Put More into Building Wealth Early, then divert Income to More Spending for Higher Income Couples

How would you like to have more money in your hands to bring up your children, spend more on life, yet still live responsibly?

I think that is the dream of many people but unfortunately, the narrative often quoted is that things cost much more nowadays compared to our parents time.

Readers here would draw a common theme here in that, we each have very differing situations, but what is most potent for us is to be able adopt fundamental sound knowledge, and our own data, to be flexible in planning the kind of life we are comfortable with.

I got triggered by someone exploring the possibilities of front loading their wealth building, such that after a certain age, they can stop putting money towards wealth building, yet have enough to retire at the age of 65 years old.

The idea is the main point of a very well shared advice that, due to the power of compounding over a long period of time, if you put more money towards wealth building at the early period, you sort of achieve the same amount of wealth build of someone starting late.

The question here is whether it is possible to front load your wealth building such that you dramatically cut down on how much you put towards wealth building after a certain point.

The Goal

Just in case some of the goal of why folks explore doing this is lost in translation, perhaps its better we list it out upfront:

  • Have the flexibility to contribute less to building wealth later at some point in life
  • Still want to build a decent family, raise 1 or 2 kids
  • Aim to still secure some form of decent financial independence later in life

Couples who start off earning above average

I sort of feel that not everyone will be in a position to pull of something like putting more into wealth building and then taking the foot off the pedal. You would need to be earning above average of your peers to front load well, yet be able to reach a decent financial independence or retirement.

If you and your girlfriend or spouse earn an average wage, its not that you cannot do it, you can still front load, but it is likely throughout your earning period, you cannot step down how much you put into wealth building too much..

A good case study is the folks that write at My 15 hour work week. They are rather young in their period of wealth building, coming out to work at 25 and are still very young at 28 or 29 years old. Yet a review of their very first income report and the most recent income report have shown a non-CPF net worth of nearly $300,000 built up for a couple that haven’t hit 30 years old.

That is rather remarkable and while I believe they are outliers, it does show that it can be done.

Early Wealth Accumulation: Where energy and human capital is at its strongest

There are much to like about the early 20s, in that this is where you are at the peak of your energy and ability to devote yourself well to fulfilling your human capital potential.

Putting in effort to accumulate wealth early have a combination of a few advantages:

  • You are able to focus on your career with less of a distraction from other family commitments
  • Most people do not maintain their body well, and thus only in their 20s can their body take the most punishment
  • They are at the stage where they are building up their skillsets so even if they get retrench, they are more sponge like to continue earning decent amount of money

Thus it makes a lot of sense to prioritize earning well, spending less and building wealth wisely at the early stage of the career.

Case Study: Put much more to Wealth Building at the Start, then cut to much less

Like the example of the family at 15HWW, front loading wealth building involves putting much more into wealth building at your most productive period, then taper off when you re-prioritize to focus on other areas of your life.

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For a  couple that starts off earning above average, they would be able to save 50-65% of their take home income. In this example they put away a combined $50,000 annually ($2080 per month each) for 6 years to build wealth at 5% rate of return during the intensive wealth accumulation stage.

After that, they decide to cut to 30% of their intensive wealth accumulation for the next 8 years, only putting $15,000 per annum ($650 per month each) into their wealth building.

During the first 7 years, non of the magical effects of compounding take place since it is a rather short time, and at the rate of return, they accumulated $407,100. This number is rather shocking to me considered I have just hit this amount (then again I am only  1 person doing it for 11 years while this is a DINK doing it for 7 years.)

At the end of the Low Wealth Accumulation Stage, they would have accumulated $744,708. This is at the age of 40 years old.

After the age of 40, the couple will put ZERO additional funds to building wealth, which basically means they let the $744,708 grow towards their retirement age.

Suppose they would like to retire by 55 years old, which is 15 years away from 40 years old. At the same rate of return, their $744,708 at the end of age 40 would have grown to $1,548,194.

That looks a decent amount to retire upon, but considering the couple at age 55 would probably have 40 years to live, this amount may not be enough. If the couple have a combined expenses of $36000 per annum ($3000 per month), 30 years later at a 3% inflation, the combined expenses will be $87,381. This comes up to a 5.6% withdrawal rate based upon a Wealth Fund of $1,548,194.

