Tuesday, October 14, 2014

Going from working middle class to rich with a simple tweak

Ever wondered how much an average family in Singapore spends on a monthly basis? Just last month, the Department of Statistics Singapore released a report on the Household Expenditure Survey 2012/13. It was reported that Singapore resident households spent an average of $4,720 a month. When we look down deeper, the 41st to 60th Quintile of the population spent an average of $5066.80 (inclusive of housing cost).

Image Credit: https://www.flickr.com/photos/franganillo/3678747186/

$5066.80 sounds quite excessive to me. It is no wonder many people remain as middle class instead of becoming rich. We have to understand and know that the rich don't spend their money like what we see on movies and television, buying Lamborghinis and snapping up luxurious suites along the beaches. They are more frugal than what we imagined them to be. Here's an important note: The rich are good at keeping their money, they spend base on their current financial situation and their goals.There are even more appealing reasons to live a frugal lifestyle. Overconsumption results in wastage. It cause the desires to always want more which makes us unhappy creatures on Earth.

With a little tweak, we can actually go from middle class to rich in a shorter time. To know how that happens, we'll need to look at each individual expense item for an average household in Singapore.

Expenditure for an average household

The department of Statistics has broken down the expenses into individual items. I would use the broad items to illustrate this example.

Type of good and servicesCurrent $Tweaked $Remarks
Food and Non-Alcoholic Beverages$444.90 $444.90
Alcoholic Beverages and Tobacco$60.10 $20.00Can cut down on excessive alcohol and tobacco which is bad for health
Clothing and Footwear$126.60 $70.00$840 per year on clothes is more than enough
Housing and Utilities$328.50 $200.00Save some electricity and water
Furnishings, Household Equipment and Routine Household Maintenance$219.60 $100.00Fix/Do it yourself to save some money
Health$222.80 $222.80Can't really save on health cost. But stay healthy
Transport$663.40 $500.00A fuel efficient car or take the public transport
Communication$225.20 $180.00Get the best bundle plans for mobile and broadband
Recreation and Culture$307.70 $200.00Learn how to plan well when travelling to get the best deals
Educational Services$254.90 $254.90
Food Serving Services (Eating out, restaurants etc)$734.20 $500.00Occasionally eating out is enough. Make delicious home cook meals at lower prices
Accommodation Services$22.90 $22.90
Miscellaneous Goods and Services (hairdressing, insurance etc)$476.00 $250.00Your hair doesn't need frequent expensive treatement. Buy cheaper term insurance plans
Non-Assignable Expenditure$23.50 $23.50
Imputed rentals for owner-occupied accommodation$956.50 $956.50Can't really save on housing cost unless you buy a smaller flat. *Housing loans paid by CPF
Total monthly expenditure $5,066.80 $3,945.50
Total monthly expenditure (exclude housing loans paid by CPF)$4,110.30 $2,989.00
Monthly household income$6,000 $6,000
Savings rate31.50%50.18%
Years to retirement28 Years17 years
Source (Current $): Housing expenditure survey 2012/2013

With a simple tweak, we manage to save more than a $1000 dollars per month. This shortens the years to retirement by 11 years. If you're not sure how I derive my retirement years, you may want to read my previous post on "Save 75% of your income to retire in 7 years". Basically, the assumption is that we invest the savings to earn a 5% yield after inflation. If you save 50% of your income, you'll be able to retire in 17 years where at that time you will have a 4% safe withdrawal rate in the form of passive income. This passive income can come from dividends from stocks, rental from properties which will pay for your daily expenses for as long as you live.

Now back to the table above. From there, we can see if we just tweak our expenditure a little, we could retire like a rich man 11 years earlier. A monthly expenditure of about $3000 equates to about $36,000 per year. I think this is still quite a decent amount to live on. At least you don't have to live on bread and instant noodles for your daily meals. In fact, you could still eat out at restaurants occasionally, own a fuel efficient car and even go on annual overseas trips.

