I am rather influenced by ideas written in Rich Dad Poor Dad (RDPD), a book by Robert Kiyosaki. The book changed my path in life, teaching me to build financial wealth by buying assets and avoiding liabilities.
Learning from RDPD
RDPD teaches that the poor and middle class has few income streams. They pay off expenses with earned income. If work stops, so does the cash.
And very often, they worsen the balance by buying liabilities. With few assets , the worker is trapped on the hamster wheel, unable to stop because of debt.
The rich do it differently, by building up multiple income streams. They buy assets, and the returns from the assets are used to pay for expenses and buy more assets. It is a cycle and with time, the assets are able to pay for everything.
And this is how the rich buy the shiny toys, and still get richer.
I need Resilience
My financial awakening was in 2003, when I experienced a personal crisis. It motivated me to want a better life, and to preserve a legacy.
It has been a difficult journey. Singapore has too many shopping malls and someone around me is alway trying to sell. As I get wealthier, it is also tempting to just indulge.
And our society is materialistic. Most find it tough to resist consuming when credit is easy and advertisements are bright and seductive.
It was just reported in the local papers that too many people overspend, racking up debts >24 months of their monthly pay.
And the reason? It is in the article headline: “Overspend first, be sorry later”.
But my humble beginning has taught me to be focused, and I will not be swayed off the path easily.
This is the second post on how I manage my income and expenses. I hope it will provide useful insights to inspire others to take the same journey.
Managing my income sources
I have always been taking a salary, since I graduated from university, except for 2 occasions. There was this year when I did a Masters, Down Under, and I happily spend more time at the local vineyards and cafes, than on my books.
And recently, I tried “semi-retirement”. I took a full year off to travel and ponder about my life. As I had more time, I became more conscious of how to live.
And now to discuss the money:
1. The biggest source for me now is earned income. Except for my first job, I have worked almost entirely for the civil service.
The good thing is I did get the promotions (in the earlier years) and increments, which is the norm for jobs in the service. The bad news is, I am stuck. It is hard to change my job, without a huge pay cut.
And it is unlikely that my salary will increase significantly anytime soon. It seems ironic to have my income stuck, even as I get more experienced, and can provide more value.
Active income: about 100k pa (depends on bonuses)
2. I have passive income from stocks, bonds, forex and cash.
My stock portfolio has only a few stocks: dividend (sph, m1, starhub, venture), economy (ocbc, keppel corp) and growth (breadtalk, rmg).
I monitor these stocks regularly, and add on to them whenever there is weakness in the market. These stocks are more “blue” than “penny”, as I prefer less risks in the markets. The stocks generate about 5% pa.
I have some money in NTUC shares, that give about 6% pa. The shares behave like bonds, and pay out dividends. They are not traded actively and is not available in the market anymore.
I have a forex account (under my own name) that is traded actively by a friend. She gets a performance based commission. The yield guaranteed is 10% pa.
Lastly, I also hold cash. It is in higher interest accounts, paying about 1.45% pa now. This cash is my war chest, and will be crucial in the months to come.
Passive income: about 22k pa
And that’s it. I have no rental properties, no royalties, no blogging fees or other sources of passive income. I used to be a landlord but have since sold my rental property.
So how do I live only on passive income, since I don’t have too much of it? The crux lies in being frugal and controlling my expenses.
Monitoring my expenses
I use a phone app to monitor my transactions closely. After years of doing this, it has become automatic for me to record.
And here are some of the ways I do it:
1. I have pretty much the same kind of fixed expenses every month e.g phone bills, broadband, parent support, tax etc. I consolidate the whole amount and on the first day of each month, I just key in the lump sum. It simplifies my record keeping.
2. So I only have 6 other categories of expenses: household stuff, utilities, eating out, transport, play jug and play jug accumulated. Everything I spend on can be recorded in one of the category.
3. What is play jug? It is like a fun fund. The money allocated for it is used for stuff that gives me joy. I also use the money to buy gifts for my loved ones, as that makes me happy.
4. And the play jug money, if not finished for the month, will not be saved. It will be forwarded to the “play jug accumulated” for the next month. And it must be used by the end of the year. The money must be spent.
The idea behind this is to “delink” frugal saving and hoarding money. I do not want to reduce my expenses so much that I make my loved ones “suffer”, by not spending on them.
Savings is good, but it should not be at the cost of joy for my loved ones. I save not for love of money, but to have a better life. Using the play jug idea, I am spending money on purpose, so that I am reminded of why I am doing this.
Total annual expenses: about 20k
Continuing the journey
The passive income is not a lot, and is only barely able to cover my expenses. This works only because I don’t spend too much. I take the public transport, eat often at home and engage in non expensive hobbies.
And since mid of this year, I have started saving my entire earned salary.
I maybe financially independent but am far from being financially free. My targeted passive income is 100k. I chose this goal as I wanted my passive income to match my annual pay.
To achieve my aim, I need to have more funds. I either have to live below my means, or increase my means. My earned income cannot increase much anymore, and I am already very mindful of my expenses.
Like in RDPD, I will follow the way of the rich. I will aim to buy more assets to increase passive income. And just like how I buy things in real life, I am awaiting a “sale” in financial assets before I go shopping.
Although tempting, I will stay off the shiny toys too. At least till I can pay for them with returns from my assets, just like the way the rich buy theirs.
My journey is far from over. My passive income is still very far from my target. But luckily, I am armed with more tools now. Together with grit, discipline and luck, I will slowly but surely, be financially free.