What I got from “Tuesdays with Morrie”

Money is not everything

One of the key lessons I personally picked up from reading the book is that money is not everything. Some of us who are more cynical may say but your blog is about financial freedom, so how can money not be everything?

The reality is that money IS important. To sustain ourselves in our modern lives, we need shelter, food, education, etc which requires money and a job or business to sustain it. But beyond our basic needs in life, it is the wants that tend to take over and drive us. That is the key lesson that I learnt even on my journey towards financial freedom.

I’d realise that financial freedom is a journey that I want to embark so that I can reach a point where my time is freed up from having to trade life-force for money and explore more of the world’s experiences as I can’t bring it all with me when I pass on. In the meantime, whilst working towards financial freedom, I balance my life by also indulging in my iPad, loading the kindle app and having so much fun buying great books that make me a better person or see the world from a different perspective within my means.

Reading other books on happiness lead me to the realisation that relationships, meaning in what we do and how we conduct our lives are factors that help make a happy life. If you are poor, you can also be happy but it’s more challenging when you have to worry about bills and providing for life’s necessities for yourself and your family.

Being rich doesn’t automatically make one happy. If one has internalised the principles of living within our means, to save and invest, to grow and protect our means, then one would not be affected by riches but understand that his or her role is to be a good steward to the wealth accumulated and to create meaning in life.

If you don’t like the culture, create your own

This also struck me from the book. Singapore also has a strong, “Get rich or die trying” culture that has seen the income gap widen. The rich do become richer in Singapore and the poor struggle. This culture is very strong and for the last 20 years or so, the materialism and growth at all cost type of economic growth has contributed to Singapore being a place with a large number of Millionaires.

That itself is not right or wrong, it just is. If you accept and like this culture, then so be it. But if you disagree with it, create your own. By all means earn your living with your own hardwork, qualifications and experience. Move away from the mindless materialistic consumerism that permeates Singaporean society. Focus on what is good and noble. Before my daughter was born, I was involved in volunteering with the Chinese Development Assistance Council in their programmes that helped children. I also served in a non-profit professional association as a board member to further the interests of members in education and training.

I’ve created my own culture to some extent, in that I earn my living, use the stock market to help fight inflation and invest in blue-chip companies for long-term dividend passive income that funds some wants in life e.g. iPhone, iPad, nice meal in restaurant. I’ve also avoided overly conspicuous consumption like branded watches or lifestyle products (other than my apple gadgets – which iPad is second hand )

My idea of luxury is to be able to read a great book of fiction or non-fiction and develop myself as a person. I do have a life list of things I want to do before I go but I’ll do it at my own pace as finances permit.

So how does your concept of financial freedom gel with what you think is important in life?

Share with Panzer in the comments section.

Be well and prosper.

When I first started out this journey, I was overly focussed on savings and investment and trying to grow my investment nest egg to a large enough size to live off the passive income. A lot of this was influenced by Robert Kiyosaki’s “Rich Dad, Poor Dad.” It is not a bad objective, but the uncertainties come with the investment returns that one can obtain from investments and also the risk of losing all your capital if you bet on the wrong instruments.

Safe is not Safe

Take AIG and Citigroup during the global financial crisis (a.k.a “subprime”) situation. These two counters were rock solid but the upheavals from the crisis saw AIG almost on the brink of collapse with only a US Government bailout that allowed it to continue as a going concern. A similar thing happened to Citigroup which saw the bank’s shares plunge dramatically taking out a lot of shareholder value in just a couple of months.

Over in Singapore, we also had our own Lehman mini-bonds and pinnacle notes scandal where some investors were mis-sold structured deposits that imploded leaving investors with only 21.5% to 70.8% of original amounts invested, i.e. losing 78.5% to 19.2% of the capital invested in the toxic minibonds/notes structured products. Such Black Swan type of events makes it challenging for the average investor to consider relatively safe areas that can beat the annual inflation of about 5% per annum in Singapore.

So what other alternatives can one choose in our paths towards financial freedom?

Alternate Realities for Financial Freedom

I still realise that earned income is one of the most reliable forms of growing your investible capital to the size where investment returns can yield sufficient passive income for living. But one needs to identify those earned income where age and experience allows one to leverage on the little white hairs and wrinkles to multiply the income earned in the same 24 hours that everyone has.

