I still have some work to do over the weekends so its no stock analysis, less reading, all work.

Meantime, I came across some stuff that you might find interesting. Something on FIRE, something on media coverage, a little on the HENRYs and my thoughts on annuities.

My Thoughts on Annuities

In my last Sunday article, I profiled how an insurance adviser manages the potentially volatile nature of his income.

He has a question for me that I forgot to address and so I do owe him an answer.

Basically, what do I think about annuities?

It is a weird question but this question can be about what I think about it as a wealth accumulation tool and what I think about it as part of retirement spending. I think my friend is more interested in my opinion about it as a retirement tool.

As an accumulation tool, annuities are likely to be underpowered. They should return you 2.5% a year to 4% a year. If you take on leverage, you would boost your IRR to above 4%.

You do take on more risk when you take on leverage. Interest rate movement can be 50% up and down within a short time.

As a retirement spending tool, they look appealing. Guaranteed income + non-guaranteed income. Those that are close to being retired like them a lot because they promised passive income payouts.

As I have explained in this Providend Passive Income article, what matters is the total return when we are in the accumulation phase and it is as important in the de-accumulation phase.

When a person buys an annuity, it is a vote that

1. I wish to have passive income
2. I am not good at having a systematic way of varying my spending up and down. I prefer for someone to tell me how much to spend on

The greatest benefit to those retiring is that they transferred the investment to the insurance company. They have also transferred the cash flow management to the insurance company.

There is a cost to this. The cost to this should be lower returns.

If this is the case, it makes these cash value endowments and whole life to be poorer wealth accumulation tools. But if you are really bad with money, you can consider getting them. But at the end of the day, you cannot run away from some financial planning problems such as how much can I safely spend.

If you have 10 streams of income, and you do not know how to spend without exhausting your capital, having 10 streams of income is less useful.

Another drawback is… I think the payouts are not inflation adjusting. Thus annuities can be used to address your core/survival expenses. But they cannot take care of the inflation adjustment of your core/survival expenses.

Start Your Financial Planning at 40 and Forget about F.I.R.E

Alvin Teo wrote this pretty popular article over at the Astute Parent. The basic premise is that life is pretty volatile before the age of 40.

The advice is that realistically, you can only start planning your retirement after 40.

FIRE is difficult because

1. You need a high income
2. You need low expenses. But this is difficult to achieve
   1. Cars are a necessity and expensive

Alvin is a financial planner so what he said should hold some weight.

The 25 to 40 period is said to be the most volatile because you are in your career building phase. Your income has not reached a level where your family feels comfortable with. You have 2 young children and logistically you will need a car.

I think it is not because your cash flow is volatile.

The right word will be that your expenses keep climbing and you could not have a high savings rate. A high savings rate is a very, very important part of accumulating money fast for financial independence or other goals.

So he is not too wrong there.

But I got some push back.

No one said that if you do not retire by 40-year-old, you are severely missing out.

It seems that his brain is fixated on this 40-year anchor or someone imprinted that in his head.

Alvin cited Pete Adeney as one of the pioneers in this movement. One reason that he could reach his magical number at age 30 is because they are working in software engineering. They earn a good salary and thus they have a leg up.

If you read through Pete’s route to accumulating his US$600,000, you will realize that while he earns above average, relatively speaking, it is not out of this world kind of salary.

His first salary is US$41,000 a year. I am not sure if this is out of this world high. It probably was higher than average in 1997. In today’s dollars, this is US$71,000 a year.

What was a success for them was:

1. Their magical number is measurably smaller
2. They control their spending
3. They control their family dynamics
4. They well optimized their slightly above middle-income salary

Having a high salary helps speed up accumulation and improves planning a lot but overly focus on the high income dissuades people who fit these criteria from achieving something that is useful.

The 40s and 50s Can be More Volatile

So here is more likely his plan. Manage your expenses before 40 by getting your home infrastructure in place. This means get married, renovate your home, budget for both your children, pay off your mortgage.

