One of the reoccurring themes I talked about was the journey towards financial independence, early retirement or semi-retirement. I been getting that question a lot from younger and younger folks, asking me for advice how that can be done.
To be honest, its kind of interesting that I get questions like these from 20 something folks, who have just started work, and are planning to stop working soon! What is this world coming to!
I haven’t started out understanding that there is this THING called financial independence. It all started from me trying to share my experience at the age of 24 years old, where fresh out of university, in my first job, I wanted to learn how to build wealth.
There was no aim, no working towards retirement. All i know is to build up SG$135,000 at age 35. Why $135,000? I have no idea ( I guess I extrapolate my meagre savings from my first job, where I thought my salary would not climb, to only reach that amount in 10 years)
It is only 4 years ago at age 31, that I realize hey, the math seems to work out. I could reach a state of Financial Independence by age of 39 years old, if things doesn’t change.
At age 35, I am seeing things being more concrete than ever.
This is despite me:
- Living in Singapore, one of the most expensive cities in the world
- Working for 10 years in a single company, which goes against the normal idea that if you want to boost your salary, move every 2 years
- Working in a company that every one says do not even close to the average in the industry
- Not being a lawyer, doctor, investment banker (I am an engineer)
- Not having a silver spoon (my net worth at the start was $4,000)
- Not having dual income (I am single)
I felt that there are some things that I can share to help those who are thinking of reaching financial independence, or to an extent its lesser cousin, financial security, or even the folks planning for an earlier retirement, to be on an easier and clearer path.
1. Everything Compounds, good or bad, and it does not always deal with money
I first came across this from a post by Blair Livingston a few years ago. We all relate the power of compounding to money, how if you have a long time, and you save and invest well, you will be a much wealthy person.
Blair deconstructed things for me that in our life everything compounds.
Doing good deeds compounds because, while each good deeds are small, you touched a lot of lives along the way and those network build up of good deeds eventually sets you up for better ‘luck’. Opportunities that otherwise wouldn’t be there.
Young engineers would never understand why I stressed upon certain things like documentation and learning to take minutes. This looks like a waste of time to technical people. The meta meaning when you have good amount of practice of doing mundane small things well is that, it frees you up when you have more responsibilities later when you become senior and that you have NO TIME and NO EXCUSES to learn to do basic reporting. Those things are expected on you.
You eat all the junk stuff, go cafe surfing every weekend and don’t take care of yourself from university days, to working. Eventually, the shit in your body builds up, you get more depressive, you have less energy, you become a mediocre to weak performer at work, and due to the health problems you need to allocate $100 to $400 per month on medication or TCM treatment on a recurring basis.
You start wondering why others have so much energy to do challenging things when you struggle to fulfilled the required amount. They are just younger and I am older.
Bullshit. You set up all of that yourself by failing to understand how important it is to take care of yourself and how it compounds.
The stuff in this list may seem really small, but they compound as well, and looking back you will be shocked how good systems, processes and habits compound to lead to a more fulfilling person.
2. The formula to build wealth is standard. Learn the Math. Use this as your starting point to build your Wealth Machine
Our lives revolves around money, whether you like it or not. Not the amount of it all the time, but the management of it.
When you start early to create a Wealth Machine that throws up an alternate cash flow stream, and it grows large enough:
- It sets up as a safety net to switch jobs if you don’t see a future in the current one
- Switch a career
- Take up entrepreneurship
- Be less worried about a volatile career knowing you have another recurring stream to depend upon
- Become financial secure or independent to semi retire
If you want to reach either financial independence, security or retire, you have got to understand the math behind it. Without understanding it, you cannot create systems, processes to move towards your goal.
The formula to the road to wealth is very generic. Different gurus have different way of saying it. Don’t complain to me that it is undoable. I am just presenting you the formula. Whether how far you decide to take this is entirely up to you.
