Understanding Financial Planning

We all have goals and aspirations, whether to buy that dream home, save up for a comfortable retirement or to bequeath a substantial sum to our loved ones. This is where financial planning plays a crucial role. It has too often been neglected by many Singaporeans who easily assume that our Central Provident Fund savings will be able to finance all our future needs.

But as evident from the recent past, relying solely on CPF funds for all our future needs may not be wise. So many pitfalls lie in wait for us, such as the rising cost of living, turmoil in the financial markets, or economic downturns. Any of these events can and often, do have major repercussions on our personal finances.

However, if we plan our finances, we can remove as much uncertainty as possible from the equation. The immediate priority is to live comfortably within our means by ensuring that our lifestyles are appropriate for our incomes. This means our expenses should never exceed our incomes. And with surplus funds, money can then be set aside to accumulate future wealth as well as insure against undesirable contingencies.

Getting Started

It is important to understand that financial planning is not just for the rich, but is really for everyone who thinks seriously about their future needs. To help you understand how financial planning works, we can break it down into a 4-step process as follows:
1. Define your goals
2. Formulate a plan
3. Implement the plan
4. Review regularly

Step 1

First, define your goals, be it a comfortable life after retirement or ensuring enough finances to put your children through university. These may be our longer-term goals but along the way, we may intend to upgrade our homes or take off on that dream holiday. Whatever your goals are, a financial plan will help to achieve them by setting out a proper framework and roadmap to get there.

Step 2

Now that we have identified our goals, the next step is to formulate a plan to achieve these aims. For those with dependent families and loved ones, having a financial plan is not just the right thing to do, but also a responsible course of action. As the article explains in detail, formulating a plan involves not just the things discussed so far, but also stresses the important element of time; in other words, the need to plan early. Time is one of the most powerful elements of a financial plan. By planning early, you can minimise the chances of not accumulating enough funds to meet your long-term goals.

Step 3

Both steps 1 and 2 sound simple in theory, but the tricky part is always putting things into practice. This is the third and crucial step that has to be implemented properly in order for the plan to work and meet its stated objectives. This step is usually best accomplished with the help of a qualified financial adviser who can help by not only drawing up a plan but also by putting it into action. For a quick guide on dealing with a financial adviser, please read the MoneySENSE guide "Dealing With A Financial Adviser: What To Look Out For?". This guide explains how the Financial Advisers Act serves to protect your interests as a consumer and contains practical tips on what to look out for when dealing with a financial adviser.

Step 4

The final step is to review your financial plan in response to changing circumstances. For instance, you may have a new addition to the family, or earned a recent promotion with a substantial increase in salary. Such events may be wonderfully life-transforming but carry major implications for your finances. Sitting down with a financial adviser would be very useful to ascertain if your plan is adequate for the future.

Aside from these ad-hoc reviews, holding annual or semi-annual reviews on a regular basis is also important from a holistic viewpoint. Regular reviews allow the opportunity to determine if your previous insurance cover is adequate for future contingencies. It also allows you to review the performance of your investments against the market or your personal benchmarks. You may find that rebalancing your portfolio is necessary in order to re-align investment returns with your stated objectives.

Now that you understand the 4 steps of financial planning, embarking on the journey towards financial freedom and a secure retirement can become much more rewarding and fulfilling.