100,000 Page Views !!!

$1Million Personal Financial Diary has hit a major milestone : 100,000 total page views. It has taken slightly more than 3 years, but we're finally here, and it's worth a blog post because I owe it all to you readers.

Three years back, I started this blog to detail my process of accumulating wealth and eventually achieve financial freedom. I also shared many of the milestones in my life such as balloting for a HDB flat, achieving my first target of $70,000 before age 25, getting my first job, etc. It has been a fulfilling three years as I have learnt a great deal from reading my blog comments and other financial blogs.

I will continue posting monthly net worth updates promptly and share my investment thoughts and actions. My next net worth target is $200,000 by December 2016 (age 28). Many people have casted doubts on this goal but I personally feel that it is achievable. Continue to follow me on my journey to achieve/exceed the net worth targets I set for myself and I wish you the best in your financial journey.

Cheers!

Combined or separate finances for married couples?

I have been trying to figure out a system to manage the finances with my future spouse. My girlfriend is against the idea of separate finances while I feel that both systems have their pros and cons.

Combined finances could accelerate wealth accumulation given that both parties in the marriage have common financial goals. Also, combined financial power can contribute to a sense of solidarity, as you begin to think of spending as a unit. Saving together allows a couple to start working towards mutual goals, such as buying a house, going on an overseas trip or building passive income.

On the other hand, separate finances will be a fairer system if the couple have a huge income disparity or markedly different spending habits. Also, it may allow greater independence when it comes to spending and make personal gifts and dates more special.

What appeals to me most is a hybrid system that incorporates the benefits of both combined and separate finances. In this system, both spouses put their entire paycheck into the joint account, and then withdraw a fixed amount(allowance) into their personal accounts every month. Household expenses and bills will be deducted from the joint account.

Below is an illustration of the system assuming take-home pay to be $3,000 each:

Both my wife and me will deposit our entire paychecks into a joint account. We will each withdraw $600 as our allowance. If there is any amount left at the end of the month, we will deposit into our personal accounts and this will form our individual personal savings. Parents' allowance, household bills, insurance, cash portion for mortgage payments and other miscellaneous expenses will be debited directly from the joint account. Also, an amount of $2,000 will be set aside every month as our opportunity fund. There will be a leftover of $1,000 in the joint account every month and this will be our combined savings/emergency fund.

Save $3500 monthly when I turn 30

One of my assumptions in accumulating "$500,000 by 33 years old" was "My wife and I will save at least $2500 monthly combined($30,000 yearly) from age 28 to 30 and $3500 monthly($42,000 yearly) after I turn 30" 

To save $3500 monthly from the age of 30 onward, I assume a combined monthly income of $8,000. Also,  household expenses are included as my HDB flat will be ready by then.

$1,000,000 by 38 years old

According to plan, I would have accumulated $500,000 at the age of 33 and the next milestone is to have net worth of a million dollars by age 38. To achieve this, I assumed a return of 8% and a yearly savings of $42,000 until age 35 and $48,000 thereafter. Also, the yearly savings are compounded at 8% per annum.

$500,000 by 33 years old

I mentioned that one of my goals is to achieve a net worth of $200,000 by the age of 28. However, during this period major expenses such as marriage and buying a house will devour a huge chunk of my cash. Renovation and furnishing of the house alone could easily cost about $40,000, not to mention wedding expenses. To make things worse, my next target net worth is $500,000 by age 33.

To achieve $500k in investable assets by age 33, I have made several assumptions:

(1) My wife and I will save at least $2500 monthly combined($30,000 yearly) from age 28 to 30 and $3500 monthly($42,000 yearly) after I turn 30

(2) At least 2 major bear markets in the next 10years: Invest lump sum periodically during downturn to achieve an average return of 8% per year.

(3) The money in my CPF OA combined with my spouse's is enough to pay for the down payment and other miscellaneous fees - cash will only be used for renovation

(4) Spend no more than $50,000 at age 28 for renovation of house and wedding($150,000 left) : Ang Pow money can cover at least 70% of wedding dinner.

Here is how i calculate my net worth to be $500,000 based on the information given in point (1) to (4) above:

Based on the information that I will save $30,000 yearly from age 28 to 30 and $42,000 yearly after 30, I use a return of 8% to calculate future value of cash flows and initial principal of $150,000 at age 28:

Principal: $150,000
28: $30,000
29: $30,000
30: $42,000
31: $42,000
32: $42,000
33:  [FV of principal and cash flows from age 28 to 32] + $48,000(amt saved at age 33) = $470182 + $48,000 = $518182

Note: Cashflows in arrears

Some of the assumptions might sound unrealistic but for point (2) to (4), I realized that it is quite feasible after some thorough research and calculations. Only point (1) has the most uncertainty because I did not take kids into account and saving $3500 a month might be quite an arduous task after setting up a family. Also, I did not consider that my wife or I might be retrenched during this period. Once again, a goal should be slightly unattainable and I look forward to overcoming these challenges and uncertainties.

Investing a million dollars

I have mentioned in my 'Me and my goals' page that I will accumulate $1 million by the age of 38 and let it compound at a 10% rate for 17 years till I reach 55 years old. A question that I always ask myself is how am I able to achieve a 10% annual return consistently for 17 years? There are 2 instruments which I can invest in, namely stocks and real estate.

Stock market

The stock market consists of different categories of stocks and funds which include growth stocks, blue chip stocks, real estate trusts, business trusts, shipping trusts, exchange traded funds, etc. Finding a particular stock which consistently yields 10% per year can be an arduous task. To play it safe, I would invest in an exchange traded fund(ETF) which tracks a particular index(eg. STI ETF). A strategy would be to invest a lump sum whenever the value of the ETF falls by at least 30%. This will give us a higher margin of safety and larger returns. A 10% return would then be much easier to achieve. As most people will be too focused on catching the bottom during a downturn, a 30% fall in prices would probably be a rough indicator that stocks are undervalued again.

Investment value at the end of 17 years(assuming 10% return) : $5,054,470

Properties

Another method to invest a million dollars is to invest in rental properties. First of all, I will set aside 20% for down payment of a $1.5million condominium(assuming zero contribution from CPF). I will also set aside an additional $100,000 for renovation and miscellaneous, which amounts to $400,000 in total.

If the monthly rental is $3,500(assuming constant), I will be able to clear $714,000 of the mortgage in 17 years using the rental income alone. Assuming tenancy rate is around 70% during this 17 year period, I will have to fork out $214,000 for the mortgage.

- Total mortgage remaining at the end of the 17year period: $486,000 (assuming rental rate does not rise over the years and zero contribution from CPF ordinary account for downpayment)
- Assuming value of property rises 5% per year(30 year annualized return of URA private property index at 6%/year), value of property at the end of 17 years : $3,438,027

- Investing the remaining $386,000 in stocks at 10% return(using the stock market strategy discussed above) over 17 years: $1,951,025

Investment value at the end of 17 years: $4,903,052


*To make the calculations simpler, I did not take into account that interest payments of the housing loan will make up a huge chunk of the mortgage and all calculations done above are based on the assumption that interest rate of the mortgage loan is 0%. However, do note that the interest payments have been factored into the underestimated rental of $3,500.