Dreaming to be a Crazy Rich Asian? Stop dreaming and start making it a reality. While most of my friends and colleagues are spending their time making a fuss about the high costs of living in Singapore, the wealthy have already planned their steps ahead. We may not be rich or crazy rich now, but with proper planning and execution, it certainly isn’t impossible.
First things first, we must define what being rich or crazy rich is. To me, being financially free is considered rich. Being financially free and able to afford branded goods is crazy rich.
This article will introduce the concept of The Five Layers, how to retire comfortably in Singapore and finally, being crazy rich.
- Retiring at 65
- Expenses at $3000/month equivalent to $36,000/year
For majority of us Singaporeans and Permanent Residents, whether we like it or not, CPF is mandatory. It is a social security system that requires both the employer and employee to contribute a certain amount for retirement, property and healthcare.
*Image taken from CPF website
Fun fact: Do you know your CPF account returns you an interest rate of up to 5% annually? Taking the rule of 72, it will take 14.4 years to double your amount!
Assuming we meet the Full Retirement Sum, we will be receiving a monthly payout of $1400/month starting 65 years old, almost half of the target of $3000! I will be sharing more about the tips and tricks to maximizing our CPF accounts in future posts.
There are two types of savings:
2.1 Saving money from budgeting and stretching your dollar.
Before we start saving, we should aim to be debt free first. That includes paying for our credit card loans and student loans because the interest rate from the banks could really hurt overtime.
Assuming you took a student loan of $40,000 at 4.88% interest and the minimum monthly instalment is $400 every month, it will take 10 years to clear your student debts and you would have paid a total of ~$50,000. That’s a loss of $10,000! This is why financial experts usually advise people to first pay off their debts before investing.
Budgeting is important. Pay yourself first. By that I mean allocating a specific amount into your savings account once you receive your paycheck to clear your debts. I will be writing on how to allocate our money using a very simple strategy. Different ways and tools you can use to allocate and track your expenses. And if you are feeling adventurous enough, you may wish to follow my way of optimizing my budgets.
2.2 Saving by putting money in a savings account.
*Image taken from Seedly.
Nothing beats the old fashion way of saving money by putting it in a bank account. But why put it in an ordinary savings account returning 0.05% interest when you should be getting 1% at the very minimum?
However, most banks require us to use their services such as crediting our salary, signing up for credit cards and meeting the minimum spend etc before we can enjoy these interest rates.
Let me ask you this question: How much are you saving if you were to spend $70 on a $100 item? The obvious answer is $30. But in actual fact, you just lost $70 because this amount could be saved for the future!
This is how minimum card spend works. So one might spend a few hundred dollars more on items or services they don’t need just to be eligible for credit cards cashback and monthly savings account interest.
I’m not discouraging credit cards. In fact, I have 3 credit cards because they are essential tools to help me maximize my savings. I will be writing on why I decide to make this decision and show you how powerful these cards can be when used correctly.
I will also be sharing my strategy to maximize my savings account and different ways you can approach based on your spending habits.
Unfortunately for 41% of Singaporeans, their wealth journey ends at point 2. So unless we can guarantee $384,000 in our account by 65, we will never hit the target sum of $3000/month (CPF+Savings). Not to mention that value is less inflation. The graph below shows a simple illustration on how much $384,000 is worth after 20 years.
With the average inflation rate in Singapore being 2.6%, the equivalent value of $384,000 would only be $226,730 at the end of 20 years. That means we can buy less things with $3000 after inflation. In fact, the true value would be around $2344 after 20 years.
Realistically speaking, unless the bank account we are using is able to equal the rate of inflation, the value of $3000/month will depreciate over time. Thus, we invest to beat inflation.
But but! Investment is risky and I might end up losing money instead!
Well, here’s another fun fact: Investing is only risky when you don’t know what you are doing.
*S&P 500 Index
If you purchased the S&P 500 index since its beginning in 1993, you would have made 537% returns today (August 2018), over a period of 25 years. That is about an annual return of 13.4%, beating inflation by more than 5 times every year! Before you get your hopes up, we must note that past performance is not indicative of future results, a more realistic expectation would be around 8% and I will share with you readers why in the near future.