I realised that being a independent director of a listed company or a paid company director is one way to go. To be one you need to have suitable academic qualifications, business or corporate experience in managing organisations, people and processes as well as enough knowledge about the Companies Act, fiduciary duties of directors as well as knowledge of SGX listing rules and regulations. It also requires one to be versed in corporate governance and to understand what it takes to play an oversight role for shareholders in a company.

To that end, I’ve successfully applied and been granted membership into the Singapore Institute of Directors (SID). It’s interesting to see that there are only 2,000+ members in the association and I am sure in the hundreds of SGX companies, there must be a requirement for a few times that number of people who are willing and able to function in such a role.

Of course, many who are already directors or independent directors in companies may opt not to join as a member of SID but it signals to me an opportunity to explore. Looking back at my career, I’m fortunate to have served on the Board of a non-profit in various roles such as secretary, director and even president of the association. In my current role in my job, I’m also lucky to have the opportunity to sit on the board of our co-operative society. These experiences help me qualify to be a full-member of the SID and with the relevant training, my experience as an auditor puts me in good stead to position myself for the independent director role.

Growing my network

What is missing now is the networking to get me into the old boys’ club to be recommended as an independent director. A friend half-jokingly told me to start learning golf as that is how connections and networking are made. I think he is not too far off the mark. It does take some degree of networking to get to be in a position to be asked or to ask to be on the Board especially a paid Board position. I have set up a linkedin profile to keep my CV updated as well as a potential way to connect with more professionals through social media. There are currently close to 200 connections with mostly people I’ve met in my professional or volunteer career. I will continue to work on developing online connections alongside face-to-face connections.

The role is not without risks, independent directors are meant as a check and play an oversight and fiduciary role to safeguard the company’s assets and resources on behalf of all  shareholders including minority shareholders (especially for independent directors). The role sometimes may put directors in conflict with the management and other directors who have big stakes in the organisation.

Balancing the Risk/Return Trade-offs for Independent Director Appointments

We learn from investing 101 that there is no returns without risks. The challenge is to find the correct balance between sufficient returns for acceptable risks. Part of the risk can be mitigated by conducting a mini-due diligence on the company before accepting appointment, the way accounting firms assess their clients before taking up the assurance assignments .

Have you explored alternate realities to financial freedom?

Share with Panzer in the comments section.

Be well and prosper.

Basically what this means is that from research, the differentiating factor between people who are very successful in their chosen fields i.e. competitive sports, musical performance artistes, professionals is that they put in the magical 10,000 hours or so to be good in their field.

What does that mean for us?

Practice Makes Better

A distinguished toastmaster I know Mr. John Sih likes to use this phrase, “practice makes better.” To achieve mastery in anything, we need to devote sufficient time and energy to it. Of course, innate talent helps but you need to be good enough and then work hard at it. My own journey towards financial freedom really started when I earned my first pay check back in 1995. I began to save earnestly and it sowed the seeds of  my current financial situation.

But it was really in 2003 that I started taking action to invest my own monies beyond fixed deposits and unit trusts. The learning that I got from dabbling directly in the equities market helped me grow in financial literacy and to be more aware of how I could get started on this journey towards financial freedom.

Taking 2003 as the starting point, I realise it has taken me from 2003 to 2011 or close to 8 years of being more proactive about taking charge of my investments and truly living the principles of living within my means, saving and investing, growing and protecting my means.

If I spend say 1 hour a day thinking about personal finance and financial freedom, those 8 years x 1 hour x 365 days a year translates into about 2,920 hours. That means I have another 7,000 plus hours to go. Realistically, I have enough of a runway to hit the 10,000 hours because I intend to work until age 68 or even beyond partly because of the ever-spiralling cost of living but also because of the inherent broken retirement system that is the CPF.

To be able to retire in the traditional sense of not working and living off retirement savings or income only works if you sell your home when you decide to stop working and downgrade. Then perhaps the unlocked value of one’s home equity plus the CPF returned could hit minimum sum and excess above minimum sum withdrawn after age 62/65 (eventually 68). Unless one is able to downgrade’s one’s lifestyle. The ability to continue earning cash flows from earned or passive income is critical.

