How Much Do You Need in 20 Years?

Recently, I've been going around asking many people how much do they need a month to survive comfortably on without any other income.

The range I've gotten was between $1,500 - $2,000 if you don't own a car, and between $3,000 - $4,000 if you intend to own a car.

As what I've written in my "About Me", I plan to retire at 45. This gives me a total of 20 years to accumulate my wealth. Yes, now you know my age *intense revelation music*.

From the above range on how much is necessary to live comfortably, what would that value be in 20 years?

Source: Trading Economics

Based on Singapore's inflation rate taken from Trading Economics, inflation rate average at 2.63% from 1962 to 2017. We can note from the graph above that there is an exceptional spike between 1973 to 1975, reaching a peak of 34% in March of 1974. As Singapore is now a developed country, it is very difficult for such occurrence to happen. Besides that, because our average inflation rate takes into account this spike, we can assume that is now on the higher end of the spectrum. And this can be proven by noting that majority of data points since 1962 has been below this average.

However, to be further on the safe side, we will multiply this by a safety factor of 1.1, giving us a buffer of 10% safety. The inflation rate (after safety factor of 1.1) turns out to be 2.89%.

Now, rewinding to our initial ranges, if we were to account for 20 years of inflation, this is how much a month we need to survive comfortably:

1) Not intending to own a car: $2,652 - $3,536
2) Intending to own a car: $5,304 - $7,072

Of course, I do not have any experience owning a car, and do not know how much it costs to own one today, however, the true intent of this post is for you to work out how much you need in future, based on today's cost of living.

Should we save aggresively?

We all know the importance of saving - for rainy days, for retirement, for financial independence, and the list goes on.. However, have you ever thought how much that extra $1.50 coffee everyday will cost you in the long run? The question then leads to how aggressive should we save, and how much would it cost us if we don't?

In this post, I'll try to put that into numbers.

Let's consider that our savings goal is $300,000, and the annual compounding rate is 3%. Based on everyone's different lifestyles, we might all achieve this goal in a different set time frame. So let's look at how much NOT saving aggressively will cost us:

Illustration of Compounding Effect - 3% Per Annum

We take into consideration three scenarios:

1. Saving $30,000/yr (takes us 10 years)
2. Saving $20,000/yr (takes us 15 years)
3. Saving $15,000/yr (takes us 20 years)

From the above illustration, at the end of 30 years, where we first save and let our savings compound after hitting our goal, it can be noted that a difference of 5 years taken to reach our savings goal will cost us around $40,000. 

Illustration of Compounding Effect - 5% Per Annum

But what if that annual rate was increased to 5%? Well, that difference of 5 years would cost us about $90,000-$100,000. And the difference increases as your savings goal increases, or your annual compound rate increases.

That brings us to the next question, should we all save aggressively? - by cutting down all the entertainment in our lives, stop eating out, and live as frugal as one can?

My answer to that is a definite NO. However, everyone's lifestyle is different and therefore the responsibility is on ourselves to judge. Personally, I feel that we need to have a balance in our lives, and to find that balance is dependent on one self. As long as you know how much is a comfortable amount for you in the future, work towards that goal.

We are all humans after all, and humans need different forms of interaction and activity. If one were to stay home and save every cent they earn, one's mind might become idle and fall prey to the devil's workshop. Besides, for the young people out there like myself, how do you expect to find love if you don't go out and mingle/date?

The aim of this post is to therefore point out the cost we pay in the future from our spending in the current. I believe a better analogy to this is how much we spend on small daily necessities. For example, that morning cup of Starbucks that we love, can we substitute it with a much cheaper alternative? Or the morning Uber/Grab to work, can we substitute it by waking up earlier to take the bus/train? You'll be surprised how these little things can add up.

Cutting Down Daily Coffee Spending By $2.50

Based on the coffee example above, if we can substitute our daily Starbucks with a cheaper alternative and save $2.50 a day, this adds up to be $900/yr ($2.5 x 30days x 12mths).

Putting that into our table, if we had spent $900/yr for Starbucks, we would only save $14,100/yr and will take 22 years to achieve our savings goal of $300,000 compared to 20 years if we don't. Looking at the results, it amounts to a HUGE difference of $17,000 in 30 years! 

I hope this post gives you something to think about.