Now reading
WTH Is Financial Planning And How Do I Get Started?

How much do you spend each month on essentials like rent or food? What percentage of your income is spent on insurance? What is your current net worth? If you don’t know the answer to these questions, don’t worry, I don’t either.

Read on for everything you need to know about managing your finances.

It turns out, Singaporean youth are  the most financially savvy in the region, but if you don’t fit the bill, it’s not too late to get started with financial planning.

First things first –  list your future financial goals like getting married (yes, it’s a huge financial commitment), buying your own home, having kids, or even that year-end vacay to Japan.

Secondly, take stock of your current financial status and have a good overview of your financial assets. This will enable you to allocate your resources more effectively and save and invest towards your life goals.

These four components of financial planning will give you a snapshot of where you stand:

  1. Net worth: Your total assets minus total outstanding liabilities and debt
  2. Savings: Your savings ratio and emergency funds
  3. Budgeting: Keeping track of your income and expenses
  4. Insurance: What type and how much coverage you have
  5. Investments: Investments to net worth ratio, how much percentage of your net worth is currently invested.

Net worth

Your net worth is an accurate measure of your financial health and progress over time, as it gives you a realistic view of whether you’re on track to reach your goals.  For instance, growing debt and dwindling assets should raise a red flag.

  1. Calculate the value of your assets: These include cash and cash equivalents, investments, CPF, and your personal property (e.g. vehicles, property)
  2. Calculate the value of your liabilities These include credit card debt, your mortgage, loans, insurance premiums
  3. Net worth = Total Assets – Total Liabilities

Savings

Surprisingly, saving for a rainy day tops the list of savings priorities amongst millennials in Singapore, followed by retirement, healthcare and owning a home.  In fact, we have mastered the art of saving early, according to CNBC.

Start by calculating how much liquid assets of savings you have. Basically, liquid assets can be converted to cash in a short period of time with little or no loss in value. Some examples include your savings deposits, fixed deposits, and stocks.

This amount should form the base of your emergency fund. Ideally, you should target to have at least 3-6 months of your monthly expenses for contingencies, or even more if you have dependents or family commitments.

Generally, you should aim to save about 20 percent of your income according to the 50/30/20 rule. Of course, this depends on how much you’re making. You might save more if you’re a high earner or less if you are just starting out.

  • 50% on essentials like rent and food
  • 30% on ‘discretionary’ or personal spending (i.e. non-essentials like shopping, holidays, nights out)
  • 20% for savings or debt repayments

Another approach to calculating your savings is to work backwards and see how much you have leftover for discretionary spending after accounting for ‘serious’ items like saving for a home, car or working towards retiring at 55.

If you feel like you need a little extra nudge, you might want to transfer a set amount each month into a separate savings account.

You can also consider signing up for a Supplementary Retirement Scheme (SRS) – a voluntary savings programme that lets you save on taxes as every dollar you deposit is eligible for tax relief (note: your contributions are capped at SGD 15,300 per year). You also have the flexibility to make withdrawals if needed or invest the money to grow your retirement fund.

Budgeting

Having a good handle on how much you’re earning and spending will help keep you out of debt and make sure you’ll always have enough for the things you need.

Your monthly income is your take home salary nett of CPF contributions, plus any additional sources of income if you have any – whether they’re from dividends, rental income or even your own side hustle.

When it comes to expenses, knowing exactly how much you spend and what you’re spending on each month will help you determine how you can weed out bad spending habits and shave off unnecessary expenditures. Keep tabs on where your money is going and track your monthly income, expenses and outstanding debts. Don’t forget to repay the outstanding balances on your credit cards or cash advances to avoid massive interest charges that can go up to more than 20 percent per annum!

Be conscious of big-ticket or recurring items like loan repayments, telco bills and gym memberships, as well as the sneaky little items that add up – think late-night Uber trips, Deliveroo meals or your daily caffeine fix. Start by setting a reasonable budget and keep track of your monthly spending with these handy money management apps in Singapore.

Insurance

You might question why we need insurance, but to put it simply, it’s because sh*t happens.

There are a couple of types of coverage that you can consider, which include Hospitalization and health insurance, Critical insurance coverage, Death and Total Permanent Disability (TPD).

The good news is that all Singaporeans and Permanent Residents are insured under Medishield Life, a basic health insurance plan by government that helps pay for large hospital or medical bills.

When choosing the right insurance policy for you, you should consider:

  1. Suitability: Taking a-needs based approach to selecting insurance (e.g. endowment policies if have dependents, or Investment Linked Policies if you want your policy to double as investments)
  2. Sum assured: Total amount to be insured for
  3. Types of coverage: What aspects of coverage will you need based on the risks that you will be exposed to (e.g. workplace injuries, road accidents)
  4. Affordability: Ability to pay your premiums in the long-term without impacting your current lifestyle

If you’re just starting out, a basic health insurance policy and a life policy should suffice, but you may also need other types or general insurance (e.g. property or car insurance) if you’re a home or car owner.

Check out this handy guide:

[Image Source: Seedly]

Investments

There is an undeniable connection between amassing wealth and investing – besides helping to grow your wealth, investing also helps to fight inflation. Once you’ve settled your insurance and built up your emergency fund, channel any excess money into investments for a higher rate of return.

The earlier you start investing, the higher the potential of your growth. All thanks to the power of compounding when you re-invest the returns and dividends from your investments.

With so many investment options out there, you might be hard pressed to find one that’s right for you.

Before you decide on what to invest in, consider these factors:

  1. Capital Outlay: Affordability and amount to set aside for investment
  2. Risk profile: How much volatility can you withstand and how much can you afford to risk or lose
  3. Investment approach: Lump sum or regular periodic investment.
  4. Investment horizon: Short or long term? How long are you staying invested?
  5. Types of investment instruments: Equities, Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), Unit Trusts

For more passive investors who prefer to leave things to the experts, consider investing in Unit trusts or ETFs if they prefer to track market indexes. Single equities may be more suitable for investors who are interested in exerting more control over their investment decisions and choices.

Even if you are not ready now, start learning about investing so you have a better idea of how it can help you achieve your financial goals.

Now that you know how to get started with financial planning, look out for the next part of this series on savings!

category name: payload
Top
1
Subscribe to Newsletter