Why Financial Planning Can Help You Live The Life of Your Dreams
Financial planning is the process of setting future financial goals and developing strategies to help you achieve them. Some examples of financial planning include setting aside a portion of your salary in savings and investing in short- and long-term assets.
However, keep in mind that all of this goes beyond more than just saving and investing. You must constantly monitor your progress and make the appropriate adjustments. This ensures that you’re on track to achieving your goals and gives you room to manoeuvre.
Why is Financial Planning Vital?
Without proper financial planning, you won’t have enough savings for retirement and be at a higher risk of falling into debt. Besides that, there’s also the risk posed by rising inflation which will erode your buying power and compromise your financial security in the long-term. All of this is why it’s critical that Singaporeans from all walks of life have a financial plan of some kind.
The Benefits of Financial Planning
There are plenty of benefits that come with financial planning, but here are the 7 most relevant.
1. Improves your financial literacy
A 2021 study conducted by OCBC found that most Singaporeans have mastered the basics of saving and budgeting. But at the same time, more than 30% have made the mistake of underestimating how much they need to retire.
While being frugal and budgeting is well and good, it simply isn’t enough to see you through retirement. This lack of literacy is hazardous and will affect your ability to remain financially secure in the long term.
A financial plan helps you understand why making your money work is essential. It also builds up your financial literacy and equips you with the skills to safeguard your financial health. Examples include setting financial goals, building up an investment portfolio, and planning your retirement.
Besides that, financial literacy is crucial for those looking to optimise their spending. It encourages you to look closely at where your money is going. Doing so helps to curb lifestyle creep, i.e., a situation where as you earn more your expenses grow in proportion.
2. Makes financial goals achievable
Everyone has different financial goals; some want to invest in their first property, and others are looking to build up a portfolio of assets or set up an education fund for their children.
A good financial plan is key to achieving success regardless of your goals.
People often make the mistake of assuming that you need to reach a certain age or have a particular bank balance to start financial planning. But the truth is that it is never too late or too early to start making a financial plan.
Remember, the hardest part is getting started, but everything will fall into place once the ball gets rolling. Prudent financial planning includes being disciplined with your spending and consistently tracking your progress.
That last point is an excellent motivator as it lets you see how far you’ve come, which keeps you going.
3. Helps you build an investment portfolio
People often make the mistake of assuming that saving money alone is enough to achieve financial security. Unfortunately, this couldn’t be further from the truth — and that’s because of inflation.
By now, you’ve probably heard about inflation and its risks. But do you know why it’s a major problem for consumers?
Inflation leads to an overall increase in goods and services. While some inflation is expected, overinflation erodes your buying power and reduces the value of your savings.
Hence, you need to invest in assets that appreciate over time. Doing so helps you beat inflation and maintain the value of your savings.
Those with larger risk appetites often prefer a more aggressive investing style to grow their wealth. Such portfolios often contain riskier assets such as junk bonds, contracts for differences (CFDs), and initial public offerings (IPOs).
On the other hand, a more cautious investor may opt for a lower-risk portfolio consisting of government-issued bonds and blue-chip stocks. This approach is likely to deliver lower returns but is likely to be less volatile.
Regardless of your preferences, the best way to build up an investment portfolio will be with the assistance of a financial analyst. AAM Advisory offers various wealth management services and can advise you on what asset classes work best for your financial objectives.
For example, they can help you understand the difference between various asset types like stocks and REITs and let you know what opportunities suit your risk profile and investment horizon. So that way, you can promptly access any available opportunities immediately.
4. Provides financial security
Financial security is your ability to cover emergencies or unexpected expenses without hassles.
However, according to research by OCBC, a significant number of Singaporean working adults lack financial security.
70% of respondents of said study confessed that their savings wouldn’t be enough to cover them for 6 months if they lost their jobs.
And another 30% of participants surveyed said they stopped contributing to their retirement funds, with the main reasons being a loss of income due to COVID and economic slowdown.
This shows us that financial planning is now more critical than ever. In an uncertain world, our source of income can suddenly disappear with no warning at all.
Remember: a large income doesn’t necessarily mean financial freedom. You can still struggle to make ends meet even with a big salary.
A financial plan prepares you for all this by encouraging you to anticipate future problems and puts you in a much better position than most of your peers.
5. A financial plan works everywhere
One of the best things about a financial plan is its flexibility. If you change jobs or relocate to a new country, your current plan can easily adapt to your new situation.
