Looking back at my working career in IT, I realised I made some terrible mistakes and missed out on several opportunities on how to make my money work harder for me. I didn’t understand the basic concepts of investing then, and how to properly manage my money. I was afraid, too passive, and thought it was all too complicated. However, as I expanded my knowledge and grasped the various concepts of personal finance management, I have eventually made my money work harder for me. Below are the key lessons that I learnt during this journey and would like to share with you, hoping that others would not make the same mistakes that I did. And as always, feel free to share your thoughts and experiences, as you read the blog, as I would love to hear your stories!
1. The Power of Saving Every Month
Saving $100 every month is the minimum one can do to ensure one can retire more comfortably, as compared to relying on state pensions or others to take care of you when you won’t be able to work anymore. The average working life is 45 years and the state pension age is being pushed towards our statistical average life expectancy. Multiplying 45 years by 12 months, the monthly $100 gets us to a $54,000 deposit. If left uninvested, this won’t end up being much, given the inflation rate targets of 2-3% (we will get to more details about inflation later). Invested safely and compounded, this can easily triple or quadruple over 4.5 decades. I hear a lot of people arguing that saving $100 is impossible but it is not – below is my current example. I believe it boils down to the lifestyle choice that one makes and if you make a point of setting aside money every month for savings, you will soon see the benefits of growing that savings base.
I took a minimum wage job as a dive instructor recently and I’m trying to live within that income and still save. I earn about 950 Euros a month, working 6 days a week and 10.5 hours daily on average. That is way below the minimum wage requirement in Spain, but hey, it’s not new to be screwed over by the employer right? The job is physically demanding and I eat a lot more than before, burning roughly 3 times more calories a day than before. I still do indulge a little – hanging out with my colleagues for beers and cocktails, eating out in restaurants 2-3 times a week, never cooking but still managing to save about 30% of my net salary every month (almost US$ 350 a month). Most importantly, I’m not touching my income of US$ 3,500 that is from my real estate. I love how fit I became, losing 12 kg, and sleeping like a baby every night, while spending my working day out and about in the sun and warm waters. And what’s more, I’m surrounded by smiles of happy customers every day, teaching my biggest passion, exchanging travel and diving experiences with like- minded souls on a daily basis.
If I were to keep my current lifestyle working for another 30 years on my current salary doing my dream job, and investing these savings alone, I could generate almost half a million dollars till I reach my official retirement age of 67. Not too bad for a below minimum wage job, right?
2. Compound Interest is the Strongest Force in the Universe
Einstein was once credited to have said that compound interest is the strongest force in the Universe. He was absolutely right. Compound interest is basically taking your period interest income paid into your account, growing your principal (the total monetary value of what you have invested), and reinvesting that amount continuously. The growth curve of your investment basically shows a exponential growth pattern. This is exactly what you miss out on when you live beyond your means and have to pay out any sort of banking loans. You need to read up on compound interest if you do not understand it fully. It is what helps small investments grow into large portfolios over an extended period of time.
3. Understanding Inflation
There is another force that affects the value of your investments/ savings and that is inflation. Inflation reduces the value of your money each year in most countries. The typical developed nation’s central bank aims an inflation rate of 2%. This is considered healthy for a moderately growing developed economy. The thing with inflation is that if you have your money stashed away under your mattress and not having it invested, you would lose 2% every year because prices for goods and services are inflating (getting more expensive) each year. Say you have $100,000 saved and sitting in a bank account that generates the typical 0.05% of interest. You would lose 1.95% each year due to a 2% inflation.That would be $1,950 a year or $162.5 a month! Never ever hold your money in such a bank account. A friend of mine had saved his whole life not investing in anything and had all his money in such an account. He stashed away a very respectable $500,000 but because the money was just sitting there, it was losing him almost $10,000 a year due to inflation in his country.
