Building a steady financial ladder
Most of us will need money to achieve our milestones in life. However, the art and science of managing our monthly cash flow, building our savings and planning for our future can be challenging. The process of managing our daily finances and finding ways to reach our future goals is akin to 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 your savings and emergency funds, and 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 work to free yourselves from “bad” debts, particularly those that incur high interest rates such as outstanding credit card bills, personal loans or balance transfers. In particular, here are 3 bad habits to kick for good financial health.
• Over-reliance on credit cards
There are benefits to using credit cards as a payment method – to chalk up rebates, miles and rewards - but there are downsides if you fall into a spending spiral. Using credit cards frequently might encourage you to spend more money than what you have, due to the ease of tap and swipe. If not managed properly, it could snowball into a mountain of debt due to late payments or a compounding of interest rates when you are unable to pay the entire monthly bill.
• Impulsive purchases
Sometimes, we purchase items that we don’t need and then regret, due to a moment of impulse. This is especially so when online shopping is so prevalent and convenient. Make sure to think twice before buying any items to reduce buyer’s regret.
• Not setting a monthly budget
By not setting a budget for yourself, there is a higher probability of overspending. And you could end up realising that you don’t have enough money to last the month. Remember the importance of emergency funds to tide you over rainy days.
At this stage, 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.
Besides saving for near term goals like an upcoming holiday, do ensure that you have adequate emergency funds.
Doing so will at least cushion you from financial worries when unforeseen circumstances befall you, such as the loss of a job or when faced with urgent and large expenses.
The general rule of thumb is to have at least 3-6 months of emergency funds. Deciding how much you need to save is dependant on your lifestyle and the number of financial dependants you have. For example, a sole breadwinner of the family will have to consider not just his own personal expenses but also for everyone else he is providing for.
Saving beyond emergency readiness also gives you the freedom of making more choices: to take a sabbatical for a year, to pursue higher education, or pursue a passion project.
Before planning your budget, it is advisable to track your current money flow to understand your spending habits. It allows you to determine what is your budget baseline for your monthly needs and wants. By having a good understanding of your monthly cash outflow, it will help you work out a suitable and realistic budget for yourself.
In fact, dividing your budget into different categories like food, transportation, entertainment and leisure helps you to plan a realistic budget which curbs overspending.
Make use of the useful digital advisory tool DBS NAV Planner that can sort your expenses automatically into different categories like transportation and shopping so that you can set saving and spending targets and view them easily with your mobile devices.
You can consider opening a dedicated savings account and making automated deposits to grow your funds easily. 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 tend to refrain from thinking about unpleasant events that may happen… like meeting with an accident, suffering a disability, or being diagnosed with a critical illness. But it is precisely during these times that we need peace of mind to know that our financial expenses are taken care of.
Getting adequate protection not only covers yourself, it also covers your loved ones in the event of any unforeseen events by ensuring that financial burdens do not fall on them. Getting the right type of insurance – life, health/medical, accident, and disability– are critical considerations in a comprehensive financial plan. Otherwise, a single incident could wipe out a five-figure or six-figure sum from your savings and throw you off your other life goals.
By having a good understanding of your current insurance plans and their coverage of your needs, you can identify and close the gaps if any.
If you are planning to buy more insurance but are not sure on what to take note of, here are 7 useful tips to help you when buying insurance.
The other handlebar in your financial ladder is growing your wealth.
Having a disciplined savings habit is great, but with regular savings accounts offering an annual interest rate of 0.05%, your money grows really slowly. Add on the double whammy of inflation at around 2% per annum (pa), it is no wonder the purchasing power of your savings is being eroded with time.
Think about this, the price of a McDonald’s Big Mac was $2.50 back in 1980. Presently, it costs $7.70 for the same burger, a 208% increase in 20 years! 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.
To some people, investing is associated with the rich and it can be daunting as there are many common misconceptions surrounding it. One myth is that we need a massive amount of money to start investing which results in the misconception that investments are not for everyone, especially for fresh graduates who are just starting out in their working life. The truth is you can start investing with any amount of capital - from as low as a few dollars per day - as long as you are comfortable with the risk.
Instead of letting your savings sit in your bank account and earning the base interest of a paltry 0.05% pa, you can use the money to invest in easy-to-understand products like robo-advisor digiPortfolio or Regular Saving Plans (RSP). The latter help to invest your savings in Exchange Traded Funds (ETFs), unit trusts, and blue chips which could potentially earn you higher returns.
But of course, all investments come with risk and if you are worried about making the wrong decision, read on to find out about the common mistakes that people tend to make while investing.
You are on your way to meeting your 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 them where necessary so that your financial ladder remains steady all the way.
Ready to start?
Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.
Alternatively, check out NAV Planner to analyse your real-time financial health. The best part is, it’s fuss-free – we automatically work out your money flows and provide money tips.
Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
Disclaimer for Investment and Life Insurance Products