BT: Freedom at 44

Business Times - 03 Mar 2008

Freedom at 44

Last week, we discussed how retiring young and rich can be an attainable goal if one plans early and invests wisely. Today, we run a personal letter from RONALD HEE, who shows it is possible to become financially free as a hardworking salaryman, without needing to rob a bank or be a corporate high-flier

To the graduating class of 2008:

YOU are entering a world of amazing possibilities - possibilities that people of my generation barely believed would be possible. The world is, quite literally, your oyster. You also enter a world fraught with challenges and dangers, and ever rising costs of everything.

In our day, the options were limited, but inflation remained low most of the time, and there was job security. I still have friends who are in the same company since they graduated 20 years ago. For you today, inflation is roughly twice the interest the banks are giving you. You will probably change jobs every two to three years. And you can be fired from any of them at any time. Or, any company you work for could downsize or close down just when you least expect it.

So, for middle-class working Joes like us, does it mean that just to survive, we will be chained to our desks until the day we die - if we're lucky and not get replaced or downsized? Is financial freedom at the tender age of 44 - for you, 20 years of earning - an impossible dream? It really boils down to one simple formula. Earn more than you spend; invest what you save.

The first thing, of course, is to find a good job. There will be many, here and around the world. But don't rely on your company or your boss to take care of you. You have to take care of yourself, regardless of the profession you choose. Assuming you are not in the lucky handful who will inherit a fortune or get a job that pays you in the six figures, or win the lottery, the career you choose is what makes your path to financial freedom possible. But you have to plan that path.

Let's first look at the cost side of the equation. Buy what you need and some of what you want and know the difference. Do you really need a 200-inch high-definition plasma TV, complete with state-of-the-art home theatre system? And how many hours per day are you going to enjoy that system? Instead of spending tens of thousands on something you will use for a few hours a week, consider instead how that money could work for you.

One thing that surprises me about the younger generation is your propensity to spend on credit. Why buy things you don't need, with money you don't have? To impress people you don't like? Here's a crazy idea: Have the bank pay you interest for your money, rather than you pay the bank interest for their money. Twenty-four per cent interest? That's approaching loan shark rates. Always, always, pay your credit card bills in full. Can't afford to pay? Simple solution. Spend less. Be low maintenance.

At some point, you'd probably want to buy a car. With an excellent MRT and bus system, and taxis when you need them, is it worth getting a car? Unless you have a real need - you're a salesman, you have a family to ferry around, your child is sick all the time, your mum is old, your girlfriend will leave you otherwise - the reality is that a car is simply not worth it. Over 10 years, a $50,000 car will cost you about $130,000, once you factor in petrol, road tax, repairs, car payments and interest on the payments, parking tickets, a few minor accidents... Again, it's better for that money to work for you. (See Table 1)

Like most people, your biggest purchase will probably be a home. For most of us, our first home will be a government flat. Whether you buy public or private, consider buying something that you can continue to pay for, for at least six months, should you be suddenly out of work. If you don't mind the loss of privacy, consider renting out any spare rooms. It's not impossible for your rental income to match your mortgage payments.

Now let's look at the income side. Your basic fallback is your CPF account. Let's assume that by age 44, you've worked 20 years. Assuming an average of $1,000 a month, you will accumulate $240,000, not including interest. Invest it if you wish, but the main use of CPF should be to pay for your home, so your cash outlay is minimised. In 20 years, with $240,000, you could quite easily pay off your flat. With your spouse also chipping in 50 per cent for the flat, you should have more than enough.

If you've managed your expenses right, it's quite possible to save an average of $1,000 a month. This, of course, gets easier as you grow older and earn more. Put some away into a savings account as your rainy day fund, eventually building up enough to keep you going for six months or more. Put the rest in the hands of a good financial planner. This is someone who should be able to give you an average return of at least 10 per cent a year. The miracle of compound interest will yield you $756,030 at the end of 20 years, more than three times what you put in! (See Table 2)

It's now 2028. Twenty years have passed and it's your 44th birthday. You are into your second or third home by now, or maybe even have a spare house, each time either breaking even or making a small profit. You have a healthy CPF balance that covers basic needs. You've taken care of some health risks by buying insurance policies when you were young and they were cheap. And your investment portfolio is chugging along very nicely, yielding around $70,000 a year, without depleting your capital, so it's sustainable for the long-term. $70,000 a year is equal to a tax-free monthly 'salary' of $5,800. Not too bad.

CPF + savings + especially your investments = financial freedom. Work part time. Start your own business. Do something else that pays a lot less but fulfils you more, such as church or charity work. Become a beach bum in Bali. Or travel round the world for six months. Financial freedom means the freedom to make these kinds of choices.

So, my young friends, my wish for you as you embark on the next stage of your life is that you will plan from the beginning to be financially free. May you have the discipline and luck to accomplish it!

Ronald Hee, 44, is a freelance writer, and just a little shy of financial freedom