Is it possible to have $100k by 30?

This story was first published in The Straits Times on July 7, 2013

"I'll never get rich," a friend exclaimed recently during a casual catch-up.

"I earn so little and I don't think I'll ever get $1 million. Heck, even $100,000 seems far off for now," he lamented.

I was caught by surprise at his outburst, but decided to ask just how much he earned.

It turned out his income was more than $3,000 a month - pretty decent for a fresh graduate in the first few years of his working life.

My friend was probably just despondent that - like most of us - his earnings fall far short of what the investment bankers of this world get.

A fresh graduate in that rarefied field can earn more than $9,000 a month, I am told.

But is it true, as my friend frets, that it is impossible to get ahead financially, on a regular salary?

I decided to investigate this claim, taking as my starting point the question of whether a fresh graduate can reasonably expect his savings and investments to chalk up to that nice round figure of $100,000 within six years of work.

These calculations were for a male starting work at the age of 25 after two years of national service and four years of university, and who was hoping to hit the target by age 30.

For the sake of the exercise, the starting pay was taken as $3,050 - the median salary for a fresh university graduate last year, meaning that half of them earned at least that. The graduate was assumed to get a 4.5 per cent pay rise yearly, and 15 months of salary a year including the 13th month plus two months of bonus.

He was then taken to save 20 per cent of his take-home pay, after Central Provident Fund contributions. This is the minimum savings target for young adults without large financial commitments, say financial advisers.

The graduate would have two options in dealing with his savings. First, he could put them all in the bank at almost zero interest rates, as has been the case for the past five years since the financial crisis.

Or he could save 40 per cent for a rainy day, and take some risks by investing 60 per cent in the stock market, where he may expect a yearly return of about 6 per cent - the average annual return of the Straits Times Index over the past 10 years.

About $50k by 30

The number crunching showed that the graduate would have accumulated only about $49,000 by the age of 30 if he chose to put all his savings in a bank.

Even if he chose to invest 60 per cent of the savings in stocks, the 6 per cent annual return would give him only $53,700 in total wealth by the age of 30.

That is well short of six figures, but financial advisory firm Providend's chief executive Christopher Tan says the achievement would still be nothing to be sniffed at.

"For an average person earning $3,000 to $4,000 a month, to have $50,000 by the age of 30 would be quite good," he said.

Save more to get another $50k

Still, the $100,000 is not necessarily an elusive goal within those first years of working life.

But getting there involves some pain, and the key is to save far more than 20 per cent. In fact, you can try to save at least 50 per cent of your take-home pay, as recommended by advisers such as AXA Life Insurance Singapore's Ms Salena Kanasan.

With some effort, young people can achieve this, especially if they do not have heavy commitments such as study loans, mortgages or young children.

They also save on rental if they live with their parents, and it is an extra plus if their parents do not need their financial support.

If a graduate can keep to the 50 per cent rule, that makes all the difference. He would be able to get almost $123,000 in pure savings by the age of 30, easily surpassing the six-figure target.

Investing a portion in the stock market could give him about $134,000 in savings and stocks.

Lesson learned

So to my gloomy friend, I can say he does not need to earn a banker's salary to squirrel away $100,000.

An average graduate's salary will do. The key lies in consistent, careful saving.

You may find it difficult to land a job with significantly higher pay but controlling spending is definitely within your control.

And saving a small nest egg early on can provide the much-needed capital to start your investing journey.

If your savings rate is low, investments will be of limited help, especially as it is becoming harder to get high returns from the stock market while keeping risk under control.

"It's not easy to consistently make double-digit (percentage) gains especially in the current new investment paradigm, where the world economy is still reeling from the fracture suffered due to the global financial crisis," said Mr Vasu Menon, vice-president for wealth management, Singapore, at OCBC Bank.

The example above shows that the 20 per cent saver would fall well short of the $100,000 target, even if he invested a portion of his money in stocks.

But he would be easily able to surpass $100,000 if he becomes more frugal and saves 50 per cent of income. Investments will then provide the icing on the cake.

It may come as a culture shock to those not used to watching their spending to suddenly have a daily budget. But saving half of your income need not entail a diet of instant noodles and plain water.

On a starting pay of $3,050 a month, a fresh graduate would still have about $980 to spend monthly. This is after accounting for CPF contributions, saving half of his take-home pay, and giving another 10 per cent to his parents.

That is more than $32 a day. Such a budget would mean very few taxi rides, meals at restaurants or nights out at a club.

But Singapore has an extensive public transport system, excellent hawker food and free entertainment in the form of parks and exercise corners. These can easily substitute for more expensive options.

Importantly, the first few years after graduation are the best years to accumulate wealth.

Friends who have started their own families tell me it is nigh on impossible to save more than 20 per cent of salary, with high household expenses from electricity to even toilet paper and additional costs, when they have children.

Before you get hit by all these expenses, it is best to start living simply and paving the path for future financial success.

This story was first published in The Straits Times on July 7, 2013

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