Fixed Expenses

I've been inspired by 15HWW to calculate our fixed expenses every month. This is part of the ongoing effort to understand our expenses more, so as to lower any unnecessary expenditure if possible.

This is important as basic math dictate that income does not matter towards financial independence, but savings rate does. Millennial-Revolution makes the math concise and upfront, which is helpful for understanding how she gets her figures and conclusion.

Of course, it can be assumed that there is a minimum expenditure that we have to make monthly to keep our bodies alive and fulfill our obligations. Therefore, this is the sum that we will seek to clarify and reveal to ourselves today, so as to better understand our financial standing.

In my case, I will define fixed expenses as regular expenses that are very unlikely to change after two years. This will be separated from semi-fixed expenses, that are defined as expenses that may change every year or 2 years (especially for telcos, taxes). Other expenses would be variable/discretionary expenses, which will be another post for another day.

Fixed Expenses

Mortgage Loan by Cash	$     213.00
Mortgage Loan by CPF	$  1,880.00
Conservancy Fee	$        90.00
Term Insurance	$        16.00
Whole-Life Insurance	$     216.79
Total	$  2,415.79

Semi-fixed Expenses

Taxes	$     117.22
Internet	$             -
Handphone (Mr)	$        35.00
Handphone (Mrs)	$        35.00
Total	$     187.22

To be clear, the internet bill is $0 as it was paid upfront.

Therefore, our fixed and semi-fixed expenditure monthly come to a total of $2603.01.

The Rule of 25, which is used to estimate the size of portfolio we'll need in retirement by multiplying your desired annual income by 25 (with the assumption of a conservative 4% return on the portfolio), can be used here. We like to adapt it as the Rule of 300 (300 = 25 x 12), as 300 is an easier number to work with, and regular expenditure is often calculated on a monthly basis.

Using the Rule of 300, our minimum portfolio size for our fixed and semi-fixed expenditure would be 300 x $2603.01 = $780,903.00

Woah! And this amount will grow as we take inflation into account!

A closer look at the figures show that the majority of our fixed expenses comes from our mortgage. Housing loan is truly a killer! 

Another way to look at this is that we are still very far from reaching our portfolio targets...

HDB loan

Much ink has been spilt over our housing loan in Singapore, which is not surprising considering that the housing loan is probably the singular largest debt most Singaporeans will get into in their lifetimes. Most Singaporeans would simply max out the amount of CPF money they can draw on to pay for the house, leaving the OA basically near flat zero for thirty years. This includes yours truly.

There are also those that would question using CPF to pay for housing.

I was giving this some thought when I realized that this housing loan is not as cheap as commonly thought.

1. Considering that the HDB loan is currently pegged at 2.6%, the interest on the total loan is at minimum 2.6%.
2. By drawing the money out of CPF OA, this portion of money does not earn the baseline 2.5% (or 3.5% for the first $20k!) interest. Instead, at the point of selling the property, one would have to put back the principal + supposed accrued interest back into CPF. With the assumption that the money in CPF is still mine, and the money is safe, we can take it that the accrued interest paid is effectively paid to ourselves. However, this does not negate the fact that for this portion of money, I will have to pay the interest to myself instead of the government paying it for me.

Compared to person A who uses his current capital to pay off the mortgage, I am effectively paying a minimum of 2.6% + 2.5% = 5.1% additional interest! If I take into account the addition 1% for the first $20k of CPF, this percentage would go even higher!

In order to avoid making a huge loss here, whatever I invest in will need to grow by a minimum of 5.1% in order for me to simply break even!

Since signing the papers on the fateful day last year, I have the impression that the loan was only 2.6% interest rate!

Of course, there are advantages to keeping cash on hand. Appropriate investment will grow in a compounded manner while the interest on the debt will not as long as payment is made regularly.

Oh dear...

On a side note, I started on the book "The Intelligent Investor" by Benjamin Graham. It is proving to be an interesting read.

Shock! I have negative networth!

Hi all!

It wasn't too long ago that I read an interesting article from BULLy the BEAR about calculating his overall networth. He seemed elated that he reached an overall networth of 0!

Naturally, I took up a pencil and did some back-of-the-envelope calculations...

Shock and horror!

A simple breakdown of my assets would be:

1. Estimated amount of cash I am holding
2. Estimate of all my bank accounts
3. All of my CPF

Coming up to a grand total of $56k!

And my liabilities:

1. HDB loan of $520k!!!

And my personal networth would therefore be $520k-$56k = -$464k!!!

Oh dear :( Now I can see why LP was so ecstatic to achieve 0 networth.

Deciding to try to cheer myself up somewhat, I did a brief estimate of my wife's networth. Her total assets would come up to roughly $100k, which would give our family an overall networth of about -$364k!

Since I was young, I have always strived to be debt-free. This has been ingrained in me since I was young. Hence, to suddenly realise I am actually in significant debt still comes as a rude shock.

Come to think of it, I did sign on the papers to take on the HDB loan. Hence, this debt is not new or foreign. It is just that during our day-to-day life, the thought of owning HDB a huge sum of money just does not come to mind easily.

Which brings us to the point: How many of us are acutely aware of the financial state we are actually in?

Indeed, while most of us are familiar with our current assets, there are many of us who do not give a second thought to our current debts. At most, we give it a fleeting thought, and it seems uncomfortable to even concentrate on it. 

We are surrounded by debt. The most commonly talked about would be credit card debt. However, there are many insidious forms of debt that we do not usually recognize.

Did you purchase any items recently on an "interest-free" instalment plan? That is a form of debt.

Do you have a current handphone/tv subscription with any of the telcos? It is effectively a form of debt, a sum of money that we have to pony up monthly unless we pay an early termination fee. In terms of payment plan, the subscription fee is effectively like the monthly housing mortgage. Yet, we do not usually think of it as such due to the smaller amount of money involved, and it seems easier on our account books to treat it as a rolling expense.

And of course, not forgetting the usual housing/car loan.

I am thankful that I just recently paid off my student loan based on advice from my wife. This has significantly reduced my liabilities, and relieved me of a significant portion of debt-stress. 

In view of the still-very-significant debt burden that I have, I want to grow my assets and pay off my liabilities to the best of my abilities. With this, I wish that we will all hang in tight and travel with me as we seek a brighter future ahead.