Over the past few months, me and my cofounder have been sitting around cracking our heads over how to best connect the very “boring” topic of financial planning with our user base.
What do you think about when you hear the term “financial planning”? For some, it’s saving money, for others maybe investing. And there are others I’ve asked who said it even comes with a twinge of baggage about a confusing experience with a financial planner.
Because for most people, financial planning isn’t fun, nor approachable.
But then we suddenly hit upon a brainwave, to go right back to basics. All the way to the pillars of financial planning, to every conversation opening I have with my in-person clients (back when we could do that!)
Here’s what we’ll begin with:
- Cash flow: Manage how much money you actually have
- Protect yourself: Insurance, insurance, insurance
- Grow money: Start investing
1. Cash flow
This is how much money you have coming in, versus going out. We don’t change jobs that easily or quickly, so it makes more sense to focus on adjusting expenditure to get this balance in check.
When you consider your outflow, don’t forget to include recurring debt payments, like mortgages and car loans.
Your emergency fund is also key. This isn’t just savings; this is a block that you can’t touch, because you don’t know when something really bad will happen, like you losing your job, or you falling seriously ill.
Finally, solvency is a part of the whole picture. This refers to the ability to pay off your debt with your assets before they go bankrupt. A general rule of thumb is for your recommended net worth to be at least half of your total assets.
2. Protect yourself
I don’t know why this is such a dirty word in Asia, sometimes. To be honest, in most other parts of the world, insurance is taken as a core part of adulting, and a drama-free component of a healthy financial plan.
A healthy financial plan should always include insurance, and this applies to everyone, regardless of financial status. Look at medical inflation alone — globally inflation is at 9.7%, and those numbers are even higher in Singapore.
Of course, it’s unwise to insure against every single risk. Get insurance for all the risks you can’t afford, or that don’t make sense to absorb. Often, these are the bigger things: total loss of income, long-term disability, big medical bills.
Navigating various insurance plans from different providers is what’s a little trickier, because everyone has plans that overlap coverage. So getting a good financial planner who gets you will make life a lot easier.
But frankly (and I’m trying not to make this a pitch for Planner Bee) it’s really the reason we made the app in the first place. We wanted to give people a way to figure out their insurance coverage, while the app figured out your financial risk so you didn’t have to. So my advice is, get a great financial planner — or get Planner Bee. Okay, elevator pitch over.
3. Grow money
This is perhaps the bit where people who are new to managing their finances will balk. I won’t lie, it’s not easy, and the horror stories of people losing a bunch of money overnight is enough to turn off most casual investors.
But you also understand that just hoarding all your cash in the bank will result in it shrinking, because inflation is greater than the bank’s interest rates. So you need to put it somewhere else.
As a general guideline, get your investment assets to net worth ratio to 50%. This means half of your net worth should be in investments in assets used to grow your overall wealth.
And on that note, don’t include where you live. You can’t just sell your place to cash out your profit without having to find another place to live. So it’s not at that level of flexibility that’s needed to be considered a pure investment asset.
Don’t forget regular investments, toward which you can direct your excess savings. I recommend you to read more about dollar cost averaging, but the general guideline we tell clients is at least 10% of your income.
Beyond this, your risk appetite will dictate what shape those investments will take. It can be exciting, and not at all daunting — but it’s a lifelong learning process, even for the veterans.
I hope this guide has been a simple and approachable start to financial planning. If you’re starting out with understanding the process, I’ve written more here.
Cherie is the founder of Planner Bee.