4. Investing in Index Funds
One of the more popular and easy form of investing is a low cost index fund. Rather than actively investing in particular companies and risking getting it wrong, the savviest investors choose for the bulk of their portfolio to sit in index funds. Investing in index funds is basically like investing in the average market growth of a given market. It could be US stocks, European Stocks, Asian Stocks, or global stocks. I missed out on this as I only recently learnt about it, which meant that I was leaving hundreds of thousands of dollars on the table when I did the maths (that wasn’t a great day, believe me). Whenever investing, it is important to remember that you are basically taking a gamble. Only invest what you can afford to loose. Timing is also very important with stocks so be aware of the cyclical nature of capital markets. Despite generally saying that index funds are a great way to invest your savings passively, I would not put my money in the stock market right now. It is highly overvalued, we see signs of weakness and stagnating growth, and I strongly believe in a massive correction coming up on the medium term horizon. Once the bear market eliminates a large chunk of the stock markets globally, I will invest in index funds for the first time.
5. Capitalising on Foreign Exchange Rates, Working Abroad, and Shopping Internationally for Deals
Given the increasing interlinked global nature of the our world now, being more cognizant of foreign currency exchange rates is beneficial, as well as knowing where to get the best bargains. For example, I found that shopping for casual clothes in the US was the most economical with the factory outlets, buying working clothes was the best in Germany, and travelling for leisure was the most cost efficient in Asia. Plus, income tax rates in Switzerland, Hong Kong, Dubai, and Singapore are the best, while cost of living compared to income was the best in Singapore.
a) Shopping abroad where it makes sense
Being aware of the different pricing structure of your favourite brands is key. When I was living in Australia and Singapore, I avoided shopping there as the brands that I usually purchase are much pricier in those countries. Instead, what I did was to do my shopping whenever I had a business trip to the US or Germany. This enabled me to save thousands of dollars over the past years. Of course, you would also need to consider the currency exchange rate at that point in time but I have managed to get my casual clothes 3-4 times cheaper and also leveraging the exchange rates, which gave me another 10% – 20% savings.
Another example is working suits. In Australia and Singapore, the average Hugo Boss suit was about $2000 – ridiculous when you know that you can plan a trip to Germany and buy 10 suits for that price in the discounted section of the Hugo Boss Outlet Factory. Of course I would plan a side trip down to Southern Germany to visit the beautiful outlet village of Metzingen whenever a work trip opportunity arose (did I mention the 19% VAT that I could re-claim at the airport on my way back yet?).
c) Country of residence and the impact on your savings
When I was mid-career, I didn’t merely evaluate my next boss, team, growth potential, but added new dimensions to my decision criteria: Foreign exchange rates, Income tax rate, state pension requirements for foreigners, health insurance fees, and general cost of living. This helped me boost my savings tremendously. I chose Singapore as my location after growing my career in Australia for 9 years. I knew the mining boom was about to end in 2012 just before I moved to Singapore. I anticipated a drop in the Australian Dollar because of it and negotiated a package that was equivalent to my current pay. Three months after arriving in the beautiful tropical nation state, the Australian Dollar depreciated by about 30%, basically giving me a 30% income boost compared to if I had stayed. In addition my income tax rate dropped from 40% to to 10% and my state pension requirements reduced from 9% of my income to 0% in Singapore. I thought I hit the jackpot. I was suddenly saving 3x more than when I was in Australia, living a far higher quality of life and being closer to my family in Europe. Food was healthier and cheaper, flights were heavily discounted due to the intense competition, making travelling and South East Asia escapes much more affordable than in Australia, and the rent and utilities costs were similar. Career opportunities were amazing coming from a small office at the end of the world to the Asia headquarter of my company and I managed to grow my salary by 50% in only three years by taking up the right opportunities.
c) Foreign investment in real estate
I have been saving 13 years without actively investing any of my money. It was okay when I enjoyed 4-6% interest rates in Australia, but once the GFC hit, I was down to below inflation or 2%. Not a good deal and something had to be done to avoid inflation eating up my savings. I started assessing where to put my money, looking at exchange rates and investment potential across the UK, Germany, US, Australia, Singapore, and Eastern Europe.
