Finance Smiths

Personal finance apprentices-in-training

Reflections on turning 30

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I’m turning 30 this weekend and my 20s will be officially over by the start of the new week. It’s nothing quite like watching the first digit of your age turn that gets you into a reflective mood. Besides, I have been writing quite a few personal finance posts lately about income, expenses and investments.

I thought it would be fun to write about my reflections for the past decade. I’m going to try writing these points in a chronological order as I take a walk down memory lane and I will also include life lessons that I picked up.  My next post, probably after my birthday this weekend, would be about my hopes for the next decade and allow me to stretch my mind to the future.

Reflections

Studying overseas

I had the opportunity to study overseas in Melbourne for my undergraduate degree and I continue to be grateful to my parents for providing me with that opportunity. Even though I was able to obtain a partial international student scholarship, it still required me to tap into the family finances for funding.

Having to learn how to live by myself, cook for myself and make new friends while in a foreign environment was one of the toughest things I had to do. It really showed me how sheltered I was despite me thinking I had grown up after National Service.

Life lesson: When you are young and live with your family, learn how to budget, shop for groceries & household items, cook healthy meals and wash the dishes & clothes even though there is no need to. Don’t wait until you are forced to do so when you are older and living by yourself.

Staying on after graduation

It goes without saying that one of the best things that came out from studying overseas in Melbourne was that I met my wife at university. We studied hard, played hard, made friends and had a good time during our undergraduate years. In our final year, we had to make the decision whether to stay on in Melbourne or return to Singapore after graduation.

It was 2009 and the impact of the global financial crisis resulted in many accounting firms and banks in Australia reducing the intake of their graduate programs. Gaining a position in the graduate program was a good way for an international student to obtain PR, work full-time and stay on in Australia after graduation.

As you can imagine, many international and local students applied to these graduate programs in their final year and competition was stiffer than usual due to the bad economic conditions. Job prospects were bleak and we were getting rejections constantly.

If neither one of us could obtain a role in these graduate programs, it was still possible to find entry-level jobs but it would  be more difficult and required us to apply for them after graduating. We were young and looking for work while unemployed in a foreign country didn’t sound appealing especially when we had the choice to return to Singapore and be employed almost immediately.

I was of the opinion that we should stay no matter the outcome but my wife wanted us to return to Singapore if we couldn’t land the graduate program role. Stress levels were already high with academic pressure from having to clear the final year modules and it got even worse with us fighting about what we should do after graduation.

My memory of this period of time is one of the most vivid among our many experiences in Australia. You could say it was a bad memory for many reasons but what happened here was actually our turning point. I had just been rejected for the last graduate program I applied to and my wife had not heard from the last graduate program she applied to in weeks.

The phone rang in the morning at 9.30am and we were still sleeping when my wife took the call. We were up late the night before studying for a test and I remembered her being groggy when answering the phone. This turned into stunned silence before she started smiling widely and thanking the person on the other line to accept the position.

I always think to myself when I look back at this on how one single event can change the course of the lives of two people. To be honest, I still have no idea whether we would have stayed on if the person had called with news of a rejection.

Life lesson: Have fun at university but remember that what you study does impact your employment prospects after graduation. Job search is like hitting your head against the wall until it or you breaks. Luck is when the wall breaks first.

Working in Melbourne and Sydney

Having worked in Singapore for more than two years now, I can safely say we were fortunate to have spent our first four years of work in Melbourne and Sydney. The work environments were friendly and conducive to learning. The working hours were decent and we got off on time by 6pm and latest by 7pm.

We still hung out with friends from our university days during the weekends but got along well with our work colleagues. Since we had no family, we had to find ways to entertain ourselves during the weekend. We spent a lot of time driving out to places like Mornington Peninsula, Great Ocean Road, Yarra Valley, Blue Mountains, Hunter Valley etc for day trips and to various suburbs for brunches, lunches and dinners.

Life lesson: If you ever have the opportunity to work overseas in a city or country that interests you, take it. It might not be a life-changing experience but the fact that you will be doing many things that are different from before will change your life somewhat.

