You will be able to separate the spending you must cover every year from the spending you could cut in a bad year.
Picture the year your investments drop by a third. The news is full of it, your app is a wall of red, and you have stopped working. Some of your spending has to go on anyway: the conservancy charges, the groceries, the insurance premium due in March. Some of it could wait: the trip to Hokkaido, the new camera lens, dinner at the place your friends like. In that year, the difference between those two kinds of spending is the difference between a plan that bends and one that breaks.
In lesson 1.1, Your number starts with spending, not a round figure, you totalled your last twelve months. This lesson splits that total in a way that will matter in every module after this one.
Essential spending is the spending you must cover every year, whatever markets do. For most people in Singapore it includes housing (mortgage, rent, conservancy and property tax), food at home, utilities, phone and internet, transport, insurance premiums and basic healthcare. If you support your parents with a monthly allowance, that probably belongs here too, because you would not stop it in a bad year.
The test is simple. Ask of each line: if my portfolio fell sharply this year, would I still pay this? If the answer is yes without hesitation, it is essential.
Be honest about the grey areas. Groceries pass the test easily, while food delivered three times a week might be partly flexible, because in a bad month you would cook more. A basic phone plan passes too, though a new handset every year probably does not. When a line is half one thing and half the other, split it into two lines and sort each part on its own.
Flexible spending is everything you could trim, delay or skip in a bad year without real hardship. Travel and dining out are the obvious ones. Hobbies, gifts, entertainment and most subscriptions usually belong here as well, along with shopping beyond the basics.
Flexible does not mean wasteful. Some of it may be the reason you want financial independence in the first place: the long trips, the classes, the time with friends. The label only says that you could cut it for a year or two if you had to, which gives the plan room to bend.
The third group is the one most people forget, as lesson 1.1 warned. Lumpy costs arrive once a year or once every few years: an annual insurance premium, a new fridge, a laptop, home repairs, a big family celebration, a gift when a cousin gets married. In any one month they look like exceptions. Over a decade they are as regular as rent.
Put them in the yearly figure as an average: divide the cost by the number of years between each one. With example figures, a S$6,000 renovation you expect every ten years becomes S$600 a year, and a S$2,000 laptop replaced every four years becomes S$500. If you own a car, spread its replacement cost over the years you expect to keep it and add that too.
Here is how one person did it, with made-up figures. Priya, 34, works in marketing and lives alone in a four-room HDB flat with a mortgage. Her statements showed S$45,600 of spending last year. She sorted it like this:
Essential, S$24,600: mortgage cash portion, conservancy, utilities, groceries, MRT and taxis to work, office lunches, her phone plan, her yearly income tax bill and a monthly allowance to her mother Flexible, S$12,000: travel, dinners out, a pottery class, shopping and a few streaming services Lumpy, S$9,000 as a yearly average: annual insurance premiums, home repairs and appliances, devices, red packets and wedding gifts, and one bigger holiday every couple of years
Notice the income tax bill in her essentials. In Singapore most employees pay income tax from their take-home pay after IRAS sends the bill, so it shows up in bank statements. CPF does not, because it is deducted before your salary arrives. Lesson 1.3 deals with what happens to both when the salary stops.
Now think back to the year your investments fell. If all your spending is essential, you have only one move: sell investments at low prices to pay the bills. If a large part of it is flexible, you have a second move: spend less for a while and let the portfolio recover.
The split also points to a stronger structure. Suppose your essential spending could be covered by income that does not depend on markets, such as a CPF LIFE payout later in life, rent from a property or part-time work. Then your investments only have to carry the flexible part. A bad year would mean fewer holidays, and the bills would still be paid. Module 3 shows how CPF LIFE can do this job from your payout age, and module 5 shows how part-time work can do it earlier.
For Priya, the split shows that a little over half her spending is essential. She finds that useful straight away. In a bad year she could probably cut about a quarter of her total, mostly travel and dinners, without touching anything she needs, and lesson 2.4 will come back to that when she chooses a withdrawal rate.
Sort by what the spending is for, not by how it is paid. A GIRO deduction can be flexible, and a cash payment can be essential.
Do not move things into flexible to make the essential figure look smaller. The essential number is meant to be the floor you can rely on, and a floor you have flattered will not hold you up.
When you are unsure, put it in essential. Being cautious here costs you a slightly higher number. Being careless costs you a bad year in which you discover that your flexible spending was not flexible after all.
Take last year's total from lesson 1.1 and your statements, and go line by line. The activity below asks for three yearly totals, one per group, so keep a running sum as you go.
Split last year's spending into essential, flexible and lumpy, and write each as a yearly total.
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