The government says that structural unemployment is here to stay. Some experts predicted
that even in good years, we would still face a minimum unemployment rate of 3-4%. In bad
years, probably even 6-7%. Your year end bonuses are cut. Your company told you that
despite the economy is recovering; you are still going to get a pay-freeze this year. For those
who do get some increments, it is probably barely enough to cover the rate of inflation.
So, you wonder when you would ever achieve financial bliss, the day when you can stop
worrying about your finances or when you have enough money to survive on if you were to stop
work now. Surveys have shown that finances are the Number One worry among Singaporeans.
Sure, some say money cannot buy happiness. But as the Chinese saying goes, “Without
money, all things are impossible” After digging through some literatures and studies done by
academics, I can safely conclude that there is “in fact” a connection between income and
happiness. Of course, you don’t have to be a multi-millionaire to be happy. In fact, based on
some studies, above $100,000 of annual household income does not contribute very much to
financial happiness.
How much you earn isn’t everything. Many other factors count in the equation of financial
happiness. One key factor is that you are in CONTROL of your personal finances. Control over
your finances plays a critical role in determining your life’s happiness, more than control of your
weight (though many women may disagree), your health, your occupation or your relationships.
After counseling hundred of people on improving their personal finances, I have come to a
conclusion that there some critical habits that you can change to improve your feeling of
control. Compiled below are six.
1. Budgeting
If you are earning an average income of $40,000 per annual, based on 45 working years, you
will earn a total of around $1.8 million in today’s dollars. If inflation averages 3%, this becomes
$4 million. But how much are you likely to save? Some Singaporeans say, “If I earn significantly
more than what I get now, I will be OK”. But you know what, you probably wouldn’t.
I have clients that earn as little as $2,000 per month and as much as $50,000 per month. They
ALL have a problem with saving money. The more we earn, the more we spend. People who
have worked for at least a few years can easily testify to that. Some of the fresh graduates
when I first meet them earn about $2,000 per month. Three years down their working career,
some of them draw as much as $5,000 to $6,000 per month. Guess what. They felt poorer than
they first started out. This is naturally so when you have all your credit card bills to pay, your car
mortgage to service, a family to support, country club membership to pay and many other
miscellaneous expenses.
Therefore, it is wise to do a monthly cash flow budget, so that you know where your money
goes. It is perhaps the first step to finding the extra dollars for saving and investment. You don’t
have to invest in fancy PDA or anything like that to do the job, a pen and a piece of paper
would do the job just as well.
2. Pay your bills as they come and minimize credit card debt
People who pay their bills as they come rather than stockpiling them are a happier lot. Clearing
your bill immediately would instantly free your mind from “worrisome debts”. I understand that in
the local context, being able to afford a house, a car or home renovation means taking on
debts, but as long as we are not spending too much, they don’t stress us out. Credit-card debt
is a totally different issue. If you rid your life of never-ending credit-card debts (carrying a
balance on your card that you don’t pay off every month), you would definitely be much
happier.
There is no benefit to prolong your debts. Take the next 10% of what you are earning and use it
to pay off your debts or repay the debt that has the minimum payment as compared to others.
That way, you would be able to pay off bills fast and not incur further interest charges.
3. Avoid punting and silly risks.
Buying the occasional Toto and 4-D are some Singaporeans’ occasional indulgence as long as
we don’t have unreasonable expectation like “I plan to retire by winning Toto”.
One thing that bothers me, however, is the number of “get rich quick” schemes advertised in
Straits Times nowadays. Examples include headlines like ‘Secret and Proprietary Option
Trading Methods’, ‘Empowerment Seminar to Create the Millionaire in you’, ‘Sure-Win Tips on
Stock Picking’ and ‘Making Money in both Bull and Bear Market’. Clearly, the operators of these
schemes understand human psychology as they entice people in getting rich fast. Who
wouldn’t want to become a millionaire overnight? The question is: does it work?
Think about it, if these ‘get-rich quick’ schemes are effective, why don’t they use them to get
rich themselves? It’s obvious, isn’t it? These schemes don’t work. I bet the scheme operator
uses your money to do what you should be doing, paying their own mortgage loan and
investing in shares.
The message is simple. High return usually means high risk as well. Don’t let anyone fool you
into thinking you can get high returns with low risk. Some level of risk is needed to generate a
reasonable return. So, investor should understand the risk of the investment they are going into
so as to make an informed investment decision.
4. Protect your family and yourself.
Doing all you can to shelter your family and yourself from financial hardship is very important.
Once you have set aside an emergency fund of three to six months of living expenses, you
should be seriously thinking of taking care of three protection needs: Death, Medical and
Disability; three cornerstones of insuring “You”, which is your greatest asset. I believe that you
should be buying as little insurance as you need. But for most people, these protection needs
are quite a lot. Let me elaborate a little on the three cornerstones I have just mentioned.
i. Death cover provides a pool of fund to your dependents in the event of your untimely
death, to make sure that the family that you so painstaking work for do not tumble
when you are gone. And that they can continue to live life as normally as they
previously did. Nothing can compensate the death of a loved one, but if the financial
aspect is well taken care of, it makes things a little more bearable.
ii. Medical cover ensures that a significant part of your medical bills are taken care of in
the event of an accident or a severe illness. Some would suggest that they don’t need
any medical insurance because they are rich enough to pay for their medical bills. In
fact, many may be rich enough to pay but not liquid enough. One of the most stressful
things when you are sick is deciding which assets you have to liquidate to pay the
medical bills. Medical cost is one thing that inflates more rapidly than inflation itself.
