Here is a higher yielding, safe way to save your money that you have no idea when you will need to use it, or your emergency fund.

The March 2019’s SSB bonds yield an interest rate of 2.18%/yr for the next 10 years. You can apply through ATM or Internet Banking via the three banks (UOB,OCBC, DBS)

However, if you only hold the SSB bonds for 1 year, with 2 semi-annual payments, your interest rate is 1.95%/yr.

$10,000 will grow to $12,197 in 10 years.

This bond is backed by the Singapore Government and its available to Singaporeans.

A single person can own not more than SG$200,000 worth of Singapore Savings Bonds. You can also use your Supplementary Retirement Scheme (SRS) account to purchase.

You can find out more information about the SSB here.

Note that every month, there will be a new issue you can subscribe to via ATM. The 1 to 10 year yield you will get will differ from this month’s ladder as shown above.

Last month’s bond yields 2.20%/yr for 10 years and 1.95%/yr for 1 year.

Here is the current historical SSB 10 Year Yield Curve with the 1 Year Yield Curve since Oct 2015 when SSB was started (Click on the chart, move over the line to see the actual yield for that month):

What is this Singapore Savings Bonds? Read my past write ups:

1. This Singapore Savings Bonds: Liquidity, Higher Returns and Government Backing. Dream?
2. More details of the Singapore Savings Bond. Looks like my Emergency Funds now
3. Singapore Savings Bonds Max Holding Limit is $200,000 for now. Apply via DBS, OCBC, UOB ATM
4. Singapore Savings Bonds’ Inflation Protection Abilities
5. Some instructions how to apply for the Singapore Savings Bonds

Past Issues of SSB and their Rates:

• 2015 Oct
• 2015 Nov
• 2015 Dec
• 2016 Jan
• 2016 Feb
• 2016 Mar
• 2016 Apr
• 2016 May
• 2016 Jun
• 2016 Jul
• 2016 Aug
• 2016 Sep
• 2016 Oct
• 2016 Nov
• 2016 Dec
• 2017 Jan
• 2017 Feb
• 2017 Mar
• 2017 Apr
• 2017 May
• 2017 Jun
• 2017 Jul
• 2017 Aug
• 2017 Sep
• 2017 Oct
• 2017 Nov
• 2018 Jan
• 2018 Feb
• 2018 Mar
• 2018 Apr
• 2018 May
• 2018 Jun
• 2018 Jul
• 2018 Aug
• 2018 Sep
• 2018 Oct
• 2018 Nov
• 2018 Dec
• 2019 Jan
• 2019 Feb

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly

This post is a review of my expense for the year of 2018.

I started off with only $6,000 in my bank account and I am probably one of the bloggers that wasn’t such a well performing employee, or the one that had a great side line.

So a lot of it has to come from watching what I spend.

However, when I started doing this 5 years ago in 2014, it is more of whether I can keep this going and show something I am comfortable in showing.

This post will show:

1. links to past annual expenses review
2. what I used in the past, and now to track all these stuff
3. some review of the expenses
4. illustrating some expenses that are not permanent
5. the annual expense and relation to your retirement or financial independence goals

My Past Annual Expenses Review

Since 2014, I been doing this annual expenses review.

In each article, you can find out what I think about my expenses during those years, and how they evolved over time:

• 2014: $23,798/yr – A review of my past year’s expenses
• 2015: $22,150/yr – How our family’s $22,150 annual expenses means for our financial security and financial independence
• 2016: $26,238/yr – My Annual Expense Report – $26,238/yr and its link to Financial Security and Independence
• 2017: $21,723/yr – Annual Expense Report 2017 – $21,723

What Software I used to Track my Expenses

From Jan 2005 to Oct 2016 (11 years 10 months), I have been tracking my expenses on Quicken. I only input the expenses in Windows, when I get home. For a long time, smartphone does not exist.

click to view larger image

Quicken is very old school but the great thing is that it is very flexible to adapt to envelope budgeting. It is a paid software and after some time, I just got sick of paying for it. Actually, the cost of it perhaps is less than the subscription services nowadays!

One thing that a lot of people may not noticed, that is rather helpful, is the reports that could generate. I went back to my old Quicken and pulled this report of spending by category from 2005 to perhaps 2016.

Since reviewing is an important aspect of a personal finance application like this, this makes Quicken worth the money you pay for it.

You can also see the crazy $31,000 I spent on medical in the past!

Quicken is pretty good if you like:

1. Create multiple accounts
2. Tracks your investment portfolio
3. Schedule Transactions
4. Can be modified to do Envelope Budgeting
5. Numerous very useful reports

From Nov 2016 to May 2017 (7 months), I decide to support a online/offline Envelope Budgeting Web App called Financier.io. Alas, it was not to be. The project went unsupported, but it was pretty functional after it stopped.