Buying an apartment

We bought an apartment in the East several years back close to my parents-in-law for investment/home ownership purposes. If we weren’t back in Singapore by the time it was completed, we were planning to rent it out. Since the apartment was completed around the same time we returned to Singapore, we decided to move into it before our wedding.

Due to the apartment’s proximity to my parents-in-law’s place, we carpool into work and get to enjoy home-cooked dinners on weekdays and even on the weekends. If we decide to have children, it would be convenient and useful to have additional help available.

We didn’t buy a BTO from the HDB or EC because our combined monthly gross income was above both income ceilings at that time. They were including our monthly Australian PAYG tax in the combined monthly gross income calculation and the Australian dollar was stronger than the Singapore dollar then. We got frustrated and didn’t explore the option of a resale flat properly.

Although we get to enjoy several benefits from staying in our current apartment, the monthly loan repayment on the mortgage is about 25% of our combined monthly gross salary. This goes up to about 50% if one of us loses our job or stops working. It would have been lower if we bought a resale flat or EC and even lower if we bought a BTO.

Life lesson: Buying a property for investment or home ownership is one of the major financial decisions you will make in your life. Think hard about the value you are getting versus the price you are paying and make sure you buy what you can afford. 

Returning to Singapore

We made one of the biggest decisions in our lives to return to Singapore in 2014. After all, we had already built a life in Australia with friends and decent careers by then. In fact, we continue to get asked about this when we share our story.

The truth is, we were getting bored in Australia and wanted to try something different. My wife and I had transitioned through the phases of undergraduate study, graduate level work and experienced level work together and found ourselves growing & maturing each time. However, each phase happened in Australia and we found ourselves wondering what it would be like to work and live in Singapore.

Since we were planning to get married in 2014, we took the opportunity to return to Singapore to build a new life for ourselves. We worked longer hours and found ourselves getting re-acquainted with old friends who had drifted apart over the years. We made new friends from work but it does get harder to change social circles as you get older. We also had to adjust to having family obligations and spending more time with our families than we were used to.

This is basically where we are at right now. In terms of our personal finance skills, we learnt the basics when we were living in Australia but only got to a more advanced level when we returned to Singapore. I guess when you are back in a familiar environment with more experience and skills, it is possible to achieve more since you have to worry less about your day to day living.

Life lesson: Don’t be afraid of change and taking risks. It’s almost always a good thing when you get to the end and look back.

Increasing income vs cutting expenses

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The previous post on our average monthly income & expenses in Singapore is useful in providing a context for this discussion on increasing income vs cutting expenses. It was a big step to reveal those figures but should be a good reference point as we update them going forward for changes in our lives. It’s always interesting to see how our income and expenses will evolve over time.

Now that you have a better picture of our monthly personal finance position, it’s time for me to write about a topic that has been on my mind since we started tracking our net worth in Jan 2016. Should we focus on increasing income and/or cutting expenses?

Increasing income

This is going to come as a shock to some people but our undergraduate degree in accounting and our occupations as accountants continue to be two of the best decisions we have made in our lives.

It was our undergraduate degree in accounting that provided us with the platform to obtain Australian Permanent Residency after graduating in 2009. Being Australian Permanent Residents definitely made it easier to live and work there instead of returning to Singapore after graduation.

As accountants, we already have a basic understanding of income, expenses, assets and liabilities. Hence, applying these concepts to our personal finance situation was less difficult. Our field of work also provided us with the opportunities to work in Melbourne, Sydney and Singapore as the skills and knowledge are transferable across the industries and firms.

Our experiences in these past 6 years have made us realise that it was the increases in salary income that contributed the most to our wealth building journey. When you have just started working, your salary is most likely your biggest source of income. This will probably be the case for many years unless you take the time and effort to develop other sources of income that can replace your salary income.

However, we have noticed that it can be difficult to develop these other sources of income in our initial years of work. This is the period of time where we pick up our technical skills and knowledge, which requires a certain level of focus. We obtained our professional accounting accreditations during this time and got to broaden our social and professional networks.

We definitely had the time to build up side hustles and investments if we wanted to but most of our focus and effort was spent on developing ourselves to increase our salary income. This has worked out for us so far and has contributed a great deal to where we are today.

