Tuesday, November 12, 2013

The advice from an economist lecturer

This is an interesting story that I heard, the source of which I will not mention to protect the people involved.


There is an economics lecturer in a university, and we shall call him John. He is middle age, with adult kids. The kids had migrated over to Australia for reasons unknown to me, but he's still staying here in Singapore, earning a more than decent living working part time as a lecturer. The other part time work that he's doing is that of a land lord. He didn't say much, but it's reasonable to deduce that he is semi retired and had reached a certain degree of financial freedom so that he can quit his job and still maintain the same standard of living as before.


I'm not sure how many properties he had, but it should be more than 1 and that excludes the residential property that he's living in now. He had many advice for the young people he taught and some of the financial advice he mention are listed below:


1. You should buy a private property as soon as you can. Suppose an affordable property cost $1 million and you need a down payment of 20%, that is easily 200 k.


2. You should study lesser and go out to work early so that you can earn the first drop of capital to start investing. Investing, together with hard savings, will make it possible to get that down payment of 200k to begin your financial freedom journey.


Okay. Decent advice to young people (in fact, to all people) trying to make a decent living here in Singapore. But when asked whether the opportunities that enabled him to buy several properties, and reach financial independence way before the standard retirement age of 65, are still available to young people these days, not withstanding all the property cooling measures and the very recent measures by the G to clam down on the high household debts, he said a thoughtful no.


On the first point, 200k is quite impossible for a young person to amass in a short time at all. Say, that a person can save 25k a year, or slightly more than 2k a month, that would be possible after 8 yrs. But 2k a month savings on a salary of what - 3 to 3.5k? It's going to be a tough 8 years. Make it very lean and very tough 8 years. If you're a non-graduate, it's going to be like running in the Gobi desert for 8 years. Barefooted.


Oh yeah. Just like that. Running barefooted in the desert.


On the sheer difficulty of young people even getting that first bucket of money, John proposed that getting married is the key to young couples amassing enough capital to make the first down payment. 200k is difficult for 1 person? Maybe 100k is much more manageable for each unit of a couple. To save 100k, that's about saving 12k a year or 1k a month for about 8.5 years.


That's pure savings, with zero elements in investing. John mentioned that the money saved should be invested in safe, recession proof stocks (he mentioned a supermarket chain). Hmm, I would think STI might prove to be a better bet if you want to be invested in something robust. I worked it out a spreadsheet, injecting capital of 12k per year and investing all in a suitable STI fund that gives a returns of 3%. In about 8 years, you'll get your 100k. But of course there's a risk that you might end up with something lower than 100k because you have to sell it when it's not doing so well at the end of 8 years.


In other words, investing in the stock market when you need a property in 8 years might not be such a guaranteed thing that John mentioned. By investing in the stock market, based on my spreadsheet, 96k of the 100k is through pure savings (12k per year over 8 yrs = 96k), while the remaining 4k is your returns from investing. 4k! I might as well save 1k per month over 4 months - it's much more guaranteed and certainly less stressful!


In other words, it's not easy.


An interesting wrap up to this is that John regrets that his parents had sent him to school overseas. They might had better investment returns if they had used that tuition fees to buy a property. Again, totally agreed, but isn't that looking back on the rose tinted, fantasy laced view from the rear mirror? He even suggested that young people should study less and go to the workforce earlier so that they can amass that all important first bucket of gold.


Alas, things are not so simple. If you're not decently educated, chances are you'll not have a decent pay, which makes everything downstream much harder. To tell the next generation to follow the recipe of your success that happened in the past is too much of a prediction for me. In my parent's time, they see the highly educated doing office work and getting very good pay, so they advised us to study hard and get a good job in the future. A future that (most likely) our parent's generation do not possess because they are not highly educated. When it comes down to our generation, we teach our children not to study so hard because the rich are those towkays who are not highly educated but they have a strong entrepreneurial spirit. We tell them it's okay not to be good in studies and should go start a business if and when they can in order to secure a good future. A future that (most likely) we do not possess because we are too highly educated and had too much to lose if we start a business.


What's the next generation going to advice the future generations?


