What Can We Learn About Household Budgeting from the Minimum Income Standard 2023 Report?
The publication of the Minimum Income Standard 2023 Report earlier this month by researchers from Nanyang Technological University (NTU) and the Lee Kuan Yew School of Public Policy (LKYSPP) drew a sharp response from not just one, but three government agencies (see news articles here, here and the official government press release press release here), just like the earlier version did back in 2021. Predictable, because in a country where social welfare policy dictates that there is no official poverty line, or minimum wage, any attempt to define one needs challenging. But politics aside, is there anything which we can learn about household budgeting from the Minimum Income Standard 2023 Report which can help us to think about how much we need for Financial Independence as a minimum?
What has household budgeting got to do with Financial Independence? For a start, it can help us work out how much we will need in the future. Especially when we have a home, a family, a couple of children and all that. Given how popular the idea of Financial Independence and even Early Retirement is among the people embarking on their working years, it can sometimes be hard to envisage what sort of household expenditures we may need to support later in life with our investment assets. Hence, a detailed study of household budgets can be useful for this. While similar information can be gleaned from Household Expenditure Surveys, the aggregated and averaged results across all households with and without children make it much harder to interpret.
How much do Households Need?
Background to the Minimum Income Standard 2023 Report
The current report is the third of a series which the researchers have been working on since 2019. The first report, back in 2019 looked at what older people (single retirees above the age of 65, two retirees living together, and single elderly aged between 55 to 65) need to live on. The second report in 2021, upon which the current report is based on, looks at what a family with 2 children, and a single parent with a child needs to live on.
The third and current report is basically an updated version of the second report. It adjusts the findings from back in 2021 for the higher inflation experienced in the last 2 years. Surprisingly, it shows that the inflation experienced by the bottom half of the households in population came to a little less than 5% over the two years 2021 and 2022. This is lower than what might be expected from the reported headline inflation figures. However, this seems not to be an issue, as the attention has been focused on the figure that $6,693 a month is needed for a couple with two children aged 7–12 and 13–18 years old. We will come back to this figure later.
What makes this series of reports more relevant than the information from the Household Expenditure Surveys is that they look quite specifically on the situation of the family with young children, and are based on focus groups which painstaking compiled the list of items and services required by such families. They also adjust for the quality of such goods and services as specific to their social standing. Information from the Household Expenditure Surveys will inevitably aggregate families with and without children, as well as single, unemployed and retired households in the mix, and hence are harder to interpret.
Also, Household Expenditure Surveys, while reflecting the actual rather than desired spending of the households, will have data that is constrained by actual incomes, so may tend to underestimate the actual minimum income standards required to live on. Hence, the methodology used is not just empirically sound, widely used around the world for such social research, but also offers a useful alternative point of view.
Focus Groups for determining Household Budgets
Importance of budgeting in Financial Independence research
While much of personal finance has been inordinately focused on the investments side of the topic, what is equally important is understanding the expense side to things as well. For example, in order to use the popular 4 percent rule (also here) to determine the size of the investment portfolio needed to support financial independence and early retirement, we first need to be able to work out the household budget it is needed to support. And for those among us who are just embarking on their personal finance journey, projecting such a household budget, especially in the future when there are more expenses and family to consider, is pretty difficult without some sort of guide to work off.
And this is precisely where the series of reports we discuss come in handy!
Household budget for a family with 2 young children
Let’s start by looking at some of the household budgets in the Minimum Income Standard 2021 Report. The 2023 version basically adjusts everything up by around 4.2% – 5% for inflation, so is largely the same.
Household Budgets from the Minimum Income Standard 2021 report
What’s more interesting than looking at the absolute amounts budgeted for each spending category is looking at the proportions across these categories. This is shown below. We also compare this with the distribution of actual expenditures from the Household Expenditure Survey 2017/18.
