Even the best of us can be seduced by articles we read online, detailing lifestyles about how “a couple who saved $XX million by age XX, left their jobs to travel the world”. That may feel like a dream, being able to leave our jobs and stresses behind to explore the world with our partner or family.
Instead of just dreaming about the lifestyle we wish for, we should be planning towards the financial goals needed to achieve it. This brings us to the three financial goals – financial stability, financial independence and financial freedom – we need to work towards in our lives.
While there may not be any set definitions, we can still broadly look at what these terms mean for us, and the objectives they represent.
#1 Financial Stability
Financial stability should be the first financial goal we plan toward. This usually comes when we initially transition from students into the workforce, and should start with being responsible for our own bills, paying for our daily living expenses and saving for our upcoming wedding and future home.
The fundamental notion of achieving financial stability is that we don’t have to get so anxious about money. With a job and proper budgeting, we should be able to afford ourselves.
There are two aspects to this:
The first is about being able to pay for our recurring monthly expenses such as our home loan, electricity and water bills, phone and internet bills, groceries and food, clothes, insurance premiums, transportation, children’s allowance, car loan and even spending on some indulgences like going to the movies, eating at a nice restaurant, spending on branded clothing, buying electronic gadgets we really want and travelling.
The second part of it is equally important, requiring us to accumulate a six- to 12-month emergency savings buffer for unexpected expenses and save up for foreseeable longer-term expenses such as our children’s university education or potentially upgrading to a condominium.
While achieving financial stability is admirable and important, it is very different from financial independence or financial freedom. Achieving financial stability still centres around being able to actively earn an income in a job to pay for the important expenses in our lives.
How much do we need for financial stability?
In the latest Report on the Household Expenditure Survey 2017/18, households spent an average of $5,931 a month on goods and services.
We need to be able to pay recurring bills, by holding down a job that will pay us a combined $8,126 (if we do not take CPF contributions into account). This also means we would minimally need an emergency savings worth about $36,000, or 6 months’ worth the average monthly expenses.
We understand this is a broad generalisation based on the average household expenditure trends in Singapore, and each of our lifestyles may differ. We should calculate our own requirements for financial stability, as well as financial independence and financial freedom.
#2 Financial Independence
We achieve financial independence when we no longer require a salary from a job in order to pay for our monthly expenses.
In other words, we have been able to replace our active income with passive income. This can come in the form of dividends from a stock portfolio, rental income from an investment property or even CPF LIFE after we turn 65.
Read Also: [Beginners’ Guide] Understanding CPF LIFE And Your Monthly Payouts When You Retire In Singapore
As long as we are able to pay for our monthly expenses, without having to hold down a full-time job, we can consider ourselves to be financially independent. While we can leave our job, as we no longer require our salary each month, it doesn’t necessarily mean we have to. Retirement or early retirement, and achieving financial independence are two separate things.
Achieving financial independence also does not mean we are rich or able to live a lavish lifestyle. All it means is that we do not need a job to be able to afford our current standard of living.
How much do we need for financial independence?
It’s a little more tricky to estimate how much we need to achieve financial independence. In addition to our emergency savings, we also each need an investment portfolio to replace a monthly household income of $8,126 or annual household income of close to $100,000.
Assuming an investment in the Straits Times Index (STI), Singapore’s benchmark index comprising the 30 largest and most liquid stocks in Singapore, we would earn an annual dividend of 4.5%. This translates to needing a portfolio of close to $2.2 million. Even if we crunch this number has individuals, instead of a couple, it would be about $1 million.
If we are able to earn better returns, through a REIT portfolio giving us 6.0%, we would require a portfolio worth $1.7 million – or about $850,000 individually.
As we can see, how much we need in our investment portfolio depends a great deal on the return we are able to earn. While doing this, we also need to understand how much risk we are taking on.
One more thing to note is that, if we have paid down our home, the average monthly household expenditure will go down by $1,188, which is that an imputed rental of owner-occupied accommodation that’s added in the calculation. This could mean building a portfolio to pay for only $4,743 a month.
As always, based on our own expenditure patterns, this figure could be higher or lower than the national average.
#3 Financial Freedom
We need to already achieve financial stability and financial independence, to be able to achieve financial freedom. When we achieve financial freedom, it means we have the ability to live the lifestyle we want.
How much do we need for financial freedom?
Unlike financial stability and financial independence, there is no fixed number we have to hit in your bank account or investment portfolio to achieve financial freedom.
This is because financial freedom is more of a mindset than an actual value. It has a lot to do with the lifestyle we want to live. If we want to own a large landed property, go on multiple holidays a year, drive a nice car and have a country club membership, the price tag to achieving financial freedom is going to be high.
Following this train of thought, the price tag of financial freedom can also be low. If the lifestyle we want to live is about volunteering our time to give back to society and we are content living a frugal and simple life, then the price tag to financial freedom can actually be the similar to the one needed for our financial independence.
Read Also: How Much Do I Need For Retirement In Singapore If I Only Spend $1,500 Per Month
Understand Your Expenses, Do What You Love, And Think About What You Want Out Of Life
To achieve financial stability, we need to understand where our money is going each month, and try to cut out unnecessary expenses where we can. At the same time, spending on some indulgences is perfectly normal, especially when we can afford it.
While many of us have the ability to achieve financial stability when we land our jobs, to achieve financial independence is much harder. We are trying to build a passive income portfolio that is meant to replace our salary – so we do not have to work if that’s our wish.
Individually, we all live different lives and it’s only natural that we will achieve financial independence at different stages in our lives.
Once we are financially independent, we have more options. We can either continue climbing the corporate ladder to achieve financial freedom faster, or we can consider switching our career to a field that we are more passionate or interested in. While this may come with a downgrade in salary, we may be happier and we are still continuing to work towards financial freedom.
When we eventually achieve financial freedom, we need to ask ourselves what we really want out of life. This can be to continue working in a meaningful job, building a business, or to live a life of unlimited travel. As mentioned, there isn’t really a specific number that we can work towards, because we each have our own preferred lifestyle and definitions for financial freedom.
Read Also: Retirement Planning In Singapore: How Much Do I Need To Save And Invest To Retire At Age 55?
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