Now you may think why is spending only $3000 per month considered rich? This looks like a poor middle class to me. However, the difference is it lies in the ability to keep your money forever. You may have a Million dollars but if you do not know how to generate cash flow with it, it'll be gone sooner or later. This difference is explained further below.

The difference between retirement for the middle class and the rich

Most of us when we plan for retirement, we would think we just save a certain amount and then draw down that savings when we retire. The problem with that kind of planning is your money will certainly run out one day which means your savings may deplete when you're still alive. I was having a small chat with my colleagues on retirement just last week and we did a small calculation. We were shock that with $1 Million dollars, it would only last about 27 years for $3000 monthly expenses. The $1 Million dollars you saved so hard throughout your working years will be gone in 27 years.

On the other hand, the rich will have money that last them for a lifetime. They could retire at 40 and their money will last them forever and even for the next few generations. The key is in creating cash flow. Cash flow is passive income. The strategy is simple. Let's say we still use $3000 as our monthly expenses. We just need to save up $900,000 then invest this amount for a 4% annual yield. That would give us $36,000 annually which equates to $3000 monthly. Keep investing and this money would continue to generate income for you every month and it could even grow to more than a million dollars as years go by.

So which is better?

1. The $1 Million dollars that can only last for 27 years?
2. The $900,000 which can last for a lifetime?

Both still give you a monthly expense of $3000. One will deplete and the other will continue forever.

Going from middle class to rich works in both ways:

  • Living a frugal lifestyle base on current financial situation to accumulate capital (it is very hard to become rich with an expensive lifestyle)
  • Investing the money to create cash flow 

Herein lies the key point in the path to riches. When the cash flow is created and you do not have to work for money anymore, money at this instance multiplies over and over again. This is the amazing thing about money. When put into the right place, it grows and multiplies for the rest of your life. When money is no longer a problem, you can indulge in some dose of luxuries as time goes by. Spending on luxuries does not kill you anymore like how it did to the middle class population.

Learn the right strategy and you could well be the next rich person. Start managing your money like a rich person.

For the full report of household expenditure survey 2012/13, click here.

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  1. A factual observation.

    lacking in impetus.

    1. Hi SMK,

      The path to getting rich is actually straight forward and requires just a little bit of oberservation.

  2. Hi SG YI,

    I agree with your article on spending less and saving more for earlier retirement. Not easily done but possible.

    Some people may not agree with this way as cutting down on daily expense will be painful and money earned should be spent to have a lifestyle.

    Different people go different paths.

    Keep up the good work in your blog!

    1. Hi P ain,

      Thanks for your encouragement. I have researched and read through many different kinds of rich people and most lead to a frugal lifestyle. Its not what most of us want to hear but its the way to success for most of us. The path to becoming rich is always tough and painful unless you're born with it or inherit it somewhere.

  3. Hi SGYI,

    Agree with you but think your recommendations sound more like a lifestyle change rather than just "a simple tweak" to most people. =p

    1. Hi 15HWW,

      Hahaha, lifestyle change sounds like a tough one. I just played with some numbers and made it a "tweak". I do think $3900 monthly expenditure is quite a good lifestyle already.

    2. That's the problem with some people. They just can't 'downgrade' their lifestyle even when it is quite obvious that they are living dangerously beyond their mean. Maybe by doing so they feel lose 'face'. Sigh.

    3. Hi Stockskeeper,

      Many people are just living for today. Unless they see that sacrificing will make their future better, then they will change their lifestyle. Or else there isn't really any motivation to downgrade our lifestyle.

  4. Good points. For someone who have invested my 500 k and 600k separately and generating good passive income to be financially free, I can identify with your train of thought. It is life long passive income and hopefully there is capital appreciation too of the investments. By now whether my expenditure is 3K or 5k a month does not really matter as long as it is not a lot more than necessary. You might want to expand on what investment is most preferred on the road to financial independence.

    1. Hi,

      Thanks for sharing. It is encouraging for me to hear from someone like you who've done it and been through the process. Good job!

      Will surely expand on the investment that is good on the road to financial independence. I've touched briefly on investing in index funds and also stocks that gives stable dividends. Will drive deeper into it.