How do you plan your finances?
This is often a stressful question for many people. Planning your finances can be intimidating, especially if you do not know where to start.
However, it is important to do so, such as setting financial goals and managing your income to ensure that you have enough savings for rainy days. Managing your finances and growing your wealth can also help you reach financial independence early and even retire early.
It may sound daunting at the beginning but all you need to do is start taking baby steps and turn them into good financial habits that you can practise daily. Slowly but surely, you will reach your goals.
Check out some tips below.
This is the very first step you need to take. What are your financial goals? What do you hope to achieve in the next 1-5 years? And the next 10 years? When do you hope to retire?
If you are in your 20s or 30s, you might feel that it is too early to plan for retirement, but actually, the financial goals we plan for ourselves for the next few years or even the next decade can affect our retirement goals.
You don’t need to have a detailed plan but at least have a goal in mind and work towards it. Do you want to retire at 60 years old? How much would you need when you retire based on your projected monthly expenses? Don’t forget to account for rising inflation while you’re at it.
Do you plan to tie the knot next year? Or are you hoping to start a family? Or buy a property? How much do you need? Set these goals for yourself and work backwards to find out how much money you need to save monthly to get there.
Now, I’m sure many of us are guilty of doing it the other way around – most of the time, we spend first and save what’s left at the end of the month.
This results in an inconsistent amount of savings every month and it can hinder us from achieving our financial goals.
Instead, after setting our financial goals, I strongly encourage us to focus on putting aside the amount we want to save to reach our goals, before spending the excess. Make it a point to put aside at least 20-30% of your salary each month into a savings account, separate from your day-to-day account and preferably one with high interest rates, and watch your saving compound over the years.
Do you usually find yourself broke at the end of the month? If so, it’s time to review where your money has gone.
An extravagant lifestyle may look good on your social media accounts, but it certainly does not help your wallet. You do not need to cut out all your social gatherings and leisure activities, but perhaps for a start, assess if you are spending beyond your means.
Is it really wise to dine at a fancy restaurant once or twice a week considering your income and financial commitments? Calculate your fixed expenses as well as financial commitments first, before determining how much you can afford to splurge monthly on luxuries like dining out at expensive restaurants or shopping.
Couple this with the habit of saving first before spending (which we’ve mentioned above), you would be well on your way to having healthier finances.
Using a credit card is both convenient and simple, but do not forget to pay off the outstanding balances before your statement due date or you will risk paying high interest rates – 25% per annum or even higher!
Similarly, if you have taken up a personal loan, payday loan, or any other loan, remember to make your repayment on time too, as they will also incur late interest and fees if you miss or make a late payment. These are charges that can be easily avoided if you practise good loan repayment habits.
So set reminders on your phone or your calendar!
Besides saving a portion of your income, consider investing another part of your income in financial instruments such as endowment plans, Exchange-Traded Funds (ETFs), unit trusts, bonds, or fixed deposits.
While it is important to save, it is also important to grow your wealth and to protect your wealth from the impact of inflation.
With Singapore’s core inflation rising by 5.5% in January 2023 and expected to stay elevated for the forseeable future, our purchasing power is increasingly being reduced.
This means that if you save $1,000 this month, what you can buy with that $1,000 a few years later would be much less. And if you only save that money in the bank with interest rates of 0.05% p.a., is that enough to protect your wealth against a 5% inflation?
This is why it is important to invest: We can do our best to prevent our purchasing power from being eroded by inflation.
You will be surprised how much you can grow your money even if you can only invest $100 a month. If you are investing in an asset that can give you 5% annualised returns, you will have $15,093.47 at the end of 10 years, as compared to only $12,027.04 if you are saving your money in a savings account that gives you 0.05% interest.
And if you can get 10% annualised returns, your money can grow to $19,124.91. This is the compounding impact of investing!
Also, the earlier you start, the more you’ll gain at the end of a stipulated time as compared to someone who started later. You will reach your financial goals earlier too.
However, one key point to note is that all investments come with risks, so do not invest in things you do not understand. You need to do your due diligence first to research before investing.
For example, not everyone is suitable for high-risk investments such as stocks, forex trading, cryptocurrency, NFTs, etc, so it is advisable to steer clear of them unless you have done your research and you are not investing an amount of money that you are not prepared to lose.
Nothing is guaranteed in investments, and high-risk investments can even lead to a 100% loss of capital, so proceed with caution. It is best to also get a professional to help you, such as a financial advisor who can help you find the best investment option that is suitable for your risk appetite and financial goals.
The pandemic has caused many people to lose their jobs and realise the importance of acquiring certain skills, especially digital skills so that they can stay relevant in today’s job market.
With increasing digitisation, it can be tough to keep up-to-date with the changes if you have not been keeping in touch with the latest developments for some time. This is why it is important to regularly upskill ourselves so that even if we lose our jobs, we can improve our chances of finding the next employment opportunities more quickly.
Now, with the government providing us with SkillsFuture credits and subsidised courses, it is a good opportunity for us to sign up for self-improvement courses, pick up a new skill or improve our current skill sets.
You never know, your newly acquired skills can even help you earn passive income!
Whenever it’s the tax season, many of us often try to find ways to maximise our tax deductions – legally, of course.
There are many tax reliefs for both individuals and couples. An example is deductions on donations, where you can claim tax deductions of up to 2.5 times when you donate to eligible charity organisations.
Topping up your (or your loved ones’) CPF Special Account (SA), Retirement Account (RA), and/or Medisave Account can also qualify you for annual tax relief of up to $8,000.
Your net worth is basically the difference between what you owe and what you own. In other words, calculate the total amount of assets you have and deduct your liabilities.
This is important because imagine if you plan to buy a house by 35 years old and are unsure of how much money you need and how far you are from that goal.
Knowing how much you have currently helps you plan your expenses and helps you meet your financial goals more easily.
We can do our best to manage our finances, but we understand, there may be times when things do not go our way.
Medical emergencies, an unplanned pregnancy, urgent home repairs – sometimes, these unforeseen circumstances may come our way and deter us from reaching our financial goals. We might even find ourselves requiring urgent cash.
But when life throws us lemons, we make lemonade.
Simply let us know your needs, and we can personalise a loan plan for you.