The 10 Years Financial Independence Target

Achieving financial independence in Singapore is possible but honestly, only a handful of the population can achieve it. This is because most of us are brought up being taught that we need a job to survive and we will probably have to work till we are quite old. That is sadly still happening when I see some of my colleagues still struggling to make ends meet even in their 50s and 60s.

In the financial goals page of my blog, the target I set for myself is to achieve financial independence by the age of 42. This is about 10 years from now as age catches up quickly unknowingly. In Singapore, I reckon we need more than $800K to $1 Million in order to achieve financial independence. My way of financial independence is to invest and get enough investment income to substantiate my expenses indefinitely. Investing $800K at 6% dividend yield will get us about $48,000 a year or $4000 a month. Most of us would probably need more than $4000 a month if we have a family and thus the target of more than $800K came about.

How long does it take to save $1 Million dollars?

A million dollars is the sweet spot in financial freedom. Investing a million dollars at 6% dividend yield gets us about $5000 a month. For a person who does not invest at all, achieving $1 Million is almost impossible. For a person who saves $20,000 a year and puts it in the bank earning almost 0% low interest, he'll need 50 years to save up $1 Million. If he saves $40,000 a year, it still takes 25 years to save up that amount.

Now, if the same person who saves up $20,000 a year and invests it to get 6% investment returns, he'll only need 24 years to achieve that $1 Million as compared to 50 years. This is the power of compound interest where it effectively shortens the time to achieve the same financial target by about half. Not many people will understand compound interest as it is always almost confusing for most people. This is why 90% of the population will continue to struggle to retire even in old age. Only the top 10% of the high income earners can retire comfortably because of the high savings they have even without investing. The rest of us will not make it if we do not know what to do.


Investing for dividends to reach financial freedom

While compound interest concept is so difficult to understand, investing for dividends should be more familiar to most of us. It is actually still compounding at work but explained in a more layman way. The focus is to keep on saving and investing and getting stable dividends and one day we will just reach the financial target that we set out for.

Let's look at a person who earns $3000, spends $2000 a month and invests for 6% dividend yield, how long will it take for him or her to achieve $1 Million in savings?

Additional assumptions is the income will increase by 3% each year which I think is quite conservative as most of us would be able to earn higher income faster through promotions. Bonus is not included also. Additional savings is ="income - expenses + dividends".

This is the result:

Year	Net worth	Income	Expenses	Dividends	Additional Savings	Investment return
1	$0	$36,000	$24,000	$0	$12,000	6%
2	$12,000	$37,080	$24,000	$720	$13,800	6%
3	$25,800	$38,192	$24,000	$1,548	$15,740	6%
4	$41,540	$39,338	$24,000	$2,492	$17,831	6%
5	$59,371	$40,518	$24,000	$3,562	$20,081	6%
6	$79,452	$41,734	$24,000	$4,767	$22,501	6%
7	$101,953	$42,986	$24,000	$6,117	$25,103	6%
8	$127,056	$44,275	$24,000	$7,623	$27,899	6%
9	$154,954	$45,604	$24,000	$9,297	$30,901	6%
10	$185,855	$46,972	$24,000	$11,151	$34,123	6%
11	$219,979	$48,381	$24,000	$13,199	$37,580	6%
12	$257,558	$49,832	$24,000	$15,453	$41,286	6%
13	$298,844	$51,327	$24,000	$17,931	$45,258	6%
14	$344,102	$52,867	$24,000	$20,646	$49,513	6%
15	$393,615	$54,453	$24,000	$23,617	$54,070	6%
16	$447,686	$56,087	$24,000	$26,861	$58,948	6%
17	$506,634	$57,769	$24,000	$30,398	$64,167	6%
18	$570,801	$59,503	$24,000	$34,248	$69,751	6%
19	$640,552	$61,288	$24,000	$38,433	$75,721	6%
20	$716,272	$63,126	$24,000	$42,976	$82,103	6%
21	$798,375	$65,020	$24,000	$47,902	$88,922	6%
22	$887,297	$66,971	$24,000	$53,238	$96,208	6%
23	$983,506	$68,980	$24,000	$59,010	$103,990	6%
24	$1,087,496	$71,049	$24,000	$65,250	$112,299	6%

The above chart shows it takes 24 years for this person to achieve that $1 Million sweet spot. However, if you look at the dividends column, his dividends have already covered his $24,000 per year expenses at year 16. 

