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An increasing number of people are looking for a clearer purpose in life, rather than going through the mindless grind of routine day jobs – the why is equally important.
At the same time, money remains an important driver for a quality and purposeful life. With money as a resource at your disposal, you are free to do whatever you want without worrying about debts, mortgage or expenses.
Since not everyone was born with a silver spoon, some of us need to learn how to make money the hard way – from losing capital in investments to wasting time climbing the corporate ladder only to find yourself stuck when you’re in your 40s.
Viewing money as a resource allows you to pursue passion projects for a meaningful and purposeful life. This means focusing on building a core financial foundation that can see you through your adulthood and into retirement.
The financial flywheel is a simple system which helps me build the right levers needed to pursue a meaningful life.
It takes into account the key factors of income, expenses and a framework to optimise for the long-term growth potential of my personal finances without compromising my quality of life.
Think of the flywheel as multiple reinforcing actions taken over the course of your lifetime compounding your efforts, adding and building the momentum of the flywheel to eventually help you achieve your financial goals.
This is not an article about FIRE, but it’s a framework that can help you achieve financial independence early. Let’s get started.
Money matters and mindset
Most of us work hard for our money, but we might not as sure about how we can make our money work as hard for us.
The reason why we need to learn how to get money to work for us is that we are inherently limited by time. Each of us gets only 24 hours each day – no more and no less. Once that time is gone, it’s never coming back – that’s why time is the most valuable resource on this planet.
In order to pursue some of our hobbies, life pursuits or goals, we need to free up time. But with most of our time spent working hard in our full-time jobs to earn money, we might never have enough time to enjoy them.
Maybe it is the lack of financial education, as I frequently gripe about, coupled with the fact that we mostly live our lives busy with work, errands, family and friends – who still has the time to think about these stuff?
Ironically, most of us are actually interested in optimising our personal finances. We see this all the time where some of us look out for the best credit card promotions to take advantage of the discount or rewards available.
Others look for every opportunity to save money on deals, promotions and coupons.
After all, if squeezing a small marginal utility or satisfaction out our cards give us some benefit, sure, we would be happy to do so.
Personally, I feel that optimising is good, after all, we want to maximise our utility for a given set of constraints.
But optimising blindly without seeing the bigger picture of personal finances is a myopic attempt at best, where we might be penny wise pound foolish.
The financial flywheel
The financial flywheel helps to put things in perspective, so you can see how whatever that you’re doing on an everyday basis contributes to a bigger and more illustrious objective of financial security – or independence – whichever you’re aiming for.
It is rather simple concept so let’s not over-complicate what’s already a complicated subject; it revolves around three factors:
If we want more money, you either make more money (increase income), or save more money (reduce expenses).
There’s also the third factor, systems. Why would systems be a factor in this flywheel?
While the concepts of income and expenses are important, It is the systems that you utilise that glue the concepts together and make them come to life.
In a corporate world, systems streamline processes, reduce risks and increase efficiency because things are standardised, automated and then scaled exponentially.
In personal finance, it is no different. The financial flywheel also has a system that frees up time to do more productive income-generating activities, reduce stress, while making your money work harder for you.
When you know how the flywheel works, and you build systems to help you turn the flywheel more effectively and efficiently, you can achieve your financial goals faster.
Take a look at this flywheel illustrated in a simple diagram. Your goal is to build a self-sustaining flywheel that takes care of itself eventually. There are multiple aspects to building an effective flywheel, from your day job to your side gigs, income from financial assets, to speculative growth investments that help grow your pie faster.
Every aspect of the flywheel is important. For example, the spend aspect is where you allocate money for spending and enjoying life. The save aspect helps you fund for life goals or an emergency need. The invest aspect grows your money at a higher rate of return while the speculate aspect keeps your speculative desires in check.
When combined, the flywheel fuels your personal financial system in a systematic and easy-to-understand manner.
Now, let’s take a look at each factor is greater detail.
The Income factor
The income factor is the most important factor of the entire financial flywheel.
It sits at the top of the funnel and it is the ultimate source for turning your financial flywheel faster.
No other factors will turn the flywheel faster than having more income so you must optimise for this factor as much as possible.