End of the day it is your understanding of the following math :
Earn more, Spend less and Build Wealth Wisely
Whether you start at the top or the bottom, this 3 things applies. If you spend more than you earn, you end up servicing a large amount of debt that you have no money to build wealth.
If you earn so much, but also spend as much, you will also not have much to build wealth.
Going back to (1), everything compounds, and building wealth requires money, and the money comes from your ability to earn more and spend less.
It is also important to build wealth wisely, and I stress WISELY, because there are much folks that think they found the holy grail of making money when it is totally unsound, or they failed to deconstruct and find out what are the most important aspect of their wealth building methods.
If you look at most of this list, it focus a lot on ways to earn more and spend less, which goes to show how important that part of the equation is.
I explained more of this in the formula that I use to build my wealth.
Power of compounding formula
To reach to $500,000, at 1% of building wealth, you need like 72 years. If you improve the rate of return to build wealth at 3%, you shorten it by 12 years. At 7% about 25 years shorter. The math is as it is.
If you fund more to your Wealth Machine, you reach your end goal faster
If you want to reach financial security or financial independence, how much you channel to building wealth matters. If you channel 10% of your income to building wealth, it takes you either 24 or 108 years to reach that stage.
If you jack up your channel to wealth building to 50% (going back to earn more, spend less, build wealth wisely), you reach your goal in either 12 to 24 years.
Being financially secure before 45 years old looks realistic. To learn more about the more detail maths to financial independence you can read here. (it will show you how much you need to create a stream of annual cash flow that grows with inflation and low probability of depleting your principal)
If you are risk adverse, and want to take less risk, yet reach the same goals, fund more!
There are many that will complain “I do not like to take too much risk with my money by buying stocks and share”.
You can reach the same place, but you have to channel more of your take home income to wealth building. The chart above shows 3 different rate of funding from take home pay into wealth building, no increments (meaning you fix X amount and keep funding X amount), 5% annual increase and 10% annual increase. Corresponding, there are 2 different rate of return of wealth building, 3.5% per annum and 7% per annum.
Observe that, to get to the end goal, a no funding increase @ 7% per annum return almost equals a 5% annual funding increase @ 3.5% per annum return. A 5% annual funding increase @ 7% per annum return almost equals a 10% annual increase @ 3.5% per annum returns.
The goal is to build up a targeted Wealth Fund, and you can go for less volatile wealth assets such as insurance endowments, bonds and all, but you have to jack up your funding from your take home pay to wealth building.
The math is as such.
If you fund EARLY rather than LATE, you may fund less, leaving more money later in life
The key to power of compounding is time. The longer the time, at a given rate of return of wealth building, the more wealth is build up.
The most common illustration is of 2 different person one that starts early, channels $6000 yearly for 16 years to building wealth and another that starts late, after the first person (early) who ended. The late person channels more, channels longer, but at the same wealth building rate of return, he reaches the same amount as early.
With more money and longer time expanded.
If you would like to channel less to wealth building, or to help your child next time, start early. The math is as such.
When your Wealth is small, focus more on funding more to it. When it is big, focus more on Building Wealth Wisely
One mistake that I made was not focusing enough on Earning more and on building up competency to build wealth.
Although I am seeing the fruits of the competency being built up, it could have been better.
If my wealth is only $5000, it is difficult to generate consistently a 20% return. A 20% return is $1000.
I can get a 100% return on that, or even a 200% return by Earning more, Spending less and channel $10,000 a year to my Wealth.
The funding from take home pay matters a lot more.
However when you have build up wealth to $200,000, a $10,000 a year increase in funding is 5% of your Wealth. It is important still, however, building wealth wisely becomes much more important
If you do not build wealth wisely and lose 50%, that is $100,000. It will take some effort to earn back. But if your wealth is $5000, totally different story.
You get rewarded for your effort because if you are a good wealth builder, a 5% annual return is $10,000 a year, or what you could save annually.
You can find more elaboration on this here (The impact of rate of return and saving more).
