Your Financial Portfolio Through The Eyes Of A Chartered Financial Consultant
One of Benjamin Franklin’s famous quotes goes like this: “If you fail to plan, you plan to fail”. This adage is just as apt when it comes to managing finances and wealth. The good news is that in this day and age, most people want to plan their finances. However the not-so-good news is that most either do not spend enough time doing so or do not know how to go about it.
The latter might seem counter-intuitive in this digital era when any information you want is at your fingertips (read Google) but that information overload is in fact what can lead to analysis paralysis or a paradox of choice. Which information should I trust?
This post will attempt to provide a perspective from a Chartered Financial Consultant’s point of view and a easy-to-use framework to holistically examine your entire financial portfolio.
4 Key Principles
When it comes to personal finance, there are 4 simple key principles:
- Secure income
- Minimize expenses and waste
- Maximize returns on residual income
- Share fruits of labor
I find these 4 principles sufficiently cover the key areas we are concerned about when it comes to planning for financial security in our lives. For each of these key principles, I highlight 2 critical areas that require careful planning, decision making and execution.
1. Secure your income
One very crucial and commonly overlooked component to financial planning is the need to secure our ability to earn an income. Our income is the bedrock of all other financial plans that we make, without which the plans will just remain as plans with no execution.
Make it a top priority to set aside at least a tenth (10%) but no more than 20% of your income to secure the rest of it. This is also defined as financial risk management, or insurance. There are two types of insurance that you can look at to hedge against the risk of loss of income:
a. Life Insurance
Life insurance focus on the need to replace your income to your family or loved ones in the unfortunate case of an untimely passing.
b. Health Insurance
Health insurance, unlike Life, focuses on benefits payable while the individual is alive but is unwell or injured, incapable of work and in turn loses his or her income.
2. Minimize expenses and waste
Once we have secured our income, the next important principle is to be prudent with expenditures. In addition to spending within your means by minimizing conspicuous consumption, there are two other ways to reduce expenses which do not immediately occur to most people.
a. Tax Planning
Tax planning can help reduce your tax liability by making use of the various deductions and exemptions provided by the government. To be clear, this is 100% legal and is not tax avoidance, which is making use of loopholes in the law. The tax reliefs were provided specifically to encourage certain behaviors such as charitable giving and all taxpayers are advised to make use of them. Read more about what tax reliefs you can tap on in my post here.
b. Debt & Mortgage Planning
When financing big-ticket items, it is best to be prudent with spending and manage them smartly. Being able to get a loan doesn’t mean you should stretch your finances as you need to buffer against unforeseen financial challenges such as rising interest rates (which can significantly increase your expenses beyond what had been budgeted) and increased monthly spending. You should plan to pay your mortgage or loan down sooner to avoid accumulating interest payments and be debt-free faster. In the first place, avoid taking on unnecessary debt for lifestyle reasons. Read about taking on debt for newly-weds and for buying cars.
3. Maximize returns on residual income
George S Clason shares in his famous book “The Richest Man in Babylon” that a part of all you earn is yours to keep. Pay yourself first and by that, I mean saving a part of what you earn. The book recommends that we pay ourselves not less than 10% of all that we earn. This difference between what you earn and what you spend can then be invested for greater value in the future.
a. Asset Accumulation
After we have worked to earn income and save part of it, we should also put our money to work for us. This is the way to grow money but not by working more ourselves. Not sure how to start? Read this useful guide.
b. Retirement Planning
You’d also need to think about and plan ahead for the times when you no longer can have a regular income by working. Starting early can help you hatch an adequate golden nest egg plan.
4. Share fruits of labor
Financial planning doesn’t just include planning for yourself but also for your loved ones. Proper planning can ensure you meet the needs of your dependents without blowing up your finances, and even when you are no longer around.
a. Child Protection & Education Planning
Providing for your child is a huge commitment that is for the long haul. And it starts way before the kid even comes into the world! You need informed and advanced planning to prepare you for the responsibility, and ensure your kid will be well provided for in future, especially in health and education. Read about what to expect when expecting a new family member!
b. Estate Planning
Preparing ahead for how your estate will be managed and distributed in the event of your death will help your loved ones avoid unnecessary stress and uncertainties during a time when they most need peace of mind, and help you plan for their continued welfare and well-being in your absence. Check out this FAQ on estate planning.
You wouldn’t build a business without a business plan. Why should building your future financial security be any different? With these 4 easy to remember principles, there shouldn’t be any excuse of not knowing how to go about it!
P.S. I truly hope you have enjoyed and benefited from this series of personal finance posts. This post will be the last of this series, but will be the starting point for something new brewing! Look out for it on my Facebook page. Meanwhile, please feel free to share your thoughts and leave a comment for me. Thanks for coming by!
