Financial independence - how to get there

Published on Jun 30, 2013

First step is having the discipline to spend less than you earn

By Goh Eng Yeow Senior Correspondent

For those of you who have just embarked on your working life, the notion of achieving financial independence no doubt seems like an elusive goal.

Just trying to make ends meet is a challenge.

And then there are those many temptations to live it up, such as buying a flashy car or going on an expensive holiday.

This makes saving on a regular basis nigh on impossible for many people.

But anyone looking ahead has to factor in the fact that Singapore has the fourth-longest life expectancy in the world. Women here can expect to live to 85 and men to 80.

So, unless you do some really serious financial planning early on, you may find yourself working till your 70s - and that is assuming someone is still willing to employ you at that age.

So, it was heartening to read recently in this newspaper of young people who are managing to squirrel away at least some of their money for investments.

However, as I read on, I realised that they were mostly driven by short-term objectives such as trying to get a better return from the stock market. Such a ploy would be unlikely to help them to secure their long-term financial security.

To be financially independent is to be able to maintain your desired standard of living, without ever facing the risk of running out of money. And being financially independent will enable you to choose what sort of work you want to do, as well as the luxury of working because you want to, rather than because you need to.

Trusting the vagaries of the stock market to try to achieve that goal is really too much like a roll of the dice.

I have spent 27 years around the financial markets and seen many of my friends attain financial independence, so I can offer a few tips on how to get there.

Work out a financial plan
Becoming financially independent requires you to have the discipline to spend less than you earn and the wisdom to save the difference.

But just blindly trying to save a portion of your salary every month is not going to get you anywhere. You have to know where you get your income and how you are spending it.

Start by drawing up a monthly cashflow statement to capture your income and major expenditures such as your credit card spending and transport fares.

Just gaining an understanding of your finances will help you to cut down on wasteful spending.

Cover yourself medically
The worst fate that can befall anyone is to be saddled with a huge medical bill in old age with no one and no income to rely on.

One of the biggest regrets harboured by my friends is that they failed to take out medical insurance when they were young and healthy.

It was only upon discovering medical conditions such as hypertension or diabetes that the importance of medical coverage hit home. By then, it was too late and they found that any coverage would exclude their pre-existing medical ailments.

For a start, at least get yourself covered on the MediShield Insurance scheme, for which the premiums can be deducted from your CPF account. Ensure you stick with it, even if you suffer a temporary setback such as losing your job.

There is no telling when a medical disaster may strike - and it may turn out to be very costly if you are not prepared.

Get a roof over your head
For most of us, buying a house is the biggest financial commitment we will ever make in our lives and we quite often literally spend a lifetime paying for it.

Getting a bank loan to pay for a roof over your head is a good example of how to leverage on other people's money - the bank's in this case - to make a tidy profit as the value of the house goes up.

It is the best example of the "buy and hold" strategy advocated many times in this column: Buy a house, stay in it for decades, while holding down a job and raising a family. Then when you retire, you have the option to sell the house and pocket the gains, as you downsize to a smaller property.

The strategy worked in my parents' generation and it is working in mine. It should work for future generations too, as Singapore's economy continues to grow, enabling real estate prices to appreciate over the long term.

Open an SRS account
Regular readers of this column will know this is among my favourite themes. Go to a local bank and open a supplementary retirement scheme (SRS) account. Any money you put into the SRS account is tax-free, so every dollar put into the SRS reduces your taxable income by a dollar.

The great benefit of the SRS is that the savings do not have to be locked up in a cash deposit but can still be used for stock investments.

I have more than doubled the money I have put into my SRS account through stock investments since I opened it in 2001. It is a resounding testimony that the proof of the pudding is in the eating.

engyeow@sph.com.sg