As per my first blog, being my own role model for me includes achieving financial freedom. I believe this many people’s goals as well. Not sure if many can say this but I am on my way to achieving financial freedom..I’m not there yet, but I can see myself getting there in the next few years, hence I’m sharing my progress and journey here.
Before financial freedom..let’s tackle financial planning, which will lead to financial freedom.
Before financial planning…you need to know how much you have in your net assets as of NOW. Know how much your lifestyle costs. Set a goal for how much $ you want to have by when. But first things first.
1. Log your daily expenses. Every discretionary expense, including $3.50 hawker lunch
In 2018, I imagined how my fiancial situation would look like if I were to quit my job. I knew that I was going to quit sooner than later, so I decided to be my future self and see what kind of lifestyle I would be having without a job. I knew one thing that I did not want to downgrade my lifestyle. I naturally didn’t expect to because in my mind, I was having a modest lifestyle, only spending on things that I needed instead of buying things for myself or my kids just because I could afford them.
So, in 2018 January, with a clear objective of getting transparency into how much I was spending, I started to log all my expenses using a free app, Toshl Finance. It’s now 2024 and I am still logging all my discretionary expenses in the app. Biggest takeaway from my daily logging of expenses is that we underestimate our expenses by about 10-20%. Why? There are 2 reasons.
First. Every month, there is some extraordinary expense (e.g. nails package that I would pay to use for the rest of the year, or quarterly carpark charges). These extraordinary expenses firstly gives you a false sense of not being a regular expense. But that’s not true because these expenses pop up every month. Last month was the quarterly parking charges, this month is the dermatologist package that you paid for 6 sessions and next month it will be the annual fire insurance for the home.
Second, these types of expenses tend to be relatively large…few hundred to over a thousand dollars.
Anyway, I have realised many positives of logging the expenses, through my 6 years of daily habit. I’ve achieved my goal of having full transparency into my expenses and hence my savings in💲terms and savings rate in % . It’s become a habit and I now use it to lower my expenses. Because I don’t want to spend over my budget, I think a few seconds more before making a purchase online. An example of this is that I actually only bought 5 pieces of clothing the whole of 2023…that was such a shock to me. Biggest shock was that I didn’t feel like I was stopping myself from shopping. The habit has naturally led me to spend less and save more.
2. Set a savings rate goal
Apparently you are to save 20% of your income in your 20s, 30% in your 30s and 40% in your 40s. Before I started logging my expenses, I’d assumed I saved 50%. I was wrong as the calculator said I was saving not even 30%. So, I started being MORE conscious of my expenses and achieved 28% a year on. It’s been a couple of years and I currently save more than 30%. In fact, including my passive income, I am now saving 39%. I personally think I should be saving >40% so I’ll continue to do what I can. Every year, I use the analytics from Toshl Finance to see which category I should cut more on. I do believe in spending on things that give me the value even if it seems extravagant (e.g. travel expenses). I learned that cutting down on small daily expenses (e.g. lunch or coffee) makes a noticeable difference on an annualized basis.
3. Review the goal monthly
I now maintain a spreadsheet with 50 columns that gets updated and reviewed monthly. But up to January this year, I was writing down the numbers monthly on a notebook with pen. So it depends how granular you want to go (I suggest more granular the better, e.g. every single bank account, by currency, every single brokerage account by currency). Make sure you include all like CPF, house loan. Doing a monthly check in achieves a few objectives – 1. you log into every account regularly and maintain your ID and password 2. you get to find ‘forgotten’accounts with some money because you are serious about having a complete view of your financial standing (e.g. CPF which I had always ignored given I don’t have immediate access to the amounts) 3. overally you’d feel like you have complete handle on the month on month movements of each account. It especially makes sense if you have assets with volatility, i.e. you keep yourself honest on the mark to market values of the investments and not get a false sense of higher value of your assets.
When I don’t meet the monthly target, the guilt stays as you go to the next month and helps to bring down expenses in the future months
4. Set a higher savings rate
Basically, continue to do better every month, every year. It gest easier to achieve this goal if you continue to earn more every year. So, not letting your expenses go up in tandem with your income is supposedly difficult. It used to be the case for me as well before I started logging my expenses. I’d spend because I knew I could afford but that’s the key. You shouldn’t spend just because you can afford it at that point. You should spend on what you absolutely need as opposed to what you can afford. Once you shift your mindset, you will realise that it gets easier to convince yourself why you’d rather invest with that sum as opposed to use the money on that expense item. What’s useful here is the concept of Investment vs Expense, which I’ll put in a note to share more in later post. in short, I’d be generous with my investments but think really carefully before expensing.
5. Invest with your savings
Don’t wait. Best time to invest is right now, so says my investment mentor, John Lee. My job gives me restrictions in shares that I can invest in, so I have most of my investments in ETFs. What you invest in is a whole other topic for another post. What I want you to take away now is to not leave the cash in bank or fixed deposits if you are young (i.e. decades away from 70). There’s a formula for investments, 110 – your age = % of investments in equities. E.g. if you’re 40, you should have 70% of your investments in shares and the remaining 30% in fixed income / real estate / gold etc. The younger you are, the higher your equity holdings should be to maximize time for you to ride through the equity related volatility. I feel silly about having put most of mine in fixed deposits aarrrgh. It’s ok, better late than never. I got serious about my investments only last year, after reading Ëœ5 books on investments (my goal is to read 20 books in investments) and watching youtube around investments. So I’m still learning but I must say I am happy with my strategy of 70% in equity underliers. The best takeaway from my 1+ year of investments study is that I feel emotionally prepared for a crash as I dont need these funds in the near term and hence I will continue to buy through bull or bear markets and ride through for long term gains.
6. Notice your passive income’s increasing contributions to income. And get further motivated to invest more.
After having some meaningful amount in investments, you’d realise that passive income becomes noticeable. And more importantly, continues to increase at increasing rate, not a linear rate. As I write this post, I feel like this topic requires more details given finance is a big part of what my interest is and is crucial in everyone’s life. In short, I see 20% increment in my monthly passive income year on year which demonstrates the magic of compound interest. An example is RSUs (restricted share units) that some companies give out as a component of bonus..for me, I have been getting these since pre 2011 and I’d left this account untouched (not on purpose but out of laziness..it wasn’t easy to find the ID and password and it felt insignificant given the tiny number of RSUs I was given then). Thankfully I was lazy, the share price of the company has gone up 3x since pre 2011 and in the meantime, I have been receiving these small number of RSUs every year and they have been compounding and now has become significant in terms of actual value! Needless to say, I belive in my company’s future and I will contiue to keep these unsold and let them accumulate and compound.
7. Keep at the monthly reviews..adjust as needed, always look to improve and keep control of your financial situation
This is a continual process. I am not sure until when, maybe I’ll update once I have achieved my financial freedom. Based on my plans, I’m to reach that goal in the next few years so I’ll come back and update then 🙂
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