Whilst I am continuing to build up my investible savings to generate that passive income, I realise because I have 3 mouths to feed (myself, my spouse working part-time, and my daughter), it is better to plan on the side of caution and be mentally prepared to keep myself in active employment.

How to Practice

My take on the 10,000 hours to achieve mastery in financial freedom means that I should continue to keep myself open to new ideas, thoughts and ways to accelerate my journey towards financial freedom whilst avoiding black-swan type of events that could wipe one’s assets away just like that. Inflation is now the real killer as our CPF balances only earn 2.5% mainly (and 4% for Medisave and Special Accounts) but inflation is nearing 4% and could hit 5-6% in early 2011.

How does one beat inflation and still avoid taking undue risks? That will be something I continue to explore in my journey towards financial freedom.

I also realise I need to read ever more widely to train my brain to make the connections to get the out-of-box thinking to re-imagine my paradigm towards financial freedom. The tried and tested way of relying on earned income is workable but relies on endurance and good health. One needs to work on one’s health as well as rely on genes and God’s grace to last the long journey.

There is no substitute from just writing in my blog, thinking and discussing with like-minded people on the options available to achieve one’s financial freedom dreams

Do you think you would spend 10,000 hours achieving mastery in financial freedom?

Share with Panzer in the comments section.

Be well and prosper.

Besides my love for learning and travelling on this journey towards financial freedom, I also pursue other interests such as public speaking. I’ve been in a toastmasters club for close to 8 years and after a break in the last 2 years when my daughter was born (she’s coming to three years in March 2011), I again participated in my club’s International Speech and Table-Topics contests.

So how did I fare in this contest?

Breaking Down Boundaries by Doing

I managed to place 3rd out of 5 contestants for the International Speech Contest. It was a decent showing given that this was my first International contest in 3 years or my second speech contest in the last year. But what I was happier about was placing first in the Table-Topics contest.

For those who do not know what Table-Topics are about, they are an activity where a speaker has to deliver an impromptu speech on virtually any topic (baring sex, politics or religion) without any preparation. A speaker has to speak on the given topic from at least one to two minutes and thirty seconds.

I credit my long years in toastmasters in preparing me for Table-Topics and also a bit of luck that I could talk sensibly about the topic and be judged to be the best speaker out of five contestants from my club. The topic was this quote:

“You make a living out of what you get; you make a life out of what you give.” – Winston Churchill

The thing that toastmasters taught me is that becoming a better prepared and impromptu speaker requires hard work. I have kept on with toastmasters for the last 8 years (with a 2 year break) but it is the accumulation of the speech practices, evaluations and contests that have moulded me into the speaker than I am now.

You break down boundaries by doing. Learning from theory is useful and is a necessary but not sufficient condition to achieve breakthroughs. Breakthroughs arrive after much effort, practice and more practice (with guidance).

It is the same with financial freedom. We can learn from the theory, but it is in the doing, the ability to live within your means each day. To focus on saving and investing as well as growing and protecting our means that we achieve breakthroughs in our own lives.

Your Boundary in Financial Freedom

We all have certain limitations in our journey towards financial freedom. Perhaps it is an issue with spending on things that are more wants than needs. Perhaps it is the ability to grow our income or to save and suitably deploy that savings into investments with acceptable risks. Perhaps it is inertia that we find it difficult to change our lifestyle habits into one that sees our personal net worth and mental well being growing over time.

You can only break through your boundaries by doing. Imagining and visualisation exercises may help but it is in the doing that we overcome our inertia and achieve a better result than the status quo.

What is your boundary in financial freedom?

How are you overcoming it in the days to come?

Share with Panzer.

Be well and prosper

I’ve been writing fewer and fewer posts over time as I approach 40 this year. Part of the reason (or excuse) is pure laziness. There are many areas in personal finance that I’ve shared and increasingly there’s fewer new areas for me to explore. I’m currently reading the book, “The War of Art” and realise I’m facing what the author Steven Pressfield describes as the “Resistance”.