COST Compounds as well, so MINIMIZE it
The power of compounding is not restricted to your returns. In reality your returns are usually not guaranteed.
But here is the kicker: Your costs that you spend on sales charges and management fees is guaranteed to the brokers, fund managers and sales team.
A 1% or 2% sales cost yearly may not look like much, but take a look at it over 10, 20 or 30 years, its dramatic.
For the same products sometimes, with the same return, you pay more money for sales and management that do not factor in much of your returns.
Think about it, given the choice of a 2% interest mortgage versus a 3% interest mortgage on the same property,which would you choose? When it comes to property the choice is obvious. Minimize the costs since the upside of a property is the same.
When it comes to unit trusts, mutual funds, folks have an idea that the more cost you pay the better the returns. This is not always true.
When you minimize costs you put more money in wealth building instead of taking out of it.
You win by minimizing your mistakes, NOT by doing outlandish things
Building wealth on our levels is similar to playing amateur tennis. In professional tennis, everyone is skilled. Their basic fundamentals are very polish. For you to win another professional tennis player, you need to be very competent and deliver outstanding serves and returns many times.
Not so if you are amateur player. When you play in the leisure circuit, tennis is not most of our main events in life, there are some who monkey see monkey do, there are some that went for more coached lessons, there are some more talented.
At this level, you win others by being adequately competent and making less mistakes. Your opponent defeat themselves more than you defeat them.
In wealth building, this is true as well. Don’t lose to yourself. Build up a standard level of financial competency. Don’t get into bad debts. Focus on spending only on things you value. Minimize costs when building wealth. For your Wealth Machine, funnel your take home pay into fundamentally sound assets instead of scams.
3. Create Sound and Good Systems, Processes and Habits
Your life will be hectic and relying on willpower has its limitations. While you may feel motivated to start making money, losing weight, when life gets busy it saps your willpower. You only have limited willpower and the more work stuff you handle, the less willpower reserved you have to do the extra things like reading up on personal finance, learning to cook and making meals, starting a technical diploma.
Instead create good systems and processes. Standardize them.
You take one or two times to set them up, invest the effort upfront, and don’t think of them so much, as long as their sound.
Automate your funnel to your Wealth Machine
When you manually make an intention to save or spend, you get challenged with the dilemma on a frequent basis. If we know that we are most susceptible to bad decisions, take ourselves out of it. Automate a scheduled transfer from your take home income to your Wealth Fund, which will be used to build wealth when you get your pay the very same day.
If you only spend the money in Bank Account 3, you will work within the limits, instead of having to evaluation should we just spend more.
Allocate 4 hours a week to building up financial competency
No body is going to give you more time. If you feel like complaining to me that you cannot find the time to learn about building wealth, such as
- reading books
- attending courses
- finding and discussing with mentors and peers
- prospecting attractive wealth assets
show me your detailed time table and make your case.
You have to make an appointment with oneself to concentrate and focus on this area.
As I get more senior in responsibilities at work, I realize that you choose to focus on the 20% that makes the biggest impact to building wealth and not the 80% of the things that don’t matter as much.
Continuing to build competency and prospecting businesses is what i determined necessary.
I fixed an hour per week day and one Saturday morning for it as an appointment in this area of Wealth Building. This is my system.
4. Learn the various stages of Financial Independence
You are not going to reach the promised land in one step. And at times the destination is so far that you don’t even know if you will get there.
Having various milestones lets you progress forward one step at a time. They let you know that before you get to the next stage, you have to conquer the current.
This 7 stages of financial independence may look like something from Tony Robbins book Money: Master the Game, but it is actually from Joshua Sheats in episode 174 of his podcast Radical Personal Finance. I find it very sound in his breakdown that I don’t think there is a need to define my own milestone.
5. Build an Emergency Fund
There are many incidents that topples your bank accounts. The most simple one would be a medical emergency. Although you may have insurance, you may need to pay some costs first. Even in cancer treatments you may need a 20-30k upfront.
