For the bulk of our FI journey, the Minimalist in the City household is predominantly a dual income one. We have budgeted and managed our expenses such that we are able to live off one income, saving and investing the other income stream thus far. Our savings rate is higher than 50% and our lifestyle is also inherently different from most other families in the same profile group (be it demographics or income range). We have consistently been living below our means and seek fulfillment in life through appreciation of experience rather than things. The discovery of minimalism also taught us to be more appreciative with what we already have and desiring a “Less is More” life. In a nutshell, we are focused on leading a simple and intentional lifestyle.
Kate is currently on sabbatical from work though she will be heading back to work soon. She has been spending some good quality time with the buds and reading rather widely. She had previously blogged about this and we are glad that we have the resources and option to allow her to take this break from work. Even with the addition of Ashton into the family, our monthly expenses has surprisingly been on a downtrend as Kate is spending a lot less during this period as a “SAHM”.
After our recent top-ups into our parents’ CPF retirement account, we stopped giving them monthly allowances. We transfer the reliance of our salary to give parents allowance to the CPF Life scheme. CPF Life is a government annuity plan which will provide our parents with a lifelong income for retirement. Even though we might need to top up with a lump sum initially, the long term benefit clearly outweighs the lump sum we have to put up. We found out that this is a more cost-efficient way to give allowance to our parents which further reduces our monthly cash outflow as a whole (monthly updates).
Three obstacles why most people cannot retire much earlier
Mention early retirement and more often than not, you will link up two things – retiring within 12 years and having a savings rate of at least 60% (according to this post from Mr Money Mustache).
A 20% savings rate is recommended by most local financial advisers but in terms of FI -you are 37 years away from retirement (according to above table). This means that if you start working at 25, you will retire at around 62. Perhaps this is also a factor why the local retirement age was set at 62, although it has since been extended to 67 years old, probably to factor in the low savings rate and inflation, as well as longevity.
This is even harder to achieve with escalating housing prices in land scarce Singapore, expensive car ownership and food indulgence which is fast becoming a favorite pastime for most Singaporeans.
Lets run through three major hurdles below which prohibits most Singaporeans from achieving a high savings rate and retiring early. According to this post by Seedly, it does indeed seemed like these are the top three expenses.
For us, we had planned our home loan obligation in such a way that we will still be able to service the housing loan should one of us lose our job. To put this into perspective, our monthly installment takes up less than 10% of our household monthly income whereas the average Singaporean spends approximately 20% on housing loan repayment. We could also choose to pay off our loan in full should the interest rate spikes. This conscious move of not allocating a larger part of our salaries to fund our dream property led us to the surplus which would allow us to invest and build up our stock portfolio consequently.
In contrast, a younger cousin of mine (in their 20s) recently bought a Executive condominium (EC) despite the fact that she had managed a queue number for a HDB BTO. Reason cited was that she got an unfavorable queue number. The EC is a three bedroom unit at approximately 90 sqm but cost slightly more than SG$900,000. With a 20% down-payment of SG$180,000 – which breaks down into SG$45,000 cash (5%) and SG$135,000 CPF / cash (15%), they still need to service a staggering loan amounting to about $720,000. As they are still young at about 28 years of age, they took up a 30 year loan like most and will thus need to service a monthly installment of approximately SG$3,000 (base on a 1.5% interest rate). The initial cash outlay of $45,000 is really a major one and this is not even considering home renovation and furnishing subsequently when they move in.
Below is another interesting table from dollarsandsense that give us the breakdown of the average salary you need to be earning to be able to afford these homes
- Down payment: 10% of property price (HDB homes) 20% of property price (private homes)
- Loan tenure: 25 years
- Interest rate: 2.6% (HDB homes); 1.5% (private homes)
- Assume that buyers do not get any government grants for Housing & Development Board (HDB) flats.
- Assume that private property owners do not have any other loans to service.
- For simplicity, assume both husband and wife earns the same salary.
- Monthly payment is also capped at 30% of gross combine salary
To be eligible for a HDB BTO unit, their combined salary should be less than $12,000. For the sake of this exercise, lets just assume that their combine salary is $12,000 and the monthly instalment takes up about 25% of their combine salary. This 25% is below the 30 – 40% housing related expenses threshold that value penguin recommended which includes housing costs like utilities. insurance and maintenance. So lets just say that they manage to cap their overall housing expenditure at 30% of their combine income which comes up to be about $12,000 x 30% = $3,600 per month. So basically, they are left with about 70% of their income to cover all their other expenses plus savings. Lets just continue to use their profile as an example from here.
Lets go to the next big ticket item on the list: Transportation
I used to own a weekend car a decade ago but decided to sell it as I wasn’t really using it much at that time. Back then, an entry level car cost about SG$50,000 (excluding the discount for weekend cars). Nowadays, a reasonable entry level average Japanese family car cost about SG$100,000. My cousin bought a Mazda 3 one year ago when the COE was approximately $50,000.
