This article first appeared on MoneySmart's 5 key steps Singaporeans in their 20s should take to become financially independent
Singaporeans might have a pretty decent median salary compared to other countries in the region, but we don't fare so well when it comes to financial freedom-at least if the number of people still forced to work or rely on their families after retirement age is anything to go by.
If you're still in your 20s or 30s, are already sick of working and are dreaming about financial independence, congrats-thanks to the fact that you've got youth on your side, you have a much better shot of retiring early than your much older counterparts in their 40s and 50s, even if they might be earning more than you.
Here are five things that make the road to financial independence less like Charlie the unicorn taking a journey to Candy Mountain and more like a story that actually has a happy ending.
Set out a roadmap containing all the steps and figures you need to take to achieve financial independence
Blindly saving money, whacking everything at one shot on your HDB flat downpayment and even putting a few extra bucks into stocks can make you feel like you're making some financial progress-and you can at least be sure you're doing better than those folks who are still struggling to pay off credit card debt.
But unless your savings level is extraordinarily high, that won't get you to financial independence. You need to sit yourself down, bust out your calculator (or your smartphone calculator app, whatever) and come up with figures for the following:
What percentage or amount of your salary you'll channel into savings each month
How much of these savings you will invest in and what
What types of insurance you'll get and how much to spend on them
Now, while this might sound like you're writing your very own school textbook, starting small and finding out the gaps in knowledge that you need to fill in before starting. Need some help? Well, you can always follow us on Facebook for useful tips on how you can get started.
Automate as many processes as you can
So you've come up with a wonderful blueprint that you're confident is going to turn you into a millionaire. But if you have to spend hours every month making investment and savings decisions, you're giving yourself more chances to fail.
Each time you put a new item on your to-do list, see if there's a way you can automate it so you no longer have to waste precious time and energy. Automation can mean getting money or payments transferred without your having to do anything each month, or it can also mean making all the decisions beforehand so when the time comes you don't need to think and can just do things like clockwork.
Here are some money-related things you should definitely automate:
Automate all bill payments by GIRO where possible including credit card, utilities, phone, insurance, etc bills.
If you're opening a new high interest savings account, be sure to update your account details with your employer so they can deposit your salary directly into the right account.
Top up your EZ-Link card using EZ-Reload, choosing a credit card that gives you rebates.
If you are using a separate account for your savings or investment fund, automate a monthly transfer.
If you're committed to investing a certain amount each month, you'll want to do this like clockwork, so that you stay disciplined about it.
Understand the different stages to financial independence and where you are right now
So you managed to afford a car or you no longer take money from your parents? No need to pat yourself on the back just yet, because if you're still trying to pay off debt you're still pretty low down on the financial independence ladder.
Many writers have conceptualised the stages of financial independence in a variety of ways. A very bare-bones financial independence roadmap looks something like this:
The Abyss: You are in debt or live from paycheck to paycheck
Financial Health: You no longer have high interest debt, and have built up an emergency fund so you don't completely go under if something bad happens.
Financial Security: You can afford to lose your job because your passive or investment income covers your basic necessities.
Financial Independence: Your passive or investment income covers your living costs. You can either retire or continue to work not because you need to but because you want to.
Decide how much you need to achieve financial independence and how you can get there
While Singaporeans have estimated that they need $1.38 million to retire, that's not a figure you might need to worry about if you plan to retire early after achieving financial independence.
For instance, if you're able to increase your passive or investment income streams to more than cover your living expenses, you do not need $1.38 million in cold, hard cash to stop working.
Everyone has a different lifestyle, and the amount you think you need to achieve financial independence may be very different from Aunty Karen's or your boss's.
Aunty Karen might be happy if she can cook at home every day and make the occasional trip to Batam for a cheap massage, while your boss might want to be able to continue to maintain his Ferrari when he retires, which is why he is slave-driving all of you employees to make money for him.
You need to work out your amount, realistically factoring in the things you'll need or want to spend money on and considering your current spending patterns.
You'll then have a better idea of how much of your income you need to save each month, and the kind of investment returns you need to achieve in order to achieve your goal. Which brings us to the next point….
Understand the value of compound interest and how much you need to invest to achieve your goals
No matter how much you hate math, you must understand compound interest if you want to be able to plan for financial independence.
Use this compound interest calculator and you'll quickly see that money does not grow in a linear fashion. And it's not the amount you manage to invest that determines the rate at which your money grows-it's how much time you have. The earlier you invest, the less you'll have to save.
That means you need to consider your age when calculating how much you'll need to invest to reach financial independence.
If you can invest $150,000 by age 35 at a return of 5 per cent, by 55 you'll have close to $400,000 thanks to compound interest. If you wait until age 55, the only way you can beat that is to save up $400,000 in cold hard cash, which is, let's face it, not going to happen for most Singaporeans.
But seriously, if you're still on the right side of 30 and even reading this article, you've got good things ahead of you if you bother to take action after you close your browser window.
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