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Wage slaves should be fearful.

Saturday, September 3, 2011

I had a conversation with someone who said he is living hand to mouth and that he is somewhat worried with how things are developing in the world now.

Although Asia is where we find economic growth these days and it explains why people are flocking here as they look for better opportunities, if a global recession should transpire, Singapore is unlikely to be spared. 

In fact, we are likely to suffer more than others due to our very open economy which is highly dependent on external demand. Many are likely to lose their jobs in such a situation.






So, my friend is right to be fearful if he was indeed living hand to mouth. If he should become unemployed, he would be in deep trouble. For people like him, we cannot even start talking about investing in the stock market.

Using some common sense, what would I do if I were him? He must first get his finances in order:

1.  Look at his expenses. See what are necessities and what are not. Remove the latter, mercilessly.

For example, I know someone who sold his 5 year old car recently because the very bouyant COE prices now means that he could sell his car at a higher price than two years ago, minimising losses, losing $6K instead of >$10K. He now saves $800 a month in monthly repayment and is taking public transport for now. The car was not a necessity.


2.  Save money! Make sure he saves enough money to cover at least a year's worth of expenses. This will be his emergency funds. In case he should be retrenched in the next recession, he would have ample time to look for a job.

Some financial advisors say putting aside 6 months salary is the rule of thumb. For me, I would say measuring how much we should put aside in terms of expenses is more meaningful. If we should have enough money put aside to cover expenses for 10 years, not considering inflationary pressures, are we recession proof?






3.  Any money in excess of the emergency funds, he should put to work, investing for greater returns. Having excessive savings is silly given the paltry interest payment on savings.

Having said this, with the stock market weakening continually now, we should be prudent and not throw everything including the kitchen sink into stocks.

4.  I would also suggest that he looks into ways of increasing his income in his current job or a new job. He might also want to look for supplementary income. Be more productive.

No one owes us a living. Unless we can show that we can make valuable contributions, no one will think we are valuable enough to pay us!

Living hand to mouth is being a wage slave. Wage slaves are pitiful but someone who is living like a wage slave when he does not have to is NOT pitiful.

Note:
Wage slavery refers to a situation where a person's livelihood depends on wages, especially when the dependence is total and immediate. (Source: Wikipedia.)

Related posts:
1. Needs and wants.
2. Do you want to be richer?

28 comments:

Marco said...

Totally agree with you. Where do you think we shall park the 1-year expenses saving? In the past, I parked 6 months in FD and another 6 month in REITs.

If the share market really collapse, I will park 3 months in FD, 9 months in REITs.

AK71 said...

Hi Marco,

The emergency funds to cover 1 year's worth of expenses will be left in a savings account for me.

Could put it in a FD but not REITs. Should not take risk with money in the emergency funds. :)

Createwealth8888 said...

When market collapses deeper and deeper; soon REITs will not be spared too. At the same time, you may also risk losing your job. Many unemployed people will be chasing after that few jobs available.

3 months is enough?

Sometime, we may have to be more realistic and match our emergency fund to how long we can expect to start bringing home some income.

The size of emergency fund must be seriously reviewed after every few years as we age. Older assets will take longer time to find job. That is fact of life. :-(

Anonymous said...

heard that inflation is about 5%, that will reduce the gains from our S-REIT yield. At least, we are still in the money.

http://www.channelnewsasia.com/stories/singaporelocalnews/view/1150663/1/.html

SnOOpy168

Marco said...

Hi AK, Given 2 reits with same dividend yield, but one with 10% gearing and the other one with 35% gearing. Assuming all the others criteria like management, properties and tenants are equally good, which one will be a better investment and why?

AK71 said...

Hi CW,

I guess your comment is meant for Marco. :)

I agree that if we are up against a prolonged recession, even the most defensive of counters will suffer and quite badly too. People might have to sell their investments to raise cash.

AK71 said...

Hi SnOOpy168,

We can't win them all. Let us count our blessings. ;)

AK71 said...

Hi Marco,

Everything else remaining equal, I would invest in the REIT with 10% gearing, of course. :)

A lower gearing would mean that the REIT has more debt headroom and would be less likely to go to unitholders for money if they engage in yield accretive acquisitions.

Marco said...

Hi AK, Thanks for the advise.
Hi Createwealth, you're right. 3 months is too risky. That's why generating passive income is so important.

AK71 said...

Hi Marco,

You are welcome, my fellow investor for income. :)

Musicwhiz said...

Hi AK71,

Nice post on living hand to mouth. Luckily I don't know anyone like that haha!

I would think about 6 to 12 months of expenses is sufficient as a buffer. For me, I keep 12 months as a standard for expenses and 6 months of CPF installments for my HDB loan. With dividends coming in periodically as passive income, I also have less to worry.

Musicwhiz

AK71 said...

Hi MW,

Yup, as you know, I am a strong believer in investing for income with the right circumstances. :)

Unfortunately, I believe there are many people out there living hand to mouth either by choice or not.

Would you believe me if I were to tell you someone who has S$10,000 a month in earned income could be living hand to mouth? Amazing.

Anonymous said...

Ak,

sure, the more you earn, the more you spend. keeping up with the Joneses and as what you have said, for showing off.

Skipper

AK71 said...

