How Many Months Do You Have to Work This Year?

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 ;)

See related blog posts:

• The Philosophy of Spending Money
• Managing Expenditure
• Living a Frugal Life

The Philosophy of Spending Money

This is a departure from the usual blog posts on how to save money. It discusses where to spend money. By knowing where to spend money, you will also know where not to spend money or to spend less money, leaving you with more money saved.

Instead of following a needs-based approach in spending money as discussed in the last blog post, another way of spending money is to follow a values-based approach. A values-based approach means knowing what is important to you and spend money in that area. This is best illustrated using an example. Being a boring and unromantic person, I think roses can be a waste of money. They are full of thorns and do not last for more than a couple of days. However, when you see the sparkle in the eyes of the girl whom you bought the roses for, you will think that the roses are worth every cent of the exorbitant price that the florist charged you for it. You will remember the MasterCard advertisements that run roughly like this: "Price of a bouquet of roses: $50. Price of your girlfriend's smile: Priceless". When people and things are important to you, it is worth spending money on them.

Of course, it is easy to get carried away and spend too much money on them. We have heard stories about young couples having lavish weddings and ending up in debts. The good news about values-based spending is that the outcome is independent of how much money you spend. You do not need to have a lavish wedding in order to live happily ever after. Our parents have simpler weddings and can be just as happy. In investment-speak, this is the land of multi-baggers, where a small cash outlay can yield returns many times over.

How do I reconcile the spend-bare-minimum needs-based approach with the spend-at-will values-based approach? In reality, there is not much contradiction. People and things important to you can have needs that justify the spending. And values provide a guiding principle for where to spend the money. In more concrete terms, when spending on my personal needs, I follow a needs-based approach. When spending on family and friends, I try to follow a values-based approach. Admittedly, there is a dominant mode, which for me is the needs-based approach. Occasionally, I do have to remind myself to loosen up a little.

There is a purpose that we work so hard for much of our lives. The purpose is not for hoarding money. It is for the people and things that are important to us. Spend wisely, and you will have a fulfilling life.

See related blog posts:

• Living a Frugal Life
• Managing Expenditure
• Increase Your Experiential Wealth This Weekend

Living a Frugal Life

This post is probably not for everyone. But if you are interested in reducing your expenditure, you may wish to read how I treat expenditures. Generally, the basic principle is that I will spend $2 on a $1 thing that I need but will not spend $1 on a $2 thing that I don't need. Despite having to "overspend" on things, there are actually a lot less $1 things that I need compared to $2 things that I don't need. Below, I describe some of the gimmicks that companies use to entice people to open up their wallets.

Coupons

Coupons can provide great savings, but they are also advertising gimmicks for the $2 things that we do not need. Generally, we need to differentiate coupons that you actively seek out and coupons that are given to you on the street or when you participate in an event. In the former case, since the coupons are something that you seek out, they are really the things that you need and can provide great savings. In the latter case, they are just advertising gimmicks. While they can also provide great savings, you can probably save more without them. As an illustration, the coupon might have saved me $10 when I spend $50 at the shop, but without shopping using the coupon, I would have saved $40 more. How I treat coupons is to give them away to colleagues who might need them more.

Value-for-Money

For many things, the more you buy, the lower is the per-unit rate, thus given you a higher value for money or a bigger bang for the buck. As an example, broadband services could be priced as follows:

Bandwidth	Monthly Fee
25Mbps	$24.90
50Mbps	$29.90
100Mbps	$39.90

The higher the bandwidth, the lower is the per-unit rate. Such pricings might tempt people to pay a little more to get the higher quantity. But do you really need the higher quantity? If you don't, you are just paying more than is necessary.

Low Upfront Costs

If you have shopped for a printer before, you would notice that prices of printers are quite cheap. However, the price of an ink cartridge can easily cost up to 30% of the price of a printer. With printers using 2 or more ink cartridges, you could almost pay for a new printer every 2-3 years. For goods and services that have upfront costs and recurrent expenditure, it is best to compute costs on a Total Cost of Ownership basis and use that to compare between the various goods and services.

