With the increase in financial awareness, more and more financial adviser representatives are being recruited in Singapore. In fact, it is said there are more financial adviser representatives than doctors in Singapore. Yet, despite the increase in expertise, adults in Singapore are still confused over how financial planning works or even where to begin.
The complex nature of financial planning means that everyone would require a financial plan tailor-made to suit their unique financial positions and circumstances. While it is impossible to do so with an article, we can give you the next best thing – an overview of the steps taken to become financially fit.
Step 1: Settling Debts
Financial planning is always complicated, so allow me to tell you a story to simplify this subject.
Once upon a time, there was a guy named Jack. Jack lived in a condo in Singapore and decided to lend $1,000,000 to his friend, Jill, for 10 years in exchange for 1% interest per annum. Jill accepted the agreement and had to pay an additional $10,000 to Jack every year. At the end of the 10-year period, Jill had paid a total of $1,100,000 to Jack, which was $100,000 more than the amount she originally borrowed!
Most bank loans in Singapore are made on a ‘per annum’ basis. This means that a percentage of the original amount owed – the principal – will be charged as interest at the end of each year. The good news is that some loans allow partial redemptions in which you pay off bigger chunks of the loan along the way when you get your bonus or receive windfalls. This way, it is possible to reduce the principal owed more quickly, which would then result in a reduction in interest charged. Do check with your lending bank(s) if the loans in question allow partial redemptions without penalty, and if any lock-in periods apply.
Let’s take Jack and Jill’s case as an example.
The original amount Jill borrowed from Jack is $1,000,000. Therefore, the principal Jill owed was $1,000,000. Let’s assume that Jill’s business took off and she made a profit of $710,000 one year later. Jill decided to set aside $510,000 to repay Jack. In this scenario, $10,000 of her money would be used to settle the one-year interest she owed Jack. The rest of the money – $500,000 – would be used to settle part of the principal Jill owed Jack.
As such, the principal Jill owed Jack would reduce from $1,000,000 to $500,000 ($1,000,000 – $500,000) and her interest payable per year was reduced to $5,000 (1% of $500,000).
The same applies to your bank loans. The quicker you settle your debt, the less interest you have to pay. Hence, the first step of financial planning should always be to settle all debts as soon as possible so that you can start building and accumulating wealth.
By the same token, avoid rolling over your credit card balance and avoid using unsecured credit lines. Many people unwittingly bleed financially from their over-reliance of easy credit.
Step 2: Build a Safety Net
One of the reasons why financial planning is so complicated is because life is a series of wild cards.
Car breakdowns, theft, layoffs, fire, flood, hospitalisation – there are a number of events that could hinder your plans to grow your wealth, for example, if you are planning to invest in fixed deposits or invest in real estate.These avenues are less flexible and you may not be able to access the funds locked up in them in the event of an emergency. Even if you are able to unlock them,you’d have to incur some form of financial penalty(or loss if, say, the property market is not in your favour).
And that brings me back to the second step of planning for financial fitness – building a safety net.
A safety net is a sum of readily available fund that is set aside specifically to cushion emergencies. As such, you should steer clear from using that fund, regardless of how much you want that new phone or what discounts the Great Singapore Sale is offering. Note that you may set aside another sum of money for entertainment purposes or for occasional splurging, but your safety net should be separated from these other funds.
Health insurance is another safety net you need to consider. Medical bills are not getting any cheaper, and huge unforeseen medical bills have been known to wipe out entire savings, so do prepare, I mean, insure yourself adequately.
Another issue you may wish to take note when planning for this step is that the amount needed for a safety net differs across individuals and families. Due to the fact that there are many incidents – such as layoffs, major illnesses or accidents – that halt your income, some financial experts state that your safety net should be able to cover your expenses for at least 6 months. Others, however, claim having a safety net that covers 2 months of expenses is plenty.
Planning your finances with the help of a financial consultant can help you determine the amount you need to set aside for your safety net. While you’re talking to your financial consultant, you can also have them get you the appropriate life insurance or medical insurance to protect yourself and reduce your exposure to large medical bills.
Step 3: Invest 10% to 20% of your income
Naturally, investment plays an instrumental role in financial fitness in Singapore. Inclusive of their CPF contributions, readers from Singapore should consider investing a total of 10% to 20% of their monthly income to build their wealth.
The Canadian millionaire, Kevin O’Leary, said it best.
“Here’s how I think of my money – as soldiers – I send them out to war every day. I want them to take prisoners and come home, so there are more of them.”
– Kevin O’Leary, Founder of SoftKey
Unless you have already retired, you’d have a constant stream of income after settling your debts and creating your safety net. Keeping that constant stream of income in your bank would be like grounding your soldiers in your camp. While this strategy keeps your soldiers safe and prevents them from dying in the battlefield (I.e – losing money due to poor investment choices), it also restricts their ability to capture prisoners (I.e – earning money from good investment choices).
So what do you do if you are not familiar with investment strategies? How do you differentiate between a good investment choice and a poor one?
You can always attend financial seminars in Singapore to educate yourself about investments and financial planning. Alternatively, you can engage an independent financial advisory firm to have key aspects of your wealth managed.
“If I engage financial experts in Singapore to manage my investment portfolio, should I invest ALL of my income to maximise my profit?”
Financial planning is important but life is more than just protecting your future self. It is also about living in the moment and enjoying life as it is. Investing all of your income, even after you paid for all your expenses, will deprive you of the joy of living in the present. As such, as a ballpark figure, investing 10% to 20% of your income might help keep you balanced while you build a fund to savour later. Nonetheless, to better identify a reasonable percentage specific to your situation, do contact your financial consultant to advise you.
And that’s the gist of it.
I wish you – my reader – good luck on your journey to financial fitness.
Important: The information and opinions in this article are for general information purposes only. They should not be relied on as professional financial advice. Readers should seek independent financial advice that is customised to their specific financial objectives, situations & needs.