In one of the reader exchange mails, the reader talks about the possibility of her spouse and herself getting to a point of financial independence soon. I think many young folks starting out in life now have it better with more local resources like these around. Back then we didn’t and we have to figure out a lot of these on our own through book reading. But I digress.
On this topic whether it is possible, the main problem here is always making HARD CHOICES. What the reader is wanting is not going to be the norm of society and that is where they are likely to encounter much pushbacks from society.
So I explained a simulation how someone as well endowed as themselves can realistically get to where they want. A key note on financial independence is how THEY define it, and so it may differ greatly from YOU. In their case, it is to create a Wealth Fund to support 70% of their lifestyle safely so that they can think about what to do after 35 years old.
I did a quick simulation using my Wealthy Calculator based on their earnings power conservatively ( You can play with the calculator. Its free.)
How is this simulation best illustrated?
We have a pair of sweet hearts who develop their relationship in NUS and comes out to work at age 25. They decide early on to work towards financial independence, that is, have the option to choose where to work, how hard to work, or not work for an extended period of time.
[Related: How much wealth do you need to reach Financial Independence]
They decide not to care about how relatives look at them, how their friends tease them and make hard choices in life.
Since they excel in school, they start off both with a 5000 salary. normalize they have a 2 month bonus without a thing call AWS (practically non existence now. Their income grows at a rate of 3% per annum. its rather low, considering they are high performers.
They decide to put away 70% of their combine disposable income to wealth building. This means its after CPF. This also means for each of their 3% increment, 2.1% goes to wealth building. Since they are starting out, they decide to do a mixture of stocks and bonds ETF, to grow it at 3% per annum. This is lower than a lot of my projections.
[Related: The Wealthy Formula I use to build wealth. What matters the most? ]
In this 10 years till age 35, they would have channel a total of $898k to wealth building. their 3% return grew their money a little bit to 1.022 mil in the 10 short years.
For top performers, at the end of their 10 years their income grew from 5k to 6.4k. typically i would think it will grow faster than that.
[Related: You will make more money at your job. Plan your human capital well]
(click to view larger image)
If you are afraid they don’t have much to spend, at the starting they can spend 33.6k per year or 2.8k per month. At the end of 10 years their expenses can grow to 43k per year or 3.6k per month.
What can 1 million do for them. if their withdrawal rate (every year they withdrew) is 3.5%, they can withdrew 35k per year or 2.9k per month. they can choose to step back in life.
There are much holes in this simulation and because I did it quick, after some thoughts and inputs, some well versed readers should be able to see it:
- High earners should contribute less to CPF and thus it might be more
- Good performers should grow their income faster than a 3% rate
- A stock and bond equity return can be higher than 3.5%
- This will entail them not having children at their most productive period
- High performers need costs to maintain their high performer status
This simulation hopes to evoke you to think about your situation. You might not have the best of scenario, but tweaking the simulation will tell you how far off or how close you are to that stage.
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For my best articles on investing, growing money check out the resources section.
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Friday 3rd of October 2014
On the paper it indeed looks very appealing. Now, as you wrote, you are not integrating some important expenses and factors that will corrupt all the maths. If we suppose that the child will only come at around 35-36 years old you still have:
- Mortgage/Rent (or do you assume that the couple stays at their parents home?) - Trips/Holidays: It is very hard to resist when you are a successful and hard working folk to not taking a few days off in Phuket, Bali, or even worse Europe/America - New iPhone/Galaxy S5 :) and other Geeky recurring expenses (Cable TV, Fibre, Laptop, Flat TV, etc...). - Health expenses - Any kind of insurance - Helping your parents - Wedding (?) etc...
Not sure 30% of their income would fund all the above. Or said differently, not sure this financially healthy couple can resist for too long to the appeal of these needs for 10 years.
Final word on the potential opportunity loss. If the couple does not purchase a HDB or a condo, who knows what it would have been worth in 10 years? If the value doubles, they will have missed an opportunity (and worse they will have to pay double in 10 years) Even if it does not double its value in the next 10 years, there is nothing like the feeling of having a roof that belongs to you. In the end you want your family to feel safe.
My above comments are mainly about feelings, emotions and impulsions. But hey, as hard working and disciplined as we can be, we are not robots :)
Personally I have a mortgage, a child and some leisures. I can barely manage to save 20% per month (excl. CPF). But this is the max. Otherwise I would have to severely downgrade my lifestyle (including my child education and my home) and this is hardly possible...I have already been trapped in my "upgraded" lifestyle :)
Friday 3rd of October 2014
Whenever you reply to me, I know its something i need to sit down think about it before I reply. Thanks for that.
With regards to what you brought up:
- Mortgage: Remember that the amount saved was nett of CPF. So theoratically they can use CPF to pay for it. Well not entirely. Since they are earning that much they cannot get a subsidized flat and the flat is going to be more expensive. (that would mean their CPF is built up as well) long story short, you are right. the couple is likely to be staying with parents - the couple have 2.8k. if they do not have children, it is possible they can still squeeze an escape yearly or twice yearly. - you can get away with a xiaomi phone, chromecast, android gadgets - they may be underinsured - their parents do not need help - the most simple wedding
What you highlight about flats next time being more expensive is very valid. that is a hard choice. When you are a high performer, they can choose to work longer by 3-4 years, get the flat initially and still end up in a good position.
The exercise lets you understand u need to make choices, you don't have to be as close to this, but you can choose to do it in 15 years.
You can also determine actually you do not need 1 mil!.
When you have a child, there are much things you will not compromised. You have to give the child adequate support. 20% is impressive with that kind of circumstance. Is that together with your spouse?
My 15 HWW
Friday 3rd of October 2014
Think there are more and more examples of people achieving FI in their mid-thirties and from your calculations, it's indeed possible.
However, I think most people would protest putting away 70% and maybe something more reasonable would be to assume a lower starting pay but slightly higher increments along the way.
I guess this is something to explore on my own blog too. =)
Especially liked the fact that this couple doesn't even need to be savvy in investments to do it. Sometimes, pure savings would be good enough.
Friday 3rd of October 2014
I think its high but there are folks that decide this is the way to go (not me) . I believe it gets easier if you are a top performer.
for those earning lower amount, its difficult to maintain this. but if you want to leech selfishly on your parents to feed you 2 of your your 3 meals and dont pay allowance, then I can't stop them.