Hi Skipper,

Very nice to have chatted with you earlier in LP's infamous cbox. :)

Yes, conspicuous consumption is everywhere. I am sure we have many more MBs, BMWs, Audis and Jaguars on the road these days. Even the relatively rare Ferraris, Maseratis and Lamborghinis are more commonly seen now.

I am mindful of my expenses and try to live way below my means. It helps to keep me grounded although I have to admit that I have been a bit more easy going in the last couple of years. Life is, after all, short. ;)

Musicwhiz said...

Hi AK71,

Nope, I would not believe it! $10,000 a month is like double the median income in Singspore! He must be spending like a duke.....

AK71 said...

Hi MW,

Believe it. It is a real person I am talking about.

In fact, his lifestyle is so lavish that he would borrow money from friends in some months as well!

$10,000 is not even enough to pay for the watch on his wrist!

Very unfortunately, one of my ex-relatives was in the same class. Bought a BMW etc. when he should not have. Things came tumbling down soon after.

Ideas of grandeur got into his head. He even forfeited $30+K deposit on a condominium he could ill afford. The money is not even all his.

Bygones.

financialray said...

I think many of the wealthy people do live below their means. Contrary to common belief that the rich drive expensive cars and live in big houses. Warren Buffett does not drive a Rolls ROyce.
First step to financial freedom and retirement is savings.
The harder part is investment.
ALong the way, one has to open eyes wide and not be duped of his pot of gold by con men who claimed they can help double the pot of gold.

PanzerGrenadier said...

Hi AK

I read "The Millionnaire Next Door" and savings is not about total income per se but rather income vs lifestyle expenditure.

I think it's to balance it out, i.e. savings every mth is important but we can also balance it with having a few occasional luxuries in life.

But to be a wage slave at $10k a mth income suggests being a slave to the keeping up with the Joneses mentality....

Be well and prosper.

AK71 said...

Hi financialray,

Yes, IKEA's founder drove the same Volvo for more than 20 years, if I remember correctly. :)

Your comment reminds me of a blog post months ago:

Today's millionaires.

AK71 said...

Hi Panzer,

Yup, definitely.

Unfortunately, there are still many who think that they will lose face if they do not have this and that.

Many are after instant gratification even for things they could ill afford. What is scary is that it could be hard to change once these people are used to the lifestyle.

financialray said...

Hi AK

I swear I did not read that blog entry till you highlighted to me.
HA HA.
Anyway, when I first started working many years ago, I made the same mistake by buying a car immediately, consoling myself I need it to travel to work.
On hindsight, my financial IQ was low then as I probably spent a large percentage of my pay on a car loan.
Now, I still drive a toyota but I make sure I can afford it before I buy.
The money is saved to plan for investments, early retirement if possible and financial freedom.

AK71 said...

Hi financialray,

I doubt I had high financial IQ in my younger days too. ;p

I did not buy a car when I started work only because I didn't have a driver's license. Haha..

When I buy a car, I would make sure that I do not have to borrow more than $20K and I would keep the loan tenure to 3 years only.

My latest purchase, the Mazda2, was bought without any borrowings. Some might say that this shows I have even lower financial IQ now. ;p

financialray said...

Don't worry AK. Each individual is entitled to his opinion. We don't get bothered whether it is financially wise to buy a car.
Many years ago, this budding entrepreneur was telling people how dumb it is to buy a car in Singapore when our public transport is so good. Good meh?
Then now this entrepreneur has made it big in property investments and own several luxury cars. Hmmm...nothing is permanent, expectations change when we face different life events. Now I smile when another budding financial guru tells people he goes by Bus, MRT and Walk and condemns against buying a car. I think LP say in a column aptly. Everything is relative. We have grown bigger than our car problem. Anyway, I wanted to pay in full too but toyota says must take a car loan to enjoy discount.

AK71 said...

Hi financialray,

No one actually told me that buying a car was a bad thing. Instead, I was told by not just one person that I was silly not to have taken a car loan. They are proponents of the concept of "good debt". ;p

As for not getting a discount if we were not to take the car loan, I told the salesman I did not have to buy a Mazda. I could buy a Honda as they did not force me to take a loan to enjoy a $1k discount.

Seeing how he was on the verge of losing a sale, he checked with his manager who approved the discount although I paid in full. :)

Bought a new car.

financialray said...

Yes, I have heard that too.
One of my friends justify buying a car by saying that the car is used for his work.
Actually, I think he could hardly afford one. He enjoys bringing his family of 4 out in car. But with an unstable income and a weekend car, the financial strains finally just lead to catastrophe.
There are small percentages in the extremes of this world.
Multimillionaires who live way way below their means while wage slaves living way way above their means.
BTW, a car loan cannot be a good debt since it is not the car that puts the money into our pockets.

AK71 said...

Hi financialray,

Their idea was that I only had to pay a 2% interest on a $70K loan and that $70K in my bank account could be put to work making 8% in distribution yield from a REIT, for example. So, this makes the car loan "good debt". ;)

Your friend sounds like a wage slave. If he is a close friend, you might want to talk to him a bit more. :)

financialray said...

No lah,
I think you know better..
Stock markets can take a sudden dive and the 8% is never guaranteed.
Also car loans when redeemed is disadvantageous to the car owner.

AK71 said...

Hi financialray,

Being fully paid up, my car is an asset. A depreciating one but still an asset.

I try to have less liabilities in life. To me, it is that simple.

Too simple, perhaps. ;)

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