One of the things that I find satisfying is reading. Reading non-fiction teaches us some hacks to make our lives easier and more efficient. Reading fiction allows one to engage more in the senses and emotions. I finished reading “Norwegian Wood” by Haruki Murakami and it was a moving though sad novel. “The War of Art” reminds me that to achieve anything worthy, one needs to work at it. And so it is for fivecentstencents blog as well. If I want it to continue to have readers and to engage with people interesting in personal finance in Singapore, I need to continue sustaining it with bits and pieces of my thoughts written down in this blog.

Reading Fiction and Non-Fiction

Reading fiction also greases the mind as one is exposed to different ways in which dialogue and prose can be written to elicit feelings and emotions of the readers with the characters in the story. I’ve read most of the “Harry Potter” series of novels by J.K. Rowling and admit she is able to imbibe in her characters and Hogswarts School of Wizardry with such realistic facets that we are drawn into Harry’s struggles to become the grand wizard in fulfilling his destiny to rid the world of Voldermort.

While my blog is not a work of fiction, I’m also trying to engage readers to think more about and hopefully gain some insights on how they could improve their personal finances with some of the life experiences I share.

Recording Expenses – A Habit that Liberates

The small little insight that I would like to share in this post is about the habit of recording expenses. I’ve been doing this in an Excel worksheet since June 2008 and it has been a useful habit to help me in my journey towards financial freedom.

It works well for me because when you record your expenses, you know how much you’ve spent and also how much you’ve saved. This eliminates fuzziness of thought and allows you to know definitely if at each month end you are saving or dipping into savings to fund your own or your family’s lifestyle.

After I’ve started recording, I find myself less uptight about the occasional unplanned expenditures of life because at the end of the month, I’m able to look back to see if I’ve managed to live within my means for the month or the year-to-date. This gives me a lot of assurance that my personal finance is on track and that I don’t have to be overly anal about being a miser and to count every single cent. I do spend but in a manner that allows me to do so on needs and the occasional wants for myself and my family without having guilt, worry or fear come into the equation.

I count myself fortunate that for 2010, the public sector is paying a decent bonus which allows me to save more than I can just from monthly income alone. The year-end bonuses do contribute to a significant increase in my net-worth and are still the key drivers to growing my investible savings towards financial freedom.

Here’s wishing one and all a Happy Lunar New Year of the Rabbit where the savings habit will hop happily into your lives

Be well and prosper.

What does the decline in the TFR have to do with your financial freedom?

Stop at Two, Developed Country Trends

There are many possible reasons for why the TFR is declining. Singaporeans are getting married later and putting their education and careers first before starting a family. Some prefer to be single out of choice or due to circumstances. The older you marry, the less time you give yourself to have children. I remember during my NS where I had a platoon mate whose name was number 12 in hokkien (“Chap Ji”). That is because there were 12 children in the family and the parents named them numerically from number 1 to number 12!

It is increasingly rare to find friends, relatives or even in your own family such large family numbers. The trend is for people to have one or two. I also have only one daughter and she is very likely to be the only child as my spouse and I aren’t exactly that young any more and my daughter is such a handful that we are not sure if we could handle another one just like her!

If we look back at our history, Singapore had the hugely effective “Stop at two” family planning policy that is arguably one of the key contributors to our declining birthrate. We won’t debate the merits and demerits of that policy but it has to be acknowledged that it did contribute to people having small families as there were serious economic penalties then if you violated the stop-at-two policy. Today, it’s the reverse in that the Government gives baby bonuses which increase dramatically with the third and fourth child.

Implications for Retirement

Smaller families mean you have fewer dependents when your child is growing up. In terms of financial freedom, that is a good thing because you only need to spend on that one child instead of two or three. However, the implications for our retirements come in later years because in the past, parents used to rely on their children for allowances when their children reached working age. This practice also meant that parents who didn’t have sufficient retirement funding in their Central Provident Fund accounts e.g. housewives who didn’t earn an income during their children’s growing up years could tap on their adult children as a source of retirement income.

But if you only have one child, it is more challenging for that one child to support two parents if they do not have enough retirement funding from their CPF savings.

We know that CPF savings are declining because of the caps in CPF contributions and declines in CPF employers contribution rates (currently at 15% and not restored to 20% as opposed to individual contributions which are at 20%). The low interest of 2.5% pales in comparison to inflation rate of 3.8% (CPI) that we are currently seeing in 2010. In addition, the CPF minimum sum draw-down age (aka withdrawal age) is being slowly increased to be 65 by 2018. Most of us who are aged 56 and below as at 31 Dec 2010 would only be able to tap of CPF to fund us by age 65. Realistically, it could probably hit 68 given our aging population plus life expectancy in Singapore.

