How To Achieve Financial Freedom In Singapore

As Singapore’s National Day is just round the corner, I thought it would be apt and timely to touch on this topic together with my fellow Singaporeans.

Having started to read this based on the title would suggest that you are either exploring the possibility of achieving financial freedom or already embarked on the journey to achieve this ultimate dream goal.

First and foremost, we need to set the stage right. Financial freedom means different things to different people. There is no one definite answer and it will depend on one’s perspective to define. To me, it simply means one’s passive income is able to cover all of one’s lifestyle expectation expenses.

Next, passive income needs to be specific and is defined as income that does not require one’s involvement or taking constant action.

A good example for the source of passive income will be interest income from deposits. The only action one needs to take is a trip to the bank to open an account, usually fixed deposit, and it does not require any further involvement or action. However, at the current low interest rate environment, it will require significant capital to achieve financial freedom.

Keeping things to the simplest, if the monthly lifestyle expense is x, the passive income rate of return is i, the required lump sum is 12x / i. (Ignoring most other assumptions like inflation and no other debt servicing) So, if my monthly lifestyle requires $2,000, and fixed deposit return is 1%, I will require $2.4 million lump sum to be financially free. I do not foresee most average Singaporeans saving this amount within a reasonable amount of time to keep the assumptions valid.

Keeping x as a constant, the only variable now will be i. If one is willing to take some risk, i can be higher by investing into investment grade Bonds that give an average of 3.5% coupon payment returns. Now, lump sum required is about $0.7 million, significantly less than when using deposits. A good way to purchase Bonds will be to use Unit Trust. Bonds are usually not sold to individuals and will be difficult to diversify purchasing at the individual level. Hence, Bond funds are an immediate diversified portfolio of international investment grade sovereign and corporate bonds.

If $700k is still significantly unachievable, one can look to the next best thing Singapore has to offer that little else places have – public housing. Property is not absolutely passive as there are maintenance issues to handle on an on-going basis. To unlock the value of the property, one can rent out a room, this will offset to reduce x. So, if the room rental is $700 a month, the lump sum is only required to generate the reminder $1,300 monthly. It will be even better if the household owns more than one property. Example, the younger generation purchases a property (BTO HDB) and the parents move in together, renting out the entire parent’s unit.

To complete the property discussion, Real Estate Investment Trusts (REITs) are not to be forgotten. They will be a more passive form where there will be no maintenance issues for one to manage. Their average dividend return is about 5%. Hence, using REITs, the required lump sum is about $0.5 million.

After REITs, it now leads to the topic of equity. If the focus is on dividend paying stock, the payout is usually only about 4.5% on average. However, investing in stock, the focus will be more capital appreciation that averages 7% to 8% rather than current income.

To round off the discussion, there may be other methods some may suggest like income from a Business or trading (FOREX, Options, Derivatives, Commodities, etc). For Business, I think only a remote few can really achieve a business where they absolutely do not need to do anything and yet reap the profits from it. Most successful business will require the keyman to carry on working optimally to continue its success. As for trading, the income is derived from taking the trade action on a regular basis. If no action is taken, there will be no income. This hardly seems passive to me, not to mention that probably only a remote few can even trade profitability consistently.

Therefore, my conclusion to achieve financial freedom for the average Singaporean in Singapore will be to A) unlock some value from their citizen given right of a HDB property B) save and invest in a diversified portfolio of Bonds (Unit Trusts), REITs and Stocks (or ETFs) that gives at least an average 5% rate of return. Example, x is $1,300 ($2,000 offset by $700 property room rental); i is 5%, $300k lump sum will be required and sounds like a reasonable amount to achieve for financial freedom.

Happy Birthday Singapore!