Date: 12-Nov-2013

10 comments :

Singapore Man of Leisure said...

LP,

I like!

I have no problem sharing my story, but I hesitate to use it as "advice" what others should do.

I made my money working overseas does not mean everyone else can and should too. 2 Singaporeans that went with me to Shanghai returned back to Singapore in less than 2 years...

If anyone and everyone can do something that's advised, what's the point again?

I especially like your bravery in highlighting parents like to give advice on things they have no clue themselves ;)

la papillion said...

Hi SMOL,

Ya, I know your stand :) However, clueless young people might use your sharing as advice, because, well, they are clueless, haha :) They will look upon older and more experienced people around them as models to follow, whether you tell not not to or otherwise.

I'm just pointing out in this post that advice is really hard to give. Whatever advice that works for you is only a point of reference for others. Even all these advice, LOL

CreateWealth8888 said...

Median income in mid 2012 is about $3K excluding Employer's CPF contribution.

Somebody on my left may not make it. Right?

la papillion said...

Hi bro8888,

This is but just one way to make it in Singapore. So many other ways to make it. For example, most people might find it easier and more breathable to get a BTO flat that is affordable for their household income to service. After 5 yrs, rent it. Save money and invest in market in the meantime. If not enough to retire or when children grew up, downgrade and cash out the difference and make do.

temperament said...

Hi la papillion,
How are you getting on?

If i am a young man today, i think i will be more frustrated as a salaried workers not less. Because the population(Fts) has exploded and competition for everything has increased.
And the World of Finance / Economics has changed to a GLOBALISED one.
It is definitely much more complicated. Without a sum of starting capital (from LAU PA or someone) it is definitely so much more difficult to start. Why?
If a couple afford to buy an HDB flat, most of them are sucked dry here. And i think it is part of the "GOV. plan". But it may back fire. Just keep watching.

la papillion said...

Hi temperament,

Haha, I know what you mean...the conspiracy theory to enslave singaporeans by debts so that they are more 'manageable'.

Knowing all these, it'll be very educational to know how you prepare your child for this harsh landscape? Self reliance by learning the ins and outs of investing/trading? Go to the landlord road? Work hard to climb the corporate ladder?

Cory said...

I made my money overseas too. Seen many Singaporean based locally as well for many years.

You will be amazed how many of them located in China and Taiwan regions. I seen a fair number who returned after few years too.

With globalization, competition of talents, and cost are at where it is needed.

If you have talent, and you are not in business or good career paths, you should be using your talents somewhere else. That's how money flows.

You have the choice to stay home but you aren't going to get rewarded fairly.

In Taiwan, people without opportunities but educated or talented, you are going to draw just ~S$1500 monthly. The cost of living is not less in Taipei compared to Singapore.

And the apartment here is sky high. There aren't "HDB" for the masses here. Parents practically has to pass down their home to their son for his family to stay.

Sorry, most of us has no low hanging fruits to pick. I wish my parents can give me millions. Is a wish not a given.

la papillion said...

Hi Cory,

Thanks for sharing your experiences. I guess we all have our challenges to meet no matter what we've inherited and where we are. I think the most important advice to give to the younger generation is that you just have to do whatever it takes and endure whatever that may come, to succeed in life.

Thanks again for sharing!

EY said...

Hi LP,

Thanks for this thought provoking post.

More than what he said, I think how he said it would be important. Did he say it with a lot of conviction and sounded as persuasive as the property salesperson? Did he provide caveats and lead his students to see a more complete picture? *Frown*

It is problematic for an educator to advocate certain views without talking about the pitfalls and the limitations of his 'advice'. Judging from what you shared, he came from a reasonably well-to-do family. If he hadn't received a good education, would he be where he is today?

Anyway, everyone is entitled to his/her opinion. :)

Cheers,
Endrene

la papillion said...

Hi Endrene,

You're right - everyone is entitled to his/her opinion. I think he's trying to advice others what made him a success today, without knowing that what will make others a success might be vastly different in the future. That's what it's so hard to give advice.

That lecturer is not my friend. I heard it 2nd hand from another person lol