Sunday, 20 November 2016

Expenses 1011. Because 101 is way overused.

Are you working for someone else's dreams now? If you are, stop whatever you are doing to finish this article. 

You achieve financial freedom only when your passive income exceeds your expenses. Therefore, for many of us, even when household income from our employment exceeds $10,000 per month, we do not feel financially free at all. Why is this so? In this post, let's talk about the two big elephants in Singapore. 


Singapore is one of the cities with the highest cost of living. A 1000 square feet private apartment can easily cost $1 to 1.2 million dollars (and at this price, we are not even talking about downtown). Assuming you made a downpayment of $240k (just for the record, if you save $2,000 per month, you will need to save around 10 years for the downpayment) and took on a 1 million dollar loan, the monthly mortgage will work out to be $3,548 per month for 30 years! 

Now let's assume we managed to save up for the downpayment (probably need around 10 years depending on how much you are saving per month) and just deduct $3,548 from $10,000, we are left with $6,452 per month for the next 30 years. 30 years on, you will be at least 60 years old, closing to retirement age. It is fantastic if you managed to stay employed for all 30 years, but if you are not so fortunate, you might face cash flow issues during your unemployment period to service your mortgage loan. 

Car Ownership

Although Singapore boasts of world class public transport system (it was the case until recently, when the trains start breaking down), there are still many PMEs who prefer car ownership. Besides the convenience, car ownership is also a status symbol. If you want to show your friends and relatives that you have made it, what's better than owning a car? However, the cost of car ownership is extremely high in Singapore. 

I just came across this article from Today Online for the monthly cash outlay required to service a car loan. Based on the latest MAS easing on car loans, car buyers are able to take a loan of up to 70% (for OMW $20,000 or below) and 60% (for OMV above $20,000) for up to 7 years. A $143,999 Honda Accord could set you back $57,600 (just for the record, if you save $1,000 per month, you will need to save almost 5 years) in downpayment and $1,186 monthly for 7 years! 

Besides the car loan, owning a car also entails paying for petrol, road tax, car insurance and season parkings. These expenses normally add up to a minimal of $500-$1000 monthly, depending on the car model, for the entire length of your car ownership. 

Financial Prudence To Increase Disposable Income

I believe it is a dream of many Singaporeans to own their own private condominium and a fancy car someday. Taking into account the above illustrations, a private apartment outside of central region and car ownership could easily reduce your disposable income by $5,000 to $6,000 a month. 

Further, we have other significant expenses for a normal household including monthly spending for groceries, food, shopping, insurance and child care (tuition, enrichment classes and etc.) which could offset disposable income by another $1,000 - $3,000 per month. 

After deducting all these monthly commitments, most families find that they have not much left at the end of the month. Without disposable income, you will not be able to generate enough passive incomes to sustain your expenses. 

Therefore, irregardless of your income level (you can be making $1m annually, but really, you could spend that amount in a year too if you really want to. Look at so many of the sport stars that went bankrupt after retirement), you need to always be thinking of how to keep your expenses well within your earned income so that the rest of your income could be used to generate investment returns. 

Believe me that one day, when your passive income exceeds your monthly expenses, you will know it. Since this is the day where you can finally say "I quit" to your boss if you really want to. 


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Financial freedom = Passive Income > Expenses. Always remember that there are two sides to the equation of financial freedom. Beside working on how to improve our passive income through investing, we should never neglect the expenses portion. By striving to improve both side of the equation, we can achieve our financial goals and win in the game of money.

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