Why the income factor is the most important factor
Most people optimise for expenses, and they attempt to scrimp and save an additional x% of their income every month or save an additional dollar from their groceries or necessities.
While controlling expenses will definitely have a direct impact on your financial flywheel, it does have the same level of impact as your income.
Let me illustrate with an example:
Let’s say Tim earns an income of $3000 a month or an equivalent of $36K annually.
He struggles and saves $600 a month, or 20% of his monthly income. Every day, he lives a conservative life and tries as far as possible to save even more, up to $800 a month if possible,
Or 33% of his income, to cover his additional expenses.
The increase in savings from $600 to $800 a month represent a 33% increase in savings rate.
Compare this to a situation where Tim performs well at his job and gets a 5% raise in salary. This brings his salary to $3150, or an additional $150.
As you can see, it is probably easier to get a 5% raise in monthly salary compared to saving 33% more each month.
This is also coming from a low base of $3000, when Tim’s income increases to $4000, a 5% increase on his new salary is $200, enough to cover his additional expense.
Alternatively, Tim could also find a side hustle that pays him $200 a month, assuming he has sufficient time to do so. This additional income would have helped given him a better quality of life.
Is it easier to get a 5% raise or find a side hustle that pays $200 a month? That’s another discussion which I will talk about later. For now, let’s move on.
Types of income
Anything that puts money in your bank account, pocket or wallet contributes to the income factor.
I categorise the income factor into 4 distinct groups:
- Main income
- Side income
- Capital income
- Special income
Most of us have a main income stream from our full-time job, which pays us when we clock in the hours. This is our first income stream that feeds into the financial flywheel.
Your main employment income forms the bedrock of the income factor of your financial flywheel. We spend an average of 8 hours – or a third – of our daily lives for this source of income; hence its importance.
Whatever it takes, you want to maximise this source of income from the get go as well. Either through promotions, fast-tracking your career or changing jobs, you want to gain a head-start in employment income as early as possible to build your financial flywheel.
A note about employment income
Employment income may be divided into base salary and bonuses – the entire package is important.
Your base salary is important because it’s used as a negotiation tool for a new job. Recruiters and HR look at your last drawn base salary as a benchmark when setting the new salary.
Because bonuses are often variable and depends on both individual and company performance, which may not be within your control, treat any bonus compensation literally as a bonus. During bad times, your bonus might be zero, so don’t count on it to live your life.
Maximising employment income
Your early career is especially important to build a high base that sets you up for long-term success.
Starting with a low base, for example, $2000, and not changing jobs for 5 years and taking a 3% raise (in line with inflation) per year, will give you a base salary of $2300 at the end of 5 years.
However, starting at a higher base salary of $5000 and not changing jobs, taking a 3% raise per year, will give you a base salary of $5800 at the end of 5 years.
Compounded, the $500 difference in base salary can be worth tens of thousands of dollars over your career – and this is assuming you don’t change jobs and have no salary raises thereafter!
There are multiple ways to increase employment income.
- Courses, training and certifications
- Job change with a raise
Out of the 4 ways above, the fastest way to raise income is to either switch jobs or get promoted in the same company quickly.
While I caution against frequent changes in jobs, each time you switch jobs might it give you between a 10%-30% raise in salary.
If you compare this against a meagre 3% salary increase year-on-year, every job change can be worth 5 years of salary raises in the same company.
If you do it right, say 1.5 years to 2.5 years per job change, you can quickly build a solid base salary with your skillsets and then let the yearly salary increase compound over time.
Job changes should also be viewed in a wider context. For example, the future prospects of the job, the pathway to greater responsibilities, income growth and personal development are all important factors. Salary should not be viewed in isolation when considering career moves.
Courses, trainings and certifications
Courses and trainings can be a great way for you to upskill and re-skill yourself for the digital economy where skills are short-lived while employment opportunities become increasingly global and remote.
Academic qualifications are perhaps one of the most useless forms of education in the modern economy as they do not provide much income value. Instead, as we move towards a skills-based economy, the practical applicability of your skills in increasing revenues or reducing costs for a company becomes key to driving your income.
