Archives for category: Personal Finance

With one stroke of the pen, Singapore academic and occasional socio-economic commentator, Donald Low* made a substantial number of people feel poor. Donald Low’s comments (as reported in this article) were in response to an article by Singapore’s favourite has-been-tabloid turned free broadsheet about a family of five with a five-figure monthly income whose purse strings feel a little tight.

Basically, using statistics from the Singapore Department of Statistics (SingStat), Donald Low showed that a family of five with a five-figure income could indeed feel middle class. This is given the fact that the average and median household incomes in 2017 were S$12,027 and S$9,023 respectively. Given that this family had a larger than average family size**, it’s no wonder that they are considered middle-income from a statistical point of view.

I get the point about people saying that the lady interviewed needs to get her priorities right – such as not needing the private sailing classed for her kid, but the data also shows that that family is highly likely to be representative of the middle-class. And we all know that it is the middle-class that tends to have the most frivolous spending. I can just imagine how many of them spend so to show that they aren’t in the lower-income bracket and because of the aspirational lure of keeping up with their peers who may be upper middle or in the wealthy group.

By the way, those looking at solving our birthrate problem need to tackle this issue. It’s probably the biggest reason why younger couples aren’t having kids. Imagine a young couple, both working in median paying jobs that pay equally well and therefore, as a household, they are right at the median. Adding a kid to the household presents them with two scenarios: one, do they have someone to outsource the childcare to and live with a 33% fall in their per-capita household income? Or two, does one of them (usually the wife) stop or reduce the amount of work in order to take care of the child. Notice that either scenario reduces their household income on a per-capita basis. The first scenario puts them more or less at the median in terms of per-capita household income while the second puts them below the median.

That’s just having one kid. And you wonder why we have problems replacing ourselves. Having said that, my bigger concern is that many of the middle-class (with one or two kids) in Singapore are spending so much of their income on housing and the occasional affordable luxury that retirement is going to be an issue for them.***

Notes:

*While there has been some controversy over the things Donald Low has said in the part, he is the kind of academic that we need in Singapore. Not many people are able to/aware of the data that’s out there, much less interpret it. Also, some of the other academics that get featured or interviewed regularly either say something that reinforces the government’s view or is trivial.

**The Average household family size for Singapore in 2017 was 3.3 members.

***I suspect the issue will be with housing more than the affordable luxury although that $300/month private sailing class adds up to a lot once you consider the opportunity cost of not investing it. $300 a month for five years and then compounded at 5% (CPF can do this easily) for the parent’s entire working lifetime (say it’s 25 years after those 5 years) comes up to be $5613.53. Who knows what other things these people are spending on?

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In a world filled with psychological biases, there is none more apparent than the “halo effect”. The “halo effect” is when someone is viewed as some Omni-prescient being due to his or her status.

This status may be due to positional goods (a.k.a Veblen goods) that signal one’s position or it could be due a status conferred by an authority. In the first case, a good example would be the conclusions people jump to based on the kind of car you drive; a person driving a Mercedes Benz or BMW is usually seen as someone with money. In the second, doctors or people who have some title (e.g. CFA, CPA, etc.) to their name as seen as authorities of some sort.

With the ‘halo effect’, the assumptions and presumptions are sometimes taken too far. For example, it would reasonable to assume that a doctor is knowledgeable about medicine and health but with the ‘halo effect’, sometimes people expect doctors to be knowledgeable about everything.  

Unfortunately, this halo effect is often present when it comes to getting wealthy. Many people assume that getting wealthy and being free from worry about finances is only something those with high-paying jobs or those who are really intelligent* can achieve.

See if you fall prey to the ‘halo effect by considering the following two people.

Person 1

Gas station attendant and later on in life, janitor.  His idea of a treat was his usual morning visit to his local coffee place. He always wore shabby looking clothing that even gave the impression that he was homeless.

Person 2

A-list actor. Earned millions from blockbuster movies screened in theatres around the world.

Who would win?

At first glance, the obvious answer seems to be Person 2. After all, if you earned millions in your lifetime, you’ve possibly earned more than most people even earn in their lifetimes. With that kind of a headstart, how can you possibly do worse than Person 1 who probably earns a wage than probably falls into the bottom 10% of any society?

Unfortunately, that’s true.

Person 1 accurately describes Ronald Read who left a US$8 million dollar fortune to charities and other institutions. And he isn’t an isolated example. Take the case of Margaret Dickson who left a US$1.42 million dollar fortune and Paul Navone who had a fortune large enough for him to donate US$2 million to charity. (full story here). In Singapore, there was a case of a retired primary school principal who left $1 million to her domestic helper (story here).

Neither of these people profiled had jobs that paid astronomical sums. In fact, Ronald Read, Magaret Dickson, and Paul Navone all had low-paying jobs while the Singaporean profile had a job that was considered upper-middle class but certainly nowhere near investment banking levels.

Whereas I got Person 2’s profile from something I read about Nicholas Cage (who had to declare bankruptcy) but that profile isn’t something out of the ordinary. I remember reading similar things about Johnny Depp and stories of lottery winners who subsequently lost it all also come to mind.

