Your cash flow refers to the relationship between your income and expenses. Your income level is less easily changed in general, so financial advisors will first examine your expenses, where we can identify leaks or areas to cut back on.
Outside of paying off a mortgage, other types of debt include credit card payment, or a car loan. These are not ideal debts in general because they tend to be related to lifestyle expenses instead of contributing to long-term investments, such as property.
Spend less than 15% of your income for on these non-mortgage debt payments.
Non-mortgage debt service ratio = Non-mortgage debt / net monthly income
This indicates a person’s ability to repay all their existing debts with their assets. It reveals the probability of a person becoming insolvent, or bankrupt. The higher the ratio, the better your financial condition.
Solvency refers to the ability to pay one’s debt as they come due while this ratio helps to highlight the potential medium to longer-term solvency issues.
As a general rule of thumb, your net worth should be at least 50% of your total assets.
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Holistic financial planning should always include insurance, and this applies to everyone, regardless of financial status.
Most people look at insurance to be prepared for unforeseen medical situations. While some might argue that they have the money to protect themselves, but it would be silly keeping that much liquidity that could go into investing (we get into this more in the third pillar, #GROW MONEY).
Further, how much money to set aside is a moving target with medical inflation. Global medical inflation has hit 9.7%, and the numbers are even higher within Singapore.
This does not mean that you should purchase insurance for every single risk in your life. Purchase insurance only for risks that you cannot afford, or that do not make sense to absorb. Often, these tend to be medical costs, loss of income, and the cost of long term disability.
We created this handy insurance map to help you navigate these scenarios.
Life insurance provides a lump sum of money to the family upon the insured person’s death. It can help their family with the sudden loss of their income, and to repay mortgage loans in their name.
Sum to insure: The general rule is to replace 10 years of your income or household expenses, plus any outstanding loans.
Planner Bee uses household expenses for this calculation. For most people, getting sufficiently covered for every aspect is challenging, so we believe in guiding people towards getting sufficient coverage across different areas to sustain their lifestyle, at the very least.
While this will not guarantee that the sum from insurance is sufficient to sustain your lifestyle, it gives you a reasonable period of time to find alternatives.
Period to stay insured: It is recommended to stay insured till you reach retirement. As we move into later stages of life, the coverage required is likely to go down as we have less debt, or fewer dependents to worry about. Hence for some people, they choose to opt out of such coverage in their retirement years. Others may opt to be covered for their entire lifetime for legacy planning purposes.
Life insurance required = Monthly family expenses x 10 years + total outstanding debt – existing savings – existing investments
How Planner Bee calculates it: Your average spending annualised x 10 + total outstanding mortgage and credit card debt – existing savings – existing investments
This is often referred to as total permanent disability insurance. Long term disability could be caused by accidents or illnesses. And with life expectancy increasing, we also need to consider that additional time could be spent in poor health and likely reduced or zero income.
We recommend a 10-year calculation of your expenses to mitigate this. In Singapore, the average period spent in poor health is 10.6 years, based on this study.
Total permanent disability insurance required: Monthly family expenses x 10 years + outstanding debt
How Planner Bee calculates it: Your average spending annualised x 10
Note: We don’t include your existing savings and investments because we assume these assets are directed towards other goals or retirement.
This type of insurance provides a lump sum of money upon diagnosis of one of the conditions it covers. This money should be used to replace the loss of income during your recovery period. In Singapore, there is a fixed list of critical illness definitions that life insurers need to follow and most will also provide additional coverage for conditions beyond the list.
The period of recovery from a critical illness is 5 years on average. Hence, it is recommended to have an income source amounting to at least 5 years’ worth of your income.
Critical illness insurance required: Monthly family expenses including debt repayments x 5 years
How Planner Bee calculates it: Your average spending annualised x 5
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Investing might sound like a scary concept to those who are unfamiliar with the topic. However in the current low interest rate environment, keeping your money in banks will subject your money to inflation.
This measures how much of your assets are used to grow your overall wealth. This should exclude your place of residence because you need somewhere to live. You can’t just sell your place to cash out your profit, and not have to buy another home, so your place of residence should be left out of the equation.
The caveat is there are situations where people pocket the profit when they make the change to downgrade. Otherwise, selling a home for high and buying another while markets are high does not make sense.
As a general guideline, a 50% ratio is healthy. As we approach retirement, we will lose our ability to earn a salary and active income, so we will rely more on passive income from investments. Naturally, this this ratio should increase as a person approaches retirement.
Net investment assets to net worth ratio = Total invested assets / net worth
Investing regularly is a good way to ensure we are constantly investing excess savings. This is also a good implementation of the dollar cost averaging strategy, which is a good way to reduce investment risk as a result of bad timing of investments.
We recommend that part of your monthly savings be invested regularly to grow wealth. Planner Bee recommends that you invest at least 10% of your income towards this.
Regular investment ratio = Regular sum invested / income
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Examining your financial health is a lengthier process than most people assume at first glance. But it’s worth it to ensure you reach your goals, including an easier retirement away from the anxieties of dealing with unpredictabilities.
We recommend this process be repeated every year, or if your income changes, or if situations at home change your financial commitment. These include getting a new job, having a newborn, getting married, buying property, or if a family member falls seriously ill.