The longer I track our income and expenses, the more I start to realise that the most effective way of building wealth at our age is to increase income. Reason being the limits to how much we can reduce expenses by are greater than how much we can increase income by.
Increase Income > Reduce Expenses
Increase Income > Reduce Expenses
At this stage, our savings rate is 40% i.e. monthly cash savings of S$4,800. To achieve a 10% reduction in expenses to boost the savings rate to 50% i.e. monthly cash savings of S$6,000, we will have to restructure our spending and lifestyle. This is a painful process and I don't see that happening unless there is a "trigger event" i.e. something drastic happens to force us to reduce our expenses.
By the way, a common suggestion is to cut morning coffees, work lunches, drinks and dinners. Based on our experience in the banking and accounting industries, this is not a good idea. My wife was the one who taught me this lesson on why that is the case.
She goes for coffees, lunches, drinks and dinners with her colleagues often. It's actually at these gatherings that important information such as upcoming retrenchment exercises, salary benchmarking and job opportunities get passed around informally. The better connected you are with your professional network, the less likely you are to get blindsided in your career.
Which is why we are better off focusing our time and effort on increasing income. It also becomes obvious that as relatively young working adults, we have a much higher chance of increasing our salary income then looking for or building up other sources of income.
Without sufficient active income to drive our passive investments, we are not going to make much progress with increasing our passive income. Self-employment and freelancing usually involve cuts to our active income provided we find a way to scale the business upwards.
Realistically, our best option is to focus on increasing our salary income, which is something we have been working on for a number of years. However, I'm sensing a lot of inertia because we seem to have reached our magic happiness individual monthly income level for now of S$6,000.
Have you heard of the income vs happiness graph? It basically shows how your happiness increases as income rises up to a certain point at which money won't make you any happier. This is essentially the magic happiness income level.
Of course, you would expect the graph to vary by country, city and individual. In our case, the individual magic happiness monthly income level is S$6,000. It is where we are right now and hence the inertia in striving for additional salary income. Let's walk through why this is the case.
1. Just enough responsibilities
We are essentially low level managers at this salary income level. There's just enough responsibilities to pick up skills from managing a small team. But not enough to overwork us and cause our stress levels to elevate.
2. Decent working hours
Consequently, our working hours are decent, usually 9am to 6 - 7pm every day from Mon to Fri. We have time and energy in the evening to engage in various social activities, exercise or have dinner with our family. Plus we don't work on the weekends because nothing is ever that important.
3. CPF contributions maximised
The monthly ordinary wage ceiling for CPF is S$6,000. Which means the employer or you will not be contributing any percentage of your monthly salary to CPF for amounts above S$6,000. Since CPF seems to think a person earning above S$6,000 don't need the additional contributions, I'm going to agree with them and stick around this level for a while.
4. Allows for family planning
We don't earn a high enough salary income to be immediate targets of retrenchment exercises. This lowers the impact of taking maternity and paternity leave if we decide to have kids. Yet the salary income is high enough to allow us to afford having kids financially.
We also get a certain level of flexibility in the planning of our workflows and schedules, which will help us adjust to having kids. Most importantly, we can both choose to continue with our careers even though the progression will be slower.
5. Low personal income tax rate
I know I keep harping on this topic but I really appreciate the low personal income tax rates here. After we factor in our CPF contributions and other tax reliefs & deductions, our individual monthly personal tax payment is S$150.
Let that sink in for a moment. Any idea how low that is compared to other global cities? This means that our time and effort spent in chasing for job positions, promotions and salary raises aren't being taken away by personal income taxes.
However, I will admit that Singapore has other wealth and consumption taxes that can hit us harder comparatively. But this is very much up to us to decide whether we purchase the items and assets (car, property etc) that subject us to these taxes.
6. Sufficient cash for savings and investments
It's true if you think we have become somewhat lazy from the considerations above. We have grown tired from all the planning and fending for ourselves that we had to do when moving to Melbourne, Sydney then back to Singapore. This is our time to recharge and rest.
Besides, S$4,800 is not a small cash amount to fund our savings and investments every month. This is not counting the S$4,500 that gets channelled into our CPF monthly for retirement purposes.
It's not a bad individual monthly income level to get stuck and be lazy at. But I will let you know if this changes. After all, our income vs happiness graph is not static. It will change as we get older and our needs & wants change as well.