Sure-fire way to wealth

I read this the other day and I completely agree. You may not be the best investor out there who can consistently generate the highest returns year after year, but being disciplined about savings and being humble about potential returns will ensure that you get there.

The main reason why people in the Person 1 profile succeed despite the seemingly low odds is that they turbo-charge their returns with a high savings rate and let their returns compound. i.e. They put their head down, work hard, lead a simple life, and let time do the heavy lifting for them.

The main reason why people in the Person 2 profile do so badly despite the odds being in their favour is that they let lifestyle creep** take over and make terrible financial decisions. It’s the same with every company that earns too much cash and then blows it on silly projects that kill shareholders’ returns rather than add to them.

As the people in the first profile show, there is a way to wealth.

You just have to stick with the plan.

Conclusion

Before we go, I’m not saying that you shouldn’t study hard, or work hard to get a job that pays well. I’m saying that getting a high-paying job isn’t a necessary condition in order to get wealthy. Neither is a high intelligence.

Obviously, better-paid people who are disciplined savers and investors end up wealthy at a younger age and find it much easier to do so. Celebrities who are smart with their finances can parlay their sums into even greater sums (Oprah and Dolly Parton for good examples of this).

The point I wanted to make is that we need to strip the halo effect away and realise that most people could become wealthy if they wanted to. Being disciplined and smart about your finances matter more than high pay and intelligence.

 

Notes:

*I used the word ‘intelligent’ and not ‘smart’ because ‘intelligence’ usually refers to one’s innate cognitive ability and is largely immutable whereas ‘smart’ usually refers to one’s learned experiences. Even if you disagree, that’s the way I mean it here.

**Lifestyle creep is something that many people can relate to especially in this era of social media. Seeing other people dine at fancy restaurants or take holidays to exotic locations stir emotions that have people convinced that they too, need to experience the same things in order to be happy. People then spend extra dollars earned on nicer but unnecessary things. It’s particularly common among younger people who see 100 dollar t-shirts or 1000 dollar shoes as a necessity in order to gain influence among peers. It’s stupid but I know the feeling well because hey, I was once young too.

I met a friend for lunch and he shared with me that he was thinking of retiring early. Not super early but earlier than official retirement age kind of early. Given that the official retirement in Singapore is 67, he was looking at something like 60. His wife also brought up the possibility of reducing the number of hours of work or stopping work altogether in order to spend more time with their young children.

Some background first

My friend is also a colleague. He’s a very dedicated and hard worker, wife and he are in their 30s, they have two young children and are basically, in terms of income, are what Singaporeans would call middle or upper-middle class. After all, when they got married, he was forced to buy a property from the resale market as their combined income already exceeded the cap that qualified people to buy a subsidised apartment from the government.

In my opinion, that’s a big handicap for him as far as retirement is concerned as he has a 20-30 year (the typical length of a mortgage in Singapore) mortgage to pay off on his property. If he plans to keep staying in Singapore, that’s money that he’ll have to pay off as he’s working towards gathering more assets that can replace the income he receives from work.

He also has two young children. That’s an additional financial burden for roughly the next 20 years of his life. The burden should ease somewhat as his children move into primary school as formal schooling in Singapore is heavily subsidised but as far as living expenses as concerned, that’s going to be another anchor tied to his feet. But given the circumstances, it’s no wonder we Singaporeans aren’t producing enough babies to replace ourselves.

The path to early retirement

He then shared that he came across a roadshow from our national pension system, the Central Providend Fund (CPF) and was seriously considering moving more funds into his Special Account (SA) as it earned a much higher interest rate (4% as of writing) as compared to the Ordinary Account (OA) which only pays 2.5% (once again, as of writing).* He also felt that CPF Life scheme, which is basically an annuity that pays you a certain amount each month for as long as you live, was promising. He also shared that he thought about moving abroad in later years as each dollar could be stretched much more in other countries.**

Unfortunately for my friend, his housing loan will probably mean that not much is going to accumulate in his CPF account. I suspect he’ll be lucky to have about $100,000 in his CPF accounts (OA plus SA) by the time his housing loan is paid off.

I don’t envy my friend’s position. He and his wife may belong to the upper-middle strata of society if we go by household income but the fact that he has a huge housing loan on a private property and two young children to take care of means that even something like retirement may be a concern for him.

My reply

So what I told my friend must have been a paradigm shift for him because I told him that I wasn’t going to wait until I was anywhere near 60 years old. I was going to stop work as soon as I hit my target net worth that would generate enough income to allow me to live a life near my current standard of living. By my estimates, this will take me another 5-10 years. I’m pretty sure I’m an outlier because very few people in Singapore are planning to retire in their 40s.

The sad thing about us having that conservation is that if we, middle to upper-middle class Singaporeans are having this conversation, then people who fall below the middle in terms of household income better hope that their bodies and mind never give way until the day they die because they’ll probably be working for the rest of their lives.

Personally, my plan hasn’t changed. If you can figure out how much you need each month, multiply it by 33 (if you’re conservative) or 25 (if you’re less conservative) and you’ll know how much you need in order to retire. If you want to be more precise, I’ve written about this before.