Emergencies could have been smaller, and happier such as someone wanting you to take over a car for 20k less than the market price, but you can only get it if you pay in cash.
Emergency Fund is a level of cash that you compartmentalize to not spend or allocate away for other purpose, for the sole reason of waiting for unknowns to happen. You can read more about my whole view of Emergency Fund here.
6. Be humble. You do not know everything. Be a sponge and absorb knowledge. Reflect on what you know
When you get out of university, you felt like your course, together with the academic experience since you are six years old equipped you adequately to be ready for a career and life.
Nothing can be further from the truth. I realize how different working life is from academics, far different. Not much prepared me for working versus the stuff learn in school. Your mileage may differ and I believe some of the better schools equipped their students for work better.
Life on the other hand is the part where many overestimate their abilities to handle it. Many think that what the school, their friends and parents have provide them enough to handle adult working life.
To have an effective career, you need to be a sponge and absorb:
- Be an active listener. That means giving your full attention to the issue at hand. And then reflect on what went wrong and right
- Pay attention to people that matters, and learn from the ones that are willing to teach you (even the nasty ones because they can be really good teachers as well)
- Go for the courses that value add to your career
- Pay attention also to what you think are idiotic courses
The last one is interesting because, there are a lot of stuff that you failed to understand because you didn’t put yourself in the position to understand.
In my company, we have a set of standardized courses that employees are sent to. The employees all went because it is mandatory and they were forced to be there. And they learn something for 2 to 3 days and totally forget about it afterwards.
They are probably too proud to admit that there are things to pick up from such stupid mandatory courses.
They are probably too inexperience to understand that the top performers understand the importance of simple, common sense things like this, and they will need it to separate themselves from their peers.
There is an even worse contagion spreading. The majority do not read or upgrade themselves out of the workplace anymore. There will be the bookish folks who still learn things a long the way after their academic years, but from my observation, the majority do not.
They are so stressed at work that they don’t want to ‘study’ but enjoy during their off days and hours. They were ‘never the study type’ and ‘could never read a book’.
That is all fine. However, don’t blame the world if you:
- End up not building wealth well
- Always find that money is never enough
- Feel like you are always short changed by management or every company you work with
- Unable to make meaningful friendships
- Tried and fail to lose weight for a long time
The answer might be you need to a create a system for self study. You don’t have to read a book if reading is not for you. There is YouTube and Podcasts.
You just need to create a schedule or a system to review knowledge on a consistent basis.
7. Be a good communicator, negotiator
In my line of work, I encounter a working counterpart from another company that I frequently have to interact with. Many of my team members do not like working with him because they felt that, he used his mouth as well as flowery email to ‘taichi’ most of the things. When he talks to my superiors, he makes my superior much more satisfied than his predecessor who, from my older working counterparts, says is a rather good technical consultant.
When he got promoted, despite joining the company the same time when I join the project, the sentiments shared was that he is a ‘balls-carrier’.
I felt that they failed to see why his company decide to put him in a senior position.
To me, he was an effective communicator, not just on the technical aspects but also the status and progress of things. As management would you rather put a good worker there, or an effective communicator?
Your expertise can only carry you that far without being good at letting even the most inexperience person in the room understand complex things.
Being a good communicator and in negotiation is a skill management sees. You are not just a good worker, but someone that have the capacity to handle bigger things.
Communication is crazy important, even on a personal level.
Suppose that you would like to work towards being financially secure by the age of 45 and your spouse do not share that idea. What do you do?
Suppose your in laws wants your spouse and yourself to have a baby. You are not financially ready for it. How do you put things across so that relationship is not broken down?
Good communication creates a great resume to open up for more opportunities as well not to mention business ventures.
The success and failure of blogging hinges greatly on my ability to communicate with the people that I want to communicate with.
