Is Saving 100k Really That Important?

While on the path FI, many would definitely stumble onto the quote by Warren Buffett that saving the first 100k is the most difficult. Is it true? Is 100k really a big deal? Many would argue that it is almost impossible to do so, and continue living the kind of life whereby they still choose to live in the moment. I want to point out here that I too live in the moment and not all people who are on the path to FI live the hermit kind of life and scrimp on every single life experience.

I shall do a reverse engineering on my path towards this first 100k, and the events that happened along the way.

How it started

I came out from University, clueless of what the working world had to offer. And like many impressionable young adults, was swayed by the seemingly easy money that one was promised in the insurance line. The managers whom tried to lure me in enticed me by describing how they were bringing in a high income each month and that it was easy for me to do so too. So I naively joined. And what a lesson that decision turned out to be. 

Having no concept of  proper finance, I was plunged into the world of Savings plan, ILP, Whole Life Plan, Term and countless other products. We were all thought to think that savings plans were the greatest products there was on earth. Being curious, I went to read up on ILP and found out from many online reviews that it was not a good product, and so I was hesitant to sell it. But my managers always told me it is a great product and bla bla bla. Over the months I delved deeper into the technical aspects of the contract, by reading the entire product feature and contract on my own (I can bet you majority of the insurance agents out there do not even do such a thing, they just depend on sales tactic of either overturning your doubts about the plan, or distracting you with some other story.). I found out about the high charges as compared to other plans and still many high flying agents were so proud of recommending the product, at the end of the day. It was just for their own pocket.

Lesson 1: Majority of the agents only care about the commission they make off you, so if you find one that really puts your needs and interest above the money they could earn, congrats.

More Discoveries

I kept thinking of the question, 'What exactly is insurance?' and at the end of the day, read up and finally concluded that the origins of Insurance was based on a simple exchange. The risk of a huge financial catastrophe was handed over to the insurer by the concept of risk pooling. And that led me to the second realization, that Term plans were the most cost effective in doing so. But the insurance industry, driven by the need to for ever increasing profits, came up with multiple financial products that were driven by money but deceitfully wrapped on the outside by the concept of Protection (think ILPs, Whole life plan, Savings plan). What is worse than a lie? A half-truth. It still contains the essence of a lie. Let that sink in for a moment.

Lesson 2: Term plans are the most cost effective plans, and the most original and pure form of Insurance coverage 

Final Straw

My concept of Financial Planning was slowing evolving, and as I looked at those successful ones around me, I realized they were mainly selling for their own selfish reasons rather than putting the customer at first. One last major lesson was when I was sitting in a class that was teaching about the investment products the company had to offer, I asked the trainer on how one does portfolio re-balancing. It fueled in me the desire to find out more and that was where I stumbled onto bloggers who were so ever willing to share their knowledge and their thoughts, FOR FREE.. I learned about ETFs being one of the safer products to start in our journey of the real investment world. After learning about it's low cost, I brought this question to one of the top producers, whom in my opinion, stood out from majority because he was always able to convince people to purchase insurance from a technical point of view. Running through every single sentence of the contract, down to actuarial calculation for the product. I had so much respect for him, until the following exchange took place.

Magpie: So senior, I read that ETFs have way lower costs than our company's investment funds (and when I mean low, here is the comparison STI ETF: 0.3%, Company Funds: typically 1.5%, with some reaching 3-5%). Isn't it a good product? Shouldn't we be recommending it to our clients so that they can save more? 

Senior: (Obviously haven't really read up on ETF, since he was making so much money in recommending expensive funds to his clients). Oh wow, ETFs seem good, but so are the Company's funds. I will recommend the client to buy both, but that is only if they ask. 

I was aghast by that reply. Clearly he was just interested in money. 

Lesson 3: I will never let such a person manage my finance. And if I were to do financial planning, it will only be to purchase a Hospitalization plan, a Term plan and I rather put my money into ETFs than into a savings plan 

**Another insight I gained from this industry. They call themselves financial planners/consultant but clearly something is wrong with their planning. Many of the top producers are trapped by their own purchasing of insurance products, since the company gives them incentives from time to time. But in the process, they become slaves to their own purchases. Many need to find ways to finance their insurance premiums that ran up to a few thousand dollars each month. That alone adds another layer of complexity into how they approach potential clients. It's like a drug addition, over time the most hardcore drug addicts ignore any form of dignity they once had in life just to fulfill their own needs.

Career Re-set

With those encounters shaping my worldview on financial planning, I left the industry. And at that moment, I recall I only had about $10k in the bank. It was also at this time that I learned about high yield accounts, etc. The feeling I had than was so clear, these bloggers who have accumulated $100k, $200k, a couple of million, while it was impossible to me. Even $50k seemed so far. I dream that I can one day have that kind of money, but it will likely never happen to me. The stories I read, were so distant. When I moved on to the next job and started having a fixed income, it was when I had my first high yield account, Maybank Saveup. At that moment, it seemed like the best to me, almost 3% p.a upon fulfilling 3 criteria. And that was when I had my first experience of seeing $20/$30 in interest each month, as compared to the paltry $0.50 that I was used to when my money was in POSB. I was hooked. It turned out to be so easy and such a huge difference it made to my day, that there was joy in seeing this money come in each month. That was when I also started learning about Cashback cards, and wow, 3% savings here and there on each transaction really added up over time. 