Now that our salaries and assets have reached a certain level, we are in a position to decide how to increase our income going forward. Should we continue to focus on increasing our salary income or build up another source of active income or allocate even more cash funds to accumulating financial assets that increase our passive income (dividend and interest)?

Other sources of active income

I have considered driving for Uber/Grab or tutoring on a part-time basis as other sources of active income. To be honest, unless there is a big push factor (e.g. job loss or medical emergency), I wouldn’t take the time and spend the effort to explore these options over the weekend. Our jobs can be demanding and recharging over the weekend while spending time with my wife keeps us going for the next week. Not the best idea for me to drain myself out even more to earn additional income.

I also considered doing freelance writing or finding a way to monetise this blog going forward but realised that I like writing for myself at my own time and on my own terms. I might change my mind eventually but would like to keep my personal finance writing interest as a hobby for now.

More passive income

I seem to be left with investing more of our cash funds to ETFs, Shares and Bonds to increase our passive income. We are already doing this but it depends on market opportunities and we can’t rush the process without getting ourselves into a financial mess. Patience is key when it comes to investing and I practise it often to avoid overstretching our finances.

Job security

Given the deteriorating economic conditions in Singapore, there is limited scope to increase the salary income in our current jobs unless we take the risk and move industries or firms and negotiate for a higher pay. How likely is this going to happen if there are job cuts everywhere?

Even our own job security is at risk if it continues to get worse and I’m starting to understand how easy it is to get stuck and feel stagnant in our jobs as we get older. Increasing our salary income has worked for us so far in our 20s but would it have the same effect as we enter into our 30s given the ever shortening job lifecycles?

Cutting expenses

I must admit that we have never been good at cutting expenses as a means to building wealth. In Melbourne and Sydney, we rented apartments that were located in the city so we could walk to work and meet up with our friends and colleagues easily. This resulted in us paying a higher rent than if we were to rent apartments located in the city fringe or suburbs.

We had broadband, cable TV and mobile phone plans subscriptions. We bought groceries to cook our meals at home on weekdays and ate out on weekends. We bought our morning coffees and had drinks with colleagues on some work days while buying our lunches on most work days. We had staycations at hotels, did day trips and travelled overseas often using our annual leave and public holidays.

Percentage budgeting approach

We did use a percentage budgeting approach to our net monthly income i.e. 33% accommodation & related expenses, 33% living & entertainment & travel expenses and 34% savings. That’s how we managed our expenses and although we did make an effort not to overspend to leave ourselves with about 40% savings in some months, we never really focused on making significant cuts to our expenses.

Even now that we are back in Singapore, you can see from our average monthly income & expenses that the percentage budgeting approach has stayed roughly the same. There was some level of lifestyle inflation but almost always within the percentages we have set out.

When I read other personal finance blogs, I know it is possible for us to try and cut our expenses significantly to increase our savings rate. But it’s just not our preferred approach to building wealth. We realised at some point in time that our potential to increase income far outweighs our ability to cut expenses. This is not to say we enjoy working but we do acknowledge the benefits work has brought us.

Ultimately, you have a limited amount of time, energy, focus and your effort is better spent on what works best for you. The 30% to 40% savings rate has gotten us this far and we probably wouldn’t try to increase this to 50% unless again there is a big push factor (e.g. job loss or medical emergency). It could be laziness for us to wait for life to decide such important matters for us but what’s wrong with enjoying our lives while waiting?

Monthly Income and Expenses

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I have been reading the monthly income and expenses reports of personal finance bloggers around the world. It’s always an interesting experience because you get to see the impact of different tax systems, employee vs self-employed income differences, retirement fund scheme contribution variations etc.

In the interest of contributing to the global personal finance blogosphere, I might share our average monthly income and expenses report in Singapore. The figures in the report are not exact and not for any specific month. Instead, these figures represent the monthly average since we started tracking our net worth in Jan 2016. For illustrative purposes, the current foreign exchange rate is S$1 to US$0.72.