Today’s digital economy means skills can be picked up for free, from the Internet (e.g. coding, digital marketing) and via books. You can also watch lectures from top universities around the world on Youtube, for free, so you should not view your academic certificates as a barrier to entry to any job.
Hence, when talking about training and certifications, always think about the practical applicability of those skills in your job. For example, taking a PMP (project management) certification might give you the skills necessary to manage large scale projects in your company, increasing your income earning potential, while taking a digital marketing course on Coursera might increase your company’s sales revenue on the Internet.
Side income from hustles
Why employment income alone is insufficient
Employment income forms the bulk of our income for most people. But there are many problems with having just a single income stream from your main job.
How I see it is that with rapid technological shifts, jobs are becoming easily automated, humans becoming increasingly redundant, and skillsets becoming increasing short-lived.
With the shift towards a remote workforce, the job market is now more global without artificial land barriers. This means it’s only going to be more competitive, limiting wages and opportunities.
The final issue with having only a single stream is that you’re at risk of being redundant at any time by your employer. Especially in the private sector, it is easy for anyone to be let go due to unforeseen circumstances like the pandemic. If this is your only income source, you have a lot to worry for.
Building a secondary income
In addition to the above reasons, building a secondary income leads to a faster turning flywheel based on the income factor.
If you build a successful side hustle, then your side hustle income can continuously feed into the flywheel to give it the boost required to turn faster after the initial stages.
When evaluating whether a gig is worth doing as a secondary income source, you need to evaluate the trade-offs of time vs money.
You’re limited by the most precious resource in the world – time. You can always make more money but you cannot make more time.
Building multiple income sources
To reiterate, income is the most important flywheel factor, and knowing the limitations of having just one source of income, the natural thing is to build not one, but multiple sources of income.
I cannot teach you how to build multiple income sources in this article, and obviously we have all different interests. But what’s important is to find your own way to build alternative income sources to feed your flywheel.
For example, side hustling tech projects, consulting, advisory and building a side business with your skills learnt during your main job are some ways to earn a secondary source of income.
Having multiple sources of income at the early stage is the best way to accelerate the flywheel because of compounding effects which I’ll explain later. Whatever way possible, if you’re young, learning to build multiple income streams will benefit you greatly in the long run.
Capital income is income from your financial capital and assets. These include dividends and interest payments from your stocks and bonds.
These income sources have limitations. For example, stock prices and dividend yields are exterior to your control – dividends paid by a company can be cut at any time at the management’s discretion.
Capital income is also difficult to produce. A monthly capital income of $1500 from real estate dividends requires close to $360K of capital to produce.
Because of its limitations, you should not optimise for it until you have sufficient capital.
The last income source is special income. And basically this can be anything from inheritance, to cashing out your company’s stock options, or an insurance claim.
I like to see this like a one-time bonus payout, where you are free to spend it however you want (or choose to reinvest in the flywheel).
All special income sources should be treated with great consideration given its accelerating effects on the flywheel.
Expenses channel money away from your flywheel and inhibit you from reaching your financial goals. Their importance is secondary to income, since you can always increase income to counter rising expenses. However, reducing expenses is always more difficult because of rising cost of living, minimum quality of life, and other factors beyond your control.
Expenses can be classified as discretionary and non-discretionary. Discretionary expenses are non-essential spending that can be easily reduced, such as meals and entertainment. On the other hand, non-discretionary expenses are more difficult to cut, such as housing, taxes and groceries.
Since discretionary expenses are easier to reduce, let’s talk about them first. The easiest way to channel more money within the flywheel is to directly cut discretionary expense such as unused entertainment expenses (e.g. subscriptions).
However, if cutting is not possible, you can consider sharing models (e.g. Spotify Family), cheaper alternatives (e.g. second-hand), planned purchases (e.g. during shopping sales or in bulk).
There are also many ways to save even more for discretionary spending, such as layering rewards (e.g. credit card promotions, cashback and sales promotions) or even double-dipping rewards when they arise.
This whole path of spending optimization can be mentally-tedious and might not be suitable for everyone, especially those who are busy at work. Keeping track of credit card promotions might also be too time consuming.