The other key to this is to be able to generate at least 3-4% return per year (not difficult) on your assets which will provide the income to replace the income from work. The other concern is inflation which means that the ideal rate of return is not 3-4% but more like 6-7% per year (still doable even without leverage).

An example

Just for illustration, let’s suppose that someone in Singapore needs $1,500 per month in order to survive. Assuming $250 a month for utilities, internet and phone bills, conservancy charges and transportation, that leaves our hypothetical Joe with about $40/day for entertainment and food. Food is pretty cheap if you don’t eat out at expensive restaurants every single day.

So given the above estimate, hypothetical Joe will need anywhere from $450,000 – $600,000 (depending on whether you use a 3 or 4% withdrawal rate) in order to generate the income needed for survival.

I guess a good rule of thumb would then be that if you have double the survival amount, you would be living decently and if you have double that, you would be able to live pretty luxuriously.

In short:

Standard of Living      Wealth Needed                 Income Generated (Monthly)

Survival                        $450,000 – $600,000          $1,500
Decent                           $900,000 – $1,200,000       $3,000
Luxury                          $1,800,000 – $2,400,000    $6,000

Next steps

I know that those sums above look ridiculously huge but if you plan to retire without worries, that would be the kind of sums I would aim to have to retire with a peace of mind.

Of course, if you can cut your expenditure down to much less (e.g. through growing and cooking your own food, spending much less on discretionary items such as cars and holidays, spending less on medication and healthcare by keeping yourself healthy), then I guess it’s possible to retire with much less. The other alternative would be to continue working in some form (i.e. reduced hours or reduced workloads) or to generate income from other some venture.*** But think about how much less of a burden it would be knowing that you’re not working in your job because you have to.

 

Notes:

* I know the CPF pays an extra percentage point on the first $60,000 of the sum in your CPF but in the larger scheme of things, that’s negligible.

**This, I agree. Unfortunately, it also means quite a bit of lifestyle changes. No more 24-hour prata joints, McDonalds’ and Mustafa, if that’s your sort of thing. Or no more eating cheap and good food like Chicken Rice, Nasi Lemak and Mee Goreng unless you plan to move to Malaysia. But that presents other concerns, like safety.

***It’s ironic how some people who stopped working early actually ended up making more money sharing their experience with early retirement as compared to their previous jobs.

Recently I watched a lecture that Monish Prabai gave to Boston College (full video here) and while he talked about many other interesting things in the video, there’s one thing which stood out for me.

Rule of 72

The ‘Rule of 72’ is something I learnt quite early on. It’s a nice and easy approximation to figure out how long it takes to have an initial amount double.

72 = Rate of Return per year x Number of Years

With that equation, all you have to do to figure out how many years it takes to double your money is to take 72 divided by the Rate of Return. For example, with a rate of return equal to 8%, it takes 9 years to double your money. Obviously, you could also figure out the rate of return required per year in order to have an initial sum double within a certain number of years. For example, if you want to double the initial sum in 10 years, you need a 7.2% return per year (72 divided by 10 years) for the next 10 years.

What I learnt from the video

In his lecture, Monish talked about ten ‘doubles’ which is 2^10 (2 to the power of 10). That’s equal to 1024.* That got me thinking. Going with that, for $1,000 to become $1,000,000, you need that $1,000 to double 10 times.

And putting the ‘rule of 72’ and this together, if you know your rate of return, you can easily calculate how many years you’ll need. Or conversely, if you know what kind of timeframe, you want to achieve this in, you can calculate the rate of return per annum necessary to achieve this target.

Basically,

Initial Sum x 2^n = Final Sum

n = No. of doublings.

Quick example:
Let’s say n = 10.
Using the rule of 72, if we can get 8% return per annum, that’ll take 9 years for the initial sum to double once. So if we require 10 doublings to reach the final sum, the total time taken will be 9 x 10 = 90 years.

What it all means

The math above means that there are essentially two variables that impact the road to a financial target- rate of return per year and the initial sum

(a) Varying the initial sum

For someone passively invested in the market, per annum returns can be approximated (for easy math) to be 8% per year (assuming all dividends reinvested). This means that being passively invested will require just under 10 doublings or, take you roughly 90 years to become a millionaire.**

Starting with a much larger sum of $10,000 requires only 6.6 doublings or roughly, 60 years. That’s pretty good if you’re planning to leave something substantial for your grandchildren. Start with a $100,000 and that only takes 3.3 doublings or roughly, 30 years. Thing is, starting at 30, you still have to stick with it until you’re almost at the official retirement age.

The other flaw with the above scenarios is that most people don’t get to start with $100,000. Some may start with $10,000 if they’re lucky but most people would probably start with $1,000.

So there has to be a better way right?

(b) Increasing the rate of return per annum

This is the obvious variable to focus on.

Unfortunately, there’s no easy solution to this. In my opinion, there are three ways one could go about doing this.

One, find higher rates of returns. This could be in form of asset classes that do better than market returns although it’s not entirely certain one without the right skills and temperament will do better than the market over time. Or it could be in the form of a highly speculative asset like bitcoin where the price has gone from about USD 1,000 to USD 15,000 (or more, at one point) in one year. Unfortunately, that’s only 15 times or just under 4 doublings. So if you start with $1,000, you only have $15,000. Another 6 more to go. Problem is speculative assets like this are once in a blue moon. That is if you even got invested early enough.

