Financial planning is always advocated but little has been said about how to really relieve financial burdens in life. What we are mostly taught is to go to school, get a good job, save money and then plan for retirement. This is not wrong and in fact it is a very important first step in financial planning but what's next?
Today, I will attempt to discover a new way of financial planning which will definitely relieve your financial burdens in life. In fact, you'll realise that this is the way which the government in Singapore has been managing its finances to create a financially sustainable Eco system as Singapore has little to no natural resources to begin with. If we can imitate this and manage our personal or family finances in the same way, the money we have can perhaps last many generations to come.
Discovering how the Singapore Government manages its finances
There is a lot of wisdom to how the Singapore government manages it finances. They do not just create income and then spend it. This is definitely not a financially sustainable way to manage money. How they manage money is to create funds and use the interest generated from the funds to cover some of the expenses which are needed. This can range from social assistance to healthcare and also the net investment return contribution (NIRC) which was talked and discussed quite substantially during the budget earlier this year. There is a lot we can learn from this method which I will elaborate later. Let's dive deeper into the government's way of managing money so we can learn from it.
The following is a paragraph from the Ministry's of Finance website which gives a good overview of how the government creates a sustainable budget from its reserves. I quote it as follows:
How do Singaporeans benefit from the investment returns from our reserves?
The investment returns from our reserves provide additional resources for Government spending to benefit Singaporeans. This includes Government investments in education, healthcare, transport infrastructure, R&D and other areas to improve our living environment and to grow our economy.
The ability to tap our reserves in a sustainable manner is a significant financial advantage for Singapore. Our situation is quite unlike that in many countries that have to service their debts and other liabilities from their budgets on an annual basis, and hence either raise taxes for the purpose or engage in further borrowings so as to service current borrowings.
In Singapore, the Government is instead able to take in money from the investment returns of our reserves to supplement our Budget on a sustained basis, in keeping with the provisions in the Constitution. The few other countries where Governments are able to derive net investment income for public spending are typically those with substantial reserves of natural resources such as oil.
The investment returns of our reserves supplement the annual Budget through the Net Investment Returns Contribution (NIRC). The NIRC is estimated to be S$14.1 billion in Financial Year (FY) 2017, or 17% of our budget.There are a lot of debates to the NIRC which I will not go into in this article. What we can see from how the money is managed is that the government has saved up quite substantially over the past few years and have quite a big reserve to invest and generate investment returns to pay for various expenses which we have. This is probably one of the reason why we still can have one of the lowest tax among major economies around the world.
An example on what investment returns are used to pay for is the social assistance schemes under the Ministry of Social and Family (MSF). To date, MSF has a community care endowment fund of $1.9 Billion and able to generate $57.5 Million in interest to pay for various community care programmes to help the low income and those who need it too.
Here is an excerpt from MSF's ComCare Annual Report FY2016:
As we can see, the interest income generated from the fund is used to fund the various social programmes to help the needy in Singapore.
How we can create a fund to relieve our financial burdens?
We can also definitely set aside a fund and generate interest income to pay for some of the expenses in our life. Currently, what is being advocated in the financial planning world is just to put aside your money to invest for retirement. Most of the products out there only just lock up our money for many many years before we can use it for retirement. Some people end up surrendering their policies early because they could not pay the premiums anymore.
The creating your fund strategy is different. It allows us to have some relief of the financial burdens while still prepares us for retirement. In other words, it means we can enjoy now then later. Here are the funds we can set aside and an indication of how much interest we can get on a monthly basis to offset our expenses:
| Fund Amount | Interest % | Monthly Interest Income generated |
|---|---|---|
| $200,000 | 6% | $1,000 |
| $300,000 | 6% | $1,500 |
| $400,000 | 6% | $2,000 |
| $500,000 | 6% | $2,500 |
| $600,000 | 6% | $3,000 |
| $700,000 | 6% | $3,500 |
| $800,000 | 6% | $4,000 |
| $900,000 | 6% | $4,500 |
| $1,000,000 | 6% | $5,000 |
At a 6% interest, $300,000 set aside can already yield us $1,500 per month. I suppose this can offset some of the basic expenses which we have. If you have a family, most likely a fund of $500,000 generating 6% interest will be quite comfortable as it brings you $2,500 per month.
The key is to set aside this amount of money early in life which I would think is not difficult with a good income and modest expenditure. You can take a reference to the above table and plan how much to set aside accordingly to your needs.
You might have questions on how to generate this 6% interest? It is actually not hard to find investments that can yield dividends. The key is to pick the right ones which will be sustainable. REITs and some blue chips stocks can be considered. Take for example Capitaland Mall Trust which currently yields about 5.5% at a price of $2.03 or Suntec REIT which yields 5.89% at a price of $1.70. Of course, we still have to research and analyse whether the dividends will be stable in the long term and whether we are buying at a good valuation. This is like buying a property and making sure we buy at a good price and looking at its rental potential to generate rental income. Blue chip stocks such as Singtel is also yielding about 5.50% currently at a price of $3.19.
Maybe you would think 6% is too hard to achieve. How about if we bring it down to 5%? Let's take a look at the table again:
| Fund Amount | Interest % | Monthly Interest Income generated |
|---|---|---|
| $200,000 | 5% | $833 |
| $300,000 | 5% | $1,250 |
| $400,000 | 5% | $1,667 |
| $500,000 | 5% | $2,083 |
| $600,000 | 5% | $2,500 |
| $700,000 | 5% | $2,917 |
| $800,000 | 5% | $3,333 |
| $900,000 | 5% | $3,750 |
| $1,000,000 | 5% | $4,167 |
At 5%, a $500,000 fund will still generate an income of $2,083 per month. This is still not a bad amount to have as it would definitely relieve some of the expenses which we have. The beauty of this strategy is the fund amount is left untouched and may even increase as the investment grows. At the same time, it provides an income to offset some expenses while we are still working. In this way, if we are prudent in our expenses, we can still continue to save more of our full time job income without having to sacrifice the quality of life.
If you have a partner and both of you are working, you can actually set aside this fund much easier than those who are single. It is really about delayed gratification in the first few years to build up the fund and then it'll be much easier in the future. If we spend all our earned income without putting aside anything, then we will find ourselves still struggling in life as we age. Is this what we really want?
Relieve Your Financial Burden Today
I hope this article gives you an idea how you can plan for your own finances or how you can plan your finances as a couple. Like Singapore which has no natural resources, most of us also do not have "natural resources" which we can tap on unless you are born in a rich family which has unlimited cash to spare. However, we can follow the Singapore's government footsteps to create our own reserves and generate interest income to pay for some of our expenses. This seems to be a financially sustainable way to manage our money to last for a lifetime and perhaps for many generations to come.
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