Finance Smiths

Personal finance apprentices-in-training

The roles of privilege, luck and adversity

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Have you noticed I have been posting more frequently lately? That’s because my team has been completing the various tax advisory projects recently and we are at the proposals stage for the next wave of work.

The good thing is that it’s less busy in the office and I have more time to produce higher quality tax advice or do my own research. The bad thing is that time passes more slowly and you get nervous about not having enough work to keep you busy. Just one of the many interesting aspects of having a job in the office.

Although I have more time on my hands, I find myself doing less with our asset allocation. The whole process of increasing savings & investments while reducing expenses gets quite automated after a while. We make the adjustments in our actions and wait for their effects to determine whether further changes are required.

This leaves us with more time to spend with each other and with our families & friends. It also got me thinking about how we got ourselves into this position. It definitely wasn’t just because we worked hard because that wouldn’t have been enough.

The purpose of this blog is to document our journey to financial independence (if we ever get there). As readers, you might not identify with some or most of our personal circumstances. That doesn’t mean there is nothing to learn from what we do. I frequently read the posts of local and international personal finance bloggers at various stages of their lives and with very different personal circumstances.

The key is to find motivation and learning experiences that are relevant to you. Or you can choose not to read about us at all. But being upfront and honest about the circumstances of our journey should only make this blog more useful.

There is a reason why I will not be discussing the importance of attitude, humility and working hard & smart in this post. It’s because these are behavioural characteristics that we should work on and strive towards but the positive changes can be made every day.

The interaction of privilege, luck and adversity is less tangible and understanding their roles in our journey should give us a better understanding of where we are now and where we should be headed.

Privilege

I’m going to write about the privilege we have enjoyed so far first because I reckon it played the most important part in getting us the headstart we had. The opportunity to study overseas in Melbourne without student loans, the initial financial assistance with living costs when we just started work, the support we had when moving from Melbourne to Sydney and Sydney to Singapore etc.

These are just a few of the many examples of privilege that we have been provided with in the last decade. They allowed us to reduce the stress of making it on our own as young adults and gave us valuable time to adjust to being working adults. This is especially so at the start of the journey, which is always the most difficult and when you are prone to making big mistakes.

We had the luxury to focus on building our careers overseas in the desired direction in the knowledge that failure won’t result in the end of anything. We could make plans and take the next steps effectively because we only had to worry about ourselves.

Don’t waste the headstart privilege has afforded you but don’t let it define you as well. Not having to deal with financial problems does not excuse us from developing sound financial planning skills. Having financial support does not mean we don’t work hard on a wealth-building plan.

Luck

This is the most elusive factor in our journey but is responsible for much of what we have today. In fact, when we look back, many of our achievements were made possible by tracing to a few events where luck was on our side.

I made a last-minute decision to study in Australia instead of UK. Met my wife who took a chance on getting together with me after I had just come out of a bad break-up in the first year of university. Been together ever since.

My wife landing a graduate role with the last firm to interview her in the final year of university that gave us the reason to stay on in Australia. Really glad we got to enjoy our initial years of work in a less stressful and happier environment.

Both of us finding jobs in Singapore with decent bosses and colleagues. Even though the hours are worse than Australia, they are better than comparative jobs elsewhere and helped us to adjust back to life here.

I often hear the saying that luck is when hard work meets preparation. It’s true. But having the privilege to wait for luck to happen is just as important. Don’t underestimate the impact luck can have on your life and make sure you put yourself in a position to let it happen.

Adversity

The problem with adversity is that you have to overcome it for the impact on your life to be beneficial. If not, it can crush your dreams and wipe out everything you have achieved in a much shorter time than you can imagine.

In Singapore, we have been taught to avoid making mistakes and take the safe approach to life. You can reduce the possibility of adversity that way but not taking risks in life is something we don’t recommend to anyone because it’s going to work against you in the long run.

We all have our own stories when it comes to overcoming adversity but the key is to get through them whatever they are and come out on top. That’s easier said than done because it can get really bad and punishing sometimes.

