In respond to Kyith’s article “How should freelancers manage their money?”, you can read it here, using content from his article, I would like to document how I am going to manage my own money.
There are many different type of freelancer or gig economy which does not have a basic salary and there is no CPF contribution from an employer. The different type of gig economy includes Uber, Grab, Deliveroo, Food Panda, gigs from Freelancer.com and online translation. There are professionals who manage their own time, own sales, own earnings such as tutors, photographers, videographers, make-up artists, swimming coaches, property agents and financial advisers.
I was a tutor during my university days, I remembered I was making in the range of $700-$1,000/month. That was based on 3 to 4 students. It was the maximum capacity which I could handle back then as I was an engineering student, taking 6 modules per semester and I needed to find time for dating. In a way, I had few years experience as a full time freelancer.
What has changed since then? I have my own family now and there is a fixed expense every month. We look into the 2 levels of expenses – Essential and Less Essentials.
The following are essential:
1. Meals with prospects – Estimate $5/lunch and $10/dinner = $15/day x 30 = $450/ month
2. Transport – $120/month
3. Mortgage – NIL
4. Utilities, town council conservancy fees, mobile – $180 + $100 + 200 = $480
5. Hospital and Surgical Insurance – $110 in cash, rest in Medisave
6. Business Expenses – $300/ month
7. Must have groceries – $540
Total Essential Monthly Expenses = $2,000/ month
I need to create the greatest runway for the dollar I spend before the next dollar comes in. My wife is willing to support my business for 1 year and I have set aside $24,000 for this venture. For every policy I successfully sold, it will take about 1-2 months before the commission comes in. I have set up two bank accounts, the 1st is to cater for the monthly expenses, the 2nd will be used to top up the 1st account to $2,000 whenever the money runs low. All business income will be pumped into 2nd account. As long as both accounts do not run dry, I will be in this business.
Phase 1: Business Building Stage – I have spoken to a few friends from the financial planning industry and it will usually take 2 years to build up your client base. It will take 1-2 years to stabilize the business.
Phase 2: Stabilized Business Stage – after 2nd year, I would have 200 clients to serve. I would have some recurring income to cover the essential expenses.
How am I going to fund Phase 1?
I am trying to develop multiple source of incomes to fund Phase 1. Refer below:
Employment Income: S$0
Financial Advisory Business Income: volatile (S$200 – S$1000/month) during Phase 1 (I believe in doing proper financial planning and will rather suffer in the short run)
Business Referral/Broker Income: S$200/month for 12 months + one off S$7,500 (equivalent to S$625/month for 1 year)
Property Management Income: S$250/month
Option Income: S$100 – 500/month
Total Monthly (minimum) Income = S$1,375/month (shortfall)
Total Monthly (maximum) Income = S$2,575/month (surplus)
I did not include Dividend Income because I want to reinvest the money to our portfolio or other financial instruments (To my friend who had a wedding lunch at JW Marriott, I am in a difficult situation at this moment, that’s why I can only provide a S$180 Ang Bao. I don’t mean to shortchange you but I hope you can be understanding).
Personal Finances After Stabilized Business Stage
If I can survive to reach Phase 2, then I will break my income into:
1. Essential Expenses – $2,500/month (Give myself a raise)
2. Constant Savings (Pay Yourself First) – 50% of remaining commission after deducting Essential Expenses
3. Investment Expenses/ Financial Freedom Fund – split the Constant Savings into half, the amount will be used to invest for financial freedom and the other half to be used to build up 2nd bank account mentioned earlier.
4. Less Essential Expenses – what’s left behind will be put into this fund to cater for entertainment, luxury goods and tour
This is kind of tough on my own self and family, I am an extreme saver, that does not mean I am not generous towards my family. I am stingy on myself but generous towards my family. I believe you need a higher saving rate to cater for unforeseeable business circumstances.
Investment Expenses/ Financial Freedom Fund
As my core business will be finance related, I should avoid concentrating my money in banking and credit card equities. I have diversified them among retail, utilities, energy, transportation and technology. OCBC consists of 17% of my portfolio at 20,000 shares and SYF at another 3%, I will not deliberately increase the shares holding in the near future.
Recently, I am exposure to annuity which can be used to create a lifetime of guarantee cash flow. I am planning to create a portfolio of annuities (diversify into 3 companies) to supplement the cash flow from CPF Life. I cannot predict the future and I may not continue to have the ability to pick stocks due to health reason or whatever reason (maybe I will be senile). In short, I want to diversify some of the risk to other financial instruments.
For illustration, it will look like this:
At age 65,
CPF Life income (Government Annuity) – S$4,000 per month (from my wife and my CPF Life)
Annuity Portfolio 1 – S$1,000 per month
Annuity Portfolio 2 – S$1,000 per month
Annuity Portfolio 3 – S$1,000 per month
Dividend Portfolio – S$5,000 per month
Total Passive Income – S$12,000 per month
The truth to all these is based on the fact that I have a supportive wife who is willing to take on the bulk of the household expenses and provide me with a runway for 1 year to let me pursue my dreams. There will be months which I will dip into my savings while I am building my client base and I need a breakthrough to progress into Phase 2. Meanwhile, I will need to juggle with building other sources of income and its associated risks.