And given that the Singapore government aims to reduce health subsidy in the
upcoming years, medical cover becomes even more crucial.
iii. Disability cover is an often ignored protection that most people should be seriously
considering. The whole idea is to insure your earning ability, which is one’s greatest
asset. What we are telling you is NOT that you should insure the “golden goose” that
lay the golden eggs; neither should we attempt to insure the “golden eggs”. But what
we should be insuring is the “golden goose’s ability to lay golden eggs”. Most insurance
plans only pay out when the golden goose drops dead or is critically ill, but this is not
enough. What is the golden goose is partially disabled? For example, almost no
insurance plan would pay a teacher if she loses her voice and have to quit because
she can no longer teach. Similarly, no insurance plan would pay a pilot if he is
grounded because his diabetic condition affects his eye sight. But, a properly designed
disability income program would ensure a monthly income payout if you cannot perform
your primary occupation because of an injury, accident or any illness (need NOT be
one of the 30 major illness).
5. Live well below your means.
Being frugal is the cornerstone of wealth building. Yet, too often, the big spenders are so
sensationalized by the local media that we receive the false impression that all millionaires lead
an extravagant lifestyle. Nothing can be further from the truth. People whom I talk to who are
financially carefree are usually living well below their income. They still pamper themselves with
the occasional splurges and frequent holidays. But trust me, these folks do their sums.
You should always discuss with your spouse on both your spending habits and hopefully arrive
at an amicable consensus. Note that most people will never become wealthy in one generation
if they are married to people who are big spenders. A couple cannot accumulate wealth if one
of them is a hyperconsumer. Few can sustain profligate habits and simultaneously build wealth.
Singaporeans generally build wealth by keeping a tight budget and controlling their expenses,
and they maintain their affluent status the same way.
One suggestion is to live in a less affluent neighborhood than what you can afford. This may
sound counter-intuitive, as a typical Singaporean’s dream is to live in the biggest and most
expensive house that he can afford. Imagine the amount of money you have to spend to “put
up a front” if you are rubbing shoulder with the ultra-rich. When you up-grade to a luxurious
condo, you are not only required to service a bigger mortgage, your whole lifestyle would have
to be upgraded just to keep pace with your neighbors and not be the “odd ball” in the
neighborhood. I could literally see the financial disaster many of my clients are courting when
they swallow a bigger piece of cake than they can chew by buying an expensive luxurious
condo.
Remember, “The lower your lifestyle, the greater your true wealth”. How so? Say A earns
$50,000 a year, spends $20,000 in a year and has $200,000 in saving. B earns $300,000 a
year and spends $250,000 in a year and has $1.5million in saving. According to my definition of
wealth, A is wealthier than B because if both of them lose their income, A can survive for 10
years based on his saving of $200,000 where as B can only live for 6 years. Wealth to me, is
the duration your savings can last based on the lifestyle you are used to if you stop work NOW!
This is the same definition that Dr Thomas Stanley used in his bestseller “Millionaires next
door”. The jargon ‘Financial Independence’ is then defined as the point if you stop work
immediately; you have enough to live comfortably for the rest of your life.
6. Don’t plan to save cash
Look at your monthly budget. You should have $600 left over every month and save $7,200 a
year but where is the money? From my experience, Singaporean can’t save cash, or they
simply save only to spend it all later. These folks faithfully put aside $600 every month, only to
wipe it all off with a long December holiday. Some prefer to spurge on furniture and electronic
gadgets, others on cars and house renovations. The money vaporizes nevertheless.
A typical Singaporean worker’s mindset is “I work so hard so I need to spend money to pamper
myself”. Notice the logic, work hard and spend hard, work harder and spend harder. The only
solution to this vicious cycle is to ensure that you have some structural saving program to help
you set aside a certain percentage of your income every month.
There is this interesting argument on whether you should buy a permanent insurance plan or a
term policy and invest the difference. In my opinion, IT DOESN’T MATTER! We can argue till
the cow comes home, but the ONLY important thing to do is simply to get STARTED. Most
Singaporeans simply can’t get themselves off the starting block. How are you going to finish the
race if you don’t get started in the first place? Some practical tips are listed below
a. Top up as much as possible into your CPF account if you are a self-employed.
b. If you are above the 40 yrs old, make sure you use all your SRS cap every year
c. Get yourself started in a profit participating insurance policy or variable life policy or
‘buy term and invest the difference’. Just get started in ‘something’ and see it
through.
d. Be persistent in setting aside at least 10-15% of your income every month. Never
waiver in this.
e. Immediately invest or allocate any unexpected windfall you receive, like a bigger
than usual bonus. Chuck it away before you spend it away.
7. Learn from the financial mistakes you commit
No matter how well you plan, things may go wrong sometimes. Thus, it is important to keep
your composure and work yourself out of the difficult situation. The road to financial success is
planted with mines and bobby traps. If you are caught in one or two, don’t give up. Just pick up
the pieces and move on. Remember that ‘what does not kill you make you stronger and wiser’.
Martin Luther King once said in his infamous speech “The measure of a man is not what he
stands in moment of comfort and convenience but what he stands in challenge and
controversy”. Additionally, one successful financial planner stated, “Your growth into a financial
adult is usually accelerated during the most challenging times.”
We all strive for the mountain top experience; the time when we are recognized for our hard
work, but real growth is found in the valley. Everyone strives to attain the mountain top
experience, but in fact, no one can live on the peak of Everest for long. As one acclaimed
mountaineer put it, “You can spend a maximum of 20 minutes on the peak of Everest. But you
spend any longer there, you would die. You either run out of oxygen or sunlight and there are
corpses there to prove”.
Hence, when you are the staring at the worst financial storm of your life, remember the rainbow
could be just minutes away.
Set your heart on making the above seven habits a part of your life. If you find it too hard to
make drastic changes to your financial habits all at once, focus and work on them one at a
time. The most important thing is to get started and never give up. And see you in the financial
heavens soon!
