Thursday, 9 June 2016

Increasing income vs cutting expenses

The previous post on our average monthly income & expenses in Singapore is useful in providing a context for this discussion on increasing income vs cutting expenses. It was a big step to reveal those figures but should be a good reference point as we update them going forward for changes in our lives. It's always interesting to see how our income and expenses will evolve over time.

Now that you have a better picture of our monthly personal finance position, it's time for me to write about a topic that has been on my mind since we started tracking our net worth in Jan 2016. Should we focus on increasing income and/or cutting expenses?
Increasing income

This is going to come as a shock to some people but our undergraduate degree in accounting and our occupations as accountants continue to be two of the best decisions we have made in our lives.

It was our undergraduate degree in accounting that provided us with the platform to obtain Australian Permanent Residency after graduating in 2009. Being Australian Permanent Residents definitely made it easier to live and work there instead of returning to Singapore after graduation.

As accountants, we already have a basic understanding of income, expenses, assets and liabilities. Hence, applying these concepts to our personal finance situation was less difficult. Our field of work also provided us with the opportunities to work in Melbourne, Sydney and Singapore as the skills and knowledge are transferable across the industries and firms.

Our experiences in these past 6 years have made us realise that it was the increases in salary income that contributed the most to our wealth building journey. When you have just started working, your salary is most likely your biggest source of income. This will probably be the case for many years unless you take the time and effort to develop other sources of income that can replace your salary income.

However, we have noticed that it can be difficult to develop these other sources of income in our initial years of work. This is the period of time where we pick up our technical skills and knowledge, which requires a certain level of focus. We obtained our professional accounting accreditations during this time and got to broaden our social and professional networks.

We definitely had the time to build up side hustles and investments if we wanted to but most of our focus and effort was spent on developing ourselves to increase our salary income. This has worked out for us so far and has contributed a great deal to where we are today.

Now that our salaries and assets have reached a certain level, we are in a position to decide how to increase our income going forward. Should we continue to focus on increasing our salary income or build up another source of active income or allocate even more cash funds to accumulating financial assets that increase our passive income (dividend and interest)?

Other sources of active income

I have considered driving for Uber/Grab or tutoring on a part-time basis as other sources of active income. To be honest, unless there is a big push factor (e.g. job loss or medical emergency), I wouldn't take the time and spend the effort to explore these options over the weekend. Our jobs can be demanding and recharging over the weekend while spending time with my wife keeps us going for the next week. Not the best idea for me to drain myself out even more to earn additional income.

I also considered doing freelance writing or finding a way to monetise this blog going forward but realised that I like writing for myself at my own time and on my own terms. I might change my mind eventually but would like to keep my personal finance writing interest as a hobby for now.

More passive income

I seem to be left with investing more of our cash funds to ETFs, Shares and Bonds to increase our passive income. We are already doing this but it depends on market opportunities and we can't rush the process without getting ourselves into a financial mess. Patience is key when it comes to investing and I practise it often to avoid overstretching our finances.

Job security

Given the deteriorating economic conditions in Singapore, there is limited scope to increase the salary income in our current jobs unless we take the risk and move industries or firms and negotiate for a higher pay. How likely is this going to happen if there are job cuts everywhere?

Even our own job security is at risk if it continues to get worse and I'm starting to understand how easy it is to get stuck and feel stagnant in our jobs as we get older. Increasing our salary income has worked for us so far in our 20s but would it have the same effect as we enter into our 30s given the ever shortening job lifecycles?
Cutting expenses

I must admit that we have never been good at cutting expenses as a means to building wealth. In Melbourne and Sydney, we rented apartments that were located in the city so we could walk to work and meet up with our friends and colleagues easily. This resulted in us paying a higher rent than if we were to rent apartments located in the city fringe or suburbs.

We had broadband, cable TV and mobile phone plans subscriptions. We bought groceries to cook our meals at home on weekdays and ate out on weekends. We bought our morning coffees and had drinks with colleagues on some work days while buying our lunches on most work days. We had staycations at hotels, did day trips and travelled overseas often using our annual leave and public holidays.

Percentage budgeting approach

We did use a percentage budgeting approach to our net monthly income i.e. 33% accommodation & related expenses, 33% living & entertainment & travel expenses and 34% savings. That's how we managed our expenses and although we did make an effort not to overspend to leave ourselves with about 40% savings in some months, we never really focused on making significant cuts to our expenses.

Even now that we are back in Singapore, you can see from our average monthly income & expenses that the percentage budgeting approach has stayed roughly the same. There was some level of lifestyle inflation but almost always within the percentages we have set out.

When I read other personal finance blogs, I know it is possible for us to try and cut our expenses significantly to increase our savings rate. But it's just not our preferred approach to building wealth. We realised at some point in time that our potential to increase income far outweighs our ability to cut expenses. This is not to say we enjoy working but we do acknowledge the benefits work has brought us.    

Ultimately, you have a limited amount of time, energy, focus and your effort is better spent on what works best for you. The 30% to 40% savings rate has gotten us this far and we probably wouldn't try to increase this to 50% unless again there is a big push factor (e.g. job loss or medical emergency). It could be laziness for us to wait for life to decide such important matters for us but what's wrong with enjoying our lives while waiting?


  1. It's true!Learning how to manage and grow your money is the only way for getting rich.


    market neutral

  2. I have a question that I've been struggling for a while, which seems easy for you to answer. Can I send an email? What's your email address?