It is time to start thinking about what you’d would like to achieve for the new year. I suspect 2022 to be a fairly big year for the Early Retirement Masterclass.
In a Youth Survey conducted by Today newspaper in 2021, millennials and Gen Z now emphasise early retirement:
- Close to 59% wish to attain enough funds to retire early.
- 52% want to achieve a passive income from their investments.
But the problem with setting new year resolutions is that most people cannot sustain them over time. We see so many folks exercising in gyms every year, but they soon disappear when February rolls by. Everything becomes forgotten after Chinese New Year. I would expect that the same resolutions in personal finance would wind up having the same fate.
This article discusses a profound framework on how to think about early retirement and passive income.
1) Begin with a Goal in mind
Like everything in life, we begin with a goal.
To design a goal for yourself, it has to be SMART. It has to be Specific, Measurable, Achievable, Realistic and Timely.
If you set your goal to be “Begin retirement planning.” or “Become financially free”, odds are you will not succeed as it lacks the specificity and timeliness to ensure that you can retire one day.
One reasonable SMART goal would be “Before the end of 2022, I will be able to get $1,200 of passive income annually from my investments annually moving forward.”
At this stage, you should be mindful of the double-edged nature of goals. When you set a goal, you promise to be unhappy until your goal is met. This fundamental nature of a goal is what makes it so hard to keep them once February 2022 arrives.
So, you can’t just stop at having a goal.
You need a system to sustain it.
2) Build Systems around your Goal
To reduce the psychic burden of a goal, you will need systems to support it. Systems are robust where goals are flimsy. Building a system ensures that you would not fail to attain a plan even if you wanted to.
There are different systems to get $1,200 of annual dividend payouts. Still, all these systems have one thing in common – to get $1,200 a year, and you will need a portfolio size of $1,200 / x where x is the dividend yield you receive from investment systems available in financial markets.
Here are some systems I suspect readers might be thinking about:
- A system where you buy blue chips and REITs that yield 5% annually. This requires a portfolio of $1,200 / 0.05 or $24,000 to generate $1,200 a year in income.
- A different system where you stake stablecoins at 12% APY would require only $10,000 to generate $1,200 a year, but it comes with much higher risks.
The trick is to understand that higher yields may require lower portfolio targets, but you become more exposed to rug pulls and regulatory risks.
Suppose you decide on leveraging both systems in the attainment of your retirement and passive income goals. You will put $12,000 into a diversified portfolio of REITs and Singapore blue-chips and $5,000 into a stable coin for staking at 12% APY. So, saving $17,000 will ensure that you meet your goals.
But having a system is not enough.
A system consists of two components – projects and habits. We need to determine the projects and habits that we’ll need to adapt to make the system work.
3) Execute the Projects that allow your System to function
Projects are one-shot tasks to build the infrastructure of your System. At this stage, for your System to work, the tasks need to be completed before your System can function.
For example, to build a system to invest in stock equities, you need to complete, among other things, the following project tasks:
- Register for an account with a brokerage. (eg. DBS Vickers, Interactive Brokers, Tiger)
- Perform a limit order trade and ensure that regular deductions from your bank account are automatic after T+2 days.
- Ensure that dividends are automatically credited into the bank account from CDP on the payment date.
- Ensure that you can log in to your CDP to view your stocks and track your portfolio performance.
The System for staking stable coins can look very different:
- Register for a cryptocurrency exchange and ensure that you can send fiat currency to be converted into a stable coin. (Eg. Gemini)
- Stake the stable coin and be able to receive payouts at the yields desired. (eg. USDC on Crypto.com, or UST on Anchor protocol)
- Convert the payout back to fiat currency and have the means of spending it.
- Study and vary your approaches to minimise fees which can be dynamic.
- Add a decentralised wallet to hold onto your coins, upgrading to hardware ledger where necessary. (eg. Metamask)
Projects can be mentally straining but you need to do them once.
You will find that getting the right brokerages can be a headache as brokerages compete by varying fees, and learn that government intervention could even close cryptocurrency exchanges down.
4) Adopt the right Habits to sustain your System
Finally, with the infrastructure in place due to the various ad hoc tasks you took, you can now adopt new habits to maintain your system.
Like what most folks say, new year, new you. But you need new habits to construct a new you. The nature of habits is that they exact a psychological cost when you first adopt it, but the price rapidly drops after a while, and you may even receive motivation to do more after seeing results. At this stage, sustaining your habits become extremely important, so a lot of care needs to be taken to make these habits effortless and rewarding.
So with all your brokerages and crypto exchanges in place, you may wish to launch the following habits :
- Remember that you will need to save $17,000 to meet your target. You transfer $750 into your online brokerage and $750 into your cryptocurrency exchange on payday. At $1,500 a year, you will exceed your target by year-end.
- You adopt a habit to convert the $750 into a stable coin and stake it immediately on the cryptocurrency exchange.
- If the amounts in the equities brokerage exceed $1,000 with accumulated dividends and previous payouts, you adopt a habit of buying a blue-chip, REIT or ETF in your list of stocks.
The above habits conform to the idea of “paying yourself first”.
If you set aside $1,500 a month on payday, you are guaranteed to save $18,000 by the end of 2022 and have a $1,000 buffer in case there are market losses. You also ensure that your investment income has a good glide path to reach on average $100 a month by January 2023.
Finally, one tip to make habits stick is to reward yourself.
After executing all tasks on payday, make it a point to buy something nice for yourself or have a great meal. The trick is to relate your act of paying yourself first with a positive reward. We are not robots.
Your 2022 resolution should go beyond just setting your Goals
If you plan to begin your early retirement journey via passive income in 2022, the odds of success will be slim if you focus on goals on the eve of the New Year.
Your odds of success will increase much further if you understand the systems that need to be established to attain your goals and the various ad hoc tasks and habits to sustain the systems.
A good investment course can assist in finding out more about the systems that need to be in place and the projects and habits required to run these systems.
I hope that you will have a Happy Holiday season and a wonderful year ahead.