This level of withdrawal rate is very high, and requires much variable decision making in wealth spending to ensure it last for 40 years.

Since this is a case study, things are not perfect, inflation rate can be much higher or lower, wealth building rate of return can fluctuate as well.

The crux of the matter is that, front loading wealth building, does help build up a decent Wealth Fund to be available to be financially independent.

The couple can still make a few changes:

  • They can put away more than $50,000 at the start if they earn more or feels strongly about building wealth this way
  • They can put away more than $15,000 for the 8 years during wealth accumulation stage, certainly not as low as $15,000
  • Instead of stop putting any amount to building wealth after 40 years old, they can contribute at least a small amount
  • Their combined expenses can be much different then the $3,000 projected

It is not a law that you can only front load for 7 years. If you want to do it for 10 years or 5 years based on your situation then so be it. The idea to be sold here is that for folks that are flexible in their thinking, they can take this idea and run with it.

More funds for raising the family

Its debatable whether having children at the age of 32 ( for the woman) is a good idea. From what I remember, I was born when my mom is 31, so i think I turned out ok.

Perhaps there are some things that cannot be delayed, such as it is more problematic for woman over the age of 35 to be pregnant and gave birth to healthy babies.

If you are adamant that you wish to start a family sooner, then you have to shift accordingly.

Front loading wealth building would mean the amount you step down that is not funnelled to your Wealth Machine is put to your children.

One spouse can stop working

If your spouse is bugging you whether they can stay at home and take care of the children, be a stay at home mom, they might be more sold to the idea of putting so much to building wealth at the start.

While it can be challenging for the spouse who has to take on the full load of household expenses and mortgage payment, this plan may be for the better as the stay at home spouse can provide better care, education and attention to the children.

A safety net for unplanned or planned unemployment

In the case of Mr and Mrs 15HWW, I have no doubt that having build up $300,000 so early enabled them to have a piece of mind, knowing that in a few unplanned scenarios, the amount can in the worst case be tapped upon for 1 or 2 years of living expenses should both of them be unemployed.

It has also afforded Mr 15HWW to take a 6 month sabbatical from work and now Mrs 15HWW turn to be unemployed!

Many of my peers cannot imagine what life would be like if such retrenchment takes place to the main income earner so to see them taking this in their stride is an eye opener.

Summary

My conclusion is that putting more into wealth building at the start and tapering it off works well if your income is of a certain level. Many would criticize that how many can start saving $2,100 per month when they start working when they are bury in student loans, parent’s allowance, wedding costs.

I will say again. Not every one can, but if your situation permits, this is a good idea to pursue.

Convincing the spouse is another tough nut to crack, and not everyone can live with themselves to horrendously brainwash their spouse to accept this kind of lifestyle as Mr 15HWW.

Did you pursue this unique way of rapid accumulation and then reducing your amount of wealth building? How has that work out for you?

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Updates to the 20 Singapore Dividend Small Cap

At the start of 2013, I selected 20 small cap stocks listed on SGX that I thought would do well, and allocated $10,000. I put them on a stock portfolio tracker to track them. Interestingly, some colleagues thought I really did put money in this portfolio.

As you will see later, I wouldn’t have performed too badly.

This post serve as an update on the portfolio and whether we can derived some lessons learn.

You can review the back commentaries here:

You can view the Google Spreadsheet with all the transactions and portfolio summary here.

Overall Result

For $200,000 invested at the start of 2013, the total unrealized gains is $98,272. the total dividends collected is $34,742.

The total returns is $133,014 or 66.5%. Annualized over 2.45 years, the return is 23%. This was a massive outperformance over the STI in this period, where the STI only gain 7.3% in this period.

Now you see why i wish this is my actual portfolio.

The expected dividend yield on cost of the portfolio grew from my last update in Jun 2013 from 6.3% to 7.35%. That is not bad versus the usually yielders.

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Unrealised Hits and Misses

When I select these stocks, some of them have some interesting growth themes, while others presents yield at an attractive price. It turns out that based on total returns, 17 of them turned out well, and 2 of them didn’t.One of them is rather neutral.