This person could grow his money because the dividends received could offset his expenses and in turn increase his additional savings significantly when he has more capital. If you look at year 10, the dividends received of $11,151 is contributing to his savings which is quite significant. 

Of course, some of you will say it is impossible for expenses to stay at $24,000 a year ($2000 a month). Now, this brings me to the 10 year financial independence target. 

The 10 Years Financial Independence Target

Achieving financial independence in 10 years is possible with the following in place:

1. Starting savings/investment capital of $300,000
2. Take home pay of $6400 with 2 months bonus
3. Salary increase of 3% per annum
4. 6% dividend yield
5. With $5000 per month expenses

If you look at the above scenarios, it would most likely apply to a couple who work towards a financial target together. If you are already earning that amount of salary with the above investment capital, then you can achieve it yourself. 

Here's the breakdown of the numbers: 

Year	Net worth	Basic Salary	Bonus	Total income	Expenses	Dividends	Additional Savings	Investment return
1	$300,000	$76,800	$12,800	$89,600	$60,000	$18,000	$47,600	6%
2	$347,600	$79,104	$13,184	$92,288	$60,000	$20,856	$53,144	6%
3	$400,744	$81,477	$13,580	$95,057	$60,000	$24,045	$59,101	6%
4	$459,845	$83,921	$13,987	$97,908	$60,000	$27,591	$65,499	6%
5	$525,344	$86,439	$14,407	$100,846	$60,000	$31,521	$72,366	6%
6	$597,711	$89,032	$14,839	$103,871	$60,000	$35,863	$79,734	6%
7	$677,444	$91,703	$15,284	$106,987	$60,000	$40,647	$87,634	6%
8	$765,078	$94,454	$15,742	$110,197	$60,000	$45,905	$96,101	6%
9	$861,179	$97,288	$16,215	$113,503	$60,000	$51,671	$105,173	6%
10	$966,353	$100,207	$16,701	$116,908	$60,000	$57,981	$114,889	6%
11	$1,081,241	$103,213	$17,202	$120,415	$60,000	$64,874	$125,289	6%
12	$1,206,531	$106,309	$17,718	$124,027	$60,000	$72,392	$136,419	6%
13	$1,342,950	$109,498	$18,250	$127,748	$60,000	$80,577	$148,325	6%
14	$1,491,275	$112,783	$18,797	$131,581	$60,000	$89,477	$161,057	6%
15	$1,652,332	$116,167	$19,361	$135,528	$60,000	$99,140	$174,668	6%
16	$1,827,000	$119,652	$19,942	$139,594	$60,000	$109,620	$189,214	6%
17	$2,016,214	$123,241	$20,540	$143,782	$60,000	$120,973	$204,755	6%
18	$2,220,969	$126,939	$21,156	$148,095	$60,000	$133,258	$221,353	6%
19	$2,442,322	$130,747	$21,791	$152,538	$60,000	$146,539	$239,077	6%
20	$2,681,399	$134,669	$22,445	$157,114	$60,000	$160,884	$257,998	6%

It would take some time to digest the above numbers. In summary, in just 10 years, the above person or couple can achieve close to $1 Million in 10 years with dividends received of $57,981 using 6% dividend yield. They can spend about $5000 per month freely even without working at this stage. This would be the desired financial independence where quality of life is still quite alright.

Achieving financial independence should always start from good savings habit to accumulate a sizable investment capital. Once the foundation is built and investment capital crosses above $200K, focusing on investment will make more sense. I am at the stage where I should be focusing more on investing and so generating more passive income through dividends is what I am going to do.

If you do not want to be stuck in a job you don't like but have no choice but to keep working because you do not have financial independence, then its time to start planning and see how it is actually achievable. There are many disgruntled employees in the workplace where they have no choice but to work till their old age. I've worked in 3 different companies and everywhere I go, there will be unhappiness in the workplace. I foresee in the future, working in Singapore will get more and more stressful as the ageing population puts a strain on the infrastructure spending in our country. As our workforce shrinks, each employee have to work longer hours and take on more roles and even roles of multiple persons. It is already happening and the drive for productivity using technology doesn't seem to really work. Instead, what I see is more workload for the existing employees.