And what I found that had the most potential was investing in real estate in Poland. There were a couple of reasons for that: the Polish Zloty was the lowest in a decade; there was still untapped growth potential in some of the cities in Poland when I researched on the yield returns, and it of course helped that I speak the language.
By picking a good timing for the exchange rate, I transformed my hard earned Australian and Singaporean Dollars into Polish Zloty at the peak exchange rate in 2016. And instead of transferring the funds via the traditional banking system, I utilised sites such as OFX.com and TransferWise.com to transfer my dollars at minimum fees ( I paid an average of 1% for the exchange rather than the 7-9% my traditional bank offered). At S$ 800,000, an 8% difference equated to an almost S$64,000 saving! (Did I mention I can’t stand banks?) or almost another spanking new one-bedroom apartment in Poland. In addition I saved another 20% or S$ 160,000 with the favourable foreign exchange rates. This is big money and I waited years for an opportunity like that to invest. Instead of buying 200sqm of apartments in Poland, I ended up buying 299sqm at the same price – now that is a deal. It was almost 100% more than if I wouldn’t have taken advantage of the exchange rates and money transfer platforms that help avoid those horrendous banking fees. So even if the Polish real estate market crashes by 50%, I wouldn’t be bothered much as I was still 50% ahead – my hyper conservative self felt secure.
These days I’m filling the war chest again to enter the Australian Market which is showing first signs of a decline following an almost 30 years gain. The average time for a real estate bubble to bottom out is 3.5 years. I will be observing while preparing for the next opportunity.
6. Employer Loyalty does Pay Off
Last but not least, I’m aware that my generation (Millenial) is crazy about going after short term job advancement opportunities and switching their employer on average every 2 or so years. Personally, I highly advise against it. Following a mentoring discussion with a McKinsey partner early in my career, my plan was to develop within my company longterm, become a hard to replace company asset, fulfilling various functions across key business units, and grow my income exponentially through internal career advancement, rather than switching jobs for another US$ 5,000 more a year. First of all it truly paid off, as I grew my average income over 14 years in my company by S$ 17,600 a year. Secondly, I purposefully set myself up for a potential company retrenchment package to support the jump into my new FI life, picking my last role as one that wouldn’t last forever, nor could I be offered a similar role, salary, and seniority, ensuring an offer to leave my company eventually. This helped me reduce the time to save enough capital to become financially independent by approximately 3 years (or 6% of my anticipated working life). I negotiated a redundancy package worth over a year’s salary tax free (in Singapore you do not pay income tax on redundancies). I left on very good terms with my ex-company and a highly active network. The doors are open to rejoin the company anytime. In fact the offers I received after leaving were better than when I was there and the pay ridiculously tempting. I’m not excluding going back for a second stint to boost my Financial Independence level from LeanFI to AbundantFI but that is for another post!
If you have any other experiences worth sharing, please comment below. I would love to hear from your learnings and updated this post periodically.
For Freedom and to Live Your Dreams,
Your Financial Gladiator
About: This Financial Gladiator retired early at age 34 by investing most of his savings in a small real estate portfolio in Eastern Europe. Today he saves approximately 75% of his income while roaming the world and occasionally teaching as a Scuba Instructor on tropical islands. It helps him to keep fit while doing what he loves – teaching, traveling, and scuba diving. He called quits following a successful 13 year career in Information Technology throughout which he saved between 30-40% of his net income annually. Before he quit he positioned himself in a role he suspected was going to be made redundant eventually. The day arrived quickly and he ensured not to leave without a retrenchment package reducing the need to work and save 3 more years. His real estate portfolio draws a return high enough to pay him twice his annual expenses, allowing him to continue to build up his retirement portfolio while enjoying 100% freedom today.
Disclaimer: All information provided on this site is for informational purposes only and does not constitute professional financial advice.