How extreme will you live with frugality in order to retire early in Singapore?
After being retrenched at 35, a Singaporean retired and bought a 3-room flat in full. Despite a monthly passive income of $2,500 ($900 from rent and $1,600 from insurance payout), he only spends $150 a month. His financial freedom doesn’t come from wealth building but from frugality or extreme saving.
Below are my thoughts after watching the CNA video:
1. Buy the cheapest flat
I agree with him that one should “buy the cheapest flat you can afford and pay in full.” And “if you borrow money, a 30-year mortgage means you buy a flat and give it as a free gift to the bank.”
A home with a mortgage is an expense, not an asset. The property’s title is under the bank. If you fail to repay the installments, regardless of the outstanding loan amount, the bank can repossess your home.
But I have reservations about “buying the cheapest flat you can find in Singapore”. Many cheap homes are cheap for a reason. Instead of cheap, you should go for value-for-money and buy the right thing at the right time with the right price.
In 2007, he gave up buying a bigger place and settled for a 3-room flat. He paid $87,000 for a 35-year-old flat with 64 years left on the lease so he had a place to stay till he turned 99.
Any flat over 50 years would need a major upgrade to be livable. A 99-year-old flat would have undergone several upgrades or even relocation. Is he prepared to pay the high maintenance fees in his old age?
Also, one day if he needs to sell the flat for emergency fund, there is a limited buyer pool due to tighter financing and cash-over-CPF requirements.
2. Own one home can’t make money
He rented out the spare room in his 3-room flat. Rental income covered the full purchase price after eight years. But the most he can collect is $900 a month after sacrificing his living space.
Above all, the value of his flat will drop towards zero as the lease slowly expires.
After 19 years, the value of his home may have doubled, but he can’t sell now to profit from it.
We too bought our home in 2007. Recently, our opposite neighbor just sold their house. The selling price is 3.3 times our original purchase price. But we won’t sell our home anyway.
Once you stay in a home, whether its value goes up or down has nothing to do with you. Because you need a roof over your head. That is why net worth is calculated as total assets minus total liabilities minus the home you are living in.
It is difficult to profit from your own home. Most likely, you sell high, buy back higher in the market, and take up a bigger mortgage during home upgrade.
You can’t possibly grow your net worth by living in a more expensive home. Unless you own more than one property. Wait for prices to go up. Then sell your investment properties and use part of the profit to pay back your home mortgage.
3. There is a limit on saving but not investment
For his working years, he worked extremely hard to save as much as possible. The saving rate is 80 to 90%. His strategy was to save aggressively, spend as little as possible and lower the cost of survival before retirement.
He even went dumpster diving regularly and carried discarded items back home including his bed and mattress. This is real frugality!
He plans to hire a maid or check into a nursing home when he grows old. But his current passive income is $2,500 a month. Minus the $150 monthly spending, how much can he save over the years? Can his savings after decades of humble living afford eldercare and home maintenance in his golden years?
Since I started working, I also saved 70% of my salary every month. However, I soon realized that there is a limit to how much I can save. But there is no cap on how much I can make from investment. In other words, I must own some good asset, be it properties or stocks.
So I invested and grew the money I saved. Income from investment properties gradually covered my rent and living expenses. With other income streams, I was saving 100% to 120% of my salary before I retired from my full-time job.
There is a limit if you grow your wealth through saving and frugality. But growing your wealth through income and investment can be infinite.
4. Life satisfaction from frugality
He claims that he doesn’t feel deprived. Listening to music, reading, watching podcast, learning something are all mental and cost nothing. He is single with a small dog.
German philosopher Arthur Schopenhauer’s pessimism theory emphasizes that human life is painful and meaningless because of our endless and unfulfilled desires. The only way to escape from this suffering is through the denial of the will with aesthetic experiences, especially listening to music or contemplating art.
I have the same hobbies as the saver in the video. But my other hobbies like traveling and eating well do need to spend money. Besides, the joy of my daily life comes from human interactions, especially with family and friends, who may desert me if I am too frugal or live frugality to the extreme.
5. The true value of money
I feel sad when he had to undergo 15 surgeries and was hospitalized for 62 days. To have the full bill subsidized by the government and the rest paid by insurance, he stayed in a Class C ward (8 to 16-bed open ward with natural ventilation and common bathrooms).
For some people, money is scarce. They are afraid to spend for fear of running out. To me, money is abundant if we know how to make money.
Apart from survival, money is a tool to solve problems and create value.
– Solve problems: In case of sickness, accidents or tragedies, having money can prevent you and your loved ones from suffering unnecessarily.
– Create value: Money can enrich your life with new experiences. It can help you to fulfill your dream: to continue an academic pursuit, build a business or support the underprivileged.
Of course, we all have the right to make our choices and live our own life. After all, happiness and peace of mind are most important in life.
Watch the CNA video “How this Singaporean retired at 35 without getting rich” here.
(the above is a repost from my facebook page fb.com/propertysoulblog)
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