We got lucky with adversity and its role in our life. There was enough to challenge us, make us mature more quickly as young working adults, allowed us to learn & thrive as a married couple and maybe even prepared us for having kids somewhat. We haven’t been knocked down so hard that we can’t climb back up on our feet yet.

The issue is that the effort to overcome adversity increases over time as you get older. Even now, just thinking about going overseas to another country to work & live or even returning to Australia makes us hesitate. The idea of having to do it all over again knowing how difficult it can be scares us. Plus raising children by ourselves without help looks really tough after seeing how our friends are doing it.

Don’t be afraid of adversity but get ready for it. It comes for everyone and I find myself wondering what we will be like in the face of adversity again.

What I do on pay day

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I wish I could say I am one of those people that are just focused on spending time with family & friends, developing my own interests and getting stuff done at work such that I don’t even notice its pay day. But I’m not.

That being said. I do enjoy engaging in all these various activities but I’m acutely aware of when its pay day for my wife and I. As our salary is paid monthly, pay day is usually at the end of the month for both of us.

This is the day when our monthly salary gets credited into our designated bank accounts for getting through the month of work. For our office jobs in accounting, the month of work could range from getting slammed with multiple deadlines to having not much to do depending on the time in the year.

We get paid the same amount either way since Singapore is not big on overtime pay. On a side note, annual performance bonus is quite a big thing here and it does give employees something to look forward to at the end of each year. In bad times, salary freezes and no annual performance bonus could mean you take on more work for the same pay for quite a while.

That’s a short insight into why pay day is an important day for us. However, it is more significant to me because of what I have to do on pay day. My wife just wants to know the pay has been credited so she can do fun things with the money she has earned. I actually have a list of personal finance management tasks to get through. Lucky her.

1. Ensure the correct monthly salary amount is credited

I log into the internet banking designated accounts to check that the correct monthly salary amounts have been credited. These should usually be the same as the previous month unless there are any reimbursements for work expenses incurred.

2. Funds transfers to other bank accounts

On the same login, I make online funds transfers to other bank accounts. I have to top up the accounts where I set up automatic payments for the monthly credit card bills. Or where there has been drawdowns for investment purposes and withdrawals for spending purposes. The reason being there are usually required minimum average daily balances to avoid being charged a fee.

For low interest bank accounts (< 1% p.a.), I maintain them at only S$500 above the required minimum average daily balances. This is a sufficient cash buffer since I don’t like our funds idling in such low interest bank accounts. Hence the need to manage them in a lean but efficient manner.

For high interest bank accounts (> 1% p.a.), I maintain them at the maximum average daily balance to qualify for the higher interest. There is no point having more funds than this balance amount since the excess cash reverts to earning a low interest (< 1% p.a.).

All excess funds are transferred to a single normal interest residual bank account (1% p.a.). This is where I keep the cash to allocate for savings, investment and spending purposes.

3. Review cash allocation for current month

I don’t update our Google Sheet of assets, liabilities, income and expenses on pay day. This usually happens on the first or second day of each month so I can better capture the movements and balances for the previous month. Besides, I try to coincide this with the updating of the pages on my blog so they can happen concurrently to save time.

What I actually do on pay day is to conduct a cash review. It’s a good time to look at how much cash we have been spending on expenses for the current month. This is especially useful in picking up on spikes in our non-discretionary spending and identifying areas for reduction.

We also work out how much cash we have invested and leftover as savings. Cash deployment monitoring for investing in a downturn is critical since this period of time usually coincides with an increased risk of retrenchment. As long as we can increase our cash on hand savings by S$2,000 each month (after investment cash allocation of S$2,000), we are happy with the progress.

These three steps take about 30 minutes to complete on pay day but gives us a better idea of how we can approach our cash budget for the next month. That way, we don’t have to go through the month worrying about our cash allocation and whether we have sufficient cash savings.

Are my parents ready for retirement?

