4 easy steps to getting your finances in order

Financial planning is a lot more important than many people give it credit for. While some could think it is just a simple exercise, the reality is that there may be a significant number of people who may not be doing it well.

According to the Monetary Authority of Singapore (MAS), credit card rollover balances has increased by nearly 63% in the past 10 years, to $5.5 billion today. The Life Insurance Association, Singapore (LIA Singapore) released a study in 2018, highlighting Singapore’s mortality and critical illness protection gap of $893 billion. News articles, as well as our AIA360 Retirement Survey, have also reported that Singaporeans are lacking an adequate retirement plan.

With proper personal financial planning, you can better understand where your money is going each month and put in place a strategy to get your finances in order. If you need help managing your finances, here are 4 easy steps to get you started.

Step 1: Create a prudent, but feasible, budget

The first thing you can do is to understand where all your money is going each month. This starts with creating a budget, listing down all your necessary living expenses, which typically includes: 

• home mortgage
  
• utilities, mobile and broadband bills
• transport costs
• allowances for children and/or parents
• food and beverage, groceries
• insurance premiums
• taxes
   

These can be viewed as fixed expenses you cannot avoid each month. Next, you might like to list down all the other expenses you are paying for that you don’t necessarily need, but you might want to have. These can include, among many other things:

• car loan
• entertainment expenses 
• shopping and dining out
• subscriptions to streaming services, such as Netflix, Amazon Prime and Spotify
• gym memberships
• gifts (for ourselves or loved ones)
• spa, manicure, and pedicure sessions, and massages
• yearly vacations (split into monthly amounts)
   

The majority of these expenses should be labelled as your discretionary expenses, which means that if you want to, you should be able to live without them. Sure, you may justify that you are working hard each month and deserve to have some luxury in your life. That’s reasonable, but what’s not is spending more than you can afford.
 

Step 2: Cut as much of the unnecessary expenses as you can

Once you have listed down what your typical monthly budget looks like, you should be able to clearly identify what you need to cut out.

Often, there’s very little you can cut from your fixed expenses. However, this doesn’t mean you should not scrutinise your expenses here. You should zoom in to your mobile and broadband bills to determine if you really need the plans that you are currently on. Your transport costs could also comprise many unnecessary Grab or GOJEK rides that you can reduce. Often, your grocery bills may also include many things from your discretionary expenses which you don’t really need, such as fizzy drinks, ice-cream, chips and other snacks.

While no one expects you to live like a hermit, you could cut down a large proportion of your discretionary expenses. Keep those that really make you happy, and forgo those that you can live without.

By doing this, you would be able to visualise all the money that you could actually be saving and putting towards your future.
 

Step 3: Get your basic personal financial needs covered – insurance coverage, emergency funds, pay off high-interest debt

Your next move should be to get the insurance coverage that you need right, before you try to invest and grow your retirement nest egg. Coverage for your basic personal finance needs will help you tide through the curveballs that life inevitably throws you from time to time.

In the order listed above, you should be adequately insured. This means getting the right level of health and life insurance coverage.

• Your health insurance will protect you in the event that you are hospitalised or require surgery and incur large medical bills.
• Your life insurance, whether whole life or term, provides financial security for your loved ones in the event you are no longer able to provide for them.
• You should also consider purchasing a critical illness policy to cover yourself and your loved ones in the unfortunate event that you are diagnosed with a major illness.
   

Your emergency funds come next. You should set aside at least six to 12 months of your average monthly expenses in cash for emergency. This will help you get through unexpected events such as retrenchments, medical requirements, unpredictable large expenses for home repairs or replacing appliances, and other things that could unexpectedly happen.

Holding high-interest debt can be financially detrimental to your long-term financial security. You should pay it off as quickly as you can, either with the savings from cutting down your monthly expenses or using part of your emergency funds. By doing so, you further reduce unnecessary cost that you need not have to incur.
 

Step 4: Start growing your retirement nest egg

Steps 1 to 3 will help you get your personal finances in order. Thereafter, you should be ready to start growing your retirement nest egg.

While the old adage of “better now or never” holds true, it really is better if you are able to start saving and investing for your retirement as early as you can. This is because you will be able to enjoy compounding interest for a longer period of time, as well as ride out market fluctuations or economic cycles.

AIA Smart Wealth Builder is a savings plan that magnifies your returns, while giving you the flexibility to withdraw at key milestones in your life, such as to pay for your child’s university education, afford the retirement you want or to leave a legacy behind to your loved ones.

This plan provides 100% capital guarantee on the premiums you pay from the 15^th year onwards, regardless of how well or poorly the market performs. In addition, you will also stand to earn non-guaranteed bonuses on your savings. To get started, AIA Smart Wealth Builder allows you the flexibility to choose your premium payment term of between 5 and 20 years, while also providing you death, total permanent disability and terminal illness benefits.

Find out more about AIA Smart Wealth Builder here