Build a steady financial ladder


If you don’t have time to read through the whole article, you can check out our short version below:

Set the right foundation before building your way up your financial ladder.

Ensure manageable debt and positive cash flow.

The general rule of thumb is to have 3-6 months of emergency funds.

Ensure adequate protection for your wealth.

We all need money for every milestone of our life. However, the art and science of managing our monthly cash flow, building up our savings and planning for how much we think we will need for the future can be challenging. The process of managing our everyday money events and finding the link to reaching our future goals is like climbing up a ladder. We need solid ground for the ladder to stand on, sturdy handlebars on either side, and that first step up to get us on our way.

It all starts with setting the right foundation before climbing your way up.

Managing debt is a foundational cornerstone of prudent financial planning. Poorly managed debt will impact all other aspects of financial planning including day-to-day cashflow, building up your savings and emergency funds, securing sufficient protection for yourself and your loved ones. This will hamper any plans to grow wealth in the long term. It's like trying to set up your financial ladder on shaky ground.

Before you start planning for any of your milestones in life, you should get free of debts such as outstanding credit card bills, personal loans or balance transfers. These are categorised as unsecured loans.

Unsecured loans typically have higher interest rates than secured loans since the lender has nothing to hold on to as collateral. That is why it is a good idea to pay them off quickly to avoid the interest charges piling up. It is helpful to prioritise building sustainable repayment plans to clear any outstanding payments. Do make payments on time to avoid late fees and additional charges. Assess if you can scale back on any other expenses to get debt free more quickly.

For secured loans like home loans or car loans, assess factors such as the total amount you need to pay in interest over the entire term of the loan and the monthly amount repayable. Then check if you are in a position to shorten the term of the loan to reduce the overall amount of interest you need to pay. You should also determine if the monthly repayment amount affects your ability to set aside regular savings.

Once you have debt under control, well done! You are now on solid ground where your monthly cash flow is positive. This is solid ground on which you can set up your financial ladder and start building your savings.

The next step is building up your savings. Beyond saving up for near term goals like an upcoming holiday, build your savings with a view to having sufficient emergency funds. Having sufficient emergency funds will at least free you of financial worries when unforeseen circumstances befall you, such as loss of a job or urgent, large expenses.

The general rule of thumb is to have 3-6 months of emergency funds. Deciding how much you need to save is dependant on your lifestyle and also how many financial dependents you have. For example, a sole breadwinner of the family will have to consider not just their own personal expenses but also for everyone else they are providing for.

Saving beyond emergency readiness also gives you the freedom of making choices: to take a sabbatical for a year, to pursue higher education, or pursue a passion project.

Map out your monthly expenses (including insurance, groceries, transportation etc.) and then aim to set aside a fixed amount, no matter how small, every month for savings. You can consider opening a dedicated savings account and making automated deposits to make growing your funds a little easier. Give yourself a pat on the back each time you make progress towards your saving goal. You are securing that important first step on your financial ladder, from which progress to all other goals can begin.

We turn our attention now to the two handlebars of your financial ladder: protecting your wealth and growing your wealth. These two go hand in hand at every stage of life.

We dislike thinking about unpleasant events that may improbably happen… like meeting with an accident, suffering a disability, discovering a critical illness. But it is precisely at these times that we need peace of mind to know the financial expenses are taken care of.

Getting adequate protection not only covers yourself, it also covers your loved ones in case of any unforeseen events and ensures the financial burdens do not fall on them. Getting the right type of insurance – health/medical, accident, disability and life – are critical considerations in any comprehensive financial plan. Otherwise, a single incident could wipe out a five-figure or six-figure sum from our savings and throw you off your other life goals.

Check out what protection coverage you have: company insurance, private insurance, or CPF-linked protection plans like Medishield Life. Then determine how much protection coverage you need depending on your stage of life, financial commitments or family medical history.

The other handlebar in your financial ladder is growing your wealth.

Saving hard and saving a lot is great, but interest rates on regular savings account are typically only 0.05% so your money grows really slowly. With inflation at around 2% per annum, the purchasing power of your savings is being eroded with time.

Think about this, the price of a McDonald’s McSpicy value meal was $5 back in 2005. As of 2019, it costs $7.70 for the same meal! Rising prices of goods and inflation are real, and this is why you should start growing your wealth as early as possible, especially for long term needs like retirement.

There are many ways to build your wealth – starting from the basics like moving your money to a savings account with preferential interest rates that are higher than 0.05%, or buying an endowment plan that you can time to mature when your child is ready for university, or when you are ready to retire. You can also invest in instruments such as equities, bonds, ETFS, unit trusts, and ready-made portfolios, then allowing time and compounding to help you build value.

Where do you start? It is important to understand exactly what you are investing in. How does the product work, what are the risks involved, and are you prepared to accept those risks – monetarily and emotionally.

Once you have these four things in place:

Manageable debt and positive cash flow
Healthy savings
Adequate protection for your wealth, and
Plans in place to grow your wealth

You are on your way to meeting life’s milestones with greater confidence, whatever they may be.

As you progress through various milestones like getting married, buying a house, starting a family, planning for your children’s education and preparing for retirement, keep these four elements in balance and adjust where necessary so that your financial ladder remains steady all the way.


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