Financial Literacy

How Much Is That Monthly Dollar?

How Much Is That Monthly Dollar?

A freshly hired graduate once told me she needed Starbucks everyday. When asked why, she said she likes customizing her drinks, but other than that, its just for her daily fix.

My impression from her response: Customized or not, the coffee wasn’t even that good, she just needed something to stay awake.

What really bothered me was that there were numerous alternatives near the office that would’ve saved her a dollar or two for her dose of caffeine. It may not seem much, but 20 working days a month amounts to $20 to $40.

However, had she even substituted Starbucks with cheaper coffee, assuming it could save her a dollar every month; it would’ve meant her owning an asset that’s worth a lot more than she thinks!

 

The Dollar Benchmark

How do we determine the true value of that monthly recurring dollar?

As of this writing, the safest fixed-income investment available in Singapore are the 30-year Singapore Government Bonds with a coupon rate of 2.75%.

So for every $100 invested, these bonds generate fixed income of $2.75 a year, split into semi-annual coupon payments. That’s about $0.23 a month.

Bond yields, especially those issued by the Singapore Government, are stable and consistent. So unless the Republic of Singapore collapses or ends up in serious trouble, you can expect the yearly 2.75% coupon payouts to be guaranteed.  Takes a whole lot of guess work off the table for our bench marking.

For simplicity, let’s assume you’re getting the bonds at it’s par value ($100).

 

The True Value of $1 Per Month

So back to our case.

In order to fund a monthly $1 commitment, you’ll need enough bonds to generate at least $12 annually.

If 2.75% equals $12, then 100% amounts to $436.36. Simple mathematics1In case you’re still trying to figure it out, that’s 12 / 0.0275. In other words, you’ll need at least $500 worth of bonds 2Rounded up because the bonds don’t trade below $100 to generate at least a dollar passively every month!

How’s that dollar looking now?

For every dollar you spend each month, you are $500 away from financial independence.

How long does it take you to save $500? Half a month? 2 months?

We’re being really conservative by assuming you only save a dollar a day with regular coffee. Regular coffee should cost around 2-3 bucks cheaper than Starbucks, so multiply that by 20 working days, that’s around $40-$60 savings per month — which translates to owning $17,460 – $26,180 worth of incoming producing bonds!

Your mind is probably churning up stuff you’ve been silently paying for all these years, that did not give you as much fulfillment as they should.

Take for example that cable subscription you never had the time to watch. Or that ridiculous mobile subscription where they charge you fees for things that should be part of the service, e.g: caller number display. How about that cup of mocha frappucino that you’re so convinced you need everyday that seriously isn’t really that fantastic? Are you fully maximizing that gym membership?

Most of us could probably cut down at least $30 to $120 per month easily, some perhaps even more. That’s $13,100 to $52,400 worth of income-producing bonds to passively fuel those needs.

If you could only invest $1,000 a month, that’s 1 to 4.3 years spent building up passive income for shows that you don’t watch, sub-par services or coffee that ain’t that great to begin with. How about shaving off another 3 to 7 years of your working life just by running in the park instead of running like a hamster?

 

So what’s the point?

The point here is to not underestimate the value of every dollar you can salvage every month. As the CEO of your own life aiming for financial freedom, this is not asking you to be miserly, to scrimp and save and deprive yourself of life’s simple pleasures.

It’s about optimizing your life to achieve maximum fulfillment with minimal wastage.

Take the Starbucks example mentioned in the beginning. If that fresh grad had saved $1 every month on coffee, that’s an extra dollar that would’ve required $500 worth of bonds to generate passively.

Sometimes, it’s perfectly alright to pay a little more for convenience or time savings. But spending extra to achieve the same results is just wasting your life and the reason why most people work till a ripe old age.

Know how much passive income you need for what’s necessary. It helps to identify what’s worth spending on and what’s worth a miss. The true cost of things will reveal itself and you’ll start looking for better value and ways to reduce wastage.

At the end of the day, it’s not how much you earn, but how much you keep.

They say a dollar saved is a dollar earned.

I’d say a dollar saved each month, is good as owning 500!

 

Footnotes   [ + ]

1. In case you’re still trying to figure it out, that’s 12 / 0.0275
2. Rounded up because the bonds don’t trade below $100

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