Financial Planning 101: Everything You Need To Know

Financial freedom means having enough resources to live comfortably and pursue one's goals without worrying too much about bank balance or debts. Every individual desires financial freedom. But not everyone is endowed with adequate knowledge or persistence to plan finances effectively.

The most common myth surrounding financial planning is that it is only for the wealthy. The truth is that each person has a unique perspective on life and different objectives. When making financial plans, two factors must be taken into account. We must first comprehend where we currently stand financially. Second, what financial objectives—short-term or long-term—do we need to accomplish in a specific time frame. The road map for obtaining the desired state, starting from the current one, is financial planning. 

Planning for income and savings, investments, insurance, a retirement portfolio, and several other financial considerations are all part of the process.

Proper financial planning has many benefits including better living standards, improved savings, being ready for significant life events or financial emergencies, and proper retirement planning.

We have identified the below steps for sound financial planning- 

Assess Your Current Financial Situation 

First and foremost, you need to figure out your financial situation. Any financial planning must include information on cash inflow and outflow. You should subtract your fixed expenses, such as loan payments, tuition fees for your children's education, medical costs, and basic expenses like rent, electricity bills, groceries, etc. to establish exactly how much money is left over each month for savings or investments.

Target Realistic Financial Goals

Setting attainable financial objectives that are measurable, aligned with the current finances, and achievable within the intended time range is the next stage. The easiest method to do this is to identify significant life events that may require money and group them into the three categories listed below -

• Short Term Goals (less than two years) - Funds for leisure trips, higher studies, upskilling cost

• Intermediate goals (2-10 years) - Marriage cost, Child Birth expenses, School admissions

• Long-Term Goals (over 10 years) - Higher education expenses of children, Retirement savings 

Once you have identified the goals, you should plan investments accordingly based on the time frame available, cash flow, tax strategies, and risk tolerance.

Get Insured

Death, temporary or permanent disabilities, and critical illness can happen at any time. It can cause a financial disaster for you and your family. Therefore, you should protect your wealth through insurance by choosing the right kind of plan with enough coverage amounts. A term (or whole) life insurance plan where a lump-sum payout is guaranteed, in the unfortunate event of your demise, is a suitable option if you have dependent family members.

It is also crucial to have health insurance. Any type of treatment or urgent hospitalization can prove to be very expensive. The cost of medical care is constantly rising, which might drain your funds, cause you to sell off your assets, or even push you into debt. The risk of an unplanned financial outflow can be reduced by having adequate medical insurance coverage.

Medisave and Medishield Life are affordable and dependable options provided by the Singapore government and administered by the Central Provident Fund (CPF)

Proper Budget Planning

You should always be able to differentiate your expenditure into what you need or what you want. Impulsive expenditure is a sure-shot way of financial draining. The best way to prevent emotional spending is to set aside a specific amount at the start of the month. You should also keep a track of your expenses and review all transactions made during the month. 

Keep Emergency Funds

The Covid outbreak has shown the necessity of having emergency funds for every individual. Many people lost their employment as a result of lockdowns and economic instability. Employers had been forced to lower or forego compensation. Unexpected medical emergencies or accidents and global recession can also impact regular income. For such unforeseen events, one should have 6–12 times their monthly income set aside in low-risk and easily redeemable investments. One can consider the below options to hold emergency funds -

• Regular savings account

• Higher interest savings account 

• Singapore Government Treasury Bills (T-bills)

• Money market funds

• Singapore Savings Bonds (SSBs)

Proper investment planning

The most tricky thing about money is that it always loses its value over time. Only savings cannot beat inflation. Hence it is important to plan your investments to get better returns than standard inflation rates.

Low-risk investments and blue-chip funds are less volatile and provide stability when markets are down. Below are some low-risk investment options -

• Central Provident Fund (CPF) - Ordinary Accounts and Special Accounts

• Annuity schemes like CPF Life

• Singapore Government Treasury Bills (T-bills)

• Singapore Savings Bonds

• Fixed Deposits (FDs)

• Higher interest savings account 

On the other hand, high-risk investments offer more returns over a longer time horizon. Below are some high-risk high rewards investment options available -

• Real Estate Investment Trusts (REITs)

• Individual stocks and shares

• Investment funds (ETFs, unit trusts) 

• Cryptocurrencies 

It is wise to have a diversified portfolio having a sensible proportion of investments ranging from low-risk to high-risk. Age and time horizons become important factors in selecting the proportion. If you start early in your career then you can opt to invest more in high-risk funds and you will be in a better situation to take advantage of compounding interest. If you have less time till retirement, you should invest a larger portion of your money into less risky schemes providing stable returns. 

Also, you should take advantage of the Supplementary Retirement Scheme (SRS) to get tax relief.

Review progress regularly and reassess your plan

As one’s financial situation, lifestyle, and responsibilities change from time to time, reassessment of financial plans also becomes necessary. What worked in the past may not work in the future. 

Such reassessment includes the change of insurance portfolio, investment portfolio, and the ratio of savings.

Consult financial advisors 

With numerous tools and resources available online, the task of financial planning can often prove to be pretty daunting and time-consuming.

Consulting a financial advisor is the best option to simplify this process. However, be careful of fraud and choose experienced and certified professionals licensed by the Monetary Authority of Singapore (MAS). 

Conclusion 

Financial independence is a long-term goal. One cannot hope to achieve it overnight. It requires thorough financial planning, rigorous efforts, and firm self-control. So, start as early as possible, invest in diverse assets, and slowly but steadily work towards your long-term goals.

If you are confused about how to take the first step towards financial independence, then book a free consultation with us.