Lesson 4: High yield accounts + Cash back really gives you a good feeling each month. And it is 'Free' with minimal effort once it is set up

First Foray

It was also around this time that I began taking baby steps into investing, with finally taking the decision to start on POSB-invest saver. As I read up more, I found out that I was quite hesitant to put money into investments, given how people always said it was risky. I also read plenty on why people deployed Dollar Cost Averaging(DCA) into their investment planning, and it was so that emotions could be removed. I finally took the courage to start this, and I was glad I did it. This monthly plan removed the emotions I had, and at that time, I was comfortable with investing $100 into it. I thought of how this $100 seem like a big deal of money, but to many others, it was a comparably insignificant sum. Everyone has different perceptions, and I tried to see it from other people's perspective, on how they invested thousands of dollars into their business with no guarantees on whether they will earn it back. I took this bold step into another world. 

I soon found myself reading more about what this STI ETF was, what it consisted of, and what were the pros and cons of it. It was my first foray into understanding financial metrics that in the past, seemed unimaginable to pick up, PE ratio, Div Yield, ROE, ROI, etc. And finally came the season where dividends came in. It was so small and insignificant, I remember it being around $7. But still I thought, wow, this does not feel difficult, and my money is still sitting there. If I increase the capital, the incoming dividend will be more. Wow. This led me to reading up more on dividends, and I discovered this wonderful website called dividends.sg. It was something that I looked into quite religiously over that period, and it convinced me that dividend payout was almost guaranteed every year(of course, please do your homework, not everything is guaranteed), with companies having different payout dates. It solidified the idea that Dividend investing is here to stay, and I was tilting more towards this investment angle, other than doing Trading as another way to increase money. 

Lesson 5: Start with ETF, and you need to make the plunge to give it a try. It will be the start of a whole new journey. Because you own it now, and when you own it, it creates a psychological need to understand what is it you own and protect it. And Dividends are the icing on the cake on this journey

Another Game-Changer

It was also around this time that I started tracking every single costs I had. I started by logging them on the iphone notepad, and going home to update an excel sheet. But it soon became a chore, and I switched over to google sheets instead, constantly improving on the template I used to update my expenses. Till this day, I would say that creating your own tracking sheet beats any app there is out there, since everyone has their way of recording and categorizing their expenses. It is very important to be using something you are comfortable with, and this made such a huge difference. I remember using a couple of apps that people recommended online, but it hardly moved past the initial excitement phase I had in the first couple of weeks of using the app. 

From tracking it on a notepad to developing a tracking sheet each month, I finally enhanced it to have an overall goal each year on what my target would be. The final product.

I set out the goal I want to achieve, the negotiable and non-negotiable targets, and every month, log into every account that contains money, and jot it down into this excel. It sure feels good seeing the goals reached, but more than that, it made me aware of how much my networth was growing, and inspired me to find ways to increase it to reach my goals. I celebrated when I hit my goals, it certainly helps. 

Lesson 6: Setting goals may sound so stupid, especially since we were forced to do it every year in school for our grades. But it makes such a huge difference when it is something you have interest in. TRY IT

Making Optimal Decisions

As a result of the above few learning points, and especially Lesson 6, I learned how to optimize my spending decisions and habits. Here are just a few

- Using Shopback instead of paying to the merchant directly

- Using Youtrip instead of paying via CC when overseas

- Never paying late fees for any bills

- Choosing to pay insurance premiums in annual mode instead of monthly

- Using Singsaver/Go Bear to sign up for Credit Cards on promotion and getting vouchers (almost effortless too)

- Learning that annual CC fees can be waived upon request

- Choosing the right broker for my stock purchase

All these small little decisions compound, and collectively they do add up to a tidy sum of money saved up. Life still goes on, celebrations take place. I do not scrimp on every single thing, but through the above platforms, I know I am getting just a tiny bit of return. It brings a smile on my face. 

Lesson 7: Your mindset and habits changes through this journey, and you learn to make better financial decisions that sets you up for the next half of your life

Conclusion

Looking back, is this 100k really important? You decide for yourself. To me, my financial worldview has been re-shaped for the better. 

It is not about the absolute figure, but the process of change that took place internally.

Just a random thought: I thought back to when I only had 10k at the start, but now, if the 100k is fully deployed with a dividend yield of 5%, I just need 2 years, without any effort other than the initial effort of placing it into the right stocks. And my 10k doubles. It seems like it is getting easier. Don't you like that thought too?