Two, increase your leverage. It’s no secret that being levered increases your rate of return.*** Whether they know it or not, that’s one of the real reason why Singaporeans are obsessed with property. The returns seem paltry on paper but given that no one pays for property in full, the returns are pretty decent.**** Unfortunately, not many people have the gumption for increased leverage, especially in equities. As Lord Keynes remarked, “The market can stay irrational longer than you can stay solvent.”

Another form of leverage is through leveraging the efforts of other people’s labour and capital. This basically refers to setting up a business so that other people’s labour and capital become your returns. I think this depends on person to person. Not everyone is suited to take on the many varied tasks that a business requires.

Three, you can boost your rate of return on the initial sum through a higher savings rate or by adding more money to the pile. I know this sounds like cheating but hear me out. The goal is to get a certain amount of money (e.g. $1,000,000). Adding more money is like adding more seeds to the ground, it increases your chance of getting more crop. The magic of compounding will add a rate of return to ever-increasing sums and that helps you hit the target quicker. It’s just math.

Personally, I’ve only used methods one and three. With number three, there’s no way to lose. I guess the only “loss” would be the utility given up from things I could have bought but hey, I don’t feel it. With number one, I’ve had my fair share of successes and misses. Overall, I’m probably doing slightly better than the market but honestly, not by much.

Real-world results  (sample size n = 1)

I realise that many people may wonder how all this works in the real world. I’m glad to say that the above has worked pretty well for me. In the last 10 years, my portfolio has doubled just under 6 times. Let that sink in. $1,000 would have become $64,000 with that sort of returns.

If you think that I had some magic wand or some incredible investing insight, you’re wrong. Most of it happened because I had a high savings rate. A high savings rate contributes a lot to your portfolio in the beginning as your initial sum is so small that it’s probably a fraction of your annual income once you start working.

That really juices the returns per year in the initial stages. For example, starting with $1,000, saving 20% of the average fresh graduate starting salary of $36,000 per year ($3,000 per month) gives you $7,200 which is a 7.2 times increase in the size of your portfolio. That’s basically three doublings taken care of in one year through savings alone.

Obviously, the same savings rate does little to move the needle as your portfolio gets bigger and that’s where you need the markets to do the heavy lifting. Right now, my savings can still move the needle by a few percentage points a year so saving still works for now. At some point*****, I’m probably going to have to find returns either through better investing or leverage. That’s no two ways about it.

Many others have started on this path and have shown similar success. Just take Mr. 15HWW or Kyith over at Investment Moats for example. They have 6-figure portfolios but don’t for a moment think that that’s due to investment returns alone. My guess is that a fair percentage came from a high savings rate. There are too many newbies out there promising to teach you something about investing when the simplest thing they should be starting with is how to save lots of money.

Notes:

*Or as Monish says, for easy math, round it down to a thousand.

**You should see the problem with this. For one, 90 years is more than an average person’s lifetime even for a developed country like Singapore. Second, I’m not sure it’ll mean much to be a millionaire, in nominal terms, 90 years from today.

***Kyith from Investment Moats has a great article on this.

****side note: I had an interesting exchange with my boss where he said that many people in Asia invest in property because that’s how lots of tycoons in Asia (e.g. Ng Teng Fong’s family, Li Ka Shing etc.) made their money. I then pointed out the irony that these guys all developed and SOLD property to retail investors. Basically, mom-and-pop property investors hoping to be the next Li Ka Shing is on the other end of the deal from him.

*****Probably when the same level of savings moves the needle by less than 1%.

This is a series of posts that I planned to start on some time ago but never got around to doing. So why am I doing so now? Well, someone in the family wanted to know how to get started so here I am writing down my thoughts, basic reading material as well as other things one needs to get started. The entire series is here.

Why should one invest?

This sounds like a simple question but it needs to be answered because without honestly answering this question, one may find that he/she does not have the necessary resolve to see the plan through.

A simple analogy would be dieting. Many people diet because of some shallow motivation like wanting to lose a few kilos or to fit into a pair of jeans that they used to be able to fit into. However, most diets fail simply because many people who start a diet see the diet as something temporary. Once the objective has been met, the diet will stop. Unfortunately, once the diet stops, the weight gain comes back with a vengeance.

It’s the same with investing. Many people start investing thinking that it’s the path to helping them get a new car or to pay for that dream holiday. However, once that goal has been reached, the investment plan is chucked aside and the wealth accumulation stops.

Notice that in the previous paragraph, I used the word “plan”. And the reason I used the word “plan” is that an investment operation (to use Benjamin Graham’s phrase) is not a one-off action. It is a commitment to a process.

The commitment is necessary because markets don’t always go your way. Often, they go against you and test your nerves. You will wonder if you are indeed doing the right thing or if the wisdom passed down through the ages have become obsolete. This becomes especially true when many people around you are making huge gains* from some new-fangled form of investment that they themselves fail to understand.

