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Tips to Manage Your Finanes Wisely

Tue, Sep. 12, 2017 Posted: 07:10 AM

Planning is the key to financial independence and a debt-free life. This has been propounded by financial experts for long. However, applying theories to your practical problems isn’t easy. Executing your plan requires passion, diligence and acuity of mind.

Today, you’re usually trapped in debt even before you have started to earn. With a social culture that promotes partying, shopping, dining and frequent holidays, staying debt-free is an obstacle that most fail to surmount.
Having said that, it needs to be firmly stated that the basic tenets of financial planning remain unaltered. They are as follows:

• Defining your financial goals
• Perking up your retirement savings
• Gathering financial data for planning
• Gathering relevant financial knowledge and tools needed for planning
• Implementing your plan and constantly monitoring it
• Creating an emergency fund and a plan for the future

Financial Planning Relevant to Today’s Times
The following are the logical steps to analyse and apply a financial plan to your life problems:

• Financial goals: Defining your financial goals realistically is the first step towards setting up a plan. To execute your plan, you need to be aware of the threats and opportunities surrounding you. You also need to take stock of your aspirations and know what the costs of achieving each are. Some of the questions that you need to ponder over are:
• What is your current debt burden ratio and what percentage of your income can you contribute towards servicing your debts?
• What are your short-term and long-term goals?
• What are the costs of realising your goals?
• How do you plan to invest your additional funds?
• Have you set deadlines for each goal and are they realistic? What are the parameters you wish to use to evaluate the success of your plan(s)?
• Investment plans and risk tolerance: Once you have a better idea of your debt servicing ratio, solvency ratio and your liquidity ratio, you can get in touch with a financial adviser to help you set up a periodic investment plan. You can undertake a psychometric risk tolerance test to better understand your appetite for risk and evaluate your wherewithal to support your ambitions.
• Monthly budget and debt payoff: A budget can’t be properly appropriated if you don’t have a better understanding of your indebtedness. To calculate your monthly debt payments, first understand the following:
• Identify the type of all debts and loans.
• Create a separate plan for reducing the liability related to each debt.
• Create a timeline for turning debt-free and give yourself short-term goals for attainment of the bigger goal.
• To avoid missing payments, maintain a spreadsheet and set up a reminder for date of repayments for each of your credit cards and loans. Also jot down the interest rates, the exact size of each debt and which bank account or fund you want to use to make the monthly payment for the debt.

Make your debt payments an integral part of your monthly budget. Remember that savings and monthly contribution to an emergency fund should be two important components of your budget. Ideally, the emergency fund should have at least 3-6 months of your monthly cash flow.

• Tax liabilities: Your financial plan would be incomplete without your tax liabilities. In a country like Singapore where tax compliance rate is high and rate of taxation is reasonable, capped at 22% for incomes above S$320,000, you will have to put aside a part of your income for paying taxes. Singapore offers a one-tier taxation system, tax reliefs, relief from capital gains taxes and many other attractive incentives. To further reduce your tax burden, start investing in tax-saving schemes.

• Retirement savings: It is important to know your short-term goals and current financial position but more important to know where you want to be after retirement. Make a plan as to when you exactly want to retire and how much you need to save up to make it possible. If you aren’t a salaried Singaporean, you’re advised to voluntarily invest in CPF retirement schemes.

• Map your inflows and outflows: After you have a better understanding of your monthly income and your liabilities, you need to create a chart that shows the inflows and outflows for the month. Your outflows should reflect your tax and loan liabilities, your rent and utility bill payments and other liabilities including your contributions to insurance plans, retirement plans and investments. Your inflows will comprise all your incomes including unexpected windfalls, if any. You can now use financial management tools to better study the data.

• Final financial report: Your final report will consist of a balance sheet, a consolidated tax report and a report on the cash flow. Once you have the report, you can better tally your aspirations with the costs for each. You can also decide which financial instruments to use for the purpose of attaining your goals.

• Financial literacy: To understand your own aspirations, opportunities and extraneous factors that can affect your financial plans, you need to be up to speed with the latest financial tools and modern financial concepts. Understanding how changes in laws, interest rates, and global and local investment climates affect you is integral to financial success.

Lynn Joesph