Is financial independence for families possible?
Is FIRE for families just a dream in expensive Singapore?
Spending money to show people how much money you have is the fastest way to have less money.
- Morgan Housel, “The Psychology of Money”
Singapore is all abuzz with the presidential race and the dark horse candidate Ng Kok Song. The former GIC chief investment officer not only campaigns on social and political grounds, he dispenses great financial advice as well. Three things he says stand out.
The key to personal finance is your ability to save.
Financial independence is possible if you run your family portfolio like a professional one.
Financial independence gives you the “optionality” of leaving your job if your boss is terrible to you.
You may be a working mom longing to spend more time with your young kids. Or you may be a worn out dad concerned about future retrenchment. You may look at the Financial Independence movement and wonder… Is it a pipe dream in expensive Singapore if you have a family?
After all, most Financial Independence proponents in Singapore seem to be single and male. While financial independence for an entire family is challenging, it is possible. With the end goal being less reliance on working income, and more freedom due to passive income.
Stage 1: List down your essential and non-essential expenses by month.
Essential expenses include utilities, groceries, lunch money, school fees, public transport fees, mortgage payments, taxes and insurance. If you pay taxes and insurance premiums annually, divide them by 12 months.
Stage 2: Reduce your total expenses to 60% or less of your total income.
In my 20s, my first salary was only $2,500 a month. So my expenses accounted for 90% of my after-CPF income.
But I tried to drive down the percentage of expenses pretty hard. First, I swapped out Starbucks coffee for kopi siu dai from the kopitiam. Next I woke up an hour earlier to take the train rather than taxis. Increasingly, I window shopped instead of actual shopped. Finally, I replaced half my restaurant meals with homecooked or caifan meals. I ate out only once a week.
Together with salary increases, my expenses finally went down to 60%.
Stage 3: Invest in passive income until it is large enough to cover your essential expenses.
Passive income can be generated by investing in real estate, stocks or bonds.
My hurdle rate is the existing inflation rate. For eg. If inflation today is about 4%, I look for assets that yield at least 4%. For these reasons, I invest in US ETFs, Singapore dividend stocks, retail bonds, US Treasury bills and money market funds at my brokerage.
For example, my monthly family expenses on utilities, groceries, food, public transport and school fees come to $3,500 a month. These are essential expenses.
Including car related expenses, insurance premiums, medical expenses and elderly parent expenses, these come to $6,500 a month. These are highly important expenses.
All other expenses are discretionary, for example, tuition fees, enrichment fees, shopping, restaurants and travel. These can be scaled up or down, depending on your income that year.
Hence, my goal is to generate passive income of at least $3,500 a month, preferably $6,500 a month.
To generate $3,500 a month, if your whole medium-risk portfolio yields at least 6%, you would need an investment portfolio sized at $700,000.
To yield $6,500 a month, if the same portfolio asset allocation and risk level is used, you would need a portfolio sized at $1,300,000.
Return asumptions of my portfolio's asset allocation:
Long term annual return of US stocks: 10%
Dividend yield of Singapore stocks: 5-7%
Retail bond yields: 4-6%
US T-bill yields (USD): 4-5.5%
Singapore T-bill yields (SGD): 3.5-4%
Money market fund yield (USD): 4%
Money market fund yield (SGD): 3%
Two levers to increase portfolio income
To increase the passive income a month, you have two levers. The first lever is size of investment portfolio, and the second lever is the risk taken on your portfolio.
Of course, increasing portfolio risk is not a straightforward decision. Upping risk could also increase portfolio losses in a stock market crash, for example, during a time when you are retrenched. The safer way would be to accumulate a larger portfolio in a medium-risk portfolio with good cash, bond, stock and real estate holdings.
Once your passive income covers your essential and discretionary expenses, you can be said to have reached financial independence.
Legal disclaimer: This content is for informational purposes only. You should not construe such information as material for financial, legal, investment or tax advice. Views and opinions expressed by Pugs&Pennies are personal and not meant to constitute advice. In exchange for using this site, you agree not to hold Pugs&Pennies liable for any claims of damages upon decisions you make after visiting this site.
I have been a Chartered Financial Analyst since 2009, and the views expressed on Pugs&Pennies are my own musings and not to be construed as personal advice.