Sunday, 12 August 2018

Sunday Times Article - 53 Tips for Better Financial Health

I read with interest this article on Sunday Times today on the 53 important points about personal finance.



There are few points which I think are absolutely critical to one's financial well-being, especially for beginner anyone or working adults just started on his investment/financial journey.

Saving
11 - The 50/20/30 Budget. A budgeting guideline that suggest spending 50% of income on living expenses and essentials; 20% for financial goals like savings and investments; 30% for discretionary spending.

I feel that 20% for financial goals is actually too low. If one is serious about growing wealth, one should place protection and investment as top priority. Why not inverse the percentage allocation to 50% wealth building, 30% living expenses and essentials, 20% discretionary spending?

Of course this is just a guideline, and no guideline will suit every individual's lifestyle, life circumstances etc. So its really up to individual to make necessary adjustments to his lifestyle and spending patterns to channel a bigger portion of income to wealth building. Just make up one's mind and have that resolve to pull it through. Initially it will be difficult, but it will get easier as time passes.

21-Too much cash in savings? The article mentioned about 6 to 12 mths of emergency cash.

How much is enough? I would think 6 mths is sufficient. Some sources would suggest 3 mths. End of the day, consider how likely are you to be jobless or income-less for 6 months or more? The possibility is rather low. And I would suggest 6 mths of expenses instead of 6 mths of income, which is equivalent to half your annual income that is too high.

In my line of work I have seen some really large savings stashed in Fixed Deposit or high interest rate account earning next to nothing that cant even match inflation. Some are in 6 digits worth, or even sufficient to sustain the person's lifestyle for up to a jaw-dropping 7 years. Perhaps this gives the person a peace of mind, but such mental comfort comes with high opportunity cost of missed investment returns.

So whatever amount above what your reasonable expected maximum time frame of not earning an income, put them to investment to earn better returns.

Insurance
22-Hospitalisation and Surgical Insurance. This is the basic insurance that is an absolute must regardless of age, gender, family illness history, due to hospitalisation and surgical cost in Spore being sky high.

If affordability is not an issue, go for private hospital coverage simply because of the shorter waiting time and option to go with one's preferred surgeon/doctor that has been treating you and have a better grasp of you illness history, thus higher chance of more effective treatment.

Do consider those plans with Letter of Guarantee so one can seek treatment immediately with a peace of mind and one less worry about forking out the treatment costs in cash later, before seeking reimbursement.

While coverage from first dollar (ie include deductible and co-insurance) is often cited as the reason for ever-increasing premium, it is deemed un-necessary and government has already plugged the gap by removing riders that cover from first dollar expense.

23-Commitment. While the article states that buying life insurance is a long-term commitment and pre-mature terminations will likely result in loss, the same applies to investing too. Investment, very often, needs long term commitment to see returns. Commitment in investing is not bounded by contract, but often by one's mental fortitude and determination to stay the course. Hence it is much trickier as it large depends on individual.

Investing
36-Rule of 72. Divide 72 by the expected return would give you the number of years required to double your money. Investors can use this as a rough gauge to estimate how long it takes to see his investment double.

Do use as conservative a return rate as possible when using this formula. Reason is that earning good annual returns over extended period is extremely difficult. As it stands, beating STI ETF return of ~6%-7% per annum is already hard enough. And investors often over-estimate their ability to earn a profit. Hence to reduce negative surprise, do use a conservative figure.

Also, the key word here is 'expected return'. It doesn't mean that returns every year will always be at, for example 5%. There will be up and down years. So bear in mind the expected returns take time to attain, and its an average annual rate over more than few years probably.

41-Don't Try to Time The Market. I wrote about this in previous article. My definition of timing the market is 'buying/selling based on gut feel about near future price movement derived from quick glance at price chart and forming an opinion about near term price pattern, with the goal of buying at lowest and selling at highest.'

Develop your investment rules and system. Should it work for you, stick with it.


1 comment:

  1. This is such an interesting post about financial health. Not everyone thinks about it unless they are in need. Even I had gone through very bad phase of life and had minimal savings so had to go for loan. But after that I paid off all the debts and then did personal financial planning which will help me in a long run.

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