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This is a note on attaining financial independence/freedom in Singapore that I have written for myself1.
What is financial independence? It means being able to survive financially from one’s passive income without having to work any further. To have passive income, one has to figure out the amount of money that needs to be invested – this is known as the financial independence (FI) number. For example, if your investments pay you 4% per year and you require $5000 per month, then your FI number would be (5000 x 12) / 0.04 = $1,500,000.
The components of attaining financial independence involve:
These topics will be introduced in more detail in the next few sections. In cases where there already exist excellent sources of explanation, I will link them here instead of reinventing the wheel.
This is cash that one has to set aside in case of emergencies. The recommendation is to keep around 6 months worth of expenditure in cash. Paying off all types of loans would also help towards financial freedom. I would achieve this by being thrifty and putting the remaining funds into savings. Whenever I take funds out to invest, I would then ensure that there is at least 6 months’ worth of expenditure left in the bank account.
Remark. Some brokerage firms offer decent yields if you park your money in their accounts (around 3% per annum). An example of this would be the POEMS cash plus account. I would put extra funds (outside of my emergency funds) in such accounts since my funds would be liquid, and I get a nice yield bonus on top of it. Setting up a brokerage account is also crucial for investing (introduced later) so no harm setting it up earlier.
Furthermore, it is important to understand how the CPF works since a portion of your income goes there. An overview of CPF is provided here and a guide to CPF is provided here
The purpose of insurance is to provide a safety net for undesired circumstances (injury, illness, disability, etc.). An excellent guide to insurance is provided here. I believe integrated shield plans, life insurance, and total permanent disability insurance are the crucial ones.
Remark. Generally, insurance saving, endowment, and retirement plans are sub-optimal and it might be wise to avoid them. This is explained in greater detail by this post.
A low-risk and time-tested way to invest would be through the use of index funds, which are made up of tons of individual stocks. Hence, there is no stock picking involved and one is essentially buying the entire market. The underlying assumption is that in the long run, the index fund will increase in value, thereby matching/beating inflation, and at the same time, providing the investor with adequate dividends. An excellent guide to index fund investing is provided here.
Broker. Buying index funds or stocks requires the use of a trading platform and each purchase sometimes incurs a commission (a fee one has to pay for the transaction). I personally use the broker POEMS – a guide to setting up a POEMS brokerage account can be found here.
My personal preference would be to go for one US fund and one local (Singapore) fund, with the following choices:
Remark. One might often wonder if it is worth using roboinvestors instead of investing through trading platforms (as mentioned above). It turns out that if we are planning to invest a large amount of money for the long run, then the cost of roboinvestors eventually exceeds the cost of investing through trading platforms – for a more concrete comparison, see this case study illustrating that $1000 is all you need for investing through trading plaforms to be cheaper than roboinvestors.
(Other things that might be of financial interest: lasting power of attorney, and writing of will – explanations of these are omitted here.)