By the start of your 40s, you should have a much more comfortable financial situation:

1. should understand your family budget better
2. have less big-ticket / lump sum expenses that you would need to pay for
3. if you have done correctly, you may have de-leverage your home mortgage loan

The problem that we may face is that the 40s and 50s may not be less volatile.

We can roughly map the milestones

1. 30s: Child-bearing, wedding, buy-house
2. 40s – 50s: Kids tuition, Children tertiary education, taking care of parents
3. 60s: Retirement spending

Many of us feel the expenses never go down. It just keeps going up. And so the salary would have to keep up.

An emerging problem is that the 40s and 50s is just as challenging

1. Mid-life crisis & depression
2. Your job hits terminal salary growth faster than you imagine
3. Retrenchment and having to re-climb the ladder again
4. Taking care of parents, losing your parents

Now, imagine being middle income and having limited resources, facing the above. Not less volatile isn’t it.

In fact, you may not be more employable.

We end up funding our lifestyle to just be in time for when our salary is more volatile. (Unless you believe the old corporate ladder system still existing)

The point is that 40s and 50s are not less challenging than the 20s and 30s.

Everyone’s Situation is Different

When you write for the masses, you have to use a very average person as an example. However, there are some of you who would really do better doing what Pete Adeney did.

Your spouse and yourself earn $160,000 a year that in 5 years you could amass $500,000. A $500,000 wealth at age 33 would be able to grow on its own over time if it is deployed well. You worry less about uncertain future career in the 40s and 50s by pre-funding it now.

And since you could maintain a frugal nature, it is likely your family can use 1 year of savings for wedding, renovation, and furnishing.

Funding goals need not be spreading your money out evenly over time.

You can choose not to fund retirement first. First-year save up $92,000. That is equivalent to your 2 children’s local degree in today’s dollars. You could put this $92,000 in a balanced portfolio and let it grow over time.

Then next year, commit that $92,000 to something else.

Higher than average salary, with knowledge, plus intentional living is what pursuing Financial independence is really about.

You can choose not to pursue it and go with a traditional route. But some of you would have missed out on some great life opportunity costs.

The Surprising Part of the Eagle Hospitality Trust Coverage

Recently, in the financial space, what is on people’s minds is the Eagle Hospitality Trust saga. A seemingly not very popular REIT became one of the most scrutinized REIT in a few short weeks.

Enough bloggers write about it because we crave for eyeballs and ad dollars but also… because perhaps this is a genuinely good buying opportunity.

When a stock goes down with poor news, either they have long term fixable issues, or that there is a change in fundamentals. The former would mean this is a good buying opportunity, and we might want to stay away if it is the latter.

However, I would like to comment on a certain aspect of this EHT narrative.

We realized that established news sources such as SPH have deeply researched company pieces. The same journalist who wrote a deeply investigative piece about Best World also wrote about Eagle Hospitality Trust.

Deep scuttlebutt is not something that journalist cannot do. Even the average joe can do it if they put their minds and deductive minds to it. I have seen conscientious average retail investors try their best to do it. If you are willing to dig, you are able to find things.

I do think that if you write as a job, there are just so many things to do. So much so that I wonder if someone is providing journalists with areas to look into. I grew to empathize with analysts when people say some of their reports do not value add. I want to see you put your heart and soul into writing when you have to cover so many companies.

Would the people providing these sources have some agendas?

Let us pay attention to whether there are deeply researched articles without the crisis elements in SPH Business Times next time.

The HENRYS – Huge Opportunities that can be Lost Easily

HENRY is short for High Earners Not Rich Yet.

There is this site called HNWORTH with a rather well-researched article on it. I appreciate him trying to do the research work.

This is a group that is likely earning between $250,000 to $500,000 a year. It is probably the dream of all financial advisers to make up the majority of their client base with clients of this stature.

The take-away that I get from the article is that the gap between this group and those above them, versus the rest are getting wider. Their income and wealth are growing versus other groups which are struggling.

