Don’t be clueless. Be in control.
Do you know someone who is a slave to his job because of the big mortgages he has to pay? Someone who could not afford the best medical care when diagnosed with cancer? Someone who is broke due to speculative investing? Someone whose marriage fell apart because of financial stress? Someone who has to get a court order for financial support from her children?
The buck starts with you
Personal financial planning is about achieving financial freedom. It helps you focus on your financial goals and uses suitable methods to achieve them. It is an integrated and continuous process of looking after your financial health, While it touches every aspect of your life, it is not rocket science. Once your plan is drawn up, all you need is the discipline to implement it and to regularly review it. This is something that everyone can and should do early in their lives.
But if you fail to plan properly now, you could be facing financial failure some time in the future. The buck starts with you.
Generally, financial planning methods cover a mix of strategies briefly discussed below.
Cash and debt management
Frugality is |n. Conspicuous consumption is out. If you live above your means when you are younger, you are quite likely to be living below your means when you are old. Even high-income earners can suffer from poor financial health if they manage their cash flow badly.
Watch your expenses carefully. Do avoid getting into heavy debt just when you start working. Money used for debt servicing could be better invested for the future. And remember not to pile up your debts. It is one quick way to financial ruin - especially during tough times. Make sure that at the end of each month,you have at least 10% of your income left to save and invest. And keep at it.
Develop your personal net worth statement and take a close look at your assets and liabilities. Check whether you enjoy a healthy financial position or if you must address certain issues. (A financial planner can help you draw up your personal balance sheet for a snapshot of your true financial worth.)
Are you "asset rich" but “cash poor"? Are your assets appreciating in value and generating income? Are you excessively in debt? What happens if you were to lose your job? Do you have enough emergency cash of three to six months to tide you over for all your living expenses - and for your dependents, if any?
Life insurance and other forms of coverage are essential to managing risk in your financial planning. Many families are incapable of recovering from the financial consequences arising from the main wage earner’s loss of income due to premature death or disability. They also cannot cope with big asset losses such as a home destroyed in a fire. Or they could be financially ruined by hefty medical costs incurred for unforeseen critical illnesses.
Insurance protection provides the most cost-effective way of managing risk. You should do a detailed needs-analysis with your adviser. Be very open and frank in giving information so that you can be sure the advice you get is relevant to your unique situation.
Remember, you should first get adequate insurance protection before moving on to other aspects of the financial planning process such as investment or retirement funding.
Think of the money you save as your “workers”. They could stay idle - earning very little in a low-interest bearing savings/checking account or fixed deposit. That money could easily be “eaten” away by inflation. Or you could invest to make it work harder for you. And that means willingness to take on more risks since higher returns come with higher risks.
But do you have the appetite for it? Do you panic easily when the value of your investment drops significantly?
First, find out how much appetite you really have for risk. This can be easily done through risk profiling.
Also, consider your investment time horizon. Are you investing for the long term? If yes, you can afford to be more aggressive in taking risk as there is more time to recover from any temporary losses. But if you are investing for a shorter-term goal like your wedding in a couple of years’ time, stay away from stocks.
Having identified your risk profile and investment time horizon, you can then build up your investment portfolio. What should be your asset allocation strategy - how much to put into different investment instruments such as stocks, bonds and money market instruments. And how do you select them?
It is important for you to minimize risk through diversification made across:
- different asset classes (such as equities and bonds),
- different geographical regions, and
- different sectors.
If you do not have the investment knowledge, you might want to consider investing in unit trusts. It has several advantages. You are leveraging your money by pooling with other small investors and getting professionals to manage your investment for a small fee. Hence, you could achieve a far greater yield than would otherwise be possible investing on your own. It is relatively affordable. Generally, the minimum cost of investing in a unit trust is between $1,000 to $5,000
You can even set up a regular savings plan - investing a fixed sum of money every month. When prices are lower, you are actually buying more units. Over time, your average cost per unit will be lower.
To have a happy retirement, you have to prepare and plan for it. When are you going to retire? How many years of retirement expenses do you need? Other considerations include the kind of lifestyle you desire, the home you would like to live in, and the inheritance you want to bequeath your heirs or donations to charity. All these would determine the amount of retirement money you require.
Risk management is also an important aspect of retirement planning. Make sure that you have adequate insurance protection for healthcare. Long-term care insurance related to prolonged physical and mental deterioration should be taken care of. Protect your major
assets, especially your home.
Start your retirement planning early. The more time you have, the better. When you start young, you can afford to be more aggressive in investing. Starting late means you have less time to recover from losses, and you would have to settle for a more conservative approach and lower returns.
Tax and estate planning
Paying taxes reduces our disposable income. Thus, you should try to minimize your tax payment. This has be done legally, taking advantage of the range of deductions/reliefs allowed by the government and using other tax planning strategies.
Estate planning is not just for the rich. Successful planning helps you to live comfortably now, and to bequeath your assets while paying the lowest possible taxes and having the least administrative hassles. The probate process (legal process by which your assets are administered and distributed after your death) can be lengthy and costly.
A will, to ensure that your estate is distributed according to your wishes, can also help speed up the probate process and keep the costs down. There are other estate planning techniques, e.g. creating an inter-vivos trust, to enable you to pass your assets to your beneficiaries outside the probate process.
Proper estate planning will also help ensure that there is enough liquid cash to pay for the estate duty and other expenses. Otherwise, some assets in your estate may have to be sold to raise cash.
Never too little or too early to start
Remember a small beginning can go a long way. If you save just $1,000 a year and compound that at a rate of 10% annually, you would get $164,494 in 30 years.
So, the earlier you start investing, the better you are able to enjoy the “magic” of compounding to realize your financial goals. Do not delay. Remember that investment is about time and not about timing the markets.
There is really no excuse to stay clueless if you seek financial contentment. Get in control.
If you do not have the expertise, get help from the professionals. Start planning now.
Can you afford not to?