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