Personal Financial Review For 2023 – 7 Actions and Decisions to Get Your Finances Up and Running
The article by The Straits Times “What can home owners do as mortgage rates continue to rise” prompted me to share my thoughts on how you can take stock and review your finances in the new year.
If getting your finances reviewed is one of your 2023 resolutions, consider “BALANCE” to help you review your finances during times like these where there are rising interest rates and volatile markets:
1. Budgeting – Budget, budget and budget!
The article suggested this is a time to be more prudent in household budgeting and spending less on unnecessary items such as “spending less on buying ice-cream or going for holidays”. I would not recommend making drastic moves unless your financial situation has changed substantially such as a suffering from retrenchment.
My recommendation is to adopt a “play to win” approach such as committing to a “forced savings program” such as insurance policy, endowment plan, regular investment plan that ensures you will save first before you spend. For example, if you commit to “force save” 20% of your income, your spending can only affect the remaining 80%. Some will save more of the 80% while others will spend more of the 80% but the end result is still the same – you have paid yourself first.
2. Advice – Do you need the help of a financial adviser representative/professional advice?
As a financial planner, one of my priorities in the beginning of the year is to “fine tune” my clients’ financial portfolio to their personal unique needs and situations.
I believe that there are 3 areas in financial planning that you should consider getting the help of a financial planner if you are not confident to do so:
- Planning your own investment portfolio by investing using a customised portfolio
- Planning your own retirement and ensuring that you have enough
- Planning your own estate and ensuring that you have no regrets.
3. Loans and Liabilities – How can you manage your home loan and other liabilities?
In managing debts, it is important to work out reasonable financial projections and budget them in advance. Ideally, the “stress-test” planning should be done before taking the loan.
There are 2 types of debts – the good debts that are used to finance assets such as home mortgage and bad debts that are used to finance liabilities (for example credit card). You should consider paying off all bad debts to free up your cashflow and review your cashflow to ensure that there is sufficient buffer should the floating interest rates loans rise further in the coming year. For your home mortgage loans that you are paying, you can explore if there are possibilities where you can refinance and enjoy savings by paying a lower interest rate.
4. Arrangements – Are they set up legally and in order?
The correct setting up of legal documents such as wills and lasting power of attorneys can serve as the foundation for organising an estate plan. As your financial situation changes, these documents may need to be reviewed and updated. For example, there could be new assets that need to be included and planned for.
5. Never lock up all your liquidity
Liquidity for a financial plan is like oxygen for the body, we must always have liquidity and it must be sufficient to support our body. A healthy financial plan needs to have a good amount of liquidity at all times to ensure that we can withstand short term financial shocks. You can do a quick review by taking your liquidity buffers (i.e. cash and cash equivalents) divided by your monthly expenses. For example, if you have $50,000 bank savings and your monthly expenses is $5,000, your savings can last you for 10 months.
Do note that paying off the loan too early may cause liquidity risk and leaving you with too little cash savings so this decision should be considered carefully.
6. Coverage – Do you have an updated insurance coverage portfolio?
Having sufficient coverage that protects against the health risks of today’s lifestyle is an essential part of one’s financial plans. Changes or adjustments to our insurance may be required via a review and update to the amount of coverage when we take on new financial commitments. Having an updated insurance portfolio is so important to give you the confidence to give your all in the new year while knowing that should you fall ill, you will not be using your hard-earned money to pay for any medical bills and your loss of income is completely covered.
7. Equities – Is it time to include equities or other risk assets in your investment portfolio?
The current higher yields offered form relatively risk-free assets such as Singapore Government Securities and Singapore Savings Bonds have attracted many to include them in their financial portfolio last year. However, these assets are still yielding a negative real yield and it is not an effective way to protect purchasing power thus you should still keep your portfolio balanced with a good amount of risk assets such as equities. This is because investors still need their portfolio to grow in real terms (i.e. achieving returns that are higher than inflation) and savings assets will not be able to achieve that. Over the long term, savings assets will likely underperform inflation and result in the compounding loss of purchasing power over time.
I hope that these 7 points can be a helpful nudge to get you started to review your personal finances. Good luck and make your financial journey an enjoyable one!
Article by Lee Meng
The writer is an Executive Financial Services Consultant of GEN Financial Advisory