The commitment is also necessary because unless you use leverage (i.e. borrowed money), buying assets require savings and savings require income, and needless to say, income comes from work. Therefore, there has to be a commitment to save instead of spending your income on present consumption to distract you from the stresses of work. This isn’t something that many people can live with unless one has the epiphany that consumption beyond a certain base level doesn’t bring extra utility.**

For me, investing is a no-brainer.

  1. It makes you wealthier and with wealth comes fewer worries and more choices.
  2. It’s fun. Investing is like a game where you try to figure out what things are worth. If you can buy it for less than what it’s worth, you’ve got a bargain.
  3. I’ve reached the realisation that more things don’t make you happier. Even certain experiences are over-hyped. Many things that make one happy don’t necessarily come at a monetary cost.
  4. It’s an exercise that you can do in solitude. In fact, some solitude may be necessary as chatter and other opinions may only add to ‘noise’ instead of being ‘signals’.
  5. It’s simple if done right. Notice I said ‘simple’ and not ‘easy’. Simple means that you don’t have to follow complex and arcane rules or necessarily be quicker or smarter than others. However, it’s not easy because one needs to have the right temperament (i.e. discipline and patience), especially when things aren’t going your way.

That’s why I invest. You may not become one of the richest people in the world but if done even semi-right, you will definitely be better off than most people who leave their financial future in the hands of financial planners***.

In short, start thinking about why you really want to invest before even doing any investing. If you find your reasons to be shallow and superficial, you may want to start thinking again before committing to an investment plan.

Notes:

*Unfortunately, many of those gains will eventually prove to be illusionary.

**Taken to the extreme, this is the nirvana reached by monks. The detachment from worldly possessions because all worldly possessions are by their very nature, impermanent.

***The term ‘financial planner’ refers to how it’s used in the Singapore context. I don’t have anything against financial planners but in Singapore, ‘financial planners’ are basically product salespeople for insurance companies. There’s nothing wrong with having insurance but most financial planners are paid on a commission basis and belong to an agency whose targets are sales-driven. The only way to hit these targets is to sell products that have higher commissions and these are typically plans with some sort of investment component where the investments are taken care by the fund management company associated with/outsourced to by the insurance company. These funds charge high fees for basically giving you market returns. Some financial planners may not like it but show me a financial planner who got wealthy through actual financial planning instead of sales commissions and I’ll retract what I said.

In physics, escape velocity is the minimum speed needed for an object to escape from the gravitational influence of a massive body. – Wikipedia

Some colleagues and I were talking about how really rich people have a happy problem, which is figuring out how to spend all the money they make even while they sit around doing much.

First of all, escape velocity is NOT financial independence.

For me, financial independence is when you don’t need a job to take care of necessary spending. For example, let’s say you need $1,500 a month to pay the bills and the expenditure necessary for survival (i.e. food, clothing, utilities). Financial independence will be when you can generate enough passive income to cover these expenses. The money coming from a job is basically a bonus to treat yourself to things that are more of a luxury (i.e. holidays, gadgets, meals at restaurants).

Escape velocity is a little different. Escape velocity is reached when passive income generated from assets is so huge that you have trouble spending it all even when spending on things that are common luxuries.

Essentially, escape velocity is the complete absence of worry about money.

The idea goes like this:

Once you attain a certain level of wealth, it becomes quite difficult to spend more than the amount you make even if you get very low returns on your investment. For example, someone with $100m in assets that generates just 1% a year has to spend more than $1m a year in order to start running the principal down. Given that the median monthly household income in Singapore was S$8,846 in 2016 (that’s S$106,152 per year), it seems ridiculously impossible to spend more than $1m on consumption goods.*

I call this level of wealth escape velocity because once you reach those levels, it seems almost improbable that a sane person will ever fall back down to the income or wealth levels of an average person.

So what’s escape velocity for me?

I suspect I’ll need a level of about $10m (at today’s prices). At a spending rate of 3%, that’s something like $330,000 a year. Given that my wife and I are not frivolous spenders, that’s probably escape velocity for us.

Notes:

*buying ridiculous things like one-of-a-kind artwork and yachts not included.

This is from November but still interesting.

Personal wealth per adult grew strongly in Singapore up to 2012. Since then it has risen slowly in domestic currency units, and declined a little in terms of US dollars. Despite this drop, average wealth remains at a high level – USD 268,780 per adult
in mid-2017, compared to USD 115,560 in 2000. The rise was mostly caused by high savings, asset price increases, and a favorable rising exchange rate from 2005 to 2012. Singapore is now ninth in the world in terms of household wealth per adult, giving it the highest rank in Asia.
– Credit Suisse Global Wealth Report 2017 (source)

The report puts our mean and median wealth per adult at 268,776 USD and 108,850 USD respectively. This isn’t hard to imagine for most people whose HDB flat has more or less been paid up for* which probably puts most middle to senior Singaporean residents in this category. Also, the study looked at wealth per adult which excludes children who are unlikely to have any substantial assets to their name. In other words, the wealth of a family with children is not diluted to the presence of children.

What got me searching for the wealth of an average Singaporean is because I was updating my own spreadsheets the other day and I was quite surprised at the total staring back at me on my spreadsheet.

