It’s already starting to happen. Every time the stock and property markets hit new highs, you get young working adults wishing for a market crash and fire sale in financial and physical assets. But we need to be aware these usually coincide with economic crises or similar crisis level events.

I have written before on this blog about why I prefer not to have a recession. It has far-reaching consequences on our jobs, skills, financial and personal lives. Even after planning for such severe events, I’m not confident we can benefit from the resulting fire sale in shares and properties.

Let’s have a think about why this is the case. I will show you how people like us can be badly affected and our lack of practice in controlling our emotions can screw our carefully laid plans to “take advantage” of the fire sale.

This is from the perspective of young working adults. If you come out from this exercise still thinking you are ready for a fire sale, good for you. If not, you had better stop wishing for a fire sale and start wishing for more time to get ready.

1. Are you reliant on your salary income?

It’s a simple question. Do you rely on your salary income to pay for your expenses? It doesn’t matter whether you have an emergency fund to sustain your living expenses for a period of time.

Once you lose your salary income and start drawing down your emergency fund to manage your expenses, you let me know whether your investment risk appetite is still as high as before. Especially when the salary income is likely to be the highest or only source of income for young working adults.

It would be naive to think your job is not at risk during such a time or even worse that your job is recession proof. If you think you can wait it out until you find your next job, the bad news is this type of crisis level event causes structural changes in the economy. Your job might no longer exist or the salary is significantly lower.

Don’t underestimate how quickly your skills and mental or physical health can decline in a period of unemployment. To pick yourself up and move forward requires considerable time and effort. Enough to drain your energy levels just to keep going much less think about investing in the stock and property markets.

2. Do you have a significant amount of investment cash?

Without a large amount of investment cash, you just don’t have enough to inject into the beaten down stock markets to make up for the potential loss of salary income even if they subsequently rebound. You also won’t have enough to make the downpayment for a distressed property.

Even with a significant amount of investment cash, have you thought about your funds deployment strategy and how well would you follow it? Young working adults have yet to go through a severe bear market with skin in the game. We were either not vested in the markets during the last one or had little cash to do anything then.

When the fire sale happens, how capable are you at investing your cash into the markets when your net worth is declining, your jobs are at risk or gone and your emergency fund is disappearing fast. Without a large enough buffer, you will hesitate to pull the investment trigger every time.

3. How vested are you in the markets?

Young working adults that have invested in the markets in the past few years have only been watching their portfolio values grow. That means you have not gone through a sustained period of time whereby your portfolio value has declined heavily and stays there. Still feel like throwing even more money into the abyss?

If you have not invested in the markets and are waiting for the big fall to do so, it’s even worse. That just means you have no experience or idea on how to actually deploy your investment cash efficiently much less try to do so in a severe bear market. This lack of practice in controlling your emotions when investing is going to get you hammered by the markets.

4. Do you have to maintain an emergency fund?

Having to maintain an emergency fund (doesn’t matter how small or big it is) just means you actually have expenses that will burn through your cash savings the moment you lose your job and salary income. You just won’t be in the right frame of mind to take advantage of a fire sale knowing your emergency fund is getting drained.

5. How serious was the money talk in the relationship?

This is applicable to the young working adult couples. Have you had the money talk yet? If so, did both of you work out exactly what to do in the event of a fire sale? It’s easy to talk about money when the financial plan is going well. You only realise the differences when things start to break down.

Young working adult couples are in a better position to take advantage of a fire sale provided they are in sync. Losing one source of salary income hurts less when you have another to keep both of you going. But both parties must work out what the investment plan is when the crisis strikes and markets start to freefall with everything else going wrong at the same time.

The 2008/2009 Global Financial Crisis is a good case study on how things can go wrong so quickly to blow up your financial and investing plans. One of the worst bear markets in history and more people had their wealth destroyed then gained wealth even after the subsequent rebound.

Generally, I found that these are the working adults who were able to really use it as a wealth-building opportunity:

• Did not lose their jobs in the economic crisis or already had large sources of passive income to make the job loss irrelevant
• Had significant amounts of investment cash to deploy in buckets as the markets tanked
• Did not need to maintain an emergency fund because their monthly incomes were already exceeding expenses by a lot or there was no drain in the emergency fund at all
• Been through at least one other severe bear market to recognise how bad it can get and how to utilise the investment cash effectively

Otherwise, what you are going to find more people doing is sell out of the markets to increase their liquidity position i.e. raise more cash whether to meet expenses or for peace of mind to feel safe.