Not just that, the data seem to give me an impression that

1. deposits and cash have growth a lot
2. private property have grown a lot
3. CPF has grown a lot

The rest have not grown as fast.

There seemed to be a pent up demand for private properties, as if, there is not enough residential private properties around for investments.

I have sort of form this view about a segment such as this. The typical higher decile Singaporean household would spend between $4000 a month to $9000 a month. Those on the high side would spend between $7000 a month to $12,000 a month. This depends on how frugal or spendthrift they are.

What this means is that it is likely they will have a high savings rate (about 40-70%), to channel into saving and investments. So there is much pent up money waiting to be invested.

The main instrument would be private properties. With the ABSD, psychologically this might deter some of them from buying another one. Other good investments for the HENRYs would be what is provided by the private bankers.

The HENRYs are in a position where a lot of people wishes to manage their money and eventually, they might end up with an assortment of financial assets that they forget the initial reasons for buying them (if there is any)

They have great opportunities, but they may easily lose all these opportunities as well if they are not careful.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The last time all these value factors didn’t work so well, for such a long time is in the 1920s.

That is a long time.

Our brains would probably reason that there are similarities today to the time back then. When there are periods of extreme financial upheavals, the value factor does not seem to work so well. (When we say extreme it is this kind of financial meltdown, not your typical 20-30% market drawdowns)

Looking back, the value factors came back. As an investor having a 30 years horizon, you would have enough time to benefit from it.

There is also another dislocation.

The investors living through these past 10 years will form the opinion that the only place to be is in United States stocks. And they are not wrong.

Their experience with the market is that U.S Stocks Trounced all others (that is not true. There are more obscure markets that did better).

Albert Bridge Capital did some data crunching and present some insightful data.

They are based in Europe and thus, they are more concerned about the market performance in Europe versus other markets.

For 3 decades, the performance of MSCI Europe has matched the S&P 500. Europe did better in the first and third decade. United States better in the second.

If you are a wealth builder, I would say that if you have $50,000 on 31st Dec 1979, and you add $3,000 a year for the past 30 years, you would have amassed $652,528 at the end of this 30 years.

But after 2009, everything changed.

We can observe the difference in the last decade. United States did better.

My friend Mr 15 Hour Work Week said something along the lines that Europe and Hong Kong is Trash. I guess it is ridiculous to invest in them.

Sometimes I do not know.

Most folks expect that if these markets are so visibly poor, then it should mean they perform very poorly. Most folks are also heavily influenced by what is happening recently.

They have this idea that these correlations between asset classes, geographical markets that they just experienced will stay consistent throughout.

It is only older farts like ourselves that see the period where the United States were doing not too badly yet the markets were not performing well (refer to the second decade in the chart above)

My Judgement was Also Clouded

We recently have to help one of our advisers do up a growth of wealth comparison. Basically, we want to compare how much $1 invested in different indexes will be at the end of a certain time period.

In SGD.

Both my solutions head and myself have this mindset that the S&P 500 will do the best.

We were not wrong.

From 2010 to 2019 1 or 2 months ago there was this tremendous outperformance. And for those who are saying Singapore market is shit, you are not wrong as well.

I choose to see that for our Providend clients who invested in the Dimensional World Equity Fund, their money would double in Singapore dollars.

But let us factor in 10 years before, from 1999 to 2019, and see how is the result:

The MSCI Singapore and DFA World Equity Index proxy in SGD, absolutely killed the S&P 500.

My boss and I originally think this is because of the strong SGD. We shifted it back to USD. Still the same. It is not a currency thing.

Nothing is Set in Stone

Will Europe or Value factors go back to “the balance”?

I am not sure. I guess that is my posture in all this. I am currently an individual stock investor. As an individual stock investor, whether which market outperform or underperform, you can have a game plan to do relatively well.

If you are not good, you get smashed pretty badly.

If you are a passive wealth builder, this might matter to you more.

And my answer to this is, I do not know.

If you lean towards an opinion that despite what Kyith presented, I still think there is no way the United States and growth would do worse than any other markets than you should invest that way.