These trends mean that relying on your child to support your retirement could become a thing of the past because we only have that one or two children to support us and in this age of increasing cost of living coupled with relatively high housing prices, our children will find it challenging to support themselves and their own families so how would they find the resources to support aged parents?

Taking Care of Yourself and Not Burdening Your Children

I count myself fortunate that my parents were retired on pension scheme. Their medical needs are taken care of by the State due to their long years in service to the country as educators. Thus, between three of us, we only gave allowances to our parents more out of filial piety than their financial needs.

I too am striving to keep myself as healthy as I can by eating a balanced diet, exercising and taking care of myself. A enhanced shield plan is also a must and I intend to work as long as I can and to transit into a second career nearer to 60 so that I have more options then. I also continue to adhere to my principles of living within my means, saving and investing as well as growing and protecting my means as each year sees more grey and white hairs sprouting on my head

My legacy to my daughter would be a good education coupled with not burdening her with the financial responsibilities of taking care of her parents. As an only child, the burden is higher and I should do what I can within my means to take care of myself even as I grow older in life.

How do you think the stork will have an impact on your own retirement planning?

Share with Panzer in the comments section.

Be well and prosper.

The start of the year is associated with setting resolutions and targets for the year as we say, “goodbye” to 2010 and, “hello” to 2011. If you read enough about New Year’s resolutions, you’d realise that goal setting should be happening all through the year and not only during the beginning of each year. Although for many of us, the start of a year is a good cut-off to review what transpired in our lives in the past 365 days and what we intend to do for the next 365 days.

Look back at 2010

It was an interesting year from the perspective of life experiences. I sold my Executive Condo (EC) and bought a older condo for about the same price at a psf basis but paid more as my condo is larger by 100 sqft than my EC. Part of the reason why I moved was for a quieter environment (my previous EC faced the MRT track) as well as to be closer both mine and my spouse’s workplaces.

Family-wise, things are better as my daughter approaches three this year (2011) but I still do not take what I have for granted and focus on improving myself in managing the relationship at home one day at a time.

Career wise, 2010 was one of consolidation as I started in my current organisation in late 2008 and I’ve gotten day-to-day operations set-up fairly efficiently despite having staff turnover every 1.5 year or so. I learnt from the experience that having standard operating procedures, adequate briefing and explanations help ease new staff into the role but the hand-holding can be fairly tiring when the staff can’t seem to grasp some of the nuances of the work.

The recovery and spectacular rebound of the Singapore economy also saw decent bonuses declared for 2010 which has helped build up my income (and savings) from salary.

My investment strategy now is more refined in that I try to buy blue-chips for dividend yield at fair prices for long-term and keep them as opposed to trading. But I still allow myself the occasional punt but I make it very clear to myself what is the target price and sell when it is reached. I’m still cautious in that my equity-cash ratio is 43%:57%, i.e. I am overweight in cash and cash equivalents.

This is partly because the cash component is funded largely by the housing loan that I had to take when buying my bigger but older condo when selling my EC. I actually paid off most of the loan as the bulk of it was to bridge the timing difference between receiving the sales proceeds from EC sale and paying for the condo purchase. Hence, once I received the sales proceeds, most of the loan was paid leaving a five digit loan quantum still outstanding that I can pay anytime.

Looking Forward to 2011

In terms of financial freedom, I am slowly getting there. I managed a respectable but not spectacular return of 3.2% for 2010. If we factor in inflation at 3.8%, then I’ve made a net loss of 0.6%. Not a great performance but considering my target is 2x fixed deposits rates, I’ve actually beaten the internal benchmarks as even the best FD now is 1% plus for long-tenure so 3.2% is decent.

I realised that you have to risk quite a chunk of your capital to achieve higher returns and thus given that I’m still partially sidelined and overweight in cash, a 3.2% return is not bad. But I can improve and focus on identifying other blue-chips for investment when their values are temporarily depressed due to external factors.