Also, I had a hunch that I might be considered pretty well-off by other people’s standards. The problem for me was: What is “other people’s standards”? So now, I finally have some idea.

What’s interesting is that the CS report takes its data from the Department of Statistics Singapore (SingStat) so let’s dive a little deeper into what SingStat counts as assets and liabilities in calculating net worth.

Thankfully, that can be summed up in one picture.

 

 

Singapore Household Balance Sheet

Singapore Household Balance Sheet (source)

So looking at this, I’m actually quite surprised that the average Singaporean adult only has 268,776 USD (362, 815 SGD) in net worth if his primary residence and CPF is included in the calculation. Here’s why.

A typical four-room flat should be worth around 400,000 SGD. Assuming that it’s jointly owned by a couple, that would be about 200,000 SGD per adult. Are the mortgage and other loans so huge that their Cash, CPF monies and life insurance** add only 163,000 SGD per adult to their net worth? Furthermore, the average has been skewed upwards by outliers as the median isn’t even half the average.

 

So, am I missing something here? Or is the average Singaporean’s net worth really the sum of his/her HDB flat and CPF and they save next to nothing plus carry a mortgage and some personal debt (e.g. credit card, car loan)?

Let me know what you think in the comments.

 

 

 

Notes:

* You can quibble about whether it’s appropriate to include your primary residence as part of your net worth but that’s how it was done in their study.

** I’m not even going to bothering adding equities as the average Singaporean probably doesn’t have much invested in the markets. Most people I know treat the market as a quick punt. There are very few people my age or even slightly older who have anything more than 50,000 SGD in the markets. For every one of me, there’s probably 7-8 more who have at most a five-digit portfolio.

With all my recent posts on bitcoin (here, here and here), I started thinking a little bit more about how people build wealth over time and I’ve come to realise that building wealth over time isn’t rocket science. It mainly comes down to what you spend your money on.

In general, there are three things in life you can spend your money on- one, things you consume immediately; two, things that will go up in value, and three, things that produce things of even greater value.

The first type of things – Cheeseburgers

Suffice to say, it’s clear that if you spend most of your money on the first type of things, you’re not going to get very far. Think of a cheeseburger. It tastes good when you eat it but after you eat it, it’s gone. It comes out as waste and gets flushed down the toilet. Even for things that last longer than a hamburger (e.g. a t-shirt), it’s clear that once the good is bought, it’s unlikely to be sold for at anywhere near the same price as when it was first bought. Therefore, if most of the things you’re buying are cheeseburgers, you’re unlikely to get wealthy.

The second type of things – Treasure Boxes

The next category of things is like treasure boxes. You buy one, thinking that it contains treasure and sometimes, they really do. People have gotten rich by being able to (through skill or otherwise) ascertain whether the treasure in the box is worth more than the price they’ve paid for it. Unfortunately, how much you can sell the treasure for in the future depends on how much people in the future are willing to pay for them.

Things like art or collectables are like this. You could pay $1,000,000 for a piece of art and in a hundred years, for reasons unknown even to the by-now long-dead artist, someone else may be willing to pay $2,000,000 for it. Or just as easily, it could be worth $100,000. Who knows.

The third type of things – Geese (golden, if you like) or Fruit Trees

Things like these produce even more wealth for you as time goes by. Geese can produce more geese if you don’t turn them into roast geese and fruit trees produce fruit that you can consume as well as, with a little sweat, use to grow even more trees. Starting with a pair of geese, you could get a whole flock. Or with a bag of seeds, you could get a whole orchard over time.

Don’t buy too many Cheeseburgers

This question is probably the one question that will determine how wealthy you eventually get. Obviously, you need to purchase some ‘cheeseburgers’. You have to have a certain amount of food, shelter and clothing for basic survival. For entertainment, you need some spending on simple luxuries like watching movies, an ice-cream, or even a holiday.

The point is, these things are all ‘cheeseburgers’. Consumed today and provides immediate satisfaction. The danger of consuming too many ‘cheeseburgers’ is two-fold. One, as you consume more ‘cheeseburgers’, you start to find that you need more ‘cheeseburgers’ than before to feel as satisfied as you once did. Driving a Toyota is cool when you didn’t have a car. Once you’ve had one, the next step is a Mercs or BMW even though its primary function is still to bring you from point A to point B.

Or take going to the club. The first experience is cool and exciting but after going to the same club many times in a week for multiple weeks and the mind starts to get bored. It’s the same with restaurants. With ‘cheeseburgers’, the mind needs that constant stimulation of novelty in order to feel the satisfaction derived from a ‘cheeseburger’.

The second danger is consuming ever-greater quantities of ‘cheeseburgers’ lead to an addiction that has unhealthy consequences. Indulging in too much food literally makes you unhealthy with the onset of obesity and the health problems associated with it. But buying ‘cheeseburgers’ like a more fancy car also leads to an unhealthy mental state like never being satisfied with what you have and always being envious of what others may have that you don’t. Using our earlier example, the Mercs or BMW takes on a second function of showing off one’s wealth.*

Treasure boxes or Geese?