But if you are of the opinion that I do not know whether THIS TIME IT IS REALLY DIFFERENT, the better way is to hold a moderate portfolio that gives you exposure to all and let the market tell you.

This can be an MSCI World ETF, a low-cost global equity unit trust like the Dimensional World Equity or Dimensional Global Core fund and a global bond fund.

The takeaway I get from this is… man… we have really short term memory of things. But also the future is unknown. “the balance” in the past might not be “the balance” after factoring the future.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

After a tiring day, I don’t really feel like putting out an article that was supposed to be meant for this Sunday.

However, there are some comments to be made.

How Should A Financial Adviser Manage His Own Money?

My friend Jason here heeded my call to have more self-employed folks show us how they manage their variable income, or how they kick start their business in the initial years.

Jason applied my Phase 1 and 2 planning. He worked out how much is his Essential expenses ($24,000 a year).

He would have a 1-year runway to proof that he could get business off the ground.

You can see how he is going to get a diversified stream of advisory income going forward. I think the family (his wife and himself) is being pragmatic about it.

To be fair, if phase 1 for this kind of business lasts 1 year, then setting aside $50,000 before taking the plunge would be adequate. If Jason is a fresh graduate, then he may not have the luxury of such a safety net. But then again, as a fresh graduate, Jason would also have a much more frugal lifestyle (this is not to say that Jason is not frugal).

I think he has a lot of buffers but he chose to compartmentalize it away. For the time being, he could cash flow from his dividend portfolio. However, he is pretty clear that he is in the stage where he would rather reinvest the dividends so that the portfolio will be able to grow.

I do wish Jason all the best in his new job. If you look at his finances, it is in tip-top shape. Cleared off his mortgage, build-up a portfolio that allows him to do career transition.

If You Solely Depend on CPF for Your Retirement, You May Not Be the Best Person to Manage your CPF

A certain Clifford Theseira decided to follow a certain Toh Thiam Hock’s footsteps by complaining about his CPF on social media.

Mr. Thesiera complained that his CPF payout of $575 a month is rather measly and not enough for his wife and himself to live on. He would have to drive Grab to supplement and at 72 years old, he might not be able to drive for long.

So CPF came up with a swift rebuttal on a Sunday (!)

There were some who felt that CPF should not be opening up the people’s details to respond this way. However, what were they suppose to do when it seems Mr. Theseira wishes to use his own situations as evidence of our CPF’s failure?

CPF revealed that $140,000 was withdrawn from his CPF since he turned 55 and that the Medisave contribution from his pay would be 1% of his monthly income.

Here is my guess. There is a few information not reveal to us at this point but I believe Mr. Theseira pledge his 5-room flat so he set aside half his minimum sum (the old scheme) which goes into his CPF retirement account. Upon turning 55, about $140,000 was taken out. At the same time, he also had $60,000 in his CPF Medisave.

If you ask me, that does not seem like a person who does not have much money.

In February this year, Josephine Teo provided some figures on how much older Singaporeans are getting from CPF Life and Retirement Sum Scheme. It looks like what Mr. Theseira got is much higher than the average.

To top that, the Medisave is super healthy.

I think Mr. Theseira have inevitably showed what a “success” the CPF has been for Singaporeans like himself.

TOC came up with a rebuttal to CPF’s response:

Of course, the CPF Board did not disclose that from 55 to 65, there is no payout from one’s CPF Life. To survive, one will either have to work, assuming he can find a suitable job at the age of 50s to 60s, or to start using his withdrawn CPF funds from 55 to 65 to survive.

Assuming Mr Theseira used up the $140,000 from 55 to 65 before getting his monthly payouts of $575 after 65, on average, he would be surviving on $1,170 per month for both himself and his wife during the “lost decade”.

