I have not really been reading much finance/investing books recently. But Anthony Robbins’ Money: Master The Game caught my eye from a year back and I finally got my hands on this book from the library recently. I am one-third through and I really enjoyed it (a review is on the cards).
There was one concept which I felt was truly useful. Instead of treating financial freedom as ONE BIG GOAL (with an impossibly large figure attached), he broke it up into 5 different stages. That way, we can celebrate “small wins” on the way and maintain momentum and motivation.
And the 1st stage, Financial Security, is the most important and attainable of them.
What is Financial Security?
You might not consciously know it. But the most primitive reason behind our habit of saving money is definitely security. Security for yourself, your spouse and your family. And in the personal finance world, security likely means not having to worry about all these basic needs:
- Home Mortgage
- Utilities Bill
- Basic Transportation
- Insurance Costs
Achieving Financial Security is definitely something to be euphoric about.
“How amazing would you feel if these five things were paid for as long as you live, without ever having to work to pay for them again?”
How Much Would You Need To Attain It?
To give you a better idea of how much you need, I will present my numbers. (As I have almost always unabashedly done for the past 3 years…)
Home Mortgage: $500
The monthly mortgage of our 5-room Punggol BTO flat is around $1,000. If you divide it into two, my portion would be $500.
Utilities Bill: $150
The conservancy fees ($70), the electricity, gas and water bill ($100) and the broadband charges ($30) add up to about $200 a month. If we include handphone bills, it’s approximately $150 for each of us.
This is quite inflated since I really think I can eat very well on $10 a day. Some fruits and nuts for breakfast would actually cost less than $1 per pax. We could probably still dine out a couple of times a week if we mix in a bit of cooking. Not to mention $15 a day.
Basic Transportation: $150
To be honest, based on my current lifestyle, it’s probably closer to $50/month for me. My students either come over to my place or most of them live within walking distance from my home. But well, I know I am a big anomaly here. And well, I actually provided a buffer of 5 cab trips to make this category more reasonable.
Insurance Costs: $150
Our relatively low insurance costs are well-documented here. It’s less than $100/per pax for our household but I understand that some might want to purchase some critical illness plans on top of hospitalisation plans. Or perhaps even some whole-life. My view is that $150 per month for basic insurance should be more than enough.
Total: $1,400/ month = $17,000/year
I am not going to assume a 10% return since that’s highly optimistic. Heck, I am not going to even use a reasonable 7% return which you might be able to receive from yields alone with a portfolio of high dividend stocks/REITs.
Instead, I will base it on real returns of 5% (by purchasing the STI ETF now, you will already get close to 4% yield). Which means I will multiply what I need by 20.
And my magic number is … $340,000
A Worthy First Long-Term Financial Goal
So yes, you do not need $1 million to have the awesome feeling of not having to worry about your basic needs. In fact, if you have a similar expenditure pattern as what I have painted above, you only need 1/3 of that million.
Assuming you’re starting out with nothing at the age of 25, saving $500 a month or $6,000 a year for 27 years would give you $340,000 at the end of the day (at a rate of return of 5%). If you are able to triple that savings (not all that impossible), it would just take a mere 13 years, a little over a decade. You haven’t even touched 40 yet.
And well, if you are earning $100k a year, saving 50% of that would get you to the target within 6 years’ time! 6 years to reach a significant financial goal, that really isn’t too far off!
I am glad that I am halfway towards the $340,000 that I need. Hopefully, within the next 5 to 8 years, by saving $20,000 a year and compounding it, I would be able to attain Financial Security! I could then aim for more lofty financial goals along the Financial Freedom spectrum.
So, what is your magic number and what are your plans to achieve it in the foreseeable future? Write it down and let me know!