There is a great article on Channelnewsasia about the costs of car ownership in Singapore and breakdown the costs as below. If I were to add all the items as listed, it will cost about SG$18,000 annually or SG$1,500 per month to maintain a car in Singapore which is pretty close to what My 15 Hour Work Week blogged about recently. And this is not even considering the cost of accessories, repairs, additional parking charges, fines and other unforeseen expenses. You will need at least SG$2,000 per month to be able to comfortably own a car in Singapore. You can do the math to see if you really own the car or vice versa.
We are fortunate that our parents own a car, thus once in a while, we get to use it. During our occasional usage of the car, Kate observed in her recent post that there is an increase in expenditure for that weekend on top of normal expenses like petrol and parking fees. With a car at our disposal, we tend to use it more often to go out when we feel bored at home. Then we tend to dine out more often than usual and spend our time at shopping malls on rainy days which inevitably allows us to spend more than usual. Of course, we do not deny that there are cheaper ways of entertainment aside from that cafe hopping weekend we had.
Without a car, we will just take a cab to go to places or we could just take a train / bus there as the connectivity of our public transport system has really expanded in the past few years.
With my cousin’s case in point, the car took up another 15% of their combine income of $12,000 and they are left with 55% of their income to save before we are left with the last big ticket item – food.
This is the last big ticket item: Food
Singaporean households on average spend about $1,188 per month on food and groceries according this post by dollarsandsense. This 2012/2013 figures are retrieved from Singstats and is a pretty good representation of the rising food indulgence trend among Singaporeans. A weekend meal with a family of four could easily set you back by at least $80 – $100 in a nice cosy restaurant in Singapore or by $200 – $300 if its a seafood meal with your extended family.
There is also a report which highlighted that Singaporeans emerged as Asia’s top dining spenders with an average of USD 262 per month on dining, according to Mastercard’s survey on Consumer Purchasing Priorities in 2013. The food cost will increase to approximately SGD 400 per person in 2018 if we were to factor in a bit of food inflation. When we are talking about a family with two young kids, we are talking about a spending of at least $800. And imagine that this is just for restaurant dining and excludes cost of groceries, snacks, etc.
We do not really dine out a lot except when there is a birthday celebration within our family or during festive seasons. Our average monthly cost for food and grocery is slightly less than $600 so far for 2018 according to our latest monthly updates.
This average spending on food will shave another 10% off my cousin’s savings rate which now stands at 45%, considering that she would still need to cater for your other spending categories. The example above of spending about 55% on the 3 above categories is a bit lower as compared to this article from Business insider which states that Americans spend almost 70% in housing, transportation, and food (not including income taxes and Social Security). What about other peripherals such as shopping, insurance, holidays, gym memberships, facial / massage package etc? Guess there is not much left for savings at the end of the day.
Lifestyle and Savings rate
Your lifestyle and savings rate are two important components in determining how comfortable you could be when you really do lose your job. This is an interesting post by dollarsandsense.sg which compares two families with different lifestyles:
- Lee Family who are frugal with lower-income of $6k but save 50% their income
- Tan family who earns twice as much but spend a ton to fund their expensive lifestyle and save about 5%
If both of them use their savings to invest over 10 years with yearly returns of 5%, the Lee Family have almost $500k in their stock portfolio while the Tan family have less than $100k in their portfolio. This difference will grow exponentially should these two family continue to do what they are doing over a period of 30 years (you may read more about this post over here).
Some might argue that their salary will increase over time, thus they might still have a bit of money to save. But a salary increase might also lead to lifestyle inflation which makes saving much harder than ever. Nonetheless, we still strongly believe that having a simple lifestyle with high savings rate could propel any young family towards financial independence earlier.
The above points pretty much sums up why most people never thought about financial independence or early retirement.
Most of the people around me never thought that financial independence or early retirement is possible because they probably spend too much on things the perceived society wants you to spend on. I bet most people will be surprise on how much they spend if they were to start tracking their expenses. Many even go further to say that living in Singapore leaves you without a choice as the cost of living here is high. But are we really left with no choices? (Although I do acknowledge that for the lower income group, they are left in a pretty tricky situation)…
“We could cook at home, eat at hawker centre or coffee shop instead of dining at restaurants”
“We could stay in public housing instead of private housing”
“We could take public transport instead of owning a car”
“We could spend more time doing free outdoor activities instead of going to shopping malls”
It is not that we do not desire the above so called “better choices” but we always practice delay gratification so that we could treasure the item more by not buying on impulse. At the same time, we are building up an asset that generates passive income for us to afford those items if we want to.
In all honesty, there is nothing wrong about spending on what you love but if you are trying to emulate what others perceived as a successful life then you really got to ask deeper questions like “Is this a life that you really desire?“.
As I am almost done with this post, my cousin just flew to Club Med Maldives for a 4D3N $8,000 package for two (inclusive of flight and a beach villa) with her boyfriend. She booked the holiday just a week after she obtained an approval for her mortgage loan.
The thing is, there is no right or wrong to these decisions. After all, they are spending their hard-earned money and it is up to them on how they would like to allocate their funds and resources.
But this begs a bigger question – What do you really want?
FI is not entirely impossible.
For many dual income families, this is within reach.
But we are definitely more conscious in our spending patterns. As well as actively building our portfolio.
We have yet to reach FI.
But it’s not that far away.