This is, in fact, a sum already less than the minimum $1,379 a month by a study for a single elderly aged 65 and above, in order to attain a “basic standard of living” in Singapore

– The Online Citizen

Even the SDP decided to jump on this bandwagon and criticize the government on the CPF:

The SDP also questioned, “To date, the Government has refused to provide data on how many individuals squander their savings and turn to the state for help. Does the number warrant a blanket punishment for the vast majority of retirees like Mr Theseira who are responsible and astute managers of their own funds and lives?”

“Another crucial question that the PAP must answer is why at the age of 72 must Mr Theseira and others like him continue to work to support himself and his wife?

The answer, if the PAP cares to admit, is that many retirees are now asset rich but cash poor. In simple words, Singaporeans have had little choice but to use their retirement savings during their working years to pay for their HDB loans.

These loans are often stretched to 25 to 30 years because of the inflated prices of the flats. When they now have to retire, they find themselves with insufficient savings”, they added.

– SDP

SDP brought up some good points. Home too expensive. Asset Rich Cash Poor. Both are not the CPF’s problem.

It is an Asian mentality problem. We just love properties. And the HDB can be purchased at less than 5 times price to combined income. If you are conscientious, you can finish paying in 12 years.

In fact, I am 39 this year. Most of my friends are like finish paying, almost finish paying and thinking of upgrading to EC. They have a choice. Yet they choose to upgrade. They finish paying for their HDB and decided to upgrade.

I will tell you of another group of people that have to work at 70-year old to support their lifestyle. These are the friends who need $5,000 a month to have “bare minimum living”. They have no choice because that is what they believe in. Whether you are 70, 50, if your CPF is not enough, you gotta find a way to have a residual stream of income.

The beef that Toh Thiam Hock, Mr. Theseira have with the system would always be the shifting goal post, not allowing them to withdraw all their money at 55 years old. Whether they die or not die is none of the government’s business.

But the problem is real. For the better part of 30-40 years, if they have not been able to engineer a more comfortable situation for themselves at age 50 or beyond, what are the chances that they are likely to be able to manage their wealth well when they get all their money at age 55?

Put it another way, if you complain that you can only depend on your CPF money, I shudder to think if I were to let you have all your money at age 55, where would you put it to, so that your savings interest can beat the 4.78%?

The 2 Main Problems of FIRE in Singapore

Someone asked me about my thoughts on a Financial Trainer’s hard-hitting article on 2 main problems of FIRE in Singapore.

Here is the summary:

1. You cannot estimate your expenses. Your expenses will rise from $50,000 to $100,000. You need other residual income
2. Inflation in Singapore have been rather low. We are underestimating. You need to have 20-30% buffer
3. 4% withdrawal rate based on the fact that the USA is a superpower. When you live in Singapore and you are not a superpower, your returns may be drastically different. If you use 4%, you are being lured into thinking your framework is sound
4. Bond rates are low. How low can it go? Most likely it will go up
5. SGD is strong. If you are in a portfolio of S&P 500 and 20 Year Treasury index, your returns may be cut due to forex risk
6. His solution is an actively managed all-weather portfolio

I think the are valid concerns.

I do wonder how many people really understand how that safe withdrawal rate methodology work.

You might want to find out how to tackle FIRE from him. He has a course and have a solution to this tough monster.

Bond Tent in Singapore Context

Life Finance put out a good article discussing the traditional glide path during wealth accumulation and the bond tent.

The Traditional Glide Path happens when you increase your bond allocation as you approach retirement. This will gradually reduce your portfolio’s volatility over time.

The Bond Tent is a strategy to tackle the negative sequence of return risk.

Life Finance tries to test the bond tent out with Singapore data. I am not sure how much sample he has, but his conclusion is the traditional glide path does not work so well, the bond tent does not work so well.

Based on my research, the bond tent, as elegant as it sounds, does boost the success rate by a lot.

The overall idea is that you need adequate stocks to have a greater chance of lasting a longer retirement duration. But if you have too much, the volatility reduces the success rate. So the allocation tends to vary between 40% to 80% equities. The best result happens when we can ramp up to 60-80% equities in a smaller window.

Overall I think the 60% equity 40% bonds is still the preferred allocation.