My take on financial freedom has evolved over time. I still plan to derive a significant stream of income from dividends in the long-run, but I realised another form of investment is to build capability for me to get involved in other small ventures that could generate income streams. For instance, I still think that becoming a paid non-executive director of a listed company is one of the second careers I can aspire too but I need to build up my skillsets to do so right now. I am fortunate that in my current organisation, I’ve been appointed to be a director as part of my job to one of our entities and this is helping me learn the ropes of board responsibilities.

Healthwise, I’ve put on some of the kilogrammes I lost whilst my daughter was growing up the first 2 years. I know that health is a critical and real component of being financially free so am investing time and effort to wake up at 5.45 AM to go jogging or brisk walking. I hope to sustain this for 2011 as there is really no excuse not to pay attention to my health.

I look forward to the year 2011 and realise each day is to be lived one day at a time. I believe in the saying that, “If we fail to plan, we plan to fail.” At the same time, I realise that one has to be flexible and open to what life throws at us. Life just “is”. Whether it is “good” or “bad” depends on our own perception of it.

What are some of your thoughts as the new year 2011 begins?

Share with Panzer in the comments section.

Be well and prosper.

Makes you think more about funding your child’s college tuition in the future especially the point made that colleague fee increases outpace inflation.

What is value-for-money (VFM) and how does it impact you in your own journey towards financial freedom?

Value for Money (VFM)

By now some of you would have already fired up another browser tab to search on Google or Wikipedia for the definition of value-for-money or VFM. VFM is a concept that is talking about the three “E”s of economy, efficiency and effectiveness. It is a useful framework for examining business processes. For example, if I am reviewing budgets, I will talk about best sourcing to get economical purchases, i.e. getting more with the same budget or getting the same (quantity and quality) with a smaller budget.

Efficiency touches on the ratio between inputs and outputs, i.e. taking fewer steps to achieve same results or cutting red-tape and processes that do not add value to the organisation’s delivery of its goods or services.

Effectiveness is arguably the most challenging part of VFM in that knowing what your final outcome or objective is may not always be the easiest or most intuitive thing when you are delivering a service.

These three Es come together to forge a powerful framework in which an internal auditor can examine processes. Incidentally, it turns out that this VFM framework can also be applied to one’s journey towards financial freedom.

Economy

I think of economy as living within my means. December is bonus month and I make sure my living expenses for myself and my family does not exceed my monthly income. Thus, the bonus that I receive truly becomes a bonus and I apply the 10-90 rule, i.e. allow myself guilt-free spending of 10% while I save away 90% of the bonus for savings, investments and pre-payment of mortgage loan.

When applied to my life, it’s also about simplifying my life. Owning less stuff such as gadgets. I already have an iPhone so currently have no interest in buying an iPad or tablet device. Was considering looking at a Kindle but think the hoops that one has to jump through to buy ebooks from Amazon may not justify the time and effort as Kindle is not officially supported for the Singapore market.

Efficiency

I learnt a lot about money representing life energy given that most of us trade our working hours from 8.30 AM to 6.00 PM Mondays to Fridays to earn our wages or to carry out our business. Thus, I realise I need to work efficiently but getting as much (effective) work done during office hours but also spend sufficient time with my family and loved ones.

Efficiency can be related to cutting out the extraneous steps in life, i.e. simple but fulfilling living.

Effectiveness

This is also difficult for many to define. What is our goal in life? We can only define success or failure or being effective in reaching our goals if we have defined them. My journey towards finnacial freedom has taught me to define my goals clearly. It still remains at achieving $1 million in investible savings by age 45. It is tangible and very real but challenging target.

I may achieve it, I may not, but it continues to enthuse me to work within the principles of living within my means, to save and invest, to protect and grow my means.

Thinking about being effective in life also makes me more focussed at work. After working 15 years, I realise that working hard AND working smart are complementary. It’s no use working hard at things that do not matter and it if you don’t perfrom well at things that do matter, you still cannot achieve breakthrough results.

I am starting to see some results from applying the VFM framework to my journey towards financial freedom. The key aspect is to simplify my life. When you declutter your life with less material stuff and focus to being healthy with simple living and balance in work, family and self, you bring yourself closer to being financially free and being able to achieve economy, effectiveness and efficiency in your life.