Therefore, beyond the amount of ‘cheeseburgers’ needed for a sufficiently satisfactory life, we should be deciding whether to buy ‘Treasure Boxes’ or ‘Geese’. There isn’t a clear answer as to which one is better but we’ll look at the characteristics of each type. Both things will make you much more well off compared to people who only buy cheeseburgers but that will also depend on whether you have the knowledge, fortitude and good sense to know WHEN and WHAT types of ‘treasure boxes’ and ‘geese’ to buy. Let’s start with ‘treasure boxes’.

‘Treasure boxes’ contain objects of value. That value is decided in a market of buyers and sellers. In econ 101 terms, that means that whatever the value of the good is, depends solely on whatever other buyers are willing to pay for it and whatever existing sellers are willing to sell the good for. This also means that no one is really sure of what the ‘treasure box’ is worth and that its worth at any point in time is determined by what someone else would be willing to pay for it. In other words, it’s price is its current value.

A good example is the story of how diamonds came to represent love and commitment around the world. Prior to De Beers’ marketing campaign and control over the diamond market, no one would have bought a diamond as an engagement stone because diamonds were so rare and therefore reserved only for the super elite. However, as the supply of diamonds increased, the price of diamonds came down. De Beers, having substantial control over the supply of diamonds then restricted the supply in order to keep the price high while also paying to run a successful ad campaign that increased the demand for diamonds. However, for us, the more important question is: “Has the value of the diamond changed merely because its price has?”

And that is the thing with most treasure boxes. Without knowing what is inside, your best guess at its value is the price someone else is willing to pay for it and the price that the seller is willing to accept for it.

Making lots of money from treasure boxes in the long-run depends largely on having someone pay a lot more for your treasure box than what you bought it for. Many times, this can result in manias that drive the price sky-high when everyone wants to buy the “asset” due to greed which was probably fuelled by envy. After all, who likes it when you see your neighbour whom you probably think isn’t much more clever than you take a holiday in the alps while you are forced to work through the holidays? What more, he did it not by doing anything particularly clever or special. He just happened to buy (and sell) the right thing at the right time.

And finally, Geese

‘Geese’ are a special class of things. They can be traded just like treasure boxes but they can also be raised to produce more ‘geese’. If you keep a close watch on your ‘geese’, you’ll also have a good idea of whether your ‘geese’ are ill or your ‘geese’ are healthy.

And while ‘geese’ have a price in the market where there are buyers and sellers of other ‘geese’, that price is typically based on a value of what the ‘geese’ can produce over its remaining lifetime. For example, let’s take the example of a real goose. You can estimate the number of eggs a goose can produce over a lifetime. Furthermore, a goose can also be used for meat. Both goose eggs and meat are things whose value you could ascertain by checking out what goose eggs and meat currently sell for. Therefore you could roughly tell what the value of your goose would be. And if you so happen to come across an honest seller who is selling a goose for less than the value of the eggs and meat, you have found a good deal, haven’t you?

That is typically how the stock market works. You can roughly calculate the value of a company based on its current business and a plausible estimation of its future business if you know the industry well enough. And sometimes, Benjamin Graham’s Mr. Market comes along and offers to either buy or sell you a share of the company that is out of line with the estimate of the future business. In this scenario, price and value have diverged and there is a good chance that there is some profit to be made by taking advantage of Mr. Market.

Or, you buy cheap from Mr. Market and hang on to your ‘geese’ and have them produce more eggs for you over the years. You may want to consume those eggs or you could try hatching them to get more ‘geese’. That analogy is exactly how dividends are. You can choose to spend your dividends or you could choose to reinvest the dividends and have your returns compound.

Last word

I hope its pretty clear that spending most of your money on things to consume i.e. ‘cheeseburgers’ is a sure way to remain at your current level of wealth. If you want to get wealthy, you need to focus on buying ‘treasure boxes’ or ‘geese’.

If you choose to buy ‘treasure boxes’, make sure you know the market very well. After all, the price of ‘treasure boxes’ is determined mostly by demand and supply conditions for the item. There are also other factors like whether you use leverage or whether you can predict where that market is going. You may succeed but remember that it’s a zero-sum game. For you to win, someone else must have lost.

Personally, I prefer collecting ‘geese’. Right now, my ‘geese’ may be all equities but it could easily extend to rental properties or private businesses. I’m pretty certain that my own temperament is also more suited to collecting ‘geese’ rather than competing with others for ‘treasure boxes’ so this is what works better for me. Having said that, this is a much slower path to wealth as businesses don’t turn into an overnight success.

Notes:

*Of course, the level of wealth can be an illusion. Many things can be bought on credit and give people the outwards appearance of wealth while their true financial situation only reveals piles of debt.

**To a certain extent, this is also true of ‘Geese’ but we’ll see that with ‘Geese’, we have other yardsticks for value instead of relying on price alone.

Sorry for the clickbait-y title but what I’m about to say is actually quite true for almost anyone in Singapore with a half-decent job and of at least lower-middle to a middle-class family background.

And to show you that’s entirely possible, I present exhibit A- (although most Singaporeans in the financial blogging community probably already know) Mr. 15-hour-work-week (15HWW).