Lastly, most people need to look at bonds, not in the traditional sense, but bonds from a total return perspective. Active bond managers are able to gain certain returns by switching to different bonds when the yield curve flattens or steepens. They can choose to find a higher-yielding bond with the same credit quality.

What this means is that it is not a buy and hold, collect coupon game. This means your return will look like an equity fund, which fluctuates year to year.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

I would not consider that I am more of a freelancer or part of the gig economy.

For a long while, I held a job that many said was rather stable. The difference is that I have a gig at night that pays as well.

Generally, I do not face any cash flow problems throughout that time because I don’t do crazy things like spending more than what I earned.

The gig part pays, but it does not cover all the expenses, so its role to me is good to have and it keeps me motivated. But I have been doing this since Uber, Grab, Deliveroo, Food Panda is a thing.

But before all this, there were a lot of professionals that manage their time, their own sales, their own earnings. Photographers, videographers, swimming coaches come to mind.

I always wonder what is a fundamental sound framework to think about managing money if your income is not very stable. It bothers me because I seemed to have an idea that as freelancing and doing gigs get more popular, there will be more people struggling to save and manage their money well.

So here is what this post is going to explore.

Why Income can be Volatile

The main characteristics that was often mentioned was the volatility in income. A lot depends on the frequency of projects. The payment schedule is also another thing.

Some of the jobs get bunch up… then there is a period with very little job. It can be rather seasonal.

In some of my gigs in the past, I nearly forgot about the payment because the company took a long time to pay.

Some of us have to chase to see what is holding up.

In some gigs, it is not whether the jobs are volatile, it is the income depended on whether you work, and whether you worked hard.

When your income is volatile, I felt that there is this uncertainty at the back of your mind whether you would make enough to be OK. This could overtime be rather stressful.

You enjoy the good part of being in control of who you wish to work with, the hours to work, and not having to have to follow some corporate structure that does not make much sense for your case. But the stress is translated into something else.

The solution to everything seemed to be:

1. Get better. When you are better, more recognized, you have the potential to be paid better
2. Get enough buffer. Instead of living in fear whether what you earn is enough, have enough jobs, projects on a more recurring basis so that this uncertainty gets reduced

I do find that whether it is working a salaried job or working on your own business, on a high level, some rules of thumb are the same.

Managing money when income is Volatile may not be so different from managing Retirement Income Needs

The future of retirement may not be a day where you stopped working entirely.

I do foresee many not having the adequate wealth to fully retire.

Thus, it is a mixture of

1. Working and getting a work income
2. Living off CPF Life
3. Living off an endowment policy with income
4. Living off dividend income from unit trust
5. Living off selling units from accumulating unit trusts
6. Living off rental income

The only consistent income may be your CPF Life. You would need to create a sustainable spending plan to deal with how 1 to 4 comes together.

Freelancing and working on gigs look very similar in that you have multiple partners you worked with, multiple projects, work for multiple gig companies. Each of these have different durations, frequencies pays a different amount.

Thus, the freelancer may need to manage their money using a framework similar to how a retiree manages their income.

The main difference though… is that the freelancer has to put greater emphasis on saving than the retiree.

The freelancer has a long time to go. There are many future liability/goals that they would have to fund and would need money to do so.

So here is how I would think about the money side of things.

How you should Frame the Money Game

I will view your money management in 2 phases. The difference between these 2 phases is how certain you feel about the business:

1. Phase 1: Business Building Stage. You are not so sure if things will work out and are putting in efforts to bring the business to a stable state
2. Phase 2: Stabilised Business Stage. After being in phase 1 for some time, you have a very good sensing that you have reached a stable state where you have
   1. brought in enough projects
   2. have adequate recurring projects
   3. enough large clients
   4. by not working yourself dead, you can have income that covers the essential expenses and more on a consistent basis

The way you would manage your money in these 2 phases should be rather different. Let us go through them.