When I was on an overseas work trip in South Africa some time ago, the one thing that I still remember today was what the lady boss of the bed and breakfast place that I stayed in said. It was just one sentence but it stuck with me: “If we can communicate, there is nothing much we cannot work out”
I learn the hard way not to view people that is all talk and no substance as balls-carrier. You have not be able to do it to critique them. Else it is better to learn from it.
8. Build up lots of competencies in different aspect of your life
The modern society seems geared towards creating people with Single skills. You are a tax accountant. That’s your specialization. You are a database administrator. You are a science teacher.
Being single skilled is good as it can be rather lucrative. When you push your competency to a very high level, you may be paid rather well for it. Look at top surgeons, SAP consultants, lawyers, top programmers. They earn good money for it.
And you don’t need to work in something you are passionate about, or what you love to be good at it. You will like something when you put enough effort and it becomes very easy for you.
There are many cases where you will look at someone doing something that you can never imagine yourself doing and wonder “why did that guy subject himself to doing that day after day? I can never imagine myself doing that!”
Has it ever occur to you that to the person doing it, he has build up his competency to that level where it is not that big of a deal, compare to you who have zero competency in doing that.
In work specialization can be very lucrative if you do it well, but there are pitfalls as well.
I always believe that one should be multi skilled, because, having more skills gives you more perspectives, and it value adds back into the major competency that you use to earn at work.
I like to think what I build up as an investor made me a better engineer and being a good engineer made me a better investor.
Being multi skilled also open you up to
- developing side hustles that you can use to create alternate income stream
- switch from being an employee to an entrepreneur
I have seen many people with skills outside their work that are crazy good, because they give themselves a lot of time to develop them far enough.
To achieve that level of skill, it goes back to building good processes, systems and habits to ensure you can developed them despite the hectic life you lived.
If there is one lesson to be learnt here is that being multi skilled gives you optionality.
9. Develop your competencies to Side Hustles
When you build up your competencies, you can look for ways to monetize them to create an alternative income stream.
With the alternative income streams it firstly makes you less dependent on your main source of income.
Secondly, you are able to funnel more to your Wealth Machine to boost the dividends, interest and income from your wealth machine. This will enable you to reach financial security or financial independence much faster.
Last but not least, when you achieve financial independence, you may want to ensure that you are occupied doing something challenging and something you find meaningful with. Having a side hustle works to fulfil that goal not to mention, making sure your Wealth Fund is sustainable.
10. Take care of your health and wellness
When I was in my 20s, I thought that there is no way I will lose that energy. My condition was great. That was when work stress and on-going inflammatory problems wear me down. Now that I am 35, I was a shadow of my former self. Cognitive functions gets affected, and I get tired easily. If there is one saving grace, is that I don’t fall sick.
The repercussions are big considering as knowledge workers we make use of our brains and need to work long hours. Without a well functioning brain, always forgetting things, you are not a good performer, and that affects your performance rating, and your salary and bonuses.
A lot of the trouble developed from decadent living in the 20s, and from what I hear, its even more decadent nowadays.
In your 20s you are at your peak condition, and thus your body can take more of the nonsense you throw at it. But it is going to hit you sooner or later, and usually when you are in your 30s, that is when the shit hits the fan.
Your ignorance or poor decisions here will compound.
If you do not know how to take good care of yourself, pick up a book or a fundamentally sound podcast to build up competency.
11. Understand your Human Capital Potential
A common problem when I was in my 20s is to extrapolate my earnings potential at work over a long time frame.
Your human capital goes down at an increasing pace after 40 years old. Depending on the stage of your career that you managed to reach, you may still flourish well in your 40s and 50s as a senior manager. In the structural recession in the 2000-2001, many senior managers was unable to find jobs because they were overqualified and folks refuse to take risk with them.
It is rather important as a 20 something to understand whether the place you work is a ‘stock’ or a ‘bond’. A bond is a safer instrument that provides a consistent but not spectacular cash flow while a stock is a volatile instrument where you enjoy some really great cash flow and some really poor ones.