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I read an interesting post from this US personal finance blogger (Broke Millennial) – Are You Your Parent’s Retirement Plan? It sets out conversation topics on insurance, retirement funds, mortgage and debt that adult children can consider having with their parents to better understand their retirement plans.

This got me thinking about my parent’s retirement plans and whether they are financially fit for retirement. I have had conversations with my parents about this before to see where I can assist them in their financial planning for retirement.

We usually end up discussing the sufficiency of the CPF Life payouts after taking into account the other factors of insurance, active & passive income and debt. That might be how I will write this post for a more complete financial analysis of my parents’ retirement plans.

1. Insurance

My parents have health insurance plans that cover for hospital and surgical expenses. Although these health insurance plans are not the most comprehensive, the annual premiums to be deducted from their Central Provident Fund (CPF) – Medisave Account (MA) are quite high due to their age (60+).

In fact, the annual premiums are expected to increase as my parents get older and my siblings & I might have to top up their CPF – MAs or have the withdrawals come from our CPF – MAs instead. Medical costs from hospitalisations and emergencies can be a significant drain on the family finances when not managed well. My parents are relatively healthy for now due to their active lifestyles but we will continue to budget for their medical expenses.

My parents used to have term life insurance policies but they have since expired. I’m not sure how useful life insurance policies will be for my parents now that they no longer have any dependants. My siblings & I can take care of ourselves and will look after them financially as well.

2. Active Income

My dad stopped working a few years ago and has since moved to Malaysia. He built a house on top of a small piece of family farmland that we have and grows a variety of fruits & vegetables while rearing a few chickens. He also catches fish from the farm drainage canals and ponds when there is heavy rain.

Having lived for a number of years on a farm in Malaysia when he was young, my dad really likes this lifestyle and I’m glad he gets to enjoy it in his retirement. Although my dad no longer has any active income, his expenses are low since he only spends on necessities (i.e. items that he can’t grow on the farm like rice and other meat produce).

Since the cost of living in Malaysia is much lower than Singapore and my dad is a lot happier and healthier from the manual labour tending to the farm, his expenses have gone down over the years. He comes out to Singapore to visit us or we go in to Malaysia to stay with him on the farm once in a while.

My mum works as a retail promoter a few days each week and is paid monthly based on the number of hours worked. It’s not a strenuous job and she gets to interact with her colleagues and customers. The active income helps to pay for the travel trips my mum goes on with us or her friends.

I have to admit that this is not a normal or common living arrangement for most families out there. However, it has worked out well for my parents because both of them get to enjoy doing the things they like. This is especially so when you have adult children living their own lives so everyone gets to spend quality time with each other when we get together.

3. Passive Income

My parents own a residential apartment in Malaysia that is about to be completed and leased out. Since they did not take out a mortgage to pay for the apartment and had enough cash to purchase it, the rental income net of rental expenses will constitute passive income to sustain my dad’s lifestyle on top of their savings in Malaysia.

If money gets tight due to unforeseen circumstances, my mum can rent out a room in the family apartment in Singapore (where the housing loan has been paid off) for additional rental income on top of their savings in Singapore.

Since my parents do not have an investment portfolio of equities and bonds, they rely a lot on the CPF Life payouts as their main source of passive income. I never realised the importance of CPF Life until I see its payouts sustaining my parent’s retirement.

Even though my siblings & I make monthly contributions to my parents and manage their living expenses, these CPF Life payouts provide a strong layer of support. It’s usually the dual impact of reduced income and increased expenses that cause financial problems in retirement. Hence the need to find ways to maintain the income while reducing expenses.

4. Debt

This section is going to be short because one of the best things my parents have done financially is not to have any type of debt in retirement. No mortgage, no student loan and no credit card debt.

Although my parents did not manage to build an investment portfolio of shares and bonds, they have put themselves in a strong financial position to retire by managing their income and expenses. Their lifestyle does not consist of luxury spending but they get to enjoy doing the activities that make them happy. That’s all I can ask and wish for in my parent’s retirement.