Phase 1: Business Building Stage

In this stage, you are likely filled with a mixture of

1. uncertainty whether things will work out
2. things you have to figure out that you do not know about having a business on your own
3. transitioning from a paid employee, a student to a sole proprietor

Because you do not know whether things will work out, when it comes to money, this is the stage where you go into “siege mode” or “living like a student mode”.

This means that you have to first be aware of your finances and be in total control over it. This is because you might not have much income coming in, or the income can be rather low and volatile. The income needs some time to ramp up and transition to Phase 2.

Here are some things to think about.

Look at Your Expenses on 2 Levels: Essential and Less Essentials

Living the life of a student can ensure your money last for a longer time and give your freelancing or gig business a greater chance of surviving.

In order to do that, you need to know where the money goes out to.

I would tell a retiree to look at their expenses as 2 levels:

1. Essentials: What you need to survive and stay sane
2. Less Essentials: Expenses that are optional. They make life richer but without them, you should not suffer much

You will have different definitions for both and it is up to you. But you will have to exercise some critical thinking.

As a rule of thumb, the following are essential:

1. 3 Meals x 30 days that keeps you satiated (Meals that you go out with friends, socializing is less essential, or business expenses)
2. Transport
3. Rent and mortgage
4. Meals for children, school fees, allowances
5. Home utilities such as Mobile phone subscription, electricity, water, property tax, conservancy, sinking fund for home breakdowns
6. Hospital and surgical insurance (the rest are less essential)
7. Business expenses
8. Some entertainment expenses

Work out the number and know the number. If you have the chance, while you are an employee, try to simulate and see whether your essential expenses are reasonable.

Build up 3 Months of Essential Expenses before You Start

Some folks will tell you that you must have 3 months of emergency funds before you start.

I would say… let’s not term it as emergency fund.

The way to look at it is that all your money, every dollar is going to be queued up in a straight line.

Your job is to create the furthest gulf between the dollar you spend today versus the next dollar that you come in.

It would be better if you can save up 3 months of essential expenses before you embarked on this.

If you have a day job, save up the equivalent of 3 months of your essential expenses. If you are conservative, go up to 6 months or 12 months. This will give you enough runway.

Here is how it looks like:

You will have a 3-month runway. Whatever you earn in the projects get queued up behind pay 3.

The size of each blue box is the size of your essential expenses.

In this stage, there is no messing around. You do not know whether it will work out, so you will only spend the essentials. If you make more, the money gets queued up for future essential expenses spending.

Live on Last Month’s Income

This is a budgeting concept that comes from You Need a Budget (YNAB), a very popular envelope budgeting system.

On this note, if you wish to budget well, you can try to get one of the envelope budgeting systems such as YNAB, EveryDollar, Quicken so as to control the money well.

Living on last month’s income means this month you are spending what you earned last year. When your income is not consistent, it is better not to spend what just came in.

If the customer does not pay on time, then you have no money for food.

Whether in Phase 1 or 2, the idea is to build a dollar queue such that the age of the money you spend today is very old (this means that your money queue is very long)

Phase 2: Stabilized Business Stage

At some point, you will conservatively feel that you have figured things out to a certain extent.

The money management would change.

The difference between a freelancer versus a retiree is that there is much future goal/liability to think about:

1. Financial independence
2. Children’s education
3. Capital expenditure for business
4. Home

For some, their income have grown so much and so consistent that it seems to be like when they were employed. In this case, the way you manage money may not be any different from how a sensible employee would manager her money.

However, if the income is never consistent, you might need a different way of managing it.

I would suggest breaking up your income into 4 chunks:

1. Essential Expenses
2. Less Essential Expenses
3. Constant Savings. These are savings that you have conservatively estimate that you could put away
4. Good-to-have Savings. These are savings that supplements #3 when you do better

We break up #3 and #4 the same way as your expenses because to a certain extent, you need to save up for your future goal/liabilities.

But you don’t want to over save and not live for the moment. There has to be a certain balance.

However, if your business does really well, a portion of the savings can go into fulfilling those future goals/liabilities.

With that, you can build in some rules.

