Wednesday, March 27, 2019

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 worthIncomeExpensesDividendsAdditional SavingsInvestment 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 worthBasic SalaryBonusTotal incomeExpensesDividendsAdditional SavingsInvestment 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.

Thursday, March 14, 2019

Open Electricity Market - Why Cheaper Than Singapore Power?

By now, many of you would have heard of the open electricity market and have seen the roadshows by many of the new electricity retailers who are offering much lower prices than Singapore Power (SP) group's current electricity tariff. There are as many as 13 different new retailers now apart from SP group. Many of you might have seen the prices and know that it is indeed lower but is there a catch to all these lower prices? Should we all be switching to these new electricity retailers to take advantage of the lower prices?

To answer all the above electrifying questions, we have to understand what is the open electricity market first. I know there are lots of info out there and it is confusing so in this article I will explain why electricity retailers can offer rates cheaper than SP group and why SP group could not in a simple to understand way.

What is Open Electricity Market (OEM)?

Before OEM was opened to residential estates, we could only buy power from SP group. However, OEM is not new in Singapore actually. Prior to OEM being opened to residential estates, business consumers with an average monthly consumption of at least 2,000 kWh (approximately $400 in electricity bill) can buy electricity from other licensed electricity retailers already.

There are 3 main players in the industry. Firstly is power generation companies, then electricity retailers and lastly are the consumers. Power generation companies are power plants that generate electricity. In the wholesale electricity market, they bid to sell their power to electricity retailers in bulk. Then, electricity retailers compete to sell it to consumers like you and me.

Why new electricity retailers can offer cheaper rates as compared to SP group?

In the OEM, we could buy power from other electricity retailers other than SP group. These new retailers are either the retail arm of power generation companies or independent retailers who buy power from these power generation companies at wholesale prices. Previously, SP group is the only company who buys power from these power generation companies and in turn sells it to us.

With the OEM, we can now buy electricity directly from power generation companies instead of going through a middle man like SP group. It is like we buy goods from a wholesale warehouse instead of from a retail shop who also gets the goods from the wholesale warehouse and sells it to us at a higher price after accounting for their manpower and rental costs etc. Independent retailers who do not generate their own electricity but buys from power generation companies and sell to us can sell cheaper than SP group because most of their operations are online with low overhead costs.

If we look at the chart below, we can see that SP group is paid 5.71 cents per kWh, out of 23.85 cents per kWh paid by households. This comes to about 25 per cent of the tariff. About 70% of the regulated tariff goes to power generation companies. Whether we buy electricity from SP group under the regulated tariff or through retailers, the SP component collected from consumers is still the same actually.

Why can't SP group offer consumers electricity at lower rates?

Electricity tariffs are not set by SP group, but are regulated by EMA to recover the long-term costs of producing and delivering electricity to consumers. This includes fuel prices, building and operating power plants as well as maintaining the power grid. In layman terms, it means they are stuck with this kind of situation as regulated by the authority.

Isn't it unfair for them and won't SP group get into trouble if everyone switches out from them? The answer is no. As mentioned earlier, whether we buy electricity from SP group under the regulated tariff or through retailers, the SP component collected from consumers is still the same actually. This means SP group still gets its share of about 25% of electricity paid by us. SP group can now also take advantage of the situation and offer customer service solutions to these new retailers and in turn charge a fee for the services. Instead of earning from households, they can go into the business of earning from retailers in the open electricity market.

We can actually buy wholesale electricity from SP group also but the price will fluctuate every half hourly which is confusing for most consumers. It becomes we have to monitor the electricity rates across the day itself and manage our usage accordingly. In an average day, electricity prices will be highest during the day when the demand is the highest and should drop at night when demand is lower. This is how the wholesale electricity rate fluctuates.

Where can I compare the best OEM price plan if I want to switch?

I have helped my parents switched our electricity from SP to Geneco fixed price plan which is 30% lower than the current SP rate. I did not do any comparison beforehand as I think the competition is intense enough and most of the retailers are offering roughly the same package. Just make sure to read the terms and conditions properly as some retailers do charge admin fees or collect deposits. Nevertheless, if you want to compare the prices, you can do so easily too.

Besides the many road shows on the streets which you can walk around and compare the prices, you can also compare the best price plan from the official OEM website here:

3/4 of the population can now switch to enjoy lower electricity rates. Here are the zones as well as when you can start to switch:
  • Zone 1 - Postal code 58-78, From 1st Nov 2018
  • Zone 2 - Postal code 53 – 57, 79 – 80, 82 – 83, From 1st Jan 2019
  • Zone 3 - Postal code 34 – 52, 81, From 1st Mar 2019
  • Zone 4 - Postal code 01 – 33, From 1st May 2019
In conclusion, the open electricity market allows us to buy electricity directly from power generation companies without going through a middle man. This definitely lowers the cost of electricity for the consumers. To enjoy sustainable long term low cost on our electricity bills, I think its better to sign up with those retailers who are the direct retail arm of power generation companies with big power plants. In this way, they can always offer cheaper electricity rates as compared to other companies who just resell the electricity to us.

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