Back to Basics- The Financial Pyramid

With the recent financial turmoil on-going, which includes (but not limited to) high interest rates, high inflation, shrinkflation, bank failures, company bankruptcies, mass layoffs etc, it further reminds us the importance of being financially prudent, and be responsible towards our personal finances.  This is highlighted recently by the Channel News Asia Talking Point program on "Millennials & Gen-Z: Young and In Debt.  Why?"  In order to be financially prudent and responsible, protective measures need to be in place to help us tide through any emergencies and unforeseen circumstances.  As such, I think it is crucial for me, and for anyone interested at this juncture, to relook into our personal finances to evaluate how satisfactory our financial safety net is, so as to ensure that we are on the sustainable financial journey.

The base level is the 'Protection of Income'.  This, in my definition, includes insurance and emergency funds.  For myself, as I am single with no children and also self-employed, I am not too concerned with life insurances that will payout lump-sum to my family in case anything happened to me, or issues like retrenchments or layoffs.  In terms of insurance, I am most concerned with hospitalization bills and being hit by any critical illness at this juncture, as any of these will most likely wipeout my entire portfolio in one go.  I am glad that I finally got myself better insured in 2023, as shared in this post.  It is definitely late, but better than never.  For emergency funds, I separate it into 2 savings accounts, one for emergencies, and one as a top-up fund.  Emergency fund is rather low, only about one month of income.  I keep a larger amount in top-up fund, which is mainly used to supplement my income in low-earning months from November to February to cover my expenses.  This is because during this period, I will say goodbye to graduating students and have to spend time finding new students to fill in the slots.  These causes a drop in my income during these months, and this is the period where my top-up funds get used up, and replenished later from March to October.  Therefore, I would like to believe that currently my base level is 75% satisfactory.  It can be further improved with a larger stash of emergency funds, especially in current tumultuous times.

The fourth level is the 'Regular Savings with Protection of Capital'.  This, in my definition, includes fixed deposits, Singapore Savings Bonds (SSBs) and Central Provident Fund (CPF).  This is, in my opinion, similar to 'investment' with very low risk of capital losses.  I currently only hold very little fixed deposits, no SSBs, and still in progress with the building up of my CPF.  I have not achieved BHS, though I am working towards it now, and I am still quite far from Full Retirement Sum (though I have achieved Basic Retirement Sum).  I will continue to slowly, but surely, contribute to my CPF to buff up my account, as every amount I can get from CPF Life after 65 is a plus.  Therefore, I would like to believe that currently my fourth level is 50% satisfactory.  The CPF component definitely needs some beefing up!

The third level is the 'Growth and Diversification'.  This, in my definition, includes riskier investments like bonds, exchange traded funds (ETF) and stocks.  Currently this level is the largest percentage of my liquid assets (excluding property which is rather illiquid).  I hold zero bonds now, 2 ETFs and 15 stocks.  My portfolio is currently slightly in the red, as shared in my quarterly update, but I am pleased with the dividends that the portfolio is currently yielding.  I will continue to grow it further via capital injection and dividend reinvestment to boost my passive income.  Therefore, I would like to believe that currently my third level is 75% satisfactory.  Looking forward to achieving my Barista FIRE number, and my FIRE number in the years ahead!

The second level is the 'Speculation'.  This, in my definition, includes the riskiest (most volatile) or the most illiquid assets, like cryptocurrencies, properties, commodities, options and derivatives.  For me personally, I only hold properties in this level, both in Singapore and Malaysia.  Property in Singapore is currently for own-stay, thus not regarded as investment.  Property in Johor Bahru, Malaysia, is currently rented out on a 2-year lease, so it is not too disastrous.  Therefore, I would like to believe that currently my second level is 50% satisfactory.  I would like to optimize my property portfolio when macroeconomic environment permits, as the high interest rates is no laughing matter.  I do not know how long will the interest rates remain at such elevated levels, thus it is better for me to be more conservative and optimize when I can.

The top level is 'Wealth Distribution'.  This, in my definition, includes retirement planning and legacy planning.  For me, legacy planning is not important, as my optimal plan is to die with almost nothing left.  If I am fortunate to be able to leave anything behind, my nieces and nephews shall sort it out themselves.  The most important thing for me will instead be retirement planning.  As I am pursuing Barista FIRE, and eventually FIRE, I would hope to achieve my FIRE numbers by 42 and 45 respectively and set out to do what I want, whenever I want.  If no further black swan events occur, I believe I am on track to achieve Barista FIRE by 42.  How things eventually turn out, I can only hope for the best, and be prepared for the worst.  Therefore, I would like to believe that currently my top level is 75% satisfactory.  The 2020 pandemic and the current banking crisis has showed me the hard way that unexpected and undesirable events pop up from time to time, and I probably need a larger buffer to cater to such events.  

I am glad to write this blog post as an exercise to see how far I have come, and how far I am lacking in certain aspects.  The shortcomings in my financial pyramid are rather glaring, and it seems like I have many components to improve upon.  May I work towards improving my financial literacy and financial planning in the years ahead before I FIRE!  As usual, Barista FIRE, here I come...!