With the rise in financial awareness, more and more financial advisor representatives are being recruited in Singapore. In fact, it is said that there are more representatives of financial advisors than doctors in Singapore. Yet despite the increased experience, adults in Singapore are still confused about how financial planning works or even where to start.
The complex nature of financial planning means that everyone would need a financial plan tailored to fit their unique circumstances and financial positions. While it’s impossible to do with one article, we can give you the next best thing: an overview of the steps taken to get financially fit.
Step 1: debt settlement
Financial planning is always complicated, so let me tell you a story to simplify this topic.
Once upon a time there was a guy named Jack. Jack lived in a condominium in Singapore and decided to loan his friend Jill $1,000,000 for 10 years at 1% annual interest. Jill agreed to the deal 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 of the bank loans in Singapore are granted ‘per year’. This means that a percentage of the original amount due, the principal, will be charged as interest at the end of each year. The good news is that some loans allow partial redemptions where you pay off large portions of the loan down the road when you get your bonus or receive a windfall. In this way, it is possible to reduce the principal owed more quickly, which would later translate into a reduction in the interest charged. Check with your bank(s) lender(s) to see if the loans in question allow partial repayments without penalty, and if lock-in periods apply.
Let’s take the case of Jack and Jill as an example.
The original amount Jill lent Jack is $1,000,000. Therefore, the principal Jill owed was $1,000,000. Suppose Jill’s business took off and she made a profit of $710,000 a year later. Jill decided to set aside $510,000 to pay Jack. In this scenario, $10,000 of her money would be used to pay off one year’s interest that she owed Jack. The rest of the money ($500,000) would be used to pay off part of the principal Jill owed Jack.
As such, the principal Jill owed Jack would be reduced from $1,000,000 to $500,000 ($1,000,000 – $500,000) and her interest payable per year would be reduced to $5,000 (1% of $500,000).
The same applies to your bank loans. The faster you pay off your debt, the less interest you will have to pay. Therefore, the first step in financial planning should always be to pay off all debt as soon as possible so that you can start building and accumulating wealth.
Similarly, avoid transferring your credit card balance and avoid using unsecured lines of credit. Many people unknowingly bleed themselves financially due to their over-reliance on easy credit.
Step 2 – Build a Safety Net
One of the reasons financial planning is so complicated is because life is a series of wild cards.
Car breakdowns, thefts, layoffs, fires, floods, hospitalizations: there are a number of events that could hinder your plans to increase your wealth, for example, if you plan to invest in fixed-term deposits or invest in real estate. These pathways are less flexible, and you may not be able to access funds locked in them in the event of an emergency. Even if you can unlock them, you’d have to incur some kind of financial penalty (or loss if, say, the housing market isn’t in your favor).
And that brings me back to the second step of financial strength planning: building a safety net.
A safety net is a readily available sum of funds set aside specifically to cushion emergencies. As such, you should avoid using that fund, regardless of how much you want that new phone or what discounts the Great Singapore Sale offers. Keep in mind that you can set aside another sum of money for entertainment purposes or the occasional splurge, but your safety net should be separate from these other funds.
Health insurance is another safety net to consider. Medical bills aren’t getting cheaper, and unforeseen huge medical bills have been known to wipe out all savings, so be prepared, I mean, properly insure.
Another issue you may want to keep in mind when planning this step is that the amount needed for a safety net differs between individuals and families. Due to the fact that there are many incidents such as layoffs, serious illnesses or accidents that stop your income, some financial experts say that your safety net should be able to cover your expenses for at least 6 months. Others, however, claim that having a safety net that covers 2 months of expenses is enough.
Planning your finances with the help of a financial advisor can help you determine how much you need to set aside for your safety net. While you’re talking to your financial advisor, you can also ask them to provide you with the right life insurance or health insurance to protect yourself and reduce your exposure to large medical bills.
Step 3: Invest 10-20% of your income
Investment naturally plays a key role in Singapore’s financial strength. Including your CPF contributions, readers in Singapore should consider investing a total of 10% to 20% of your monthly income to build your wealth.
Because?
Canadian millionaire Kevin O’Leary said it best.
“This is how I think about my money: As soldiers, I send them off to war every day. I want them to take prisoners and come home, so there will be more.”
– Kevin O’Leary, Founder of SoftKey
Unless you’re already retired, you’ll have a steady stream of income after you pay off your debts and build your safety net. Keeping that steady stream of income in his bank would be like grounding his soldiers in his camp. While this strategy keeps your soldiers safe and prevents them from dying on the battlefield (That is to say – losing money due to bad investment decisions), also restricts your ability to capture prisoners (That is to say – earn money with good investment options).
So what do you do if you are not familiar with investment strategies? How to differentiate between a good investment choice and a bad one?
You can always attend financial seminars in Singapore to educate yourself on investing and financial planning. Alternatively, you can hire an independent financial advisory firm to manage key aspects of your estate.
“If I hire financial experts in Singapore to manage my investment portfolio, should I invest ALL my income to maximize my profits?”
No!
Financial planning is important, but there is more to life than just protecting yourself in the future. It’s also about living in the moment and enjoying life as it is. Investing all your income, even after you have paid all your expenses, will deprive you of the joy of living in the present. As such, as a ballpark figure, investing 10-20% of your income could help you keep your balance while building a fund to savor later. However, to best identify a reasonable percentage specific to your situation, contact your financial advisor for advice.
And that’s the gist of it.
I wish you, my reader, good luck on your journey to financial strength.
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 tailored to their specific financial goals, situations, and needs.