Distribution of Household Budgets and Household Expenditures
At first glance, the distribution of household budgets form the Minimum Income Standard 2021 exercise and the actual expenditures of households from the Household Expenditure Survey 2017/18 look quite similar. But the similarities and differences are more clearly seen if we graph it:
Distribution of Household Budgets and Expenditures Charted
Here, we start seeing the differences between the budgets (planned spending) versus the expenditures (actual spending). But there is just one more step which needs to be taken. Note that both the Minimum Income Standard 2021 and the Household Expenditure Survey 2017/18 figures include the expenditure on housing. For the Minimum Income Standard 2021, this is the amount to pay the amortised downpayment and mortgage payments on a 4-room HDB flat. For the Household Expenditure Survey 2017/18, the figure used is an imputed rental value. Of course, neither of these correspond to how ordinary people in Singapore view their budgets and spending since:
- Most mortgage payments are made from the CPF accounts, and not from disposable incomes
- Most people own rather than rent their homes, so imputed rental does not make much sense as part of household expenditure
So what is better is to strip the housing cost (except for cash expenditures such as utilities and maintenance) out from the household budgets and expenditures for a better apples-to-apples comparison between the two:
Household Budgets and Expenditures excluding Imputed Rental and Mortgage Payments
Here, we see the difference more starkly:
First, let’s look at what we’d like to budget less for (blue bars), but end up spending more of (red bars). And these are: Transport, Housing Maintenance and Utilities, Communication, and Miscellaneous Spending (which includes personal care, effects and insurance). Looks like we usually:
- Travel more than expected using more expensive modes of transport. E.g. taking a taxi or a private hire car on a rainy day.
- We also end up spending more on household repairs, furnishings (thanks to Muji and IKEA). And not forgetting the power and water bills
- We tend to spend more on communications (those unending TikTok videos which we just have to watch using our data plans). And of course the latest iPhone purchase
- Finally, those little miscellaneous treats we spend on ourselves (the odd massage or spa session) can add to quite a bit more than we budget for
On the other hand, there are things which we would like spend more on, but end up spending less on. Perhaps because the case runs out after spending on non-negotiable things like transport and utility bills:
- Eating out (food services) – who doesn’t like a leisurely meal in a cafe or restaurant instead of cooking and slaving away at home?
- Recreation (including holidays) – after 2 years of Covid 19, this is topmost on our minds! Revenge travel is all in vogue still!
- Education (tuition and enrichment classes for the children) – Children are the future, so they say, and they need to be better prepared for a more competitive world ahead!
Hence, when it comes to doing our own budgeting and planning, do keep in mind which are the items we usually end up spending more than expected on, and adjust those budgets accordingly, instead of being caught out by having to cut down on more discretionary, but useful spending.
What else can we learn about Household Budgeting from the Minimum Income Standard 2023?
Comparing household budgets made and actual spending on various consumption categories tell us a lot about how we plan and execute our plans. But what about the absolute dollar amount of budgeting and spending? This is where the Minimum Income Standard Report gets controversial.
The results of a couple with 2 children needing a monthly household budget of $6,693 (in 2023) and $6,426 (in 2021) actually mirrors the average monthly expenditure across all households in Singapore in 2017/18 adjusted for inflation in the intervening years. In other words, what has been controversial about the findings is that they reflect a household budget aspiration of the median household, rather than one perhaps at 60% of the median household (which is where many counter define their relative poverty threshold).
Does this mean that even our median households are so relatively impoverished that they are only spending an amount equal to what is sufficient to live in Singapore? Or are the researchers so over-zealous in constructing their household budgets that they are not really reflecting what it really takes to live in Singapore with dignity?
Perhaps this, is what the furore is all about!
What we have seen so far is that the research work in the Minimum Income Standard reports from 2021 and 2023 tell us that what we budget and what we actually spend are quite similar, there are a few areas where we often end up spending more, and some where we spend less. And the sacrifices we often make when money is tighter is on education for the children, and recreation. Which are both important for the well being and physical and mental health. Instead, we often budget too little for transport, communications and household maintenance and utilities.
So when we do our budgeting for our expenses, let’s keep an eye out for areas where the temptation or necessity of spending more is higher, and make sure we put in enough buffer for those!