If you would like a sophisticated, yet free web app, that is offline, that does Envelope budgeting, you can try Financier.io. Your data would only be clear if you empty the cache of your browser.

You can backup the data, and you can restore the data to continue your work. The backup is robust, as I have restored it on different computers a lot of times (for reference purpose).

Here is a summary of what I like about Financier:

1. Does YNAB (you need a budget) level Envelope budgeting

From May 2017 to Today (1 year 7 months), I have been using the old classic version of You Need a Budget (YNAB 4). I bought it off Steam for . Shortly after that, they decide to make this a subscription based service (US$6.99/mth).

If you do envelope budgeting, there is not a lot of things that would beat YNAB.

Click to view larger image

You can see how similar Financier.io is to this. Which is why if you do not know if YNAB will work for you, and you are stretched for cash,  you know which one to go for.

Click to view larger image

Again, to compile this report into a spreadsheet, it really help to have good reporting. This is something that Financier.io struggled with because one person just cannot add so much functionality.

It is still usable now for me. For new users, you cannot get it.

Here is a summary of what I like about YNAB4:

1. Sophisticated Envelope Budgeting
2. Schedule Transactions
3. Numerous very useful reports
4. Android and iPhone companion app for data entry

My Review of My 2018 Annual Expenses

Click to view larger table

In the table above, I have tabulated my monthly expenses break down. Some categories do fluctuate month to month, particularly when there is one off items.

The annual expense is $19,665/yr. That comes up to about $1,638/mth.

Last year it was $21,723/yr and $1,810/mth respectively.

For those who have read my article on what an annual survival expense means, you can see I have 2 master categories:

1. Rich Life Expenses. These are expenses that make life interesting and not dull to live on. It is also a category to be reduced when life gets a bit tougher or you have some other financial goals that you are prioritizing
2. Mandatory Expenses. This is mainly the survival expenses. These are the expenses that you cannot run away from. If you don’t spend, the household does not function in a minimal manner.

In the table above, I tabulated the average monthly spending for roughly each category. There are 2 master categories, rich life expenses and mandatory expenses. You can remove the rich life expenses, when the going gets tough, but not the mandatory expenses.

Of course, I have to relabeled some of the categories since I have re-categorized some of them since 2014.

So here are some thoughts on my expenses.

Top 5 Expenses

If you are trying to optimize your expenses, you will do best by focusing on the “larger rocks”.

Take care of the larger expenses, and you will find the greater cash flow.

My top 5 expenses are:

1. Family Survival Groceries: 22.5%
2. Mortgage: 19.3%
3. Insurance: 16.7%
4. Tax: 9.84%
5. Household: 9.0%

Top 5 expenses is 77.3% of total expenses.

It is a good thing that #2, #3 and #4 are expenses that are not always permanent in the long run, and can be cut away (to be discussed later)

I do see #4 to be higher next year.

Top 5 Increase in Expenses

These are the expenses that increase by the most:

1. Hobbies: +1200%
2. Medical: +137%
3. Rich Entertainment: +118%
4. Tax: +39%
5. Internet, Cable, HP: +29%

Those look like big increases, but you realize only tax is among the top 5 expenses. The rest are much smaller so an increase in expenses is not such a big impact.

The tax increased because I earned more. The internet, cable and HP is more because I factored in my Dad’s cell phone bill. Medical will fall next year most likely.

I didn’t spend a lot for hobbies and rich entertainment. They made up 5.7% of my total expenses. So the increase has been less  of an impact.

Mandatory Expenses to Rich Life Expenses Ratio

We evaluate mandatory versus rich life expenses to have a sensing if that is what we want.

If you are trying to be frugal to prioritize saving, having higher rich life expenses versus mandatory expenses is probably not what you want. If you are retired and enjoying life is a requirement, then having a lower percentage of rich life expenses might mean you are short changing yourself.

1. Mandatory Expenses: 90.70%
2. Rich Life Expenses: 9.24%

My expenses is still a profile of bare minimum expenses with very little enjoyment.

Another significance of such a loop sided ratio is that, if the going gets tough, I do not have much to cut down really, so that I controlled my expenses. If you have more rich life expenses, then you might have more leeway.

Family Expenses Month by Month over Time

The top expenses is the groceries, food bill for the family, so I do record this small subset of my expenses to see how they change over time.  This is typically my family’s food cost.

Currently, this is the food cost for 2 person.

My dad does majority of the grocery buying, with the rest done by myself for designated items like sweet potatoes. Thus to make it simple I would ask him to ensure that for all his purchase with receipts keep the receipts in a container. I will tabulate them at the end of the month.

For those without receipts, tell me and we record them in a note book. I will tally them at the end of the month as well.

End of the month, I will just add up:

1. my own groceries spending and survival expenses (if there is any) from YNAB
2. Dad’s spending without receipt
3. Dad’s groceries with receipt

The this would be our family expenses.

