Any one of us could be hit with a major negative event that could affect our finances. This includes job loss or severe pay cut, a major illness, a car accident, or even a pandemic that we are experiencing now. Planning and managing our personal finances correctly can help us to tide through any crisis with less stress. The following should be done even before any crisis hits.
1. Reduce expenses
A) Pay off credit card debt or personal loans with high interest rates as soon as possible. The high interest rates consumes your cash flow faster than you can imagine.
B) Refinance Mortgage. Interest rates are very low at about 1% per annum. You can potentially save thousands of dollars per year when you refinance your mortgage.
C) Have a budget and stick to it. Cut down on unnecessary expenses such as expensive meals at restaurants or gym membership.
D) Reduce taxes by contributing voluntarily to CPFSA and/or Supplementary Retirement Scheme (SRS). These can save you thousands of dollars in taxes every year.
E) Not committing more than 50% of your monthly surplus to financial products that require long term commitment. This principle, coupled with other expense reduction strategies, has helped our clients to sail through the current pandemic without much difficulties in premium payments.
2. Build emergency funds
One of the rules of thumb for financial planning is that we should set aside three to six times of our monthly expenses as emergency funds. Since a few years ago, I have advised some of my female clients to set aside twelve times if they want to. These are the reasons:
A) Female clients are generally more conservative and they feel a greater sense of security when they have more money in their bank accounts. While the bank pays negligible interests, having that sense of security (without having excessive idle money) outweighs the cons of inflation.
B) Employment market was not as rosy and could worsen. Hence it may take more than 6 to 12 months to find another job with similar pay in the event of retrenchment.
C) Rules of financial planning are just a guide. We should adapt according to market conditions and create customized plans based on individual client’s situation and profile.
After setting aside the required emergency funds, the rest of the money should be put to work in savings and investment programs that can earn higher interest rates. This is to accumulate for retirement and other financial goals that you have.
3. Have comprehensive, yet not excessive insurance coverage
Having comprehensive insurance coverage can prevent one crisis from piling on top of another. The last thing we want to worry about during a crisis is finances. It is also important to ensure that coverage is not excessive nor redundant which can result in you making too much for insurance. This can help you to reduce your expenses. Conducting insurance portfolio audits at least once a year ensures that your portfolio is streamlined and efficient.
4. Increase income
There are 2 main approaches to increasing income – pay raise and/or building multiple income streams. If you have a full time job, devote after work hours to improve yourself so as to prepare yourself for bigger roles. This would allow you to command a higher pay. At the same time, you may consider building other income sources through:
A) starting a side gig,
B) selling digital products or items online,
C) investing for dividend yields.
The list is non-exhaustive. The only limitation is our creativity and mindset.
Our consultants come from diverse backgrounds with unique experiences and wealth management strategies. Arrange a zoom session with one of us to help you build a crisis proof and resilient portfolio.
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.
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