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IF you decide that your path to financial freedom is through squirrelling money away and then investing a portion, the road can seem incredibly long.
You cannot think in terms of days and months.
Rather, your time horizon stretches to decades: 20 years before the kids graduate, 30 years before you stop working, 50 years before you kick the bucket, and so on.
The sheer length of time, combined with the million-dollar figures bandied about as the nest eggs people need before they can retire, makes people think that early retirement is impossible.
One issue is how passive income seems very hard to accumulate.
Passive income is income earned without lifting a finger, because you are holding on to assets yielding a stream of dividends.
Passive income is best thought of in tangible, day-to-day terms.
For example, how much money do you need to invest before you can get a dollar a day, for the rest of your life?
First, we need to figure out what an acceptable yield is.
Traditionally, this number has been in the high single digits for those in the US stock market, the biggest and most developed market in the world.
Pension funds, for example, used 7-8 per cent as an expected rate of return in their projections to figure out how much they need to invest now.
This could comprise equity returns of close to 10 per cent a year, combined with bonds yielding say, 5 per cent a year.
In today's climate of low yields and what seems like a multi-year cycle of falling interest rates and weak economic growth, these return assumptions are too optimistic.
With safe bonds yielding a few per cent at the most, and equity markets that cannot be considered cheap, expected return assumptions on a typical 60:40 balanced portfolio of stocks and bonds have dropped to the mid-single digits.
Let's take a slightly conservative stance on this matter and assume a 4-5 per cent rate of return that includes capital gains and dividends.
This is a reasonable assumption. Risk-free Singapore government bonds have yielded around 2-3 per cent in the last 10 years.
The Straits Times Index, meanwhile, has returned 7-8 per cent a year over 10 years, inclusive of dividends. Meanwhile, the largest real estate investment trusts, which wealthy investors like to hold, are yielding 5-6 per cent.
So 4-5 per cent is a decent long-term return assumption.
Using the midpoint 4.5 per cent, and 360 days a year, we find that the sum we need to generate a dollar a day in perpetuity is S$8,000 - a nice, round, and lucky number.
But S$8,000! Just to generate a dollar a day!
One's sense of proportion goes awry when we talk about eternity.
It is not easy to save up the first S$8,000, which could be three times the monthly take-home pay of a fresh graduate, or four to five times for non-graduates.
What can you do with a dollar a day, anyway?
It can buy you a cheap drink, or a short-distance bus ride. Yet as we discussed in this space two years ago, a surprisingly large number of things can be purchased with a dollar.
But S$1 can't feed you, surely.
Consider what happens, however, once you lock in that first perpetual dollar a day, followed by another one, and another. You have invested S$24,000 at this point. This generates three dollars a day for the rest of your life.
This might not seem much, but you can eat a cheap meal a day: a plate of economical rice at a hawker centre, for example. Assuming our conservative return assumption is balanced out by future inflation, you are guaranteed a meal a day for as long as you live. This is no small feat, with just S$24,000 of capital. Repeat the S$24,000 investment twice more, and you now have three meals a day for as long as you live. With S$72,000 yielding 4.5 per cent a year, you get S$3,240, or about nine dollars a day, forever.
You cannot eat lavishly, but you won't starve, either. A basic need has been fulfilled. Everyone has their own milestones on the road to financial freedom.
Food happens to be one I like.
Barring war, nuclear disaster or alien invasions, your basic survival needs are taken care of once you hit nine times S$8,000 invested. The road to financial freedom can be a daunting path at first glance. Little stepping stones can help, starting with your first perpetual dollar a day.
What can S$1 buy you, anyway? A Monday Multiple column in May 2013 discusses this:
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