The spending went down since 2016, where it was more for 3.5 person to 2 person. This came up to an average of $363 per month.

This year, I did not record down the line items of what makes up this amount of spending. I think there is no need. I don’t think it will make much of a difference.

You realize there is a tilt downwards, and I think that, if you focus on refining the process of what keeps you satiated and satisfied, your costs will be rationalized.

The Recurring Expenses that will Go Away

There are some expenses that I am paying for now, that will be reduced in the future.

What this means is that the annual expense could go down even further.

There are 2 kinds of expenses that will go away:

1. Fixed Tenure Expenses
2. Expenses that are tied to employment

Fixed Tenure Expenses

Fixed tenure expenses have a particular duration. If you pay them off, you will not need to pay for them again.

I do have 2 of these.

The first one is my parent’s mortgage. I have been paying for it since I started work, with cash (instead of the usual CPF).

We should probably have almost 4 years more of payment and about $14,000 left.

Of course, I could choose to pay it off in one shot, but I see little advantage in doing that. I have paid up most of the mortgage interest, such that the majority of the payment now goes towards principal repayment.

However, it might motivate me to save up $11,000 next year so that I can match this liability.

The second fixed tenure expense is my Tokio Marine $50,000 20 year limited whole life.

I got this policy in Nov 2006, so I would have almost 9 years of premium left to pay. Once that is done, I would have owned this policy outright.

In total, that will be $10,260 worth of premiums left.

I have ask whether I could pay this premium in full, and whether there are any advantages in doing that. The answer is that I couldn’t do that.

I am still on the fence about the role of this policy. Perhaps I need to review the way that I look at this policy. The surrender value in Jun 2017 for this policy is $9167.55, so I would probably lose $2,500 or 2 years of premium payment by surrendering this policy.

9 years is a long time, but an annual premium of $1150 is not going to make much of a difference at this current point.

I could possibly replace this with a decreasing term life insurance policy.

Paying off these fixed tenure expenses to me is accelerating the asset versus liability matching.

In total, I could reduce my annual expenses by $4,932/yr.

Expenses that are Tied to Employment

Then there are the expenses that only exist due to work.

There are 2 that fits this as well.

The first one is Income Tax. 

You pay income tax when there is work. If I do not work, I save on income tax. If I work part time, my income tax is reduced.

So the saving here could be $3,000 to $4,500/yr. (trying to project)

The second one is less transport cost. If you do not work, you reduce the average 40 monthly trips per month.

The savings is not a lot probably $360/yr.

How the Annual Expenses is Related to Financial Security, Financial Independence and Retirement

A common running theme of Investment Moats is on the topic of financial independence, and I was often asked how do you compute the wealth that you need to accumulate to achieve financial independence.

So the answer is a lot of the starting ground, is to know

1. what is your ideal lifestyle in financial independence
2. how much you need to spend to meet this lifestyle

And the starting place is from your current expenses (which is why reports to yourself like this is rather important). To find out how different your future lifestyle is, you got to know its difference from your current.

There are a few different schemes of financial independence:

1. semi retirement
2. coasting or barista financial independence
3. just wanting some form of financial security to relief your financial anxiety by providing a cash flow that covers your annual survival expense
4. be financial independent with the dream of eventually retiring

There are more different schemes, and different rungs of the ladder in your pursue of wealth, and you can use this ladder of wealth here as a guide and keep you motivated.

And for each of us we wish to live very different lifestyles. And for some of us we are very risk adverse and want to ensure we don’t have to work again, while others are more carefree in that, if things do not work out, they can see themselves going back to work easily.

So with that in mind, you need a sum of money.

This sum of money is put in a portfolio of financial assets and it will grow over time.

You would withdraw or spend a percentage of this sum of money annually. The more you withdraw, the greater stress you put on your portfolio of financial assets. The less you withdraw, the less stress you put on it, but you have less to spend.

So you are always trying to find where is the Goldilocks point.

Click to view larger table

So here is the table where I show what makes up my annual expense. I always aimed to be financially secured, but not really financially independent, since I see myself as working. I wanted to ensure that I put myself in a good financial position that is all.

So I worked out, based on my current expenses, how would my spending for each category change, if I were to be financially secured or independent.

For example, the rich life spending budget would be larger in financially independent, I would gift more, spend more on hobbies.

For both financially secured and independent, I do see the mortgage being paid off, less insurance expenses, and tax expenses.

So the annual expense to be financial security is $11,880/yr and financial independent would be $17,340/yr. And I think these numbers will change as life changes (which is why people would say its difficult to project how much you will be spending. But you got to start somewhere isn’t it?)

With this, you can calculate how much wealth you require to achieve this.

After that, you can compare that to your current liquid net worth to see how close you are to these financial goals.

So I compute an initial year spending rate of 3.5% of my wealth. This means I take out $X for the first year, then for second year, I increase $X by the inflation, and third year, I increase the second year amount by inflation.

