All this talk about financial security has recently caught some fire, with bloggers like Kyith from Investment Moats (here) and LP from Bully The Bear (here) talking about it.
But when they get comments like “where’s the entertainment expenses?” or “what about parents’ allowances?”, I start to wince.
Entertainment? Nah, not when I am just trying to just survive…
It’s apparent that the message did not get across well and the distinction between financial security and financial independence is blurry to most at best. In fact, I would even argue that there is also a difference between survival and security expenses, as explained below.
Financial Survival
The type of situation that forces one to switch on financial survival mode is rare.
I can think of one, though: A budding entrepreneur with a stay-at-home wife (likely looking after the kids). Before he takes on the risk of being an entrepreneur, it would be prudent to tabulate the expenses to ensure financial survival.
Warning: the content below is grim and is only to be read with a strong heart.
Winter is coming…
Let’s illustrate with our combined (both the Mrs and I) monthly expenses:
- Shelter ($600): Note that it’s not mortgage here. On survival mode, we would probably sell our house and rent a room for our shelter needs.
- Food & Groceries ($300): $10 a day should suffice for both of us. We could do with two meals a day. Brunch would be some bread, butter with some nuts. The average dinner would then be one cai peng (additional rice), three veg and 1 meat. And split into two. Otherwise, we would cook.
- Insurance ($50): We can just afford MediShield LIFE premiums. That’s all.
- Transport ($100): A bus or an MRT train ride would need to be well thought through to maximise the utility of the expense.
- Utilities & Toiletries ($150): Electricity and water and gas likely covered by the rental. However, there is still the broadband and the handphone charges (low-end). And of course, the daily toiletries. There’s a bit of overbudget here so that we get a nice number below.
Total: $1,200
The above scenario is a little harsh, no doubt. But that’s what survival is all about. I also reckon that in reality, there is that 5% of household in Singapore that gets by on these numbers. So it’s not impossible, even if it’s undesired for most of you readers
Even if there is a child or two in tow, the numbers should not jack up by much. No infant or childcare since one or even both parents are likely at home. It’s just the milk powder and diaper expenses. And yes, I am not about to suggest condensed milk.
To be honest, I would like to try living on these expenses for a short period just to know that such conditions do not faze me. Voluntary discomfort and stoicism needs to be practised, readers.
$1,200 a month equates to $15,000 a year and assuming a 5% real return/yield on your funds, both of us would require $300,000 to fund our “survival mode”. Not too difficult especially since we will be selling our house and pocketing the profits.
Financial Security
I wrote about financial security a month back. But I will just reiterate here again.
Basically, it’s about fulfilling these basic needs with our current lifestyle as a benchmark:
- Home Mortgage ($1,000)
- Utilities Bill ($300)
- Food ($900)
- Basic Transportation ($300)
- Insurance Costs ($300)
You will likely sleep much more soundly if these expenses are taken care of by the interests, yields or real return of your portfolio.
You don’t want to have nightmares about bills and sleep like Bran…
If we combine both our expenses, the total would amount to $2,800 a month and $34,000 a year. Using 5% yield as a benchmark, we would need $680,000.
We are still some distance off (close to halfway there though), especially since home equity would have to be excluded for the generation of the cash flow.
That’s why it’s a long term goal. It should take at least 5 years to hit that point.
Financial Independence
The holy grail, and what many are aiming for in life.
The point when they can leave their jobs, no longer need to work for money and continue living the lifestyle they are already having. The passive income funds the present lifestyle.
Based on an estimated annual expense of $50,000, that requires a cool $1 million before we get to that stage.
In Summary
If you’re still struggling to catch the differences, here’s a simplified table:
| Definition | Monthly Expenses | Yearly Expenses | Amount Required (x 20) | |
| Financial Survival | Absolute Basic for All Categories | $1,200 | $15,000 | $300,000 |
| Financial Security | Basic Categories for Current Living Standard | $2,800 | $34,000 | $680,000 |
| Financial Independence | All-In Expenses for Current Living Standard | $4,000 | $50,000 | $1,000,000 |
Hi,
I agree that there are some distinction between these terms, however, for the all categories, will it be better to set some buffer? Like set aside some monthly extra funds to ensure that the funds will cater to any exception cases (Hospital Bill, Wedding invitation, home renovation and etc.)
For me I always plan this way to ensure that I have everything taken care of
I think if you keep including buffer, there will be no end. it will not be “what is the bare minimum you need to survive”. the idea of survival have an element of being stoic and in a struggle.
Sooner or later if you include more things, you will end up in financial independence discussion.