The journey towards financial freedom is a process and not a destination. Sounds cliched but is so true. I begin to see life more and more as a process and focus on achieving repeatable results through embracing the core principles.

What type of framework or model to you use to describe how you operate towards financial freedom?

Be well and prosper.

Flickr image "Money Money Money" by Jainaj

One of the challenges of travelling along this journey towards financial freedom is how we manage our decisions to spend or save when it comes to year-end bonuses and windfall gains. It’s the time of year again where most employees would receive their 13th month bonus plus a bit more depending on their organisation remuneration policy. I am fortunate to work in an organisation that pays the 13th month as well as additional variable bonus.

What would you do with the year-end bonus that you receive?

Spend or Save: The Fork in the Road Towards Financial Freedom

Some people would spend all of it, some would spend some of it, some would spend little of it and save most for a rainy day. It all boils down to what is your approach towards financial freedom and whether you subscribe to the principles of living within (or below) your means and to save and invest the rest. My approach has been to treat bonuses and windfall gains as well… a bonus, i.e. something unexpected. Thus, I plan my expenditures for living expenses for my family and myself to be within my monthly income.

This approach then allows me to save most of the year-end bonus and windfall gains I receive. I’ve talked about the 10-90 or 20-80 rule of thumb which refers to how I’ll try to save 80-90% of the bonus and spend 10-20% of it.

What to Spend on

I’m currently reading the book, “The Happiness Hypothesis” by Jonathan Haidt and found a chapter to be extremely interesting. It talks about how much happiness we get from spending money. It turns out what many people believe makes them happy in terms of buying that new car / house / watch / <insert your luxury or conspicuous consumption item> only makes you happy for a short time. After that, the effect wears off.

It turns out that conspicuous consumption goods typically help us achieve esteem needs through signalling of our social status through the things we possess. We use stuff to signal our status in society. If you need a watch, a cheap digital quartz watch would serve the functional purpose of telling time although it won’t do too much to signal a higher social status.

From research, people experienced longer periods of happiness from spending money on experiences with people that matter, i.e. friends, relatives and loved ones. Hence, if you have $100 to blow, you may be able to maximise your happiness from spending that on a good meal with family and friends rather than on a $100 pen that is for your own consumption only. The experiences that connect you to people satisfies more than the feeling of having a $100 writing instrument because once you see someone with a $2,000 pen that is even nicer and more expensive than yours in office, the allure of your $100 pen wanes pretty fast.

The happiness we get from conspicuous consumption is relative. We are happy only if we have the biggest, nicest, latest, more expensive item than someone else. Once the relative higher status of the item is lost to someone else’s item, we start all over again. That explains why if one focusses on material stuff like a bigger house, car and home theatre system to keep up with your neighbours, one will never be happy as once your neighbour has a better “thing” than yours, you need to re-start the arms race again.

Panzer’s Approach to 2010′s Bonus

My own approach would be to spend 10% and save the rest. This allows me to indulge in the occasional frappes or blended ice coffee drink and a nice lunch versus the normal $3 economical rice. I recently bought a Bamboo Pen tablet ($125) that I found to be an useful input device that helps me minimise risk of carpal tunnel and at the same time is an interesting mouse alternative.

I’ll probably not buy another gadget since I am already using an iPhone 3GS and am not really into iPad or Andriod tablet device. But I’ll invest some of it to upgrade my wardrobe since my belts are starting to peel. Of course, bringing my family to a few restaurant meals instead of the food court would be well within my budgeted 10% spending on the bonus. My three good buddies will also get a good meal on me as we celebrate our 15 years of being friends.

My own journey towards financial freedom has taught me to develop good habits such as taking pleasure in the simple things in life. Thus, I get enormous satisfaction from visiting the public library and reading some good fiction or catching the latest Harry Potter film in the cinema. These things don’t cost much but are as enjoyable as anything that costs much more

I guess while reading Jonathan Haidt’s book, “The Happiness Hypothesis” has helped me validate some of my decisions in embarking on this journey towards financial freedom. It’s really true that keeping up with your neighbours doesn’t satisfy us as much as we think and we are just giving in to our imperative to achieve high social status.

What will you be spending your year-end bonus this year?

Share with Panzer in the comments section.

Be well and prosper.