Why 3.5%? I think 3.5% is more conservative than the often touted 4%, but its still not absolutely safe (compared to 2.5% to 3%). If you check out my planning for retirement section, I go into this in a deeper manner. Please comment below if you wish for more explanation on this.

So I would need $11,880 / 0.035 = $339,428 to be financially secured, based on a baseline annual survival expense.

I would nee $17,340/0.035 = $495,428 to be financially independent.

I also compute based on my current 2018 expenses and the sum required is $561,883.

The more you need annually, the larger amount of wealth you need. The more risk adverse you are (which means instead of withdrawing 3.5% of the first year, you withdraw 2.5% to 3% of the first year), the larger amount of wealth you need.

This is the math that you cannot run away from.

I am not going to say outright whether I have attained any of these financial independence life schemes, but if you are smart, you would have picked up enough Easter Eggs to know how close I am from this.

Shifting from a Conservative Dividend Yield formula to a Withdrawal Rate formula

Regular readers of the blog would realize that these sum, is higher than that of the 2017 figure, despite the spending going down.

So here is 2017’s figures for the same section:

The main difference is that, this year I used a 3.5% withdrawal rate.

The past few years, I based it upon a system of spending a “conservative” dividend cash flow, that is equivalent of a 5% dividend yield.

The idea is that we can find many dividend stocks to invest in, with some higher yields that is more risky and lower yields that has more quality. We could form a portfolio that realistically provides a dividend yield of 5%.

As long as the portfolio grows an additional 2% per year on average, for a 7% total return, this stock wealth machine should work relatively well.

Over time, with deeper research, I find this concept to be filled with flawed.

I would not go too deep into this but here are the summary points:

1. it makes retirees reached for high yield stocks, so that they can meet their goals, and may put more than needed risks to their retirement
2. the idea is that just spend on dividend income, and don’t touch the principal, and the principal can appreciate back to its original cost, thus a dividend equity portfolio can combat against sequence of return risk. Your result would really vary, because there are stocks, whose business can get impaired in certain poor markets such that your capital cannot recover. This strategy does not work in all situations. You need to be a competent dividend investor that actively manage your portfolio to do that. And competent dividend investor do sell and lose their capital (but redeploy this capital to areas that provide the best risk adjusted returns going forward)
3. dividend income fluctuates. This would mean your annual expenses fluctuate as well. If every $1 of your retirement expenses is mandatory, then you will face some lifestyle problem. You cannot frugal your way out of this. If your annual expenses contains expenses that are non mandatory, then you can frugal your way out of this
4. not every readers invest in a portfolio of stocks. Basing the communication on withdrawal rates is more universal.

I think moving onward, it is better to see your returns as total returns ( capital growth + dividend income that is reinvested) and seeing how much you spend from your wealth machine on a consistent basis.

Does that mean that my previous estimation on a 5% conservative dividend yield is flawed?

I think we have to viewed it in context.

An annual expense update like this is very personal, and if you are aiming for financial security like myself, then this would still work for you.

The demands on your wealth machine for financial security is very different from a full blown retirement:

1. you are probably not looking to spend that cash flow to perpetuity, or 50 to 60 years. For most they probably are looking at a 1 year, 2 year, to 4 years relief, then they will go back to earning, to build up the wealth machine again
2. what is similar is likely all the expenses is mandatory (since its required for basic survival)
3. if the dividend income fluctuates, there are plans to take a lower paying job, just to meet that basic survival

And given this permutation, if you form a dividend stock portfolio that yields a 5% dividend yield, it would fit this need.

Let us revisit the summary points before:

1. Don’t reach for high yielding stocks. In this article I written about how you can shift your dividend portfolio to be more conservative, do evaluate the stocks that form your portfolio to be based on either more matured business that is still growing, business that are growing but paying a decent dividend, or at most matured business whose businesses are intact. Always evaluate the quality of the business, versus the price you pay for it. You could still get an average portfolio dividend yield of 5%
2. If you form your portfolio with REITs that yield 7% when their valuations are attractive (and not when their prices do not provide high margin of safety), but spend only 5% of it, it gives you room to maneuver when the dividend per unit gets reduced
3. If the dividend income is not adequate, systematic sell some units to make up for it. This works only if you would replenish your portfolio next time from your work income. This will enable you to provide a consistent cash flow
4. When the business behind the stock looks like it will be impaired, or that it would not do so well in a cyclical downturn that you can foresee, re-balance the stock to one which will survive better, or into cash. In this way, you eliminate sunk cost fallacy, and always set up your portfolio with stocks that give you good risk adjusted returns going forward

To do this, you got to be relatively competent in managing a dividend portfolio, which over time I realize, can be rather challenging.