I will include commentary on each item to provide some context to these figures as applied to our specific situation in Singapore. I should note that the figures may vary widely for another working couple at our age (30 and 28) in Singapore employed in similar or other industries. This is due to differences in level of experience, field of work, family and personal circumstances etc.

Salary

The amount of S$12,000 represents our combined  monthly gross salary from being employed full-time in the accounting and banking industries. It also includes our annual bonuses (about 1 month gross salary each) averaged across 12 months.

The annual bonus is a big deal in Singapore and I was quite surprised by it when I first returned from Australia. I never received an annual bonus while working in the same accounting firm in Melbourne and Sydney. Then again, the base salary tends to be higher in Australia compared to Singapore, which probably made up for it.

Given that we have been working for about 6 years in the same fields, S$12,000 is probably a reasonable combined amount to be pulling in considering we work the average number of hours each day in Singapore i.e. 9am to 7pm.

Dividend

The amount of S$500 represents the distributions we receive from our ETF and share holdings. Dividends paid by a Singapore resident company are tax-exempt under the one-tier corporate tax system when received by an individual. Hence, most of our distributions are not included as taxable income in our annual personal income tax returns.

Interest

The amount of S$500 represents the interest we receive from our corporate bond and cash holdings. Interest paid by approved banks and debt securities in Singapore is tax-exempt when received by an individual. Hence, most of our interest earned is not included as taxable income in our annual personal income tax returns.

Mortgage 

The amount of S$2,700 represents our monthly payment on our housing loan at the current interest rate of about 2.2%. This gets adjusted every 3 months based on the prevailing 3 month SOR + 1%.

CPF Contributions

The amount of S$2,400 represents the 20% of our combined monthly gross salary of S$12,000 that is a mandatory employee contribution into the national retirement fund scheme – Central Provident Fund (CPF). This ensure that each Singaporean is contributing to his/her retirement as long as he/she remains active in the workforce.

Credit Card Bills

The amount of S$2,300 represents the monthly bill payments we make on all our credit cards. We try to charge most of our expenses to credit cards to get cash rebates. In fact, this is how I contribute funds to my parents as well even though I no longer live with them – by letting them charge the family utilities, cable, broadband and groceries expenses to my supplementary card.

Cash Payments

The amount of S$800 represents the cash payments we make on expenses that can’t be charged to our credit cards. This also includes cash transfers to our parents as monthly contributions and cash withdrawals for exchanging to foreign currencies when we travel.

Income & Property Tax

The amount of S$500 represents the monthly income tax and property tax interest-free instalment that we pay to IRAS. Singapore’s personal income tax rates are low compared to the rest of the world. I can use the calculation of our annual tax liabilities as an example.

Our individual annual gross salary is S$72,000 (i.e. monthly gross salary of S$6,000 x 12 months). Taking into account the mandatory employee CPF contribution is tax deductible, each of our annual taxable income is S$57,600. The individual annual tax payable is about S$1,782 (i.e. effective tax rate of 3.1%).

This is one of the main benefits of working in Singapore. If you think about it, the mandatory employee CPF contribution not only increases your retirement funds but also decreases your tax liability. In addition to already low personal income tax rates, you can see how it helps by adding to our asset portfolio and provide us with more cash on hand.

Property tax rates on our owner-occupied apartment are progressive and applied on the Annual Value of the property. For an average 2-bedroom apartment like ours, the annual property tax is S$800 (i.e. effective tax rate of 2.9%).

We can pay our annual income and property taxes via an interest-free monthly instalment plan for a year, which reduces the drawdown of our cash holdings since the monthly amount payable is deducted over the next 12 months.

Maintenance Fees

The amount of S$300 represents the monthly maintenance fees we pay to our apartment complex property manager. This covers the cost of maintaining the general health of shared facilities, day to day costs of the facilities’ upkeep and long-term structural costs.

Savings

Our average monthly savings rate is 30.8% and this leaves us with S$4,000 as savings at the end of each month. We allocate this amount according to our asset allocation strategy to try and generate proportionate growth across our entire asset base. That way, we are less likely to neglect one of these aspects of our asset portfolio –  investment, retirement and cash.