Beginning this year, I switched to an Android phone and had to use a new app to record my expenses. The beauty of this new app is that it allows me to enter scheduled expenses ahead of time. Thus, by the first day of the year, I was already down by $5,000 (not counting those variable or unknown monthly expenses such as utilities and taxes). This reminded me of an exercise that I carried out once a while -- to figure out how many months do I have to work to cover all my expenses and financial commitments for the year. For this year, I would have to work for 8.6 months, or more precisely, 8 months and 18 days. Hence, I will have to work until 18 Sep to cover all my expenses and financial commitments for the year.
What is the use of this exercise? Well, firstly, I will look forward to 18 Sep, because from 18 Sep onwards, all the salary earned will be for me to keep. It is quite liberating to know that you only work for yourself after this date. Secondly, I will see what I could do to bring forward the date. That means either increasing my income or reducing my expenses, the latter being easier to do than the former. Thus, if I wish to indulge on myself, it will also mean that I will have to work a few more hours or days. It is quite an effective tool to keep me from spending more than I need.
If you too wish to engage in this mental exercise, there are a few things to take note of. Firstly, you might receive bonuses in the course of the year. Ignore these bonuses in this calculation. Bonuses should be, like their name suggests, a bonus to us. Imagine if you need to rely on those bonuses to cover all the expenses, that would be quite frightening, isn't it? What would happen if the bonuses do not materialise?
Secondly, you might also have other income streams, such as dividends and rental income. It is a personal preference as to whether you should include such income streams in your income. The advantage of including these is that you can see the tangible benefits of investing. As your dividends grow, the no. of months you need to work will correspondingly reduce, keeping all other things constant. The year when your dividends are more than sufficient to cover all your expenses will be the year you can retire. That will provide great motivation to keep on investing. For me, I prefer to exclude dividends. It is a more conservative approach, matching operating income to operating expenses. Like bonuses, dividends are extras, which make them sweeter. Moreover, it is quite difficult to forecast the amount of dividends you will receive in the year.
Thirdly, you might also have income and expenses outside the cash account, such as CPF contributions and mortage repayment. So long as the contributions are adequate to cover the mortage repayment and no cash payment is required, it is OK to leave them out of the equation.
So, perhaps the next time somebody asks me whom do I work for, I could tell him I work for the banks ;)
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