Non-discretionary expenses are difficult to reduce, period. Can you spend much less on utilities and your housing mortgage? I don’t think so – sure, you might be able to switch between providers for some small discount, but it’s unlikely to be life-changing or material to your flywheel.
Other considerations about expenses
While reducing expenses might be a key factor in the flywheel, I see it as a motivational factor for a successful flywheel. If you are able to produce a flywheel that produces income at a faster rate than your expenses, then you don’t have to really worry about expenses at all. In fact, that should be your goal!
Alright, the last ingredient of building a successful financial flywheel is a set of efficient systems that help you accomplish more with less.
Knowing about increasing income and reducing expenses is insufficient, you’d need to establish proper planning, tracking, monitoring, review and automation to know if you’re on the right track or not. Usually, people do this with their financial advisor on an annual basis.
Goal-setting and planning
Setting financial goals might seem stupid for some people, but it’s actually a pretty important motivator and guiding star to getting where you want to be.
I actually recommend goal setting at least on a yearly basis, mentally is fine, although it’s also good to jot it down somewhere on a piece of paper, a diary or an online note-taking app like Notion or Evernote (I keep mine on Notion).
When goal setting, use the SMART framework to help you – keep it specific, measurable, achievable, realistic and time-bound.
Financial goals can be things like buying a $1m condominium at 35 years old, retiring with $1.5m at 45 or starting a F&B business in the following year. It can be your own personal goal, or a joint financial goal with your partner. Either way, have something to work towards so you can measure your progress against it later.
Tracking and monitoring
Once your goal is setup, you’d want to track your progress against the goal on a periodic basis. For example, some financial advisors do yearly reviews with their clients. If you do it by yourself, you can do it as often as you like, but I recommend at least semi-annually.
How do you track against your goals? There are many ways to do it, tracking can be a simple yes/no answer all the way down to a spreadsheet-based progress tracker. Some people chart their net worth over time. Others measure by their monthly salary over time. While there is no single right way to track, it’s important to track against your own goals.
If your goal is to save towards a $1.5m condominium at 35 years old, then you need to measure your progress against this specific goal. Moreover, you could have multiple goals at once, so you might want to track against all of them simultaneously.
Automating your money movements is important for a less stressful financial life. If you can worry less about things like whether your bills are paid on time, or which bank account to pay from, it’s a lot less cognitive load on your mind.
Central spending/checking account
One of the things I recommend is to centralise your spending/checking account with one bank, and pay all your expenses and bills from this one account.
For example, I use my POSB eSaver account for this and link all my transactional accounts like PayLah!, Google Pay and ATM card to this account. I also set up automatic GIRO transfers (if credit card payments are not allowed) to things like insurance bills from this account.
Utilising this single account for transactions keeps things tidy and easy. Every month, I run a standing instruction from my main funnel account to my checking account to transfer a fixed amount for expenditures. If I run short of cash, I will then transfer a lump sum to cover several months of expenditures.
The funnel account is something like my personal bank. Whatever money that I earn (e.g. salary credit) or make (e.g. dividends) comes through this account.
With this funnel account, I can then funnel it to different uses, e.g. as a lump-sum credit to my spending account, or to my investment account on IBKR or to my roboadvisors. This funnelling is done automatically every month through standing instructions, which take away the hard work of manually transferring cash each month for investments.
The levers combined
When you combine the three levers, they become a self-powering force. Capital will start flowing in multiple channels and directions, from your earned to passive income, from dividends and interest to rental income and special payouts, etc.
At the same time, you’ll be able to constantly grow your quality of life, increase expenses while maintaining sufficient buffer for capital growth.
As you get older, the system can still function without further capital injections. You will start shifting from accumulating assets to preserving and decumulating them through capital withdrawals. It’s then an opportune time to shift the levers slightly to optimise for sustainability rather than growth.
We’ve covered a lot in this article. To summarise, the important things to build a self-powering financial flywheel is to grow income through multiple sources, optimise expenses and establish an automated system to efficiently reach your goals.
When put together in a framework, you’re able to visualise how different parts come together as one.
It’s kind of like running a business! While it’s a little stressful at times, there are many people who have done it successfully, and there’s are many online communities like Seedly that are quite helpful to get inspiration from as well.