3 stocks have paper gains exceeding 100%:

  • Riverstone: 199%
  • Silverlake: 161%
  • Straco: 291%

4 more stocks have paper gains exceeding 50%:

  • Sheng Siong: 61%
  • UMS: 60%
  • Micro Mech: 76%
  • CMPacific: 51.3%

2 stocks have massive drawdowns:

  • Parkson: –60%
  • Elec & Eltek: –52%

Dividend Rises and Falls

In this 2.45 years, there are much changes to the dividends paid out by the companies on this list.

All 20 stocks still paid out dividends.

The notable ones with change in yield on cost are the following:

  • UMS: 14.84% to 17.8% ,  1 for 4 Bonus Issues
  • Micro Mech: 7.04% to 9.38%
  • Straco: 2.82% to 7.52%
  • Nam Lee: 5.78% to 4.33%
  • Lee Metal: 7.98% to 11.9%
  • Parkson Retail: 2.26% to 4.14%
  • China Merchant Pacific: 7.78% to 9.9%, 1 for 20 Bonus Issues
  • Elec & Eltek: 10% to 2.86%

The lesson learn here is that when business do well, they raise the dividends. What is also observe is that the yields are respectable compared to the business trusts, real estate investment trust.

When business does not do well in Elec’s case, dividends are cut. Parkson Retail was the interesting one, where, the dividend actually was raised in this 2.45 years. It is a question whether they can pay the same amount coming up.

There is also one stock Boustead, which grew and spun off their industrial property business into Boustead Projects. Shareholders were given 3 shares for 10 Boustead shares.

Growth and Dividends are joined at the hip

There are usually comments heard that “I will go for this stock because it is a growth stock”, or “Should I be going for dividend or for growth?”

Growth and Dividends are not mutually exclusive. In the list you would observe many stocks that have shown both growth and dividends.

Straco and Silverlake both grew more than 100%, and their dividend yield on cost are respectable after growth at 7.52% and 9.48%

When you declared higher dividend because your earnings and cash flow is higher, the company gets re-priced upwards as well.

Not all picks will work out

When you put in effort to carry out prospecting each business, it doesn’t mean it will always work the way you wanted. 2 of the picks turn out not to be.

Perhaps is because I didn’t scrutinize whether there are much margin of safety in all my picks. Parkson and Elec will eventually work out over time. Parkson perhaps there is a chance,

Here is where diversification saved the portfolio here. Although these 2 have not done well, the rest did well and balance it up.

Had this been my usual strategy of concentration, I would have been killed here.

If you concentrate, the rewards are plentiful if you get it right, but if you don’t this is what you lived with.

2 to 3 great stocks propel the portfolio

While you may have some duds, where your prospecting skills are not up to scratch, great picks have more than 100% upside. And if you get a Dairy Farm in 2000, it becomes the main driver.

Sometimes I like the idea of sending out a few scouts just to sound out the reasoning of my prospecting, when perhaps there are still some unknown knowns out there (what people know that you do not know, and you do not know you don’t know everyone knows that).

Those turn out to be rather well. The big lesson learn from that is, you have always to revisit your business thesis.

20 stocks are too much for a part time wealth builder

To build on to my last paragraph of my last point, having 20 stocks as a part timer, yet need to focus on removing the weeds and fertilizing the main plant, it gets difficult to do that. You could be able to manage a 20 stocks well, but likely you won’t go deep enough to discern the business as part of risk management.

Perhaps the counter point is, that’s why we have 20 stocks! So that the Parkson and Elec doesn’t kill our portfolio.

I may be lucky here

Rising tide lifts all boats and the good operating environment may have resulted in most of the businesses doing well. I just happen to pick a few that did better. There are still a bunch which did much better that I didn’t pick up.

You could attribute this to skill, but 2.45 years is too short of a time frame and it is likely luck have more to do with the large gains than skill.

Summary

Dividends were not reinvested, and  so the result could have been improved further. I may think whether I would like to rebalance some of the stocks that are fully valued, stocks that i was wrong on the business thesis, into some other small cap stocks.

If you would like to track your portfolio the same way by transactions, you can make use of my stock portfolio tracker here.