Finance Smiths

Personal finance apprentices-in-training

Our annual spending multiples

by //

I will be going on a 2 week holiday to Europe with my wife before starting my new job later this year. It’s always good to have a break in between jobs just to relax and refresh myself. After my probation ends mid next year, we will probably head to the West Coast USA for another 2 week holiday to reward myself if I clear it or to console myself if I fail it.

I have mentioned before on my blog that travelling for overseas holidays is one of our main expenditure items. We enjoy both short and long haul holidays and plan to travel more while we still can as a Dual Income No Kids couple in Singapore. Who knows how long this will last.

However, it’s not the fact that we just spent thousands of dollars on flights, accommodations and currency exchange that triggered this post. Admittedly, I was taken aback by how much our monthly expenses increased due to the travel spending.

Have you heard of the Wall Street Playboys blog? It’s informative and insightful yet divisive and depressing at the same time. The thought process, logic and math are sound but I doubt the majority of people can follow their suggested roadmap and actions. Me being one of them.

I’m not their target audience but I do read the blog posts sometimes to pick up insights on how we manage our careers and finances. Their latest post on why savings rates are worthless and what real net worth is brought my attention to our lack of focus on the annual spending multiples.

I have been calculating our savings rate and assumed an average fixed percentage savings of 40% will be sufficient. I should have realised the need to link our savings and investments to our spending to test whether this assumption will hold.

I’m going to take a conservative approach and exclude our retirement assets consisting of the Central Provident Fund (CPF) funds in Singapore and Superannuation funds in Australia. Reason being we can’t access the retirement monies now to manage any cash outflows and expenses. I know we can use the CPF – OA funds for housing expenses but will choose not to include it at this stage.

This is how I calculated our annual spending multiple at the end of each month: (Total savings and investments) / (Total expenses for the previous 11 and current months).

By the way, I have a new Spending Multiple & Savings Rate page on the blog to track the monthly annual spending multiples for 2016. This replaces the old Savings Rate only page.

According to the guidelines provided by Wall Street Playboys, 20x annual spending is rich, 10x annual spending is comfortable and 1x annual spending is disastrous. We are currently at 4.77x annual spending and it has increased from 4.20x at the start of the year. However, this suggests we are only at an average level of real net worth and not as comfortable as we thought.

Just when we think we are progressing. It still looks like we have a long way to go and our goal for now should be to get to 10x annual spending. At the very least, it will lower the possibility of a few significant negative events in our jobs and financial markets from wiping us out.

Jul 2016 Financial Update

by //

I have updated the net worth, asset portfolio, passive income and savings rate pages on my blog. It’s a monthly exercise that takes about 30 minutes to complete and gives us a good financial snapshot.

What’s fascinating is that since we started tracking our finances in 2015 and showing them on the blog in 2016, all these monthly static financial data points are coming together to form financial data trends!

We start to observe the impact of lifestyle inflation, efforts to increase income & reduce expenses and changes in asset allocations. It’s difficult to pick up on such trends until you have sufficient financial data to work with. I highly recommend everyone to start tracking these four components monthly for a better financial picture. It’s amazing how much information you can glean!

Since I’m doing monthly financial updates, general comments will be provided on the progress of each component. There will be less detail but I will make sure to highlight any significant financial impact events.

Net Worth

Our net worth has finally crossed S$100,000. If you think getting to S$100,000 of asset portfolio value is tough, this one is harder from having to factor in your liabilities. For 2016, our net worth has been growing at about S$10,000 every month.

This can be attributed to three monthly factors – reduction in mortgage principal of S$2,000, cash on hand & investment cash growth of S$4,000 and retirement contributions of S$4,000.

After paying rent for a number of years in Australia, it’s nice to know we are now making monthly housing loan payments to our own apartment here in Singapore and building equity. This is especially the case when we have some flexibility in reducing these monthly housing loan payments if required.

In the event of job loss or medical emergency, it’s possible to draw down more or all of our CPF – OA to make these payments for a year. This is the most powerful feature of CPF – OA in my opinion and allows us to avoid cash drain during such a difficult time. This is also why we only view our CPF – RA as retirement funds and contribute additional cash to it whenever we can.

The monthly cash on hand and investment cash growth of S$4,000 has become more consistent due to the low investment activity. At a minimum, our cash on hand increases by S$2,000 if we end up using the S$2,000 of investment cash in the equity markets.

The monthly S$4,000 of retirement contributions from our employers and us as employees help to build up our CPF, which is technically a retirement fund scheme. However, this is how we view the allocations to and purpose of each account. CPF – OA for housing, CPF – RA for retirement and CPF – MA for healthcare. Think of CPF as a financial planning tool rather than a retirement tool and it will make more sense.

Asset Portfolio

There was a run-up in the equity markets and it has stayed quite flat recently. As you can see, the increase of S$8,000 from Jun 2016 is mostly from the S$4,000 of cash on hand & investment cash growth and S$4,000 of retirement contributions.

I have been hesitant to invest any more cash than necessary in the equity markets other than the small regular purchase of ETFs to keep us vested. It’s not a good time now to be aggressive with our investments but we don’t believe in keeping ourselves out of the equity markets as well.

As long as we can achieve gradual growth of the asset portfolio, it means our slow and steady approach is working. The strategy might change over time but we are okay to stick with it for the time being.

