Financial Independence in Singapore: A How-to Guide

Key Takeaways

• 1. Financial independence requires strong financial discipline and planning.
• 2. Build a culture of fiscal prudence by maximising your income while minimising expenses and debts.
• 3. Start early to achieve more with less. Leverage the exponential nature of compounding to save more for retirement.

Financial independence, in its strictest definition, is a status where you can pay for your living expenses without requiring a salary through employment. The term has evolved over the years, and for some, it could also mean they still consult or work part-time. The means to achieving financial independence could come in various forms, from living frugally to investing in the markets successfully, to owning a passive business that does not require extensive upkeep.

In this article, we provide some tips for achieving financial independence through pursuing financial literacy, having a sound income, budgeting your expenses well, and investing conservatively over the years.

Become Financially Literate

Financial literacy is the foundation of achieving your financial goals. In today’s highly complex financial and economic landscape, it is more important than ever to keep your financial knowledge up to date.

To begin educating yourself on the topic of finance, start by asking these questions:

• 1. How much should you be saving?
• 2. What types of insurance protection do you need at your age?
• 3. How can you fight inflation?
• 4. What is the best way to invest for the long term?
• 5. How can you leverage good debt to create wealth?

You can also improve your financial knowledge by:

• Subscribing to highly credible financial news or publications. Avoid media that promises that you can “get rich quick”.
• Learning about a new type of asset or financial instrument every month.
• Taking stock of your finances by setting up a spreadsheet of your assets and liabilities.
• Taking a dedicated online course in finance or economics.

Maintain Income Security

Having a stable income is one of the core tenets of financial independence, as it directly impacts how much you can save.

Consider how you can maximise your earning potential. Here are some ways to do so.

1. Seize New Job Opportunities

If you feel stagnant in your current job, consider this chance to progress in your career. A new job opportunity could allow you to learn more, revise your salary to market rates, or secure a higher salary with more benefits.

2. Negotiate Your Salary

Most employees do not negotiate their salaries and bonuses hard enough. You should research the average salary range for your position and gain leverage by interviewing regularly. Be confident in knowing your market value and show employers how you can be an asset to the team. By demonstrating your skills and qualifications, you can negotiate for a higher salary.

3. Embrace Lifelong Learning

Technological and social change may transform the nature of your career. Set aside time dedicated to upskilling and reskilling before you believe you might need it.

Keep Savings to Cover Costs in The Event of a Major Life Change

Prepare for life’s curveballs by building up your emergency funds.

Before making any major purchase decisions, always check that you have a buffer of at least twelve months’ worth of expenses, including sufficient funds to meet your financial commitments, such as your mortgage loan.

Keep this buffer separate from your retirement and investment portfolio so you can retire according to plan.

Having a regular savings plan from your financial institution or investment company – which schedules a recurring deposit – is an excellent way to ensure you consistently bank your money.

With digital banking, you can apply for a savings account in a few clicks. Consider setting up a few different bank accounts to segment your savings according to their intended purpose.

For example, if you foresee yourself getting married soon, then you should start saving up for the wedding. You can open a savings account solely for that purpose and begin depositing a certain amount that can help you reach your goal.

You can also go one step further by setting monthly automatic transfers into your savings buckets on payday. This helps you to avoid overspending and the illusion of thinking you can afford that new gadget or an expensive holiday.

Stay Out of Debt

Debts such as personal loans and unpaid credit card bills come with considerable fees and interest charges that can quickly snowball and become unmanageable. These are also known as high-interest debts and should be paid off as soon as possible.

Practise self-control by saving up for what you need before purchasing it rather than relying solely on credit. Try to use cash, or a card with a monthly limit, to avoid overspending.

Credit cards can be useful, especially when they offer attractive rewards, but make sure you use them responsibly by charging on items you can afford to pay. Paying the bill in full every month can also lessen the burden on future payments.

Most of us will get a mortgage to finance our homes. This type of debt is usually less frowned upon as it provides a roof over your head and helps you secure one of your largest assets – a house. In some cases, it can also be considered an investment if the property increases in value over the years.

However, it would be best if you still borrowed within your limits. Your Total Debt Servicing Ratio (TDSR) should not be more than 55%. This means that the repayment of your loans, including property loans, should not be more than 55% of your gross income each month.

