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In life, there are many skills that are key to survival. Learning to swim so that you won’t drown, ability to find food (or earn enough money) so that you won’t be hungry, and basic first aid skills to heal yourself when it’s needed. And in today’s modern world, there’s one skill that is often overlooked for survival: Financial planning.
This article has not been reviewed by the Monetary Authority of Singapore and is provided “as is” for general information purposes only. It does not constitute advice nor does any part of the content constitute an open offer capable of forming the basis of a contract
Financial planning is one of those elusive skills that is vital for you to live a life with less worries. Yet, it is not taught anywhere in school or even in your adult life. Many of us struggle with it because we are always learning from bad experiences or missteps. Why can’t there be a guide or framework that can just tell us what we need to do so that we can avoid those bad experiences?
With the launch of a recommended basic financial planning guide from Monetary Authority of Singapore (MAS), help is finally here for everyone.
The basic financial planning guide is a joint effort between MAS, Association of Banks in Singapore, Association of Financial Advisers (Singapore), and Life Insurance Association (LIA) to guide you in making your financial planning decision.
The guide provides relevant guidelines on what are some key financial protection, investments, and legacy planning one will need in your lifetime. The goal is to simplify financial planning to a simple four step process.
In the guide, there are four key needs that are outlined: Emergency funds, protection, investments, and legacy planning.
They are ranked according to their importance in a sound financial plan. The need at the top of the list (i.e. emergency funds) will be the first thing that you need to address before you start thinking about the other needs.
Emergency funds form the foundation layer of a financial plan. As the name suggests, they are meant for emergencies. Under normal circumstances, you will not be touching this set of money.
But how much should you categorise as your expenses? To do that, just look at what are the fixed expenses that you pay for every month.
For example, if you are renting a place, your rent will be fixed expense that is unavoidable. If you are paying for utilities as well, then that should be counted under fixed expense. On that note, food, transport, and loan repayments should all fall under expenses as well.
Since the money you have in your emergency fund may be used any moment, it needs to be as liquid as possible. But at the same time, you want to let your emergency fund earn some interest for you.
Therefore, it is recommended to park your emergency fund in a high interest savings account. Most of the banks in Singapore are offering an attractive interest rate of at least 2.50% p.a. for saving with them. And if you do additional steps like crediting your salary and hitting a minimum monthly spend, you can earn up to 5% interest p.a.
Alternatively, Singapore Saving Bonds (SSBs) offer a safe and flexible bond backed by the Singapore government to enjoy 3+% interest p.a. They can be easily redeemed when needed, which gives you the flexibility to tap into it for your emergency needs.
After you have taken care of the emergency fund, financial protection comes next in line. The purpose of having these financial protections is both for you and your loved ones.
Death and TPD protection is fundamentally meant for your family.
The goal is to ensure that, in case of your death, your family can still move along with life and “receive income” from you. This is why the recommended amount is nine times your combined annual income. Having a nine time annual income death/TPD protection means that your family will not have to worry about income matters for the next nine years.
The most affordable type of death and TPD protection is a term plan. Term plans are pure protection plans without any saving element in it, unlike an endowment or Whole Life plan. For pure protection only, MAS recommends a term insurance plan for more affordable protection needs.
Critical Illness (CI) isn’t quite the same as a health insurance, i.e. any kind of Integrated Shield insurance plans you see on the market.
CI plans are designed to provide a lump sum pay out so that you can either (1) substitute your income in the event that you fall sick and need time to recover, or (2) pay off medical bills that are not covered by your health insurance.
Major illnesses like cancer may take around five years to recover, which is why a 4-5 time of one’s annual income is recommended for CI plans.
Link for more information: www.go.gov.sg/compare
Emergency fund and protection cover the basic needs in a financial plan. If you have settled your basic needs, you want to consider your aspirational wants.
For most of us, our aspirational want is to achieve financial freedom so that you can spend your retirement doing what you love.
To do that, you will need to start your retirement planning early so that you can have much more time to take advantage of compounding interest.
Here’s where the complex part about financial planning comes. Because there are so many different types of products (SSBs, T-bills, fixed deposits, CPF, ETF, unit trusts, stocks, bonds), most people are confused where to invest in. The lack of access to such knowledge is hindering many of us from doing what’s right for ourselves.
In order to do your investments right, you will need to consider your financial goals and risk appetite.
For example, a 40 year old single with high risk appetite and wants to retire in five years’ time will have significantly different considerations from a 35 year old couple with kids and low risk appetite.
This is where getting advice from a trusted financial planner is important. Getting into the conversation with a financial planner will give you perspectives to consider so that you can make the best investment plan for yourself and your loved ones.
Link for more information: http://www.go.gov.sg/retireplan
Having worked hard for your life, you want to pass on the legacy to your dependents. Sometimes, legacy planning isn’t as simple as just dividing your assets into equal parts for your dependents. You may have other factors you are considering when making your decision and you want these decisions to be followed properly after you pass on.
This highlights the importance of a Will and CPF nomination so that your legacy is passed on based on your instructions. Leaving your legacy to the Intestate Succession Act may result in unwanted squabbles that you wouldn’t want to see while you are in heaven.
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Legacy planning also involves planning for your own welfare in your late years. This is especially important for many of us who are living to a ripe age. But we know that the reality is that living longer may not be the same as living in good health.
In the unfortunate event that you no longer have mental capacity to act for yourself, having an LPA allows your donee to make decisions for you. This allows you to live out your late years in the best way even if you no longer have the ability to make the right choice for yourself.
Link for more information: http://www.go.gov.sg/legacyplan
As industry practitioners, we strongly applaud MAS’ move to publish this guide to the public. It is definitely a move in the right direction for Singaporeans.
At the same time, we also note that financial planning isn’t just a fixed formula that you can apply for everyone. That’s because no two lives are the same and everyone has different goals in life. Thus, if you feel that the basic financial planning guide is still hard for you to decipher your own plans, be sure to seek professional advice from a financial planner.
At Moneyline.SG, we can provide you with objective advice that is free of charge. Simply leave your contact details here and our team will reach back to you to schedule a comprehensive financial planning session with you.