reality, your mileage may vary. If we plan in this way, we can at least have a higher degree of confidence we estimate our cash flow well.
Step 4. Estimate How Much you Need to Set Aside to Meet Major Milestones
With your cash inflow of $67,200, you can come up with a table to estimate how much you need to set aside for the milestones.
From your timeline, majority of the cash outflow is required in 2020, or roughly 2.8 years later.
You can come up with the following:
The table above shows the percentage of your cash inflow that you will set aside for these milestones.
The y-axis or rows show the number of years.
The results show that by x number of years, you can accumulate this amount of money.
In our case study, by 2020 or 2.8 years later, we need roughly $79,000.
To hit this amount, I have marked in yellow where is the cut off.
This means that if you set aside only 10-15% of your cash inflow, you will struggle to satisfy all the goals in 7 years. If you set aside 20%, your major milestones can only take place in year 6. If 25% it is year 5. If 30-35% it is year 4.
To meet your milestone goal of 2.8 years you are likely to require to set aside 40-50% of your cash inflow.
Step 5. Figure out both your Personal Cash Flow Statement
You need to figure out how much you spend and whether you can optimize your spending.
To audit how both of you spend your money, you need to come up with a personal cash flow statement.
Your personal cash flow statement shows your cash inflow and what you spend in your cash outflow. To come up with this you can read my complete guide to personal cash flow statement.
Your cash flow statement will give us a glimpse on what do both of you spend your paycheck on and how much cash flow you bring in.
Step 6. Consider Seriously to Cut Away the Low Priority Cash Outflows!
You need to take a hard look at your cash outflow and reflect upon them.
In order to fulfill these major milestones, you got to ask yourself if they are more important then some of the expenses you currently spend on.
The expenses that you need to take a hard look are what I would classify as rich life expenses.
These expenses are discretionary spending that is not necessary for the well being as a human, and are good to have.
In order to figure this out, you got to figure out what do you need to survive on. This is your annual survival expense. Once you know what constitute necessary for survival, you will have identified what are not so necessary.( You can read my comprehensive guide to survival expenses)
Then you can think about trimming things down.
Many folks had to turned to debts from financial institutions or family members because they insist on keeping their current lifestyle/out flows and refuses to appreciate the higher priority of these milestones.
You only have this amount of cash inflow.
- Get a raise but you will still need to ensure you do not inflate your lifestyle
- Take on more jobs like teach tuition
- Cut out the unncessary
Which one is easier? Actually it would be great if you can do all three.
If you are 25 to 30 years old, you are at the most dynamic and productive part of your earnings cycle.
Step 7. Taking care of some Important Things
There are some things that may want to take care of, before you embark on these goals:
- Stay current on your debt payments especially your student loans
- Build a small emergency fund
#1 is important so that you do not get hit by heavy charges or get into trouble with the lenders. Ensure that in your personal cash flow statement, factor in the outflow you need to stay current on your credit card loan, student loan, personal load.
It will also be best if you can prioritize and pay off the loans before you embark on these milestones.
#2 you do not know what emergency will hit you. Thus it might be wise that you build up $3000-$5000 just in case something were to happen. (you can read my comprehensive guide to emergency fund here).
I feel that we do not need such a clear line between fungible cash because if you are subjected to an emergency, that is higher priority then your milestones, just tap the cash for that emergency first.
Step 8. Figure out the Annual Cash Flow to Fund these Milestones
If you have identified the necessary cash outflows, you can deduct this from your annual cash inflows.
You will have come up with an annual cash flow to fund your milestones.
You have 2 constraints:
- your annual expenses
- the total amount you require
The best way is as I have said, minimize your expenses to focus on these milestones.
If your cash inflow is $67,200/yr, and your optimized cash outflow is $30,000/yr, each year you can set aside $27,200/yr for these milestones.
This is 27.2/67.2 = 40% of your cash inflow.
You can then estimate whether your cash inflow would meet your timeline.
The table above is the cash flow table from previous.
We have added the amount of cash inflow that we can set aside to meet these milestones. The first year, in which we start our planning, we don’t have a full year, so we take 33% of the annual sum.
This $8976 can pay for the cash outflow of $7000 required in 2018.
At the end of 2018, we have accumulated $29,176.
This is enough for the $4,000 required in 2019. We will then have $52,376 at the end of 2019.
Now, in 2020 we need $68,000, but we face a shortfall from last year.
There are 2 possibilities. With your cash inflow in 2020, you might be able to meet the $68,000.
You would not be spending $68,000 in one short. Perhaps $47,000 first. Your previous year’s cash and some income this year should meet this.
If its too early, delay the key collection to your flat for a few months.
At the end of 2020, you would have $11,576 left over.
This could fund the baby that is likely to come one year later.
At the end of 2022, you would still have $55,976 left over.
This amount can go to clearing your student loan debt or fund your wealth machines.
Step 9. Making Adjustments to the Plan
Your plan will not fit nicely.
This is because
- The cost of each milestone might be over or underestimated
- Your final expenses, and how much cash flow you can set aside for these milestones might be different
- Your milestones might be brought forward or send backwards
It is up to you to adjust them.
Q&A. Should you Build Wealth at the Same Time?
You would be asking this question as you want to do the prudent thing.
In my article about my Wealthy Formula, I said the most high impact things that is within your control is to put more into building wealth and also to start early.
My opinion is that for most people, these milestone of wedding, home and children has to be carried out close together due to circumstances.
This can be family pressure or spousal pressure.
If you need to come up with a sum of money in short time line, even if you fund your wealth building concurrently by setting aside money for it, if you do not have enough money for your milestone, you will still need to sell your financial assets to fund it.
If you earn adequately to fund these near term milestones and yet able to fund your wealth machines, then you can do both.
If money is limited, settle these stuff first and then funnel more of the cash inflow meant for wedding, renovation to wealth building.