The Basics of Financial Planning: The Last Step is Key

Part of adulting means getting into financial planning. It may be one of adulthood’s necessary evils, but it doesn’t have to be painful at all. If you’re beginning your journey with financial literacy, here are some basic concepts to get you started:

Know what you have

One of the first things to understand is your ‘net worth’, as it will not only help you know where you are, where you want to go, how far you are from that destination, and how to get there.

Simply put, your ‘net worth’ is your assets minus liabilities — what you own that has value after taking into account what you owe and must be paid back. However, getting a proper assessment can be more complicated than you’d expect.

The first step of proper financial planning is to do a health check — a thorough assessment of your finances — with a trained financial advisor or service.

They will conduct an overview of your finances, using information such as how much you earn, how much you save each month, and your accumulated savings.

This assessment also takes into consideration your investment portfolio, assets like precious jewellery, properties or vehicles, and even stock options from your employer. Loans and liabilities include all that you’ve borrowed,  from housing, motor and personal loans, to credit cards.

One should also make a note of insurance matters. This means knowing what you’re covered for, and your options in the event you are not covered.

Know where your money is going

It’s difficult to know how much you can save if you don’t know what to spend less on. Identifying leakages in your spending is an essential part of your financial health assessment.

How much do you save with each paycheck? While a good gauge is to save a 10% of your salary, it doesn’t apply to everyone. For instance, a single person without any dependents should instead be able to save 30% to 40% of their income, while someone supporting both parents and children may only be able to put aside 10% of their income.

Outside of savings, one should also consider how much of your salary is going to loans.

The book “Good Debt, Bad Debt” by Jon Hanson outlines how some debts are actually “good”, since they are part of an income-generating asset for your future. An example of good debt is a mortgage loan, and it’s recommended that you keep your loan instalments within 40% of your income.

“Bad debt”, on the other hand, are lifestyle choices of excessive consumerism and don’t grow your wealth.

Have an emergency fund

As we all know, the only certainty in life is uncertainty, and it’s critical to prepare for these unforeseen scenarios as best as you can, by having an emergency fund. This should be in the form of liquid cash and not investments.

Read more: What is an emergency fund

As a general rule of thumb, you should have at least three months’ worth of monthly expenses as liquid cash in case of loss of income, whether unexpected or expected. However,  we advise people to have at least six months’ worth of savings to truly feel comfortable.

Those who are higher up the corporate ladder or are freelancers should have 12 months’ worth of expenses stashed away, given the nature of their work and the relative difficulty in finding an equivalent job.

Depending on your situation, it could be wise to have more cash in addition to that. For instance, you could have elderly parents without medical insurance, or own a vehicle that could require unexpected repairs. It’s essential to account for all of these before you start using your savings for other purposes.

Know your dependents and how much they need

Are there people financially dependent on you? If there are, quantify what they need in dollars, then multiply that by the expected time period you need to support them.

For instance, if you’re 30, have two siblings, and a mother who is partially dependent on you financially, you can make the following calculation: If your mother is 60 and has an average expectancy of 85, you have to account for 25 more years of support.

If she needs $1,000 every month for her expenses, against inflation of 2.5% per year, you would need to set aside approximately $420,000 for her. If you don’t have that money right now, you could choose to buy cheap term insurance for 25 years to provide her with this sum.


This brings us to insurance coverage. While emergency funds are there to help tide us over uncertain periods, it’s not wise to depend on them for bigger financial losses like a fire to your home or terminal illness.

Consider the monthly average cost of treating cancer of $17,000, or the bill of $150,000 for fire damage to a home. For these costs, it’s wiser to have insurance coverage for a comparatively low premium. Should you lose income after falling sick or become unemployed, a ready source of funds can also be provided by insurance.

There are many different types of insurance plans, including general insurance as well as life insurance, and they provide coverage for different scenarios. There are situations in which you should buy insurance, and some in which you may not need to. Understanding the concept of insurance is part of sound financial planning.

Money for the future

Due to inflation, the value of a sum of money will not be the same in the future as it is now.. So while it’s great to put aside money for our retirement or children’s education, we should also keep the effects of inflation in mind. More importantly, we should also be thinking about how we can achieve our financial goals faster by making our money work for us.

Investing through various instruments, fixed deposits and bonds for low risk short-term goals, or unit trusts and stocks are just some ways to mitigate inflation and future-proof your finances.

Either way, not doing anything is doing yourself and your assets a disservice over time. Whichever option you take, be sure to do a review on your portfolio at least once a year to ensure that your money is working towards your goals.

Rinse and repeat

Planning is not a one-time action. Change is constant, your life circumstances, needs and objectives could shift over time, so you need to re-adjust your plans to ensure they’re in line with your life goals.

Get a status update every two years, or when there are significant changes to your life, to review your financial pillars, and check if they’re still structurally sound.

4 thoughts on “The Basics of Financial Planning: The Last Step is Key

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