In my last post, I wrote about how much I spent for the year. I received mixed responses from the community.
“that’s really low”
“not easy with 2 kids”
“wah so high”
The responses are not unexpected since immediate response will be comparing to personal numbers. It is only a while later that one will start to think about the context behind the figures. It should not be surprising then that the responses are mixed as our circumstances, stages of life, and preferences in lifestyle are all different.
So is it still useful to share the numbers?
Just sharing a number without narrative is really not quite useful but if one reads the narrative, then it could help us be more aware of other alternatives that might be our blind spots. And I meant it in both ways. There might be certain areas which we can learn to reduce expenses, and others where we could spend a bit more if they are meaningful to us.
Finally, there are quite a number of positive responses towards the categories. I like it too as it clarifies why I am spending the money for and I won’t hold back the spending if I find it meaningful.
Saw this response this morning and definitely a good reminder to everyone.
Back to income
Similarly when comes to income, knowing the context is important. The numbers you are going to see come from an accumulation of two decades of efforts and experience from working and investing.
Regular readers would know that this is a special year for me as I gave up my regular income. Previously, income simply means the take home salary I received. Yes, there are CPF contributions and dividends but they are future money, not for immediate use. So typically, I just looked at my take home salary.
Now that I am funding my expenditure with dividend and investment drawdown, things get a bit complicated. Also, with less than 6 years to go before I can access my CPF, it does make sense for me to see how that will fund my future expenses.
There are different ways to present the information. After thinking about it, I decided that the following two ways make more sense to me.
- Recurring vs Non-recurring
- Cashflow vs CPF
Recurring vs Non-recurring
This provides an overall view of what I earned for the year.
Recurring refers to interest and dividends. They are not guaranteed but has a high likelihood of recurring and is generally passive. Once I put in my investment, there isn’t much tracking to do except for monitoring business performance on a quarterly or half yearly basis.
Thanks to the higher interest rate from UOB One, Singapore Savings Bonds and T-bills, the amount received from cash and CPF is higher this year. Dividends dips slightly but still contributes substantially to overall income.
On the right hand side are capital gain from stock and active income. It’s obvious why capital gain from stock might not recur on a yearly basis. It depends on stock price, which is affected not only by business fundamentals. In fact, just barely two months ago, I was having a slight capital loss! So this component is highly volatile in the short term.
As for active income, it really depends if I take on any paid employment. For this year, I still worked for a month at the beginning of the year, and gave tuition to an ex-student in the second half of the year.
Cash flow and CPF
While the above gave me an overview of my earnings, not all earnings can be used to fund the expenditure. Capital gain from the stock, unless realised, cannot be used to pay for expenditure.
So another way to view my income is from a cash flow perspective. The focus on cash flow came about eight years ago, when I decided to shift from the model of “Work, Save, and Invest” to “Invest, Cash Flow, and Work”. You can read the this historical post if you are interested.
Investing and getting the cash flow, rather than paid employment, became plan A. That model continues to be relevant now as I attempt to fund my expenditure from dividend and investment drawdown.
I executed my drawdown plan early this year as my portfolio hit the targetted return. The amount to draw down is dynamics as it depends on my expenditure. Along the year, some money is ploughed back to the stock portfolio due to additional active income from giving tuition and reduction in spending.
On the other end is simply the increase of CPF. Definitely happy to see the increasing contribution every year. Just in case you are wondering – no, I do not voluntary contribute to CPF or transfer OA to SA as I do not like to lock up my money for such a long period. I was able to increase the amount by investing my OA over the years.
So this view removes the volatility that comes from the capital gain/loss from stock. One way to think about this is to treat my investment portfolio as a separate entity, like a unit trust that pays out dividend. I will liquidate a portion of the unit trust when the price is good. On the other hand, I will put more money into the fund if the price is attractive and I have excess cash.
So is my income this year $60k? $90k? or $130k?
It is all three.