This is especially important if you’re taking up a role in a foreign country, as certain employee funds or protection schemes may not apply to you.
For example, expatriates can only contribute to Singapore’s Central Provident Fund (CPF) after they become permanent residents in Singapore.
Such a situation leaves expats with no plans to retire in Singapore in a precarious position unless they take action. And given that they’re residing in a foreign country, they may not have the knowledge and contacts needed to build up their investment portfolio.
Besides that, there are many common misconceptions about the financial affairs of expatriates. Most are based on hearsay and guesswork, which can end up being costly.
For this reason, you should instead consider leaving it all in the hands of a professional. From estate planning to providing you with investment advice, AAM Advisory’s licensed wealth managers have the knowledge and experience to help you create the ideal financial plan.
6. A financial plan helps you diversify your assets
Developing a financial plan enables you to map out potential risks and weaknesses in your financial portfolio. From here, you can then diversify your holdings to spread out your risk over different asset classes.
The recent crypto crash is one example of a failure to diversify. Begin over exposed in only one asset can result in huge losses.
However, diversification isn’t as easy as most people would think. Most retail investors lack the knowledge needed to diversify their investment portfolios properly. A lack of knowledge and experience is one of the most common reasons for this.
7. Financial plans are a crucial part of succession planning
The world is unpredictable, and things can quickly change. It is exactly for this reason that you need to create a financial plan now.
With the help of a licensed wealth manager, you can factor in the needs of your loved ones through succession planning. This can include planning for your children’s education or ensuring that your estate passes on to the right people.
So, should a tragedy come to pass, those that matter to you most will be taken care of, giving you the peace of mind you deserve.
How does financial planning work?
To create a financial plan, you must first set your life goals. In addition to working out what you want out of life, this also means studying your current and projected income along with your expenses. From here, you can then set out to create a strategy to achieve your goals.
When planning, to achieve the best possible results, you should consult a professional wealth manager. That’s because they have the skills and experience to create a comprehensive and flexible financial plan. Their knowledge allows them to scenario analyse and plan for any milestones and eventualities.
For example, AAM Advisory employs licensed wealth managers who are more than qualified to help you craft your perfect financial plan. They are backed by an expert team of in-house financial analysts who can advise you on what to invest in, how to structure your wealth, and how to minimise your risk exposure.
Can financial planning help me avoid/reduce debt?
Yes, not only does financial planning help you reduce debt, but it is also an integral part of debt avoidance. People often end up in debt due to a lack of financial planning.
Mortgages and loans are among the top reasons why households in Singapore accumulate debt. This is why it’s vital to secure your future by enlisting the services of a wealth management and financial advisory firm.
How do I start planning out my finances?
The first thing you should do is set up your life goals. Your life goals are entirely flexible and can be achieved by paying off your debt, putting aside some savings, or building up an investment portfolio.
Once that’s done, it’s time to start working towards your goals. Start off by making a complete list of your monthly expenses and make sure that every cent is accounted for.
Next, make a note of all your essential expenses and group them into 3 categories — fixed, variable, and periodic.
- Fixed expenses are payments that remain constant every month. These include loan repayments, rental expenses, insurance premiums, and internet bills.
- Variable expenses fluctuate month-on-month depending on usage or time. Examples include petrol costs, food purchases, and household utilities.
- Periodic expenses are fixed expenses that are not incurred monthly. These expenses are incurred at different times of the year, depending on the situation. Some examples of periodic expenses include membership fees, road tax, and COEs (certificate of entitlement).
Grouping your fixed expenses into different categories improves cash flow and allows you to make forecasts. Once that’s done, identify non-essential expenses and start cutting them off. Non-essential expenses that are mostly creature comforts can include subscriptions for streaming services, eating out, impulse purchases, and video games to name a few.
Should I hire a licensed wealth manager?
Yes, without a doubt. Wealth managers from AAM Advisory are licensed by the Monetary Authority of Singapore, proving their competency in all aspects of financial planning.
These experts have the qualifications, experience, and resources to advise you on the best course of action. They are backed by a team of highly qualified financial analysts with the expertise to help you sustainably grow your wealth.
When should I start planning out my finances?
Right now. It’s never too early or too late to create a financial plan. The earlier you begin, the better it is for you and your loved ones.
The key here is to have clear objectives and work towards them. While it may be tempting to change course, don’t give in, but instead, keep moving forwards.
Financial planning allows you to safeguard your future and maintain a desired quality of life.
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