Mr 15HWW recently wrote a post, summarising his 7 years (so far) in investing and it shows you exactly how (link here) most middle-class people around the world actually accumulate a decent amount of money.

If you read his post, you’ll realise that for two people in their mid-30s (counting both Mr and Mrs 15HWW they pooled their resources together), they have accumulated a six-figure portfolio that is probably the envy of even some Singaporeans who should be retired or are near-retirement. The sum doesn’t include their CPF or their home*.

For many younger people about to enter, or just in, the workforce, a six-figure sum is something that seems out of reach but many people have been there and done that. More importantly, Mr 15HWW’s post reveals that it doesn’t take a genius to do it.

His returns in the market were only about 6% p.a., something that you could easily replicate if you blindly invested in an index-tracking ETF such as the STI ETF or the SPDR’s S&P 500 ETF.

The bulk of the increase in their wealth came from an amazingly high rate of savings. I really take my hat off to Mr and Mrs 15HWW because my own savings rate is nowhere near theirs. If it was, my portfolio would probably be 25% larger than it is now.

Most people think investing is complicated or they try to aim for the stars but very often, a simple investing plan of (a) saving a lot of money, (b) investing it and (c) letting it compound will lead to wealth that most people can only dream of.

So why do most people fail to get there?

Well, that’s another story for another time.

Notes:

*You will be surprised at how many people are counting on their CPF to retire and how the government is encouraging a reverse mortgage on your HDB flat**.

**Ok, technically it’s a lease buyback scheme which means the HDB pays you to stay in the flat that you’ve already fulled paid up for. And I can see the merit in the argument that you might as well monetise an asset that you can’t take with you to the grave. Also, since HDB flats are on 99-year leases, handing it down to beneficiaries when you pass away means that the asset may not be worth much when it’s passed on.

 

There’s a mystery in my current organisation that I’ve been trying to solve.

Currently, my organisation offers employees who reach the official retirement age of 62 years a one-year contract for the next three years. There is even an option to have that extended to 67. Of course, the employee has to meet certain performance requirements before these options are offered.

Some additional context

My organisation doesn’t offer a pension upon retirement. Singapore has a compulsory savings scheme called the Central Provident Fund (CPF) where workers have a certain portion of their monthly salary socked away until they hit a certain age.

Also, the colleagues in question are not low or even average-pay workers. They would easily be considered middle to upper-middle class folk for the last 20 or 30 years of their careers.

The mystery and my theories

The mystery for me is not what my organisation offers but why would my colleagues want to take that offer up in the first place. I have a few theories but none seem to be wholly satisfactory.

Theory #1: They need the money

One possible reason could be that some colleagues who work until 62 and beyond do so because they need to. In other words, if they retired at 62, they would have problems funding their retirement.

I’m not very satisfied with this theory because I’m pretty sure most of my colleagues have enough put away for the rest of their lives. Furthermore, most of their liabilities such as housing loan(s) and children’s education (yes, in this part of the world, parents usually pay for their education if they can afford to do so) would have already been settled.

Also, if you can’t afford to retire at 62 years old, then is another three to five years going to matter? It might also have been that many moons ago, these colleagues planned their retirement up till 65 or 67 and therefore, they are near the end but not quite. In that case, isn’t that level of planning a little suspect? What person plans to the exact year without having a buffer of some sort?

Theory #2: Retirement is boring

I can understand this sentiment. If you look around, there are many people who say that once their professional lives are over, their minds degenerate quickly because there is nothing to keep them engaged. This is a particular statement many elderly businesspeople make.

The flip side for my older colleagues is that interests can be cultivated or expanded. In fact, most of us have other interests outside of our professional lives. Wouldn’t retirement free up a lot of time to pursue those other interests in a bigger way?

Many older colleagues also tend to be grandparents and I’m sure their children would appreciate their help in taking care of the grandkids. Or maybe it’s finally time for my older colleagues to go out and see the world.

Theory #3: They love the job

Truth be told, there are some colleagues who fall into this category. They love the interaction with their students so much so that they don’t want to step away from it. However, the job isn’t all fun and games. There are many mundane administrative aspects to the job as well as the boring and utilitarian committee work that we’re all forced to be a part of. If they really love the job, they could always become a freelancer. This would allow them to focus on the teaching without having to be a huge part of all the administrative machinery.

If they love the administrative machinations, then that’s a whole other story but which begs the question- why not be part of an administration somewhere else instead? Other administrations would probably pay better.

Also, teaching doesn’t have to be confined to the classroom or the school. Sharing knowledge and guiding others happens digitally and in other venues such as religious organisations as well.

Conclusion

Those are my theories and none of them seems particularly satisfactory. From the viewpoint of a 30-something year old who’s been here for about five years, I can’t imagine why anyone would want to stay until 62. The only sane thing is that they really can’t bear to leave this place because of the joy of work. Therefore, my money is on theory #2 or #3 although there are some holes in that argument.

Having said that, if I could, I would go when I’m ready. After all, age really is just a number. If I was financially free, I would be doing what interests me or what is meaningful regardless of the amount of money it brings me.