I think if there is one critique, it is that for financial security, it should be based on:

1. survival expenses that are very well optimized to make sure those are really the bare essentials (no cable TV, no providing for parents or in-law parent, no Ang Bao)
2. based on a very conservative withdrawal rate from your wealth machine
3. income cannot be volatile or fluctuating

So given the above, a more sensible withdrawal rate should be a 3% initial withdrawal rate.

If your annual survival expense is kept to $12,000/yr, you would need $12,000/0.03 = $400,000.

We will know that if the line items for survival stay the same, if we have $400,000:

1. we have a perpetual wealth machine
2. tested with historical data
3. that provide us with consistent inflation adjusted cash flow
4. to provide for our annual survival expense

That 5% dividend yield formula works but you would have to make a lot of adjustments, and that requires a certain level of competency. To have absolute security, you might want to keep it simple, have less adjustments.

You would need a larger sum of money though.

Next Year Spending Will Be More

It looks like there will be some spending coming next year:

1. home painting
2. higher taxes
3. ancestral tablet

Summary

I think for a lot of the topics that we discussed on money, you cannot run away from the expenses discussion.

And in the second half of this article, I shown just how much your longer term financial goals, depend so much on your short term annual spending.

If you have tallied up your annual expenses, you might have some stories to share. You might also have some queries on this post.

Do discuss below.

This is the last article for year 2018. I will see everyone in 2019!

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
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

The government have found a way to borrow money from the citizens and not be criticized about it.

This year have been special for the Singapore Savings Bonds in that if you held on to the SSB for 1 year, your yields would be near 1.6% to 2.0%.

Subscription and demand for the Singapore Savings bonds have been overwhelming.

This is why MAS have announced to:

1. Let SRS account holders purchase Singapore Savings Bonds
2. Double the individual limit that an individual can purchase the Singapore Savings Bonds. This means that, from 1 February 2019, each investor will be able to apply for up to S$200,000 of SSB, taking into account both SSB purchased using cash and SRS funds.
3. MAS will launch a My Savings Bonds portal in March 2019. The portal will allow investors to view their total SSB holdings, purchased using both cash and SRS funds.

Demand have outstripped supply in all but one month.

The monthly issue for Singapore Savings Bonds will double from $150 mil to $300 mil SGD.

This means that in 1 year, the government would borrow $3.6 billion from the citizens.

I think this is good for Kyith as a whole.

But its also good for SRS account holders. The data shows that one third of all SRS account resides in cash, so with this, they can earn a higher interest rate.

While SSB is attractive, Equities can be more Attractive

I think one pervasive thought process is to keep cash while the equity markets is in a challenging situation.

And this does encourage a bit of hoarding behavior for cash.

While this increase in limits for the SSB certainly increases flexibility, but also your more liquid low risk portion of the portfolio, do bear in mind that equity markets are more attractively valued versus 1 year ago.

And you need the potential of higher risk (potential downside and upside) to earn a higher return.

Short term Lending Rates may become More Competitive

One train of though my brother had was that as SSB become more well known, popular, it may suck the liquid money from the traditional lenders.

This might increase their cost of borrowing (the deposits they pay to you) and might cut into a segment of the bank’s net interest margin.

While this is good for consumers, for the bank investors it might provide a cap on their earnings, but this is somewhat expected. The SSB is just like another competitor.

I think for now, if I manage to find more money lying around not doing anything, I have less of a headache.

The hurdle accounts always changes their terms and conditions, and the higher yielding accounts, always wants me to transfer new money in.

Even the very good CITI Maxigain has up their minimum to S$70,000!

In a time like this, SSB becomes more attractive because I find it difficult to make people jump through so much hoops.

Summary

For too long the citizens are skeptical about transferring money to top up the CPF and it requires a lot of promotion for people to do that. Still, people do not like their money to top up.

It has been so difficult to get the people to buy Singapore Government Securities bonds (SGS bonds)

So this was a very successful campaign to get more Singaporeans to willingly lend to the government.

However, Singaporeans only recognize safe investments at a good return, so it will be interesting to see what happens when the short 1 year rate returns to 1%.

Personally, I am disappointed more that the money market unit trust cannot hit close to 1.5%. That would have been an even better alternative for me.

Do Like Me on Facebook. Join my Email List. I share some tidbits that is not on the blog post there often.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
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

This post is meant for peasants. Why do I say that?

At Investment Moats, a lot of what we discussed is on the growth aspect of wealth building. Probably, I haven’t delve into the aspect of how you look at your spending expenses.

So this post sought to address that.

Now if you earn a lot, such that saving money is less of an issue, and you do not wish to spend effort to right size your spending, then this post is not for you.

However, if you are interested into how I think about spending, then do stick around for this short article.

I am not going to show you some extremely lucrative ways to save money, or get unlimited supply of food at a low cost.

Rather this post will be a pretty high level look at optimizing your spending, and with that, you can live your life holding on to some of these spending philosophy.

