Wednesday, November 21, 2012

How Much Can A Middle Class Family Save?

According to an article published on Yahoo News, "People who earn S$4,000-S$7,000 are considered middle and upper middle classes." I could not find the household income range for a middle class family and thus, I will take the $7,000 (highest salary range for a middle class individual) as the combined income of a typical middle class family.  This makes more sense as the combined income of 2 upper middle class individuals would amount to $14,000, which is considered quite well to do.

Hypothetical scenario:
  • Newly wed couple in their mid thirties making a combined $7,000 a month. Combined savings of $50,000 left after wedding, renovation and honeymoon.
  • CPF contribution (20%) is $1,400 per month or $1,000 if only one person is working. (Salary ceiling for CPF contribution is  $5,000). 
  • Parents allowance of $500 per month
  • Bought a second hand car with monthly expenditure of $1300 (including  monthly installment, yearly insurance, road tax, petrol, hdb parking, ERP + coupons, maintenance)
  • Bought a resale flat and take up a loan of $300,000 at 2% per annum interest for 20 years -Monthly installment is $1,518 in this case. For an income of $7,000, monthly contribution to ordinary account is $1,610 or $1,150 if only one person is working (cash top up of $368 monthly)
  • Electricity bills = $150 per month
  • Internet + cable tv + handphone bills = $200 per month
  • Familly insurance = $300 per month
  • Monthly food expenditure = $900 - $5 for each meal per person. Assuming 30 days a month and 3 meals per day.
  • Has a new born baby - assume monthly child expenses to be $500 per month at this stage. Note that this expense will increase over time due to enrichment courses, school fees, etc as the baby grows older.
  • If the couple wants to sponsor child's future university fees in 20 years, saving $300 per month for 20 years would amount to $72,000. (current university tuition fees is around $30,000 to $40,000 excluding other miscellaneous fees such as textbooks, hostel fees, etc)

I did not include caregiving expenses or additional allowance for parents should they take care of the couple's child. So to simplify things, let's just assume the husband is the sole breadwinner and his wife is a full time housewife. By assuming one person is working, CPF contribution will reduce by $400 while cash payment for mortgage will increase by $386 and so, there is essentially not much of a difference. 

Tabulating the raw data above:

Assuming income and expenses remain stagnant, the family will be able to save $1,482 every month. Also, assuming that they started out with $50,000 and are able to generate a 3% return consistently on their savings, they will be able to accumulate $578,064 by the end of 20 years. Personally, I feel that this amount is far from enough for a comfortable retirement in Singapore.

As mentioned, this is only a hypothetical scenario for a middle class family. The family might have more than 1 kid or not give birth at all. There might be unforeseen circumstances such as illnesses, retrenchment, etc. There could also be positive events such as salary increment, job promotion or even striking lottery. So just take this with a pinch of salt.