Simple Financial Tips That Can Make A Difference

tips2018 has certainly flew by and wow.. we’re going into March already? Perhaps now is a good time for us to do a stock-take on our money. Here is a couple of tips on how to keep more money in your wallet this year.

1. Don’t Do Mental Accounting When Building Your Budget
Mental accounting means the behavioural thinking of having different piles of money for different reasons. You might have a “jar” that says this is for emergencies or a vacation, and you’re putting money in there every month – at close to zero interest rate.

Then you also have a credit card debt. You mentally classify it as a different thing and pay your debt with income each month.

Financially, this doesn’t make much sense. Money is fungible, it really is all the same. You shouldn’t have a jar with money sitting in it that’s getting no interest or growth while you still have credit card debt.

The solution is to think about all your money as the same. People like to put cash in different buckets for different reasons, but that’s mental accounting and we need to overcome that hurdle.

2. Prepaying your mortgage
Some people add a little extra to their monthly payments to pay the loan off faster. This brings up a common question – is this a good use of the extra cash?

With current mortgage rates at under 4%, you should not be prepaying your mortgage. In fact, mortgages have really low interest rates and are designed for long periods of payments, and you should stick to that payment.

Prepaying it means you are giving up opportunity to use that money elsewhere – whether it’s paying off credit card debt or just investing it, putting it aside for retirement. If you’d be getting 8% returns on your long-term investments, why put your money in something that’s only 4%?

So from a financial planning standpoint, it’s not a good strategy. Nonetheless, people feel comfortable doing that. I know you want to feel like you’re paying off the house faster, but resist if you can.

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Why Should I get Disability Income Insurance?

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How would you get by if u lose your ability to work and earn a paycheck every month?

Financially speaking, working disability is worse than death. Our earning ability is our greatest asset and you are the golden goose that lay the golden eggs. Most insurance policies only pay when the golden goose drops dead or is critically ill, but this is not enough. What we need to do is to insure the golden goose’s “ability” to lay golden eggs.

But you may ask: I am already covered, right?

Some people may believe they are already covered for the risk of disability. Let’s look at the common misconceptions:

I have a policy that covers me for Total & Permanent Disablement (TPD)
This only covers very severe disability, such as losing a pair of limbs before your insurer pays you. What if a teacher loses her voice and has to quit teaching? This does not meet the definition of TPD, but is sufficient to trigger your disability income payouts till your desired retirement age.

I have a Critical Illness policy
Currently, critical illness insurance providers do not cover diabetes as one of the 37 critical illnesses. What if a pilot is grounded because his diabetic condition affects his vision? Critical illness policies work well to provide a lump sum to cover medical expenses. But it falls short of the real paycheck protection need.

I have personal accident coverage

The weekly income payable from personal accident plans is payable only if the cause of disability is accidental, defined as involuntary and violent. Working disability from illnesses is not covered.

My employer will pay me
Most employers define how long you will receive your salary if you are unable to work. In Singapore, this is often between 1 to 3 months, which will not be sufficient in the case of long-term working disability.

Therefore, it is crucial for all working adults to consider a Disability Income policy that provides for replacement of income in all scenarios of working disability. If a sickness or injury (of any severity) prevents you from working for at least 60 days, it can replace 75% of your earned income, by offering a tax-free cash benefit every month.

Money Advice that Don’t Grow Old

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Many recommendations I’ve made are as applicable today as they will be in future, and they bear repeating. Here are some of the best financial moves for you to consider:

1. Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Our brains are programmed to make poor financial decisions. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviours forever. It is important to gain control of your finances and become comfortable using money as the valuable tool it is.

2. Building an emergency reserve to cover living expenses for three to months if you lose your job or experience a business slump is a necessity. If you are retired, having one to three years of cash available to cover living expenses can help you avoid taking money out of investments when their value has declined.

3. Retirement will happen, sooner than you think. Start early — as in the day after university graduation — and be consistent in investing at least 20 percent of your paycheck.