As someone that only started investing this year, I do not have the wisdom and experience equivalent to the seasoned investors out there. However, there are really simple investing strategies which are almost guaranteed (99%) to beat inflation only on one condition: We must invest for the long term.
Those who have upcoming big ticket purchases (renovation, kids’ education fees etc) and are unable to hold their positions in the stock market for long may consider getting bonds which almost guarantees a return of 1.75-2.97%.
*Image from SGS (September’s 2018 bond)
With proper planning and execution, I’m confident that the first 3 layers are sufficient for an average Singaporean to retire comfortably.
Remember I talked about being a Crazy Rich Asian? Passive income is what separates the crazy rich from the middle-income. According to Wikipedia, passive income is defined as income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.
I highly recommend the book “Rich Dad Poor Dad” by Robert Kiyosaki. It talks about managing our cash flow and finding assets that generate money. If you are too lazy to read, below is a summary of the entire book. And if you haven’t noticed, all the rich people have one thing in common: They all belong to the right side of the quadrant. Nick Young’s family owns many real estates. So yeah…you get the idea.
*Image from The Norells
As the saying goes: “The rich gets richer, the poor gets poorer.” This is true because the rich are “Financial Free” as their passive income has surpassed their expenses. With that monetary security, they are not living life to make money. They are free to do what they want such as pursuing their photography or writing passion, traveling around the world, etc. Literally anything they want. For most crazy rich people, they would buy more real estates or start another business with the extra income they earn and in return, it increases their passive income. See below for a simple illustration.
Realistically speaking, if you are just like me and have just started working, we shouldn’t be looking into businesses and real estate now. Not until at least we have saved enough emergency funds, be debt free and have a consistent amount of savings each month into our future goals account (BTO, Marriage, Kids education etc).
However, time is our greatest asset. We should aim to invest our time to learn new skills that improve our lives. If you have a particular skill or passion that is high in demand (Writing, design etc), you may want to consider doing freelance to earn additional income. I myself will be looking at taking advanced Microsoft excel course to improve my efficiency at work. To help you better understand, here’s a story.
That’s the power of investing our time in things that bring value to us.
Did you know? If you are a Singaporean aged 25 and above, you are given $500 skillsfuture credit where you can sign up for approved courses to upgrade yourself? What’s best is most courses don’t cost much and you can enroll in them for free!
This is what I call the cherry on top of the cake. A trader typically works 1-2 hours a day and on average, they earn about 20% of their revenue PER MONTH. But trading isn’t easy and comes with great risk. According to statistics, only 8% of traders are successful. Speaking from someone that has tried trading, it requires discipline, consistency and most importantly of all, control of emotions. One may win 9 trades in a row but if he gets greedy on the 10th, he may lose all his earnings. Trading isn’t a one month or one year thing. You need to have a decent trading strategy, hopefully one that gives you a statistical advantage and stick with it. If you read about the law of averages, it states the supposed principle that future events are likely to turn out so that they balance any past deviation from a presumed average (Wikipedia). Eventually, your win/loss ratio will average out and you will start earning money. This is why casinos always make money no matter how much people play.
A simple rule: Don’t trade what you can’t afford to lose. If you think reading and watching online videos aren’t enough, there are many live workshops available.
Being a Crazy Rich Asian isn’t for everyone. But if you are willing to invest your time and money, it isn’t impossible to build your fourth and fifth layers. The road will not be smooth like butter. Expect to fail but more importantly, learn from your mistakes and don’t repeat it.
Lastly, thank you for taking the time to read my first article. If you’ve enjoyed it, please share it around. You may find me on Instagram, Facebook and Medium as well. I’ll continue to write more articles starting from where I began my Five Layers journey and hopefully, you will be able to follow my journey and start building your layers as well. If you need help to kick start your financial journey, please feel free to contact me. I’ll reply when I can.
Once again, thank you for reading and happy building your layers.
*Featured Image from Warner Bros