This article, is the hallmark of how you should think about expense spending es for your life. To be reflected very often.

Before that, we are going to go into some terms such as your Saving Rate, your Spending Rate. If these terms sound unfamiliar to you, do read up my article on What is Your Savings Rate, Your Spending Rate and Your Personal Free Cash Flow?

If not, parts of this article will sound a little Greek to you.

The Overall Goal of Optimizing Spending

Money is a scarce resource. With money, you can obtain a better quality of life now, or in the future for yourself.

Now when we carry out budgeting, what we are doing is to match what you value to what you are willing to pay for what you value.

Sometimes you do not know how much you value something, so you end up overpaying for it or underpaying for it. In some cases, you don’t even value the item or service, yet you paid for it.

Optimizing your spending is to re-calibrate between your values and the money you spend.

And often, it is to gear up so that you will have enough for some future goals, which is a future spending.

For example, if you are a parent, you wish that you will have enough when your kids need to go for their university.

You wish to gear up to build up wealth capital, in case you get retrenched and that you need some wealth capital for security, so as to spend down temporary.

For most people, they yearn to be secure, or to have options in life. Thus, one of their goals is to accumulate wealth.

If you accumulate X amount of wealth (vertical), your wealth would give you an annual wealth cash flow (horizontal) at 3%,5% or 7% rate of return, while keeping your capital intact

The upside of building up wealth is that if you have a future goal that requires funding, that you have not thought about, building up wealth greatly contribute to fulfilling it.

In my wealthy formula, I sought to explain in detail how optimizing spending together with earning more and building wealth wisely is the way most people from different walks of life could accumulate wealth. In the article, I also shows what makes the most impact to build up wealth.

While earning more and building wealth are the important ingredients, what is much more doable at the start is ensuring that you are spending on things that you value greatly.

The Breakdown of Your Cash Outflows

In my article on what is the spending rate, saving rate and personal free cash flow, I defined how I categorize some of your common cash outflows.

There are a lot of cash outflows but usually there are 2 types of cash outflows: the mandatory expenses and discretionary expenses.

Your family would spend on some things that make your life livable in just the right amount. These are mandatory expenses.

To make your life joyful and comfortable, you spend on the discretionary expenses, hoping that you achieved that.

Outside of this, the rest of the cash outflow are channel towards building up wealth assets to fund future / potential future spending goals.

Could you increase your saving rate or decrease your spending rate?

Your saving rate and spending rate is the opposite of one another. In 2 different articles that discuss the spending rate by Michael Kitces and J.D Roth, both of them agree that what you can affect is the spending rate.

In other words, if we debate the chicken and egg issue of which one comes first, your saving rate is a byproduct of you spending less.

If you get inspired to work towards a financial goal, I tend to see less people being motivated to increase their income by jumping into another position. However, optimizing spending tend to be something more readily doable.

There are those who have been job hopping every 2 years. They would probably accelerate it. However, most tend to be a little conservative and think that secure a higher paying job entails, going for a few interviews, and one of them succeeding and eventually working out.

This would breed inaction.

For most people, you cannot control your saving rate.

By controlling your saving rate, it inevitably result in you spending less. This is a problem. And for those of you who are prudent, you would say: “But Kyith! You should always pay yourself first before you spend!”

Let me perhaps highlight some blind spot of mine in the past and perhaps yours.

You cannot increase your saving rate if your fixed expenses is high

Kitces highlighted an important point.

Perhaps it is a bit of checking our privilege.

Suppose this is your disposable income. If try as you might, your mandatory expenses is 80% of your disposable income, and that your discretionary expenses is 15%, that leaves little room for you to maneuver.

You could possibly cut out 50% of your discretionary expenses so your savings rate can be boosted to 12.5%.

Reducing the mandatory expenses, in reasonable measurement, will impact the life of your family.

In this case, it is difficult to boost your savings rate because there is nothing much to cut.

So who fits this group of people?

1. Those living in high cost of living places, where large spending are dear
2. Low income family or individuals

If this configuration matches what you are faced with, the general solution that makes greater impact is to increase the cash inflow.

This would be a topic for another day, but it is to increase with another job, get a promotion, and with that comes more salary.

Do not proportionately increase your spending. In this way you have more money to be channel to savings.

Of less impact but doable is that you need to seriously reflect on your discretionary expenses and whether you gain value out of them.

If not, cutting them out will increase your savings rate.

You would also need to seriously review your mandatory expenses, to see if they are really mandatory.

I went through this exercise with some folks who are in this category. Their saving rate is low and I do agree that part of their circumstances result in a low saving rate by product.

However, if I ask the hard questions, a few of those discretionary expenses can be cut. Some of those mandatory expenses are not so mandatory in the grand scheme of things.

So sometimes serious reflection of your life values and your expenses are required.