4. Learn to appreciate the word “budget”. Creating a way to track and manage income and expenses is an essential skill to thrive financially. Numerous free or inexpensive tools, like Mint.com and Expensify, can help.

5. Run from consumer debt. Personally, I use credit cards for almost every purchase for convenience and cash back rewards. However, it’s of vital importance to pay the card off every month, without fail.

6. A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy without a down payment.

7. No asset goes up forever. Price declines, even crashes, are part and parcel of investing. It’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is a big mistake that will cost you dearly.

8. The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or with different fund managers. It’s about having a good balance of mutual/exchange-traded funds that invest in SG and International stocks, SG and International government bonds, real estate investment trusts, commodities and junk bonds.

9. There are no free investments. Pay attention to the fees associated with any investment, as well as how the advisor recommending any investment is compensated.

10. Pay yourself first. The most successful savers and investors I know simply take all their fixed expenses, taxes, and retirement plan contributions off their income earned, then spend the rest. This means learning to live on 30% to 50% of how much you earn. Certainly, it isn’t easy, but one of the most valuable money habits to cultivate is to save something for the future, instead of spending everything that comes in.

You may have likely heard of these pieces of advice before. There’s a reason for that: it works, and never goes out of style.

4 Life Stages of Financial Planning

Many of us know that financial planning is a lifelong process. Our ultimate dream is to achieve a retirement life which we desire. This could mean being debt-free, having a passive stream of income and best of all, pursuing our interest and passion which we might not get to do in our younger days.

Our lifelong financial process can be split into 4 stages. What are the crucial aspects which we should consider at each stage? Read on to find out more.

Stage 1: Young Adult (Aged 20-30)

The young adult is new to the working world and naturally earns a low income. He/she is driven to succeed and increase his earning ability. Being single, there are little or no financial commitments for him/her. Some may have an education loan to pay off after graduation which can be fully redeemed after working for 2 to 3 years.

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This is the best time for you to start some form of wealth accumulation to prepare for retirement as it could be harder to save money in later stages of life when financial commitments increase. With the high risk tolerance at a young age, investing in more equities and mutual funds on a regular basis is recommended.

 

Buying a house is common goal for young couples preparing to get married. Do the math on your liquid finances and CPF savings to find out which type of property best suits your financial ability.

Having a comprehensive insurance portfolio is a must as well for wealth protection. Key insurance components include Hospital & Surgical, Critical Illness and Disability.

Stage 2: Young Family (Aged 30-40)

At this stage, one could be married with or without children. With a moderate income, you would have more financial commitments such as a home loan and a car loan. Retirement planning remains an essential component in your portfolio. Risk tolerance starts to moderate as you are one step closer to retirement. A correct investment mix of equity and fixed income helps you to achieve financial goals easily.

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Being a parent, getting insurance cover for your child prevents you from incurring unnecessary huge medical bills. Saving for your child’s future tertiary education should be your concern too. Another wealth protection area concerns the largest debt that you share with your spouse – home loan. If a spouse passes away, any outstanding loan is left to be paid off by the surviving spouse. Be responsible in financially protecting your loved ones in the event of your passing.

 

Stage 3: Mature Family (Aged 40-50)

Your children are grown up by this stage of your life. Your earning ability is at its highest and naturally your expenses increase as well. You could possibly take up a bigger car loan of home loan, thus increasing your financial commitment.

Child’s education and retirement planning are your main financial objectives for the long term. Therefore, your investments should be diversified in equities and debts instruments according to your age, available time and risk ability.

Stage 4: Pre-retirees or Retirees (Aged 50 and above)

retireesBy now, your home loan would have been fully paid off and your children are no longer dependent on you financially. This means low financial commitment which means your protection needs are its lowest stage. However, health insurance continues to play an important role as you age.

The security of your retirement savings carefully accumulated over your younger days, coupled with regular income, becomes your focus now. For that, investments should be more in fixed income which yields regular income with low risk.