More than just investing

Contrary to popular belief, wealth management is more than just about investing. More importantly, it is about holistic planning, which includes money management, safeguarding wealth and planning for life goals, beyond just investing in the markets. While the term is often linked to affluent clients, the general advice and concepts are applicable to virtually anyone, regardless their income standing or affluence.

Getting the basics right

Typically, planning for a better financial future starts by understanding your present situation. To do this, you need only follow the money.

• What are you spending on?
• What loans you are currently servicing?
• Do you have insurance coverage for important liabilities?
• How much do you save every month?

The clearer you are about where your money comes from and goes to, the easier it is to adjust your spending behaviour so that you can save more. You have to do this for a simple reason -- savings is the fundamental building block for all your future financial plans. After all, you need money to make money.

Savings also provide some assurance for a rainy day when your cash flow is tight. Indeed, the current Covid-19 crisis has underscored the importance of having access to emergency liquidity during periods of financial stress.

A rule of thumb is to have at least 6 months’ worth of your monthly expenditure in emergency cash. The reason? Imagine you lost your job today. In normal times, it typically takes Singaporeans about 3 months to be able to find gainful employment after being let go. During periods of recession, the duration of unemployment could stretch longer.

Having at least 6 months of emergency cash on hand means you don’t have to worry about your monthly expenses for the next few months and can focus your time and effort in searching for and securing another job.

It’s important to note that you should never touch your emergency funds. They should only be tapped in dire circumstances. Emergency funds are like a fire alarm. You only break the glass if there is an emergency.

Protect yourself against an uncertain future

The important assumption we make when discussing about emergency funds is that you are fit enough to be able to bounce back quickly from losing a job and find a new one. The main purpose of emergency funds is to tide you over when you are in-between jobs and need money to cover your monthly living expenses.

However, there is always a possibility that health crises could shock us both financially and physically, thereby impairing our ability to earn an income. The inconvenient truth is savings alone may not be enough to tide through life’s most grave and unpredictable obstacles.

Health insurance is one way to hedge against the financial burden of large, unexpected medical expenses. Without insurance, paying for these expenses out-of-pocket can easily deplete your savings, which may take a while to rebuild even if you were well enough to work. After all, recovery may take some time. How do you focus on recuperation if money matters occupy your mind? Critical illness plans help minimise these worries, providing you a source of income while you recover.

Safeguard your dependents from income shocks

The situation becomes more complicated when you have dependents that rely on you. Suppose something unfortunate and unexpected happens to the primary breadwinner that permanently affects his or her ability to work. What financial buffers do the family have to withstand the permanent income shock? Sure, emergency cash can sustain the family for a few months. But beyond that, what else can they rely on?

The spouse, the next of kin or even the dependents themselves may be left holding the bag of long-term liabilities that needs to be repaid, in addition to the responsibilities of covering the daily expenses, all while being unprepared to do it. This could be highly disruptive to a family’s general well-being.

Here, life insurance is important to protect you and your loved ones financially should something untoward happen. Financial plans mean little without the proper safeguards.

Start planning for your future

With foundations like an emergency fund and insurance plans in place, one can now focus on planning for the future, whether it is planning for retirement, buying a dream home or preparing for children’s education.

Instead of bucketing finances into various long-term goals, perhaps your objective might be to maximise the overall financial pie. In that case, you shouldn’t just stop at saving. More importantly, given the low interest rate environment, there is little to gain from having too much cash sitting idle in deposit accounts. Ultimately, we do not want the real value of our savings to be eroded by inflation over time.

On a practical note, if you are working towards specific goals in your life, it is always best to address them separately because the solutions will be different. As the saying goes, different strokes for different folks. The same goes for goals. You’d be surprised that how you plan for children’s education is very different from how you’d plan for your retirement.

Indeed, there are many different investment asset classes to consider and a myriad of ways to put a portfolio together. One should always remember the cardinal rule of investments: Diversify. Adopting a long-term perspective with a well-diversified portfolio goes a long way towards maximising your returns over time. After all, it is time in the market that matters, not timing the market. Diversification gives you the stamina to run this long marathon.

Review your finances periodically

You should not be discouraged if you cannot meet your goals today. Financial planning is a cycle, and you will need to reassess where you stand by reviewing your progress regularly.

Why is this important? One word: Change. Circumstances change. Markets change. Our goals may also change. Thus, it is absolutely necessary to review your financial plans as your needs evolve. Six months' worth of expenses mean different things for a single person, a married couple and a couple with children. Protection needs also change as more people become dependent on you. As your income increases, and you become more confident and knowledgeable, you can also afford to invest more and perhaps take on more risks.

Hence, a periodic review of our financial plans is crucial to ascertain if we’re indeed on track to achieve our goals. After all, how do we know if we are closer to our destination if the map is wrong to begin with?