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A Fresh Graduate Guide To Achieving Financial Freedom

PART ONE (LIVING EXPENSES) By Timothy Ho

A Fresh Graduate Guide To Achieving Financial Freedom: Part One – Living Expenses

Here is something that neither your secondary school teachers nor your university lecturers taught you – Financial guidance upon reaching your adulthood.

Financial institutions such as banks and insurance companies want you to think about these matters, but only because they want to sell you financial products that may or may not help you in the long run.

We have decided to start a series of article on how fresh graduates could help themselves achieve financial freedom quickly in life. Financial freedom means not having to be reliant on your job for survival, and having the freedom to truly do what you enjoy without having to worry about money matters.

With the high cost of living and the absence of welfare in Singapore, a person needs to be smart and discipline in the way he or she manage their finance.

We hope to journey through this experience with you by sharing our 2-cent worth.

Time And Discipline

When planning for financial freedom while we are still in our 20s, time is our biggest ally. The power of compound interest is something we can and should use to our advantage.

Some people only start thinking about their retirement when they are in their 50s. We got news for you. It is probably too late. Unless you strike the lottery or take some ill-advised risk that (somehow) pays off, it is very difficult to build a retirement portfolio in less than 10 years, while having to concurrently support your family.

Time by itself is not enough without discipline. To achieve financial freedom, you need the discipline to consistently save, invest and watch your spending habits.

Don’t Upgrade Your Life After You Start Working

The biggest challenge you will be faced upon getting your paycheck is to stop yourself from upgrading your lifestyle. A monthly salary $3,000 is going to seem huge compared to your previous allowance of $600. You will be tempted to upgrade your lifestyle in some of the following ways.

  1. Weekly TGIF (Thank God It’s Friday) dinner with your friends at restaurants followed by drinks at a pub. This could easily set you back about $75 per week which adds up to $300 a month.
  2. Increasing your shopping expense to fit in with the office culture at work. This is where you start buying branded bags, shoes, ties, accessories, shirts, pants, dresses and skirts. Again, this could easily add up to a sizeable amount.
  3. Taking private transport more regularly is going to cost you money once you add them up. Even if you are smart enough to avoid buying a car, taking cabs can easily cost you an extra few hundred dollars each month if you are not careful about it.
  4. Increasing your daily expenses unnecessarily will add up to a lot of money each month if you don’t budget tightly. $5 takeaway breakfast each day accompanied by $15 lunch sets and $20 dinner on a daily basis during weekdays will set you back $800 more each month.
  5. Increasing your monthly expenses unnecessarily can also be detrimental to your financial health. The gym membership package, check. The pedicure package, check. The upgraded mobile plan, check. Cable TV, check. All these costs are going to add up.

The Ripple Effect Of What Really Happens When You Increase Your Living Expenses

Most people think that increasing their monthly expenses only means they save less money. That’s only one-third of the entire truth.

The best way to explain would be through an illustration. We have two fresh graduates, Danny and Tony. Both of them earn a starting salary of $3,000. After CPF contributions, they have a monthly take home pay of $2,400. Both of them are singles and do not have many financial commitments (yet) in life.

Danny Tony
Take Home Pay $2,400 $2,400
Monthly Expenses $1,000 $2,000
Savings $1,400 $400

In our example, we assume that Danny spends $1,000 each month. Danny previously spent $600 each month during his undergraduate days. Due to his student loan and some other extra work related expenses, he now spends about $1,000 each month, or about $400 more than what he used to.

Tony has the same expenses as Danny. In addition, Tony also spends about $1,000 more due to additional expenses such as gym membership ($150) TGIF ($300), Taxi Rides ($150) Shirts and Pants ($200) and the occasional restaurant meals ($300). None of these things are essentials but Tony spends on them to enjoy a “better” standard of living.

The first thing most people look at is the difference in savings between the two individual, which is currently $1,000 per month. That is true, but this is not all.

Investing The Differences

Danny and Tony both recognize the importance of investing while they are young. They both channel 80% of their monthly savings toward investments, earning a return of 5% per annum.

Danny Tony
Savings $1,400 $400
Investing 80% of Savings $1,120 $320
Returns 5% per annum 5% per annum
Portfolio After 5 Years $76,167 $21,762

At the end of 5 years, Danny’s portfolio would have been worth $76,167 while Tony portfolio would have been worth $21,762.

Net Asset

Danny Tony
Portfolio After 5 Years $76,167 $21,762
Savings After 5 Years $16,800 $4,800
Total Liquid Assets $96,967 $26,562

Let’s take an analysis of the two individuals. After 5 years, Danny has accumulated close to $100,000 in liquid assets from both his investment portfolio and his savings. On the other hand, Tony has about one-quarter of that. The actual difference is $70,405. This difference will only grow larger over time.

The Final Element – Financial Freedom

Both individuals may have only worked for 5 years, but the outlook on their financial freedom is now vastly different.

With all things remaining equal, Danny would now have enough total liquid assets to sustain his lifestyle for 96 months, or about 8 years, without working. Tony, on the other hand, would have enough to only last him 13 months, or about 1 year, without working. The reason for this is not only because of the significant differences in their liquid assets but also because of the spending differences in their lifestyle.

We will let you decide for yourself who has greater financial freedom.

In Singapore, deliberately living a lifestyle that is below what you can comfortably afford seems to go against the norm. You might realize that all your friends are going for more holiday trips, buying more luxury goods and enjoying the finer things in life. All these while you continue living a simple lifestyle.

Yet at the same time, a little discomfort now would go a long way towards enjoying a better, more financially free life in the future. Ultimately, only you can decide which is more important for you.

This is the first article in a series of articles that DollarsAndSense.sg will be publishing on a Fresh Graduate Guide To Achieving Financial Freedom.

 
Timothy Ho
Timothy Ho

Timothy Ho is co-founder of DollarsAndSense.sg, a personal finance website that aims to help people make better financial decisions. He is a big fan of empowering ordinary Singaporeans with the right financial knowledge so that they can make better and more educated decisions for themselves.