Low Spending Rate is often linked to Privilege

If you have a low spending rate, relative to your disposable income, then, despite what you can say, you are in a privileged position.

If your disposable income is high, your mandatory expenses is low.

In this way, you have that optionality to balance between comfort now, and in the future. You balance between your discretionary expenses and your savings.

If you favor safeguarding your future, you can have 10% discretionary expenses and 55% saving rate.

If you favor living life now, you can have 50% discretionary expenses and 15% saving rate.

This is what the former group yearn for, to have this luxury to choose between spending now or saving for the future.

For this group they can pick a scheme of budgeting and go with it.

This fits those who choose to pay yourself first.

Pay yourself first is a form of reverse budgeting, where you focus on how much wealth you wish to achieve in the future, break it down into monthly savings.

Then you ensure that you save that monthly savings amount, and spend the rest. To do that, you need to have ample personal free cash flow.

Despite a low spending rate, some folks in this category might feel extra motivated to push themselves to

1. Strongly match their values to the amount that they spend, and minimize wastage
2. Hit their wealth accumulation target faster than they anticipated
3. A combination of #1 and #2

This is why they would still sought to optimize.

From this point onward, I hope these philosophy helps.

Become a Valuist When You Decide Whether to Purchase Things

I first heard this term from the host of ChooseFI and I think it perfectly describes how we should shop.

The general idea is that we spend based on how much we value something.

To be a Valuist, often you need to have a pretty good sensing about

1. your financial position
2. quality and grading of the items or services you wish to purchase
3. what are your life’s priorities

When you try to make a purchase decision based on this, you are said to be a valuist.

For example, your disposable income may be low, but you realize that if you can give your child the tuition she needs, and this doesn’t affect putting food on the table, you can go ahead and find the best teacher within what you could pay.

You can buy the cheapest laptop around, but if your laptop is something that you use in your freelance work, and you use it so often, it might make more sense to get a better grade one so that you rid yourself of some small niggling inconveniences instead of living with them.

The overall idea is that

1. understand the three points above
2. try to spend as little as possible to get the best thing you need

Focus on the Expenses that Makes the Most Impact

If you examine the categories of expenses, you can figure out what are the line items that constitute the largest amount.

For those largest amount expenses, if you choose to spend them, you have to make sure that you get good value out of them.

There is an asymmetric behavior that we sometimes observe.

People tend to be more familiar with getting the best deals for those line items that makes up a small percentage of their disposable income. So they try their best to get the best deal out of those.

For those large ticket value items, they do not scrutinize whether they are making a good decision.

Net net their expenses are less optimized.

Generally, a family large expenses are:

1. food
2. transportation
3. home
4. child related expenses
5. vacation

If you focus on optimizing these expenses, so that they fit close to your values, the impact is much larger than those smaller expenses.

The caveat here is that, make sure you do not have a lot a lot of those smaller expenses!

If Your Personal Free Cash Flow is Low, Do Not Have Too Many High Grade Things You Value

Whenever I show someone how to budget, I will explain that how you spend your money should reflect your value systems.

If you look at your spending, and you think that is not how you prioritize life, then you have to tweak your spending.

My co-worker tells me she values a lot of things in her life, so she cannot increase her savings rate.

So here is the thing. You can do something like that, but the consequences is that you would have less for your future self. You value things for your future self less than these things right now.

While their free cash flow is limited, they have a lot of high priorities items.

Normally, if the items are high priorities, then it is alright to spend more on them.

However, if you have a lot of these high priority stuff, then almost all your personal free cash flow will be devoted to discretionary expenses.

Suppose you have 7 hobbies and you really like all of them. So you proceed to spend money buy purchasing high grade items and services pertaining to these hobbies.

This ends up sucking away all or majority of your free cash flow.

If your disposable income is high, you have greater free cash flow, you can indulge in more of these high grade things.

You do not have to Acquire the Highest Grade, Highest Quality for Everything

I think there is an over exuberance of wanting the best of everything.

When we are buying things we can separate things to different grades, high grade, medium grade or low grade.

When we say grade it is that there are some differentiated difference between what you are purchasing.

For example, I can buy a hosting package where they give me a 20 Terabyte worth of transfer limit. I can go one grade down to a 40 Gigabyte one. Each of them have different price.

Within one grade, say medium grade, you have different quality. This can range from high quality to low quality. So for some competitor within the 40 Gigabyte transfer limit one, how they count and compute whether you hit your limit is different.

If we were to use another example, a condo is a high grade living, with a lower grade being a 5 room HDB flat. The differentiating factor is the amenities and perhaps the people that you can network with.

Within the high grade condo, you have some that is higher quality and those with lower quality.

Now, if your free cash flow is small relative to your disposable income, do not have too many things that is of the higher grade and highest quality.

If you get the highest of grade and quality, the price tag is often not going to be low.