For some civil servants in government, they might view their employment as more of a ‘bond’, while if you are in the sales line, or the frequent job hopper, your career resembles more of a ‘stock’.
Various decisions on managing your wealth depends on knowing this well. If you are in a very lucrative but volatile career, it might be wiser to ‘rebalance’ a large part of your income in good times to lower volatile assets that provides a consistent cash flow. That way, when the income from your job during the bad times is offset by this safe consistent cash flow. If you have put your wealth assets in volatile assets, they might lose their value together during the time when your income is poor.
If your job is more like a bond, you might be able to leverage on that to purchase an investment property. While the risk of taking a big mortgage is that you are unable to finance when you lose your job, knowing the nature of your job allows you to make this move that folks who can get fire at anytime couldn’t.
The worse thing to do as a 20 something is failing to realize how much money that are potentially in your hand. If you are earning an average of $45,000 annually, in 10 years you will have $450,000.
That is certainly a large sum of money, a sum that you should be responsible about this substantial sum to ensure you don’t lose it.
12. Be very critical of what makes you happy. Cut down on things that do not make you happy or unnecessary
Don’t do things just because everyone is doing it. Don’t buy a car just because society says that when you earn an excessive amount of money, the natural thing is to purchase a car. Don’t go to a holiday every year just because you are pressured to go by your peers. Don’t go to a holiday and do something just because when you go to that country, people say you have to do something like that.
If you enjoy take 7 days of leave and going to a nearby island to read 4 books then so be it.
But at the same time be open to new experiences suggest by others. Give them a try and see if you will stick to them.
Some times there are indirect happiness. No matter how much you hate the idea of a hotel wedding, if you like making your parents and grand parents happy, and you are happy when they are happy, some things have to be carried out.
Lionel from Cheerful Egg said it best when he said some of his most enjoyable times is when he spent his time on some nonsense and when little money was spent.
Spending large amount of money does not always equal satisfaction.
Always work out a list together with your spouse, what do the two of you placed high value upon. You cannot have everything and resources are scarce, so what you decide to spend on should reflect how much value you placed on them.
For those that you do not value as much, be aggressive in minimizing them.
13. Wealth is like your Office Toilet. Focusing on it doesn’t make you happy
Why do I say wealth is like a toilet? If a toilet is clean, you are satisfied, but it seldom make you extremely happy about it that you will stay at your current work place because the toilet is clean. But if the toiled is dirty, that is certainly a huge pushing factor to leave the place.
That might be an exaggeration, but your income may be a better example. A low pay, less than what you value yourself suppose to get, will push you out the door, but having a high pay will make you initially pleased, but won’t be a factor that you stay in the place for long.
There will be one day when you wonder what the heck am I doing, if
- the job is not challenging,
- your boss suck
- you are not part of a team delivering meaningful goals
- not managing people
Those are probably some of the reason people leave, aside from not being well compensated.
Wealth, is also similar in that if you do not have enough of it, you are unhappy about that it doesn’t provide a good foundation to pivot your life.
If you have too much of it, it doesn’t make you directly happy.
Wealth is more of an enabler, or an infrastructure. How you make use of it to deliver happiness is the more important thing.
This journey up to this point have much ups and downs but certainly have been interesting. After some time, I realize that perhaps what makes me happy wasn’t reaching that state, where everyone who embarks on this journey hope for, but the lessons learnt and shared along the way.
If you have not learn to enjoy the experience then sometimes I wonder whether you are ready for the next stage when you eventually reached the end goal.
You will embark on another goal, and if you did not learn to enjoy the last journey, don’t you think there is a chance you won’t enjoy the next one?
I am sure there are many who have already achieve this goal and have things to share with those who are about to start their journey. Do let me know what I have missed out, or which advice you disagree with.
For those folks who are based in the USA and would like to find out where you are at when it comes to your net worth, Personal Capital have a good net worth calculator here that you can make use of to compute your net worth.