Tuesday, December 16, 2014

Financial Independence as a Continuum.

Since my exams, I have been busy getting my EC ready as TOP occurred a couple of months ago.

Most of my day has been spent moving my belongings from my parent's place and assembling Ikea furniture. As we spend quite a fortune on conservancy fees, I was also retooling my exercise routine to ensure that my conservancy fees will result in a healthier life which will hopefully defray medical expenses in the future.

This blog article is my first one from my new home.

A lot of bloggers and the financial community have been very anxious and excited over Anthony Robbin's latest book entitled Money. Overall, I think that it is a a very credible product. I don't really read Tony Robbins for his financial know-how, his genius lies in making really complex self-improvement habits accessible to the lay-man - folks who are emotional creatures and not conscientious scholar-types who would not require a motivational speaker to meet their personal goals. This is something which I struggle to do as a finance writer.

The financial community has had many years to criticize Anthony Robbins when he was the King of Infomercials in the past, when he was trying to sell his brand of NLP and even invented a new measure of healthiness of  a food product by labeling each item with a frequency measure.

This time, twenty years after his previous book, Tony Robbins actually created a real product which can benefit a lot of readers, he has come under  attack from all corners of the financial industry. The criticisms  focused on nitpicking his choice of portfolio allocation, but I think what the financial community really wants to do is to muffle his central message which is to get everyone to cut down the commissions they pay to the financial industry. Another words, readers are advised to move away from actively managed funds into low cost ETFs.

I am only currently a third into his book and can't really comment on his investment strategies yet, but I am already impressed with the way he broke the concept of Financial Independence into manageable steps which people can aspire to.

Basically, according to Robbins, there are 5 levels of financial independence. At each level, your investment income covers some of your needs. A person who is financially secure covers his basic expenses, a person with absolute financial freedom can buy a private island in Greece and live a life of constant luxury without being answerable to anyone.

A summary of Robbin's ideas are as follows :
  • Financial Security = Investment Income covers  Mortgage, Utilities, Food, Transportation, Insurance
  • Financial Vitality = Financial Security + 0.5 x (Clothes + Dining + Entertainment + Indulgences)
  • Financial Independence = Current level of expenses
  • Financial Freedom = Financial Independence + Some travel + Donations
  • Absolute Financial Freedom = Financial Freedom + Private island + Private Jet
If you refer to Robbin's model, I can currently cover his criteria for Financial Independence but that's mainly because, beyond the fees I pay to SMU for Law School, I have few indulgences in my life. 

More useful to the beginner who is just beginning his journey in investments, is that it may be better to break the first step of  Financial Security down into component expenses. For a young graduate or blog reader who has just realized that he needs some retirement planning, one approach is to start with each expense item. 

For financial security, let's say that you incur $200 of insurance expenses a month or $2400 a year, As a beginner, you do not know how to invest and has decided to buy a portfolio of REITs which yield about 6.5% ( Suppose you alphabetically buy 1 lot of all local REITs with your savings ) . Using a conservative 5% estimate for dividends, you will need a portfolio size of $2400/5% or 20 x $2400 or $48,000 to permanently cover all your future insurance expenses. If you can save $12,000 a year, you may attain the state of being able to pay off all subsequent insurance expenses after 4 years of work. 

Similarly for transport, you may also spend $200 on bus and MRT trips. By saving another $48,000, you also permanently resolve your transport woes once your portfolio reaches another $48,000 milestone. This will take shorter than 4 years as you would have a couple of raises and can also save the $200 you no longer pay from your earned income to the insurance company. 

In your journey towards becoming financially secure, you may start with Utilities, Insurance, Transport before moving on to food and the mortgage which tend to be larger expenses. This may take a decade of work but at the end of the journey, you can stop relying on your earned income to pay for these basic items. Note that disciplined savers may also find that they can accelerate their wealth accumulation as they earn more and spend less of their earned income as the years gone by. 

All in all, it was nice that a motivational superstar like Anthony Robbins agree with my slow and steady approach to wealth accumulation. The problem with each generation of folks is that they are always looking for a short-cut to gain financial independence where there is none.  By the time I was in my early thirties, I was able to save 100% of my earned income every month. I was even more pleased that Tony was also able to highlight areas of growth for folks who have achieved financial independence. Perhaps after I resurrect my career as a lawyer in the future, I can start thinking about designing a more comfortable lifestyle for my self and my family.  






2 comments:

Stoical Keynes said...

Hi Christopher,

Congrats on your new home!

I actually quite like Robbins' book after browsing though it for half an hour at Kino.

He probably doesn't really need to make more money out of a new book (it's been 20 years) and I do think his motivations to help more people attain FI is genuine.

Liked how he break down the journey into 5 stages and you are right that even for the 1st stage, one has to break them down into several levels to get some "small wins" and maintain motivation.

Hope all's well in law school.

Christopher Ng Wai Chung said...

Thanks man ! All is good until Friday when results for the first semester will be announced.