I do observe folks that tell me, “I would rather buy something really good, and be done with it and not think about it”

If you have that kind of mentality for everything, you are going to buy a lot of stuff that you might not use all the higher grade factors that comes with it.

You need to think about what are high priorities, and whether you can afford them. Then for those that are low priorities you can then get a lower grade.

Combining this with one of the previous point about focusing on your big expenses, you can choose the appropriate grade.

Lifestyle inflation happens when you get a a higher income, and you upgrade the grade of your things accordingly.

Having agency in your life is to understand which one of these you hold a higher priority for the disposable income available to you.

And then you make a conscious choice.

Communicate, Negotiate and Influence on Your Peers

As we go down this list, it becomes harder and harder to do.

But the rewards becomes proportionately big.

Now not buying the highest quality or the highest grade might be easy for you.

However, you might find it extremely hard to:

1. let your spouse know you guys should not go for the best every time
2. let your family know your free cash flow does not allow you to always have the highest grade
3. let your boss or colleague know you cannot go for every farewell treats

And this is the aspect that I find the highest mandatory and discretionary cost optimization.

A shift in vacation grade, food grade and transport grade would really impact the expenses.

However, people do not understand what is on your brain. And we tend to think we cannot influence people to make this happen.

This is a subject by itself and do let me know if this is among the hardest.

Turning Your Annual Spending into a High Yield Saving Account

Now, for those that have control over their spending and achieved financial solvency, one very popular thing that the savvy ones try to do is to optimize their spending, so that they either get cash back value or they earn miles.

On credit cards, and debt cards, when you spend on different types of things such as supermarket, dining, certain bills, there are different level of cash backs ranging for 0.3% to 7%.

Now suppose your disposable income is $50,000 and you spend $40,000. You might not have a portfolio of $40,000, but imagine by spending well through choosing the right cash back credit card, you can earn $40,000 x 3% = $1,200.

There are certain nuances to this such as:

1. minimum spend on your credit card needs to be $500 – $1,500/mth
2. some spending are exempted

So doing this will require some effort.

However, if you do it for 10 years, I would say the amount of “interest” might be substantial.

The other camp is the miles camp. In this way, instead of using cash back credit cards, you choose cards that allows you to earn airline miles.

These miles allow you to exchange for airline tickets. By optimizing in this area, you could offset the cost of your holiday ticket and hotel costs, which are pretty big costs.

If you are able to do that, your annual expenses will go down.

This is a competency by itself, and something that I heard about but not done extensively since my expense is not normal (read low).

Leverage on the Community To make Things more Efficient

I believe that not everything, you have to get it yourself. There are some things that can be shared since they are not used so much.

Thus, if you have a community there are more options.

Used goods market place such as Carousell in Singapore is a community that you can perhaps find what you want cheaper. That reduces the costs.

When I was part of the Freegan community, I learn a lot about the supply chain of the life of various food and used items. I learn about where the opportunities were and how frequent are those opportunities.

For every thing that you need, if you go deep to a certain extend in the community, your competency and knowledge also become deeper to a certain level that might translate to money savings because you do not buy the wrong stuff and service that does not fit your needs.

You learn that for a casual listener at a certain point, you cannot discern the difference between very good earphones and good earphones. This saves you money by finding the sweet spot.

Often you will need to incur search cost to garner information like this. However, this is sped up when the experienced folks within the community shares their experience.

Reflecting Instead of Rationalizing

A lot of the tactics offered in this article are pretty general and up to you to make a good decisions.

The more good decisions that you make, the more your expenses look like a realistic version of what you want.

However, when it comes to expenses, what I notice is a problem my ex co-worker referred to as rationalizing more than reflection.

There is a difference.

Rationalizing: You try to reason that your decision is right.

Reflecting: You take a look at the evidence, and the conclude whether your decision is right.

There is a lot of rationalizing due to endowment effect for a lot of people. After you buy it, you self justify that buying this grade and this quality is the right reason.

In a different way, you also have people rationalizing all of their spending is mandatory and not discretionary.

If you struggle to reflect, you cannot separate between mandatory, discretionary expenses and those items that will build wealth for future spending.

What if I Cannot Cut My Spending in Any way after All This??

Now after you tried going down the rabbit hole, and tried to implement all this, and you still have no way of optimizing your spending.

What does that mean?

The idea of doing all this is to implement a self-audit of how your family spend your money.

If you ensure that you stay objective, and reflect upon it as an exercise, and you cannot optimize lower, that means that your solution is to increase on the earning side.

The upside of this audit is to ensure that, when done right, you figure out there is really not so much that you can cut.

However, my thinking is that most are less than rational about their spending and there is nothing much you could do.

This is especially so for the communication, negotiation part. That is difficult to do.

Let me know of any Optimization Strategies, in broad categories that I might missed out, that is impactful enough.

Here are My Topical Resources on:

1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – The Deeper stuff on REIT investing
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