In addition to TDSR, Mortgage Servicing Ratio (MSR) is applicable to HDB properties and is capped at 30%. You may want to consider keeping it to 25% instead which puts you in a better position if interest rates increase in the future.

If you take a loan, borrow with these limits in mind and be mindful of the loan tenure to avoid being overextended. Calculate how much you can afford, and only borrow what you need to reach financial independence earlier.

Live Within or Below Your Means

Create a lifestyle you can sustain and choose more affordable alternatives.

While you don’t have to eliminate luxuries completely, having a budget to work with keeps you focused on your goal of financial independence. Consider the 50/30/20 rule, which suggests using no more than 50% of your income on necessary expenses, 30% on discretionary spending, and 20% on savings.

Furthermore, before purchasing big ticket items such as a house, prepare a budget and keep within it. For example, you can look for a HDB flat in more affordable and newer estates like Sengkang rather than in mature estates like Serangoon or Ang Mo Kio. This can ultimately lessen your financial burden in the long run.

Before you commit to big-ticket items, consider all the costs involved, from upfront costs to recurring expenses such as loan repayments and maintenance fees, and make sure you can afford them. In particular, many big-ticket items have associated taxes and stamp duties that we subconsciously underestimate, such as buyer’s and additional buyer’s stamp duties for property in Singapore.

Overspending can derail your financial plans while underspending may lead to resentment. To avoid this, have an open discussion with your spouse to reach an alignment on your financial goals.

Ensure You are Adequately Protected and Insured

Insurance can potentially make your money work harder and provide security if life’s contingencies affect your income.

In the event of an illness or accident, insurance typically covers your medical and, in some cases, your living costs. Meanwhile, insurance for your housing and car protects your assets and helps you recover from unexpected events such as fire or theft.

Think of insurance coverage as the first line of defence. By covering unexpected costs, it allows you to keep your primary retirement portfolio intact.

Invest Early and Conservatively

The earlier you start planning for retirement, the more you will be able to save. By leveraging the time value of money, you can save more with much less effort. This is known as compounding.

A possible example of the exponential nature of compounding would be that of investing $1,000 every month. Suppose an individual invests $1,000 monthly into the S&P 500 starting from his 20th birthday. The S&P 500’s annualised average return from 1957 to the end of 2021 has been 11.88%. Assuming that the individual is a long-term passive investor, and he achieves a conservative annual return of 7%, it is possible to save $3.4 million from the age of 20 to 65. However, this number drops to $2.4 million if the individual started later at age 25. Moreover, investing in the market over a long period of time allows you to be resilient against economic peaks and troughs while achieving higher returns than just investing purely in debt.

Here’s what you can do to kickstart your retirement planning.

1. Save as Much as You Can

Consider high-interest savings accounts or fixed deposits that make your money work harder.

2. Start Investing Now

Due to the nature of compound interest, when you invest matters more than how much you invest. Start investing after you have saved enough for your emergency funds.

3. Find Out How Much You Need for Retirement

Financial tools such as a retirement calculator can help you identify any gaps in your retirement plan. By considering your debts, savings, investments, and other expenses based on inflation and your health status, it can provide you with a clear idea of how much you need to put into your retirement funds every month.

Invest in Retirement Plans

Consider participating in retirement plans offered by your employer or learn how to maximise your CPF LIFE payouts. Alternatively, putting money into mutual or index funds can build your retirement savings conservatively and securely.

If you don’t have a retirement plan, speak to a qualified professional, such as your financial advisor, who will be able to suggest financial solutions that can help you meet your retirement needs.

Achieve Financial Independence and Early Retirement With FIRE

Financial Independence, Retire Early (FIRE) is a movement that advocates saving and investing aggressively so that you can retire early.

Quite understandably, this requires a lot of detailed planning and financial discipline, which may be too extreme except for the most determined among us.

Yet, the core principles of the FIRE movement – detailed planning, financial discipline, and investing in retirement – are important values that you can apply to your retirement plan to increase your likelihood of retiring earlier, even if it is not at age 40.

Start planning for your financial independence today and discover how you can achieve your financial goals, your way. Whether it’s improving your financial literacy, saving more, or investing better, you can take the first step towards financial independence with Citi Plus and enjoy up to S$686 in welcome rewards (Terms and Conditions Apply).

Disclaimers

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