INTRODUCTION
Personal Financial Planning is an important aspect of our lives and it is intertwined with our day to day activities. It is a life-long process and managing and planning one’s finances is the bedrock for a successful and stable future. The main components are spending and budgeting, saving, insurance, debt management and retirement planning. A logical starting point for Personal Financial Planning is when one joins the job market after completing his /her studies at high school/ college / university. An understanding of personal finance and managing it properly would pave the way for a successful future and help avoid serious problems in life. It would help in laying the groundwork for a solid financial foundation for you and your family.
Budgeting
A budget is like a road map to help you in managing the money that you earn every month. It simply lists down how much money is coming in, the amount being spent and on what items and if there is a surplus left over which should be saved.
Far too often, some of us, especially when we are young, fall into the trap of over-spending and exceeding our budget, leading to a debt trap. Peer pressure or the proverbial ‘keeping-up with the Joneses ‘ may be the reasons. As time goes by, it becomes difficult to extricate oneself out of debts.
Drawing up a detailed budget and putting it in writing and more importantly, sticking to it are the hallmark of financial discipline. Remember, when you spend money on something, you won’t have money to spend on something else i.e. it is an opportunity cost. Adhering to a budget does not mean that one is considered miserly. While unnecessary expenses should be avoided, keeping a tight rein on your budget is not encouraged either as some flexibility may be necessary in certain situations.
Saving
The thrift and savings habit should start when one is young as this would imbue certain values to prepare one for adulthood. Putting aside a certain sum regularly from the paycheque would go a long way to build a nest-egg and help in facing emergencies. A rule-of thumb is to save one -third of one’s income and also maintain a savings equivalent to six (6) times of one’s monthly salary in case of loss of job, etc. until securing another job. This would serve as a kind of insurance. The temptation to spend-off one’s monthly earnings and wait for the next pay cheque should be avoided. A good habit would be to cut down on some of the variable expenses like unnecessary subscription and membership services that you do not really need. Bigger cuts could come from refinancing your debts to save on interest charges.
It requires much will-power and discipline to start saving for your future and to stay your course. Getting into the savings habit and building your ‘pot of gold’ is one thing but preserving and growing your savings is quite another. Stories of hard-earned savings being whittled down or lost in some get-rich -quick schemes or scams are only too familiar. Start small by taking baby steps. You’ll be surprised at how your savings / investment portfolio can grow.
Insurance
This is another important aspect of your finances. One of the key objectives of insurance is protection. Accidents and disasters may be unavoidable and if you are not well-covered by insurance, you may end up in financial ruin and emotional setback. Some of the basic insurance coverage are for motor-vehicles (required by law), assets such as residential properties (against fire and other types of risk) and life. Life cover comes with many types of benefits and it is important to choose the policy that best fits your needs and goals, weighing the benefits vs the cost. An additional option would be to include medical benefits as well to give you added peace of mind, especially if your employer does not provide a comprehensive medical scheme. Additionally, it becomes a much-needed benefit in your golden years. In order to reduce your financial burden in paying the premiums, it would be prudent to take out such insurance policies early on in your life.
Debt Management
While the adage ‘neither a borrower nor a lender be’ may somewhat hold true, it is an idealistic notion. In these modern times, however, one has to live with debt during most of one’s life-time. It is hard to imagine financing a motor-vehicle or home purchase without a loan. The question is whether the debts are manageable given the income of the debtor and the simple rule of debt-service ratio. When you can’t keep up with the repayments and are taking on more debt than you can ‘swallow’, you’re in trouble. Some ‘notorious’ debts that can be a source of problems are credit cards and personal loans where the interest rates are typically high and punitive with additional charges for default.
The following chart on Debt Service Ratio gives a comparison between different income groups and between civil servants and the national average. The debt service ratio of civil servants looks alarming at slightly above 50%. A high debt service ratio will put a strain on personal finance with no ‘breathing space’.
Retirement Planning
Last but not least, this area deserves special mention. Retirement planning should not be reserved for the later stages of one’s life. Rather, one should start preparing for it early as part of your savings plan. This way, you would not be ‘crashing’ your retirement plan in your golden years and this would ensure a more stable and successful life.
In investment, as always, the higher the returns, the higher the risk. It is wise to err on the conservative side and keep emotions and greed under control.
In Retirement Planning, the goal should be to retire your debts and achieve a zero-gearing position. You should have sufficient savings and returns in your golden years to cover your living expenses, medical eventualities and other contingencies.
