Friday, 30 September 2016

Our annual spending multiples

I will be going on a 2 week holiday to Europe with my wife before starting my new job later this year. It's always good to have a break in between jobs just to relax and refresh myself. After my probation ends mid next year, we will probably head to the West Coast USA for another 2 week holiday to reward myself if I clear it or to console myself if I fail it.

I have mentioned before on my blog that travelling for overseas holidays is one of our main expenditure items. We enjoy both short and long haul holidays and plan to travel more while we still can as a Dual Income No Kids couple in Singapore. Who knows how long this will last.

However, it's not the fact that we just spent thousands of dollars on flights, accommodations and currency exchange that triggered this post. Admittedly, I was taken aback by how much our monthly expenses increased due to the travel spending.

Have you heard of the Wall Street Playboys blog? It's informative and insightful yet divisive and depressing at the same time. The thought process, logic and math are sound but I doubt the majority of people can follow their suggested roadmap and actions. Me being one of them.

I'm not their target audience but I do read the blog posts sometimes to pick up insights on how we manage our careers and finances. Their latest post on why savings rates are worthless and what real net worth is brought my attention to our lack of focus on the annual spending multiples.
I have been calculating our savings rate and assumed an average fixed percentage savings of 40% will be sufficient. I should have realised the need to link our savings and investments to our spending to test whether this assumption will hold.

I'm going to take a conservative approach and exclude our retirement assets consisting of the Central Provident Fund (CPF) funds in Singapore and Superannuation funds in Australia. Reason being we can't access the retirement monies now to manage any cash outflows and expenses. I know we can use the CPF - OA funds for housing expenses but will choose not to include it at this stage.

This is how I calculated our annual spending multiple at the end of each month: (Total savings and investments) / (Total expenses for the previous 11 and current months).

By the way, I have a new Spending Multiple & Savings Rate page on the blog to track the monthly annual spending multiples for 2016. This replaces the old Savings Rate only page.

According to the guidelines provided by Wall Street Playboys, 20x annual spending is rich, 10x annual spending is comfortable and 1x annual spending is disastrous. We are currently at 4.77x annual spending and it has increased from 4.20x at the start of the year. However, this suggests we are only at an average level of real net worth and not as comfortable as we thought.

Just when we think we are progressing. It still looks like we have a long way to go and our goal for now should be to get to 10x annual spending. At the very least, it will lower the possibility of a few significant negative events in our jobs and financial markets from wiping us out.

4 comments:

  1. Hi may I know how u calculate monthly spending multiple? Tried to google cannot find.

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  2. Tried calculating based on your income and expenses but don't get 4. Hmmmm

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  3. Hi Cheryl,

    I'm tracking my annual spending multiple on a monthly basis rather than calculating my monthly spending multiple. At the end of each month, I calculate my annual spending multiple using this formula: (Total savings and investments) / (Total expenses for the previous 11 and current months).

    You are correct that if you try calculating using the figures on this blog, you won't get to 4. The numbers on my blog are proxies for the actual figures. I don't disclose offshore savings & investments held in Australia in the asset portfolio page. But I include a portion of them in the passive income, net worth and spending multiple calculations.

    Cheers,
    TFS

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  4. There are a lot of ways to manage an individual's portfolio in financing and accounts, and the truth is that there isn't a one solution fits all answer. We just have to be active in management and know our limits at the end of the day! The fact that you are able to manage your well enough to afford yearly holidays is already an achievement!

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