Firstly, ensure before you start this phase, you could have 8 to 12 months of essential expenses queued up. That will give you a good runway.

Your order of priority when your income comes in:

1. Essential Expenses
2. Constant Savings (pay yourself first!)
3. Good-to-have savings and Less essential expenses

A stabilized business should deliver in excess of a total of essential expenses and constant savings. But by your estimation, it should be well in excess of that.

You should have adequate for essential expenses and paying yourself first.

For each month, anything in excess, split in 2. One part you save, one part you spend.

Every year, increase the essential expenses and constant savings by a particular percentage. This may be the inflation rate.

In this way, you can try to build some stability in spending and saving.

Be Sensible with Your Less Essential Expenses

The idea is not to blow your less essential expenses for that month.

There are less essential expenses that are lumpy such as vacations, annual subscriptions, annual premiums.

You have to know the amount, and if you have excess that month, fill it up. If you wish to go to Europe and need $5000, the moment you have $1200 in excess for the month, spend part of it on trips with the family locally but put $700 towards this $5,000 target.

What should you put your savings into?

The savings is meant for longer-term liabilities such as children’s education and financial independence.

In order for your money to grow, you need to put into risky assets. This would depend on your ability to take risks as well.

I would not advise putting in a highly risky portfolio but you cannot live with it. A good investment plan is one that you could stick to.

If you look at your life portfolio as a business, almost 80-90% of your net wealth is concentrated in your business. It is something you know very well about.

Your business may be volatile or less volatile.

The financial assets that you should use to build wealth upon should be:

1. Less correlated with your business. If your business is in the media industry, don’t have all your money in other media investments
2. Opposite to the volatility of your business. If your business income is uncertain, then the assets you put into should be less risky

It is no wonder that for many business owners individual bonds, property, insurance endowments have become the favorite.

They have a few things in common:

1. low volatility in value
2. provides an income
3. not very liquid

I do wonder if it is a good idea for property agents to have their net wealth in properties as well.

In any case, I think a low cost, diversified portfolio of stock ETF/Unit Trust and bond ETF/Unit Trust could also do the trick.

The allocation will depend on your ability to take risk and your need to take risk (most often you will need to)

A diversified portfolio offers a few advantages:

1. Liquid
2. Can be invested in small amounts
3. If you wish to liquidate, you can choose to liquidate partially
4. Diversified away from your freelance business
5. Ability to cash flow if you require

It is a misnomer that you could not cash flow a portfolio of funds that does not provide an income by default. The fund puts the decision & responsibility to cash flow in your hands.

Otherwise, why would the majority of the United States Financial Independence community be able to get cash flow if they have primarily used low-cost funds?

Your Portfolio As a Buffer

One advantage of that liquidity and cash flowability is that in the event you need to tap on your portfolio in the short term, you could do it:

1. Your mortgage would have sapped cash flow instead of giving you cash flow
2. Insurance endowment that do not distribute cash flow are illiquid
3. Your income from your bonds is fixed

In a diversified portfolio of funds, you could spend a conservative amount and the portfolio could still grow. For example, you could conservatively spend 3% to 3.5% of the value of the portfolio if it has grown to a sizable amount.

If not, when you really need it, you could spend 10% of it. If you keep up at this rate, your money will not last long, but the idea is, weather the short term storm and in the future replenish it.

Get Some Help if You Need To

Help can be in the form of some software as a service to help you manage your money.

I have mentioned YNAB and possibly a lot of mobile money app will help you keep track of what you spend on.

Summary

I am not sure if most readers agree. There should be a fair bit of you who are in this group I am talking about. You could correct me if I am wrong.

In actual fact, I would probably not be the right person to write about this.

But I don’t see some property agent, or insurance agent, or Grab food driver write a piece on this side of things.

There are probably some areas I missed out. I would add them in when I think of it.

Meantime do let me know if there are areas I failed to consider.

What May Be Helpful:

• Bully The Bear – Freelance Tutoring as a Business Part One, Two, Three

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