How much savings should one have at different life stages? What is a sufficient amount of money? How much should one save by age 30? At what age should one own a car and a house? Of course, there are no standard answers to these questions. Everyone's living conditions and aspirations vary, so there's no one-size-fits-all figure.
While it's true that personal factors significantly influence financial goals, a formulaic approach can still be applied. Let's consider an example:
Assuming Xiao Wang is currently 25 years old with an annual salary of 600,000, savings of 200,000, and has recently purchased a car with a 400,000 loan (total interest over 7 years being 20,000), owns a car but not a house, and still has a 100,000 student loan with interest to pay off, let's estimate how much money Xiao Wang will need by the age of 30.
Firstly, it's crucial to distinguish between two financial systems: 'Cash Flow' and 'Assets', which should be considered separately. Here, cash flow refers to your monthly income and expenses. We need to assess your ability to manage monthly cash flows upon reaching your goals. Assets, on the other hand, pertain to the total amount of cash, including savings, liquidated stocks, funds, and similar assets.
Step One: Establish a Target Cost
We need to set practical goals, like determining what your objectives are before turning 30. For instance, Xiao Wang wants to buy a house at 30. Under this condition, you should select the anticipated cost of the house. If it's a 6 million second-hand house, you need to reserve 1.5 million in cash for the down payment and other expenses, and plan to allocate about 17,000 from your monthly salary for the mortgage. Your target cost is therefore at least 1.5 million in cash, with a monthly surplus of at least 17,000.
Recommend maintaining a moderate planning horizon of 2 to 5 years for optimal feasibility
Step Two: Fixed Monthly Expenditure
This section requires a habit of keeping track of expenses and being aware of any annual payments. For example, during his 25th year, Xiao Wang's monthly living expenses are about 29,000 (including rent, food, entertainment, fuel, car maintenance, phone bills, etc.). Additionally, he has fixed expenses (like an annual insurance premium of 36,000, a monthly car loan payment of 5,300 over seven years, and a student loan to be paid off within five years, which we won't count here), totaling his monthly expenses to approximately 37,300.
This amount constitutes your regular monthly expenses.
Step Three: Calculation Formula
Target Cash Flow = Target Cost + [Fixed Monthly Expenditure x 1.06^(Estimated Age - Current Age - 1)] + Monthly Financial Freedom Money = 17,000 + [37,300x (1.06)^4] + 50,000 x 10% = '69,090'.”
*1.06 represents (1 + Consumer Price Index increase percentage (6%)), denoting the annual inflation rate. For rough estimates, using 6% is recommended. *Monthly Financial Freedom Money = 10% of monthly income (for non-investors, consider a higher percentage, typically between 10% and 25%).
Target Assets = Target Cost + (Monthly Fixed Income - Monthly Fixed Expenditure - Monthly Financial Freedom Money) x (Estimated Age - Current Age) x 12 - Current Assets
=1.5 million + (50,000 - 37,300 - 5,000) * 12 - (-70,400) = '2.0334 million'.
*Current Assets = Current Savings - Annual Debt at Target Year: 200,000 - 100,000 - 174,000 = '-71,400'.
*Debt at Target Year = Remaining Loan Amount + Remaining Interest: For example, a loan with interest totaling 420,000, after five years, leaves a balance of approximately 174,000 (calculations can be done using loan calculators available on various bank websites).
*Debts repayable within the target year should be directly deducted from current savings: For example, a student loan of 100,000 should be subtracted directly from savings of 200,000.
At this point, you might realize that achieving such an amount is not easy, both in terms of cash flow and assets. Considering the current savings are modest, aiming to save over 2 million in 5 years is challenging, equating to saving more than 400,000 annually, which means annual expenses must be limited to under 200,000. This estimation isn't meant to discourage you from life goals, but rather to clarify your financial capabilities and adjust your targets realistically. The adjustments can be made in three main directions:
First, reduce expenditures
Second, increase income
Third, lower your goals
This sequence is intentional. Don't hastily downscale your goals just because they appear out of reach, as that would defeat the purpose of the exercise.
Firstly, pinpoint where financial excesses lie. Scrutinize your highest expenditures and explore avenues for reduction.
For instance, Xiao Wang's monthly living expenses amount to 29,000, including rent (8,000), food (10,000), entertainment (5,000), car fuel (3,000), vehicle maintenance (2,000), and phone bills (1,000). Consider whether entertainment costs can be reduced, if cheaper accommodation is feasible, or if owning a car is truly necessary – a common misconception among young people. Next, focus on increasing income. Regular employees often receive annual raises, which can be factored in. Additionally, if feasible, explore other income sources.If you've minimized expenses and worked overtime to boost income but still find your goals too ambitious, then it's time to lower them. This might involve extending timelines or reducing target amounts. For Xiao Wang, moving to a place with 5,000 rent, cutting entertainment to 4,000, and forgoing a car to save 420,000 could lower his annual savings target from over 400,000 to 280,000, making it seem much more attainable.
Annual variations are substantial, and this financial plan should be updated each year, tweaking the numbers, not the objectives. This principle is applicable to all life areas, beyond just home ownership. Life offers numerous goals to pursue. Hence, young adults should adopt this practice: avoid letting goals become elusive. Instead, make them concrete and achievable for a more stable life journey.
