Financial freedom is the end goal which most of us will like to achieve during our working lives. During this journey, it will involve taking many different decisions and shaping our financial plan. The decisions will involve tracking your expenditure, saving more than you spend and actively reduce your debt. Now let us take a step back to put together from previous posts what we have learnt and how the strategies can help to improve your financial situation.
“If you don’t know where you are going, any road will get you there.”
This apply to your own financial situation, if you don’t know how much money you are spending every month, your debt level, your interest expense, if you don’t know how much you need to retire, how are you going to retire, then you do not have a financial road map!
Firstly, you need to set a financial goal. Is it early retirement at age 40 years old? You want to create a study fund for your children? You will decide what this financial goal will be. A lot of people not realizing where they are financially and where they are aiming for, end up nowhere. In the absence of long-term financial goals, you will make financial decisions which you cannot afford. As a Singaporean, do not just rely on your CPF (Central Provident Fund) as the only source of income for retirement. Fail to plan, plan to fail. It will an emotional heartache to see those who fail to plan and what they have brought to their lives.
In order to think long term, you need to ask yourself the following questions about your financial goals:
- How much money do I want to receive each month when I retire?
- At what age, do I want to start receiving a monthly payout?
- What is the plan to assure I will receive this desired monthly income?
If you ask me what and where I will be 40 years from now, I do not have the answer. Neither will you. This is one of the reason why people tend to procrastinate and indulge in the present. “YOLO” which stands for You Only Live Once, does not mean you spend all your money now to enjoy your life. It is important to strive a balance to pamper your hard work while saving more money for your future. You just need to understand that we will all one day start to grow old and been young is not forever.
From previous post, the longer you wait to start to save and invest, the harder it becomes. Therefore, ask yourself what you are going to start today to accomplish your financial goal. The only decisions made today will affect the future.
Saving is delayed spending, in today’s consumerism society, we are often tempted to spend money thoughtlessly. Many people act irresponsibly towards spending money and will not think through on impulsive buys. I am often guilty of impulsive buys as well, last Sunday while waiting for my family to reach the shopping mall, I decided to pop into Pedro shoes store and buy two pair of shoes which are on sales. Wait a minute, I do not need the second pair as I have a total of four shoes already. It is a moment of impulsiveness.
Ask yourself three fundamental elements towards your Spending Decision:
- Utility – Is it a need or a want?
- Availability – Do I have the money? Does it involve cash, check, credit card or a loan?
- Affordability – Can I afford it? Does this fit into my long term goal? Will this purchase jeopardize my financial plan?
Affordability is linked to Long Term Financial Goals and Opportunity Cost.
Develop the Grand Financial Plan
To develop the Financial Grand Plan, you need to combine your knowledge on spending and borrowing with long term planning for the future. Examine where you are and what are the key actions to reach there. When you can see that this is possible, you will commit to make it happen and your financial future will have drastic improvements.
- Enter your current annual income. This is your gross income before taxes and contribution.
- Estimate the percentage of your income that you will need at retirement. This should be between 70% – 80%.
- Multiply by 70-80% to your current annual income to determine an approximate annual needs at retirement. The higher the percentage, the more comfortable the retirement will be. You can aim for 90%. This is your retirement needs.
- Write down annual income from CPF payout.
- Write down annual payout from your personal savings
- Write down other annual income such as rental, annuity, dividend, etc.
- Item 4, 5 and 6 are total income received from outside sources for your retirement
- Subtract item 7 from item 3. This is the amount of income you will need to generate from personal savings.