Young working adults should focus on preparing for an assets fire sale and stop wishing for one. You need a lot more time than you think to get ready. Then maybe you will come out on top when it’s finally here.

The longer I track our income and expenses, the more I start to realise that the most effective way of building wealth at our age is to increase income. Reason being the limits to how much we can reduce expenses by are greater than how much we can increase income by.

Increase Income > Reduce Expenses

At this stage, our savings rate is 40% i.e. monthly cash savings of S$4,800. To achieve a 10% reduction in expenses to boost the savings rate to 50% i.e. monthly cash savings of S$6,000, we will have to restructure our spending and lifestyle. This is a painful process and I don’t see that happening unless there is a “trigger event” i.e. something drastic happens to force us to reduce our expenses.

By the way, a common suggestion is to cut morning coffees, work lunches, drinks and dinners. Based on our experience in the banking and accounting industries, this is not a good idea. My wife was the one who taught me this lesson on why that is the case.

She goes for coffees, lunches, drinks and dinners with her colleagues often. It’s actually at these gatherings that important information such as upcoming retrenchment exercises, salary benchmarking and job opportunities get passed around informally. The better connected you are with your professional network, the less likely you are to get blindsided in your career.

Which is why we are better off focusing our time and effort on increasing income. It also becomes obvious that as relatively young working adults, we have a much higher chance of increasing our salary income then looking for or building up other sources of income.

Without sufficient active income to drive our passive investments, we are not going to make much progress with increasing our passive income. Self-employment and freelancing usually involve cuts to our active income provided we find a way to scale the business upwards.

Realistically, our best option is to focus on increasing our salary income, which is something we have been working on for a number of years. However, I’m sensing a lot of inertia because we seem to have reached our magic happiness individual monthly income level for now of S$6,000.

Income vs Happiness

Have you heard of the income vs happiness graph? It basically shows how your happiness increases as income rises up to a certain point at which money won’t make you any happier. This is essentially the magic happiness income level.

Of course, you would expect the graph to vary by country, city and individual. In our case, the individual magic happiness monthly income level is S$6,000. It is where we are right now and hence the inertia in striving for additional salary income. Let’s walk through why this is the case.

1. Just enough responsibilities

We are essentially low level managers at this salary income level. There’s just enough responsibilities to pick up skills from managing a small team. But not enough to overwork us and cause our stress levels to elevate.

2. Decent working hours

Consequently, our working hours are decent, usually 9am to 6 – 7pm every day from Mon to Fri. We have time and energy in the evening to engage in various social activities, exercise or have dinner with our family. Plus we don’t work on the weekends because nothing is ever that important.

3. CPF contributions maximised

The monthly ordinary wage ceiling for CPF is S$6,000. Which means the employer or you will not be contributing any percentage of your monthly salary to CPF for amounts above S$6,000. Since CPF seems to think a person earning above S$6,000 don’t need the additional contributions, I’m going to agree with them and stick around this level for a while.

4. Allows for family planning

We don’t earn a high enough salary income to be immediate targets of retrenchment exercises. This lowers the impact of taking maternity and paternity leave if we decide to have kids. Yet the salary income is high enough to allow us to afford having kids financially.

We also get a certain level of flexibility in the planning of our workflows and schedules, which will help us adjust to having kids. Most importantly, we can both choose to continue with our careers even though the progression will be slower.

5. Low personal income tax rate

I know I keep harping on this topic but I really appreciate the low personal income tax rates here. After we factor in our CPF contributions and other tax reliefs & deductions, our individual monthly personal tax payment is S$150.

Let that sink in for a moment. Any idea how low that is compared to other global cities? This means that our time and effort spent in chasing for job positions, promotions and salary raises aren’t being taken away by personal income taxes.

However, I will admit that Singapore has other wealth and consumption taxes that can hit us harder comparatively. But this is very much up to us to decide whether we purchase the items and assets (car, property etc) that subject us to these taxes.

6. Sufficient cash for savings and investments

It’s true if you think we have become somewhat lazy from the considerations above. We have grown tired from all the planning and fending for ourselves that we had to do when moving to Melbourne, Sydney then back to Singapore. This is our time to recharge and rest.

Besides, S$4,800 is not a small cash amount to fund our savings and investments every month. This is not counting the S$4,500 that gets channelled into our CPF monthly for retirement purposes.

It’s not a bad individual monthly income level  to get stuck and be lazy at. But I will let you know if this changes. After all, our income vs happiness graph is not static. It will change as we get older and our needs & wants change as well.