Passive Income

The average monthly dividend & interest income for 2016 so far is about S$800. The dividend income distribution is uneven due to most of the shares paying dividends semi-annually. The good thing is that the increasing size of the ETF portfolio (whereby dividends are paid quarterly) should help to balance things up.

The interest income distribution is more even with small spikes due to coupon payments from corporate bonds. The aim is to increase the average monthly passive income every year until it can cover our current average monthly expenses (everything included) of about S$8,000. It’s an ambitious goal and we have a very long way to go. Of course, the plan also includes reducing our average monthly expenses over time to make this goal achievable.

Savings Rate

Our monthly savings rate used to be 30+% but is now fairly consistent at about 40% from efforts to reduce expenses. Ideally, I would like this to be 50% but I don’t see this happening unless we make some long-term structural changes to our spending.

It might be possible if we can find ways to increase our salary and passive incomes but it’s probably more effective to work out how to reduce expenses further at this stage. Expense management is one of our weaknesses but we have to keep trying!

End of Jun 2016 Financial Update

by //

I have just updated my net worth, portfolios, dividend & interest income and savings rate pages for end of June 2016. Since the first half of the year is now over, this financial update is a good way to see how we are tracking with our goals that were set earlier in the year. This will be set out in order of how these pages appear in my blog for easier reference.

Net Worth

The goal is to reach S$100,000 by 31 Dec 2016. As at 30 Jun 2016, our net worth is S$98,408 and it should exceed S$100,000 by 31 Jul 2016. This is due to a combination of monthly payments to reduce the mortgage debt, cash savings, additional investments in ETFs & shares and contributions to CPF.

We have understated our net worth by using a net mortgage debt calculation based on 50% of the value of our apartment and 100% of the housing loan liability. Unless our apartment starts generating rental income, we are not likely to increase the percentage of its value in our net worth calculation. However, this does mean that our net worth figure is not as accurate when compared to the proper or textbook method of calculation.

We prefer for any increase in our net worth to be largely tied to having more liquid assets in our portfolio and less to do with the value of the apartment (an illiquid asset). There’s no point in having a high net worth if we don’t actually have much liquid funds to tap into.

This is why our net worth figure also indicates our liquidity position and gives us an idea of how much liquid assets we have to redeploy when a significant event occurs. As long as our net worth figure trends upwards, that means we are managing both our BS and P&L in the right manner.

ETF Portfolio

The goal is to reach S$40,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our ETF portfolio is S$44,377. This is mainly due to us investing quite a bit in the ETFs after the markets sell-off from Brexit.

We are happy to see that the change in focus of our investing strategy to ETFs is starting to take effect. However, we have decided to reset the goal to reach S$50,000 by 31 Dec 2016. Always good to keep pushing ourselves to aim higher.

Share Portfolio

The goal is to reach S$120,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our Share portfolio is S$115,788. We averaged down on some of our stocks due to price weaknesses and this accounted for most of the growth in the Share portfolio.

We seem on track to meet our goal but don’t plan on increasing the value of our Share Portfolio much going forward. If anything, our belief in ETFs has grown from the recent market volatility and find them to be a more effective financial instrument for wealth generation.

Other Portfolio

The goal is to reach S$150,000 by 31 Dec 2016. As at 30 Jun 2016, the value of our Other Portfolio is S$147,800. Cash savings has largely contributed to this increase from the previous month as we have not subscribed to any corporate bonds recently and wholesale life policies’ surrender values grow really slowly. We might actually hit the target by 31 Jul 2016.

Retirement Fund and Cash On Hand

No goal was set for the 2016 year because they are functions of the monthly mandatory contributions to our CPF and cash savings. As long as we are employed, this asset component continues to grow and we are happy not to attach any targets to them. Our main aim is really just to stay employed until we figure out how to be self-employed (if ever) and try not to lose our jobs before that.

Dividend Income

The goal is to reach S$5,000 by 31 Dec 2016. As at 30 Jun 2016, we have received S$2,631 of dividend income. This is more than 50% of the target by half year and we should hit it by end of the year given how we have invested a bit after the ex-dividend dates in 2016 of some of the ETFs and shares.

Interest Income

The goal is to reach S$5,000 by 31 Dec 2016. As at 30 Jun 2016, we have received S$3,098 of interest income. We don’t think there should be any issues in meeting the target by the end of the year. However, we are concerned that we are earning more interest income than dividend income.

This means we have too much cash on hand and might not have allocated our asset portfolio efficiently. It’s a nice problem to have but we still have to work on a solution. We are tempted to start investing even larger amounts of cash but the run-ups in the equity markets over the past few years is making us hesitate.

Savings Rate

No goal was set for the 2016 year because I only recently started tracking our savings rate on my blog. The good news is that the savings rate has been increasing slightly with each month. We have started to make small adjustments to our spending habits to try and lower the monthly expenses. It’s difficult to make significant changes to our lifestyle at one time but we are taking baby steps towards it. Taking less cabs, having one less coffee/drink, eat out less etc.

Overall, we are satisfied with the way things have gone financially for the first half of this year. Work has been tough and who knows what’s going to happen in the next half of the year. But we have also enjoyed our time off by going on vacations, meeting family and friends etc.

We have also started exercising more now, especially my wife who has been running after work on weekdays, and it always helps with our moods and stress levels. It can be overwhelming to deal with our personal, professional and financial lives at times but we try to manage them in the best way we can.