On a similar note, there are services that may appear attractive based on the promotional rates during an initial period of usage. But when the initial period expires, the rates will revert to higher levels. As an example,  I was recently offered to upgrade my broadband services from 2Mbps to 25Mbps when my contract expired. The promotional rate for the higher 25Mbps service was $24.90, which was slightly higher than the $23.10 for the 2Mbps service. On top of that, the promotion came with 3 months of free subscription and some free TV channels. It looked really attractive, especially when compared to the approximately $35 non-promotional rate for the 2Mbps service which was no longer available for re-contracting. But when the contract expires after 2 years, the non-promotional rate for the 25Mbps service would be $45. Whatever savings I would have from the promotional rates would be wiped out by the higher non-promotional rates after another 2.6 years of usage. Hence, it is best to see beyond the promotional rates and calculate the total cost that you would have to pay for a service. (For your info, I eventually decided to upgrade as the telemarketer convinced me that broadband prices would continue to drop, so I might not have to pay the non-promotional rate at $45.)

Conclusion

In the final analysis, you need to know what your needs are and spend only on those needs. Salesmen will always try to convince you that you need certain things. If it is something that you really need, you probably do not need anybody to tell you that. If somebody has to tell you that you need something, it is probably a want that you can live without.

Also, do not try to suppress your needs so that you can save a little money here and there. It is a long journey and you must be at ease with your needs. What's the value of life if you can't satisfy your needs? As mentioned in a related post, managing expenditure is not about being a miser; it is about knowing when to spend.

See related blog posts:

• The Philosophy of Spending Money
• Managing Expenditure
• How Many Months Do You Have to Work This Year?

Managing Expenditure

Saving is usually the first step towards achieving your financial objectives. One approach of building up savings is to have additional sources of income. The other approach is to defer consumption to a later date. To manage my expenditure, I have tried several ways over the last 2 decades; some work and some don't quite work. Let's discuss the ways that don't quite work before discussing the ways that work.

Ways That Don't Quite Work

The conventional way to manage expenditure is to set a budget for the various categories of expenditure. After trying for several years, I have come to the conclusion that budgets don't work. It works well for expenditure that are regular, such as utilities, taxes, etc. But when it comes to discretionary expenditure such as recreation, social events, etc., the budget is sometimes exceeded. The main reason is that the budget does not come to mind at the time of spending money. By the time I remember about the budget, money is already spent.

Related to setting a budget is to record all the expenses made. By recording and compiling all the expenses, you can analyse at the end of the day/ week/ month whether the money has been spent wisely and if not, to remind yourself to spend wisely the next time. Again, it does not quite work. Regret only lasts for as long as I'm looking at the expenses. It does not last until the time of spending money.

Perhaps the only time that budget setting and expense recording work is near the end of the month. If the budget is almost exceeded, I would try to defer some expenses to the next month.Conversely, if I spend less in this month, I would bring forward some expenses from the next month so that more money is available for spending next month. This is usually done by topping some stored value cards that are regularly used.

Ways That Work

The ways that work in managing expenditure (at least for me) has to do with how we think about expenditure. There are 2 ways of thinking about expenditure. The first way is to think of it in terms of opportunity cost. When you spend money on certain items, it means that you can't spend on some other items. As investors, it also means that the money cannot be invested and grown. Hence, the opportunity cost to investors is usually very high. The higher the rate of return and the younger the investor is, the higher is the opportunity cost. As an illustration, I have a target rate of return of 10% per year. At this rate of return, money will double every 7.2 years. I have 27 years before reaching the retirement age of 65. So, every $1 today will become $14.81, say, $15, when I retire. That means that for every $1 I spend today, I will have $15 less when I retire. Hence, the price tag of every item today is multiplied by 15. A mid-level digital camera that costs $2,000 to most people will actually cost $30,000 to me. That is a lot of money! From this perspective, I would think very hard about spending money on big-ticket items.

The second way of thinking about expenditure is to think about the amount of hours you need to put in at work to pay for the item. Let's say the expenditure is equivalent to 2 weeks of salary. Instead of the company paying you a monthly salary and using part of the salary to pay for the item, would you be willing to work for FREE for 2 weeks and at the end of the 2 weeks, the company gives you the item? Bear in mind that during these 2 weeks, you will need to endure the usual scolding from the bosses, tight deadlines, office politics, etc. Very likely, you will think a little longer about spending the money.

Conclusion

Generally, my experience is that if you manage the big-ticket expenditures well, you do not really need to worry too much about the small-ticket expenditures. You might overspend on the small-ticket items, but they will not blow a big hole in your pocket. Managing expenditure is not about being a miser; it is about knowing when to spend.


See related blog posts:

• The Philosophy of Spending Money
• Living a Frugal Life
• How Many Months Do You Have to Work This Year?