2017 has been a crazy year for me. Firstly, this is the year I spent the most. My expenses almost doubled from a year ago. This was probably the result of me foregoing tracking my expenses like how I used to in the past. My goal in 2017 was still to save at least 50% of my income which I would not have been able to achieve if I just relied on my main income alone.
In 2017, I changed job for a higher income role. It didn't really make up for the increase in expenses. My savings rate would have suffered tremendously. However, because of a change in focus, I didn't just complain that my salary was low and sit there and do nothing. In the end I managed to revive my savings rate and save almost 100% of my salary for 2017.
How is it possible to save 100% of my salary? The reason is simple, it is the answer to financial independence too. I created more side income (lots of it), to cover almost all my expenses. Even when my expenses doubled, I still created more side income to cover it. This is the strategy of financial independence which I learnt from the book "Rich Dad Poor Dad" almost 8 years ago. In the book, it taught me to use assets to create cashflow that puts money in my pocket. Do this until it covers all your expenses and there you have achieved financial independence. Although the book talks more about investing in real estate for cashflow which is difficult for average Singaporeans, the concepts taught were still applicable.
Here is a summary of my income and expenses for the year 2017 (up to Nov 2017):
The additional income created is almost enough to cover my expenses for 2017. The expenses are not in thousands but in tens of thousands so it wasn't easy creating the income to cover it. It took time and effort and lots of hard work. It is a far cry from the passive income which we are all familiar with.
With the additional income created, I am on track to save almost 100% of my basic income in 2017. If not for this, just by relying on my main income will achieve only a savings rate of about 33%.
There are many ways to create income by doing what we enjoy and using the skills that we have. The world has changed and we can virtually work anywhere in the world. Yes we all want the passive income so we can sit back and relax and wait for the money to come in but that does not happen overnight. We have to create active income first then slowly transform it into passive income. This is my strategy for next year and moving forward for my life.
Active income is necessary to create passive income. Without cash, we can't buy assets that generate passive income. For now, our assets are our hands and legs and our mind and skills which we can invest in to generate active income.
I have created 3 diagrams below which sums up my strategy and which also explains the path to financial independence and retirement.
The first chart below will be where most of us are at. In fact, most people do not have the side hustles part where you have created additional income. Side hustles is a word very well known in the west where many of them leverage on technology and freelancing to create more income. This accelerates the path to financial independence if we can save more from the additional income.
If you manage to get a high main income and can still save quite a sum of money at a young age, then side hustles will be optional for you. However, there is a problem with relying on main income only which brings me to the second diagram.
The second diagram is where we can depend on our side hustle to continue living our life. The main income is removed in this case as we no longer need it. Most of the time, we will be doing side hustles which we like and there is always the freedom from office politics and all sorts of nonsense in the corporate world and the rat race. This is the gig economy which I wrote about in a previous article. There are about 9% of the workforce in Singapore who are in the gig economy as compared to 30% in the US.
When we do not need to depend on a salary to continue living our life, then we would have effectively gotten out of the rat race. The real financial independence will be on diagram 3 below.
In diagram 3 below, this is how financial independence will look like. We are able to generate enough passive income through out investments to cover our expenses. At this stage, we can choose not to do any work or continue with the side hustles we like to do. The main benefit here is the freedom from the work which we do not like.
The maths behind early retirement
It is not difficult to chart the path to early retirement. The maths shows that it can be done and how it can be done. The maths shows that just by saving 75% of your income, you can retire in 7 years base on a 4% withdrawal rate and assuming your expenses stays the same.
In Singapore, many people do retire in their 40s. It is achievable as what has been done by various financial bloggers. What they do is they save and invest early in their lives and also try to earn a decent high income. Most generate additional income through other means as well including investing in stocks, properties or freelance.
As for myself, I have the option to call it quits for my job and still be able to continue living my life but I'm not going to do that anytime soon. There's still a lot more work to be done to stabilise the foundation. One thing for sure is I'm looking to do more meaningful work instead of just working for money. Many things have happened in 2017 which changed my perspective of life. Seeing my loved ones falling ill one by one is not an easy thing to go through. Life is definitely more than working. The stress and burdens that creates the illness is not worth it at all.
Many people see the dramatic positive effect to their health when they stop working in the corporate world and have the freedom to do things they like. High blood pressure, back pain, headaches, gastric disappear when people stop working. Those are health problems that comes with stress and can cause even serious life threatening illnesses. We should know when to stop but its easier said then done when you have no choice but to continue working. When you have a choice, then you can choose your health over the work. We can all aim to be financially independent one day.
