This is my third article in my series of #MoneyTalks – an area I am truly passionate about. I grew up reading Robert Kiyosaki’s book “Rich Dad, Poor Dad”, Napoleon Hill’s “Think and Grow Rich”, Peter Lynch’s “One Up on Wall Street”. Many books talk about ways to generate income, having a growth mindset instead of scarcity mindset, how to identify market opportunities.
While I do embrace all these, I firmly believe financial planning is more than just investing to generate more income. Many people overlooked the concept of “Cashflow Management” in their Financial Planning. This is an important concept especially during this time of uncertainty. It is the cornerstone for financial planning which will put you in a good position to navigate difficult times like this.
In the business context, Cash flow management is the process of tracking how much money is coming into and going out of your business. Applied in a personal context, it is about managing your income (inflow) and expenses (outflow). Simple as it sounds. But if you peal off the layer, you will need to develop a structure to help you manage and optimise your cashflow.
Here’s a simple breakdown which I applied on my financial management. I hope you find this useful.
(1) INCREASING YOUR CASHFLOW
(a) Pay Yourself First
Start with the basic idea of “Pay yourself first”. Paying yourself first is one of the most common pieces of financial advice around. You can then bucket this stashaway cash into three buckets (1) Emergency Fund (2) Opportunity Fund (3) Special Events Fund.
Emergency fund is especially important in times like this when jobs may be disrupted. You should have emergency funds that covers at least 12 months of your daily expenses (I call this the operating expense).
Opportunity fund as it says allows you to invest in undervalued stocks or you can put this into a regular investment account to do Dollar Cost Averaging (DCA). If we use US market as a proxy for stock market returns; the 100-year study encompasses the period between 1912 and 2011. Over 5 years, positive returns were achieved 87.6% of the time; utilising DCA over 25 and 30 year periods generated positive returns in every instance. Average annualised returns for a DCA strategy (over 5, 10, 15, 20, 25 and 30 years) were between 5.4% and 6%. DCA also gives you peace of mind as you don’t have to time the market.
Special Events Fund is the money you set aside for big purchases such as a new home appliance, upgrading of air conditioning or putting it into an endowment insurance for your child’s university education.
(b) Invest in Yourself
We talk about dollar cost averaging in investing your money. But have you thought of applying that on yourself? If you are an employee, you are probably the “highest income generating asset”.
Do a “dollar cost averaging” on yourself. Set aside an annual budget to identify courses that will build new skill sets or in demand skill set that will future proof your career.
The government has given you the skillfuture credit to up skill. Take ownership of your own development. When your job is secured, you can be assured of positive cashflow. Or acquire new skillsets which allow you to set up your side hustle. That way you build multiple streams of income.
(2) MANAGING YOUR CASH OUTFLOW
(a) Financial Discipline
Firstly learn to distinguish between your needs and wants. The two months of circuit breaker should give you better clarity on what you can actually do without. Are there alternative ways of doing things? For example instead of joining gym membership, could you jog around your neighborhood, climb the stairs etc? Or instead of buying a brand new car, could you settle for public transport or buy a second hand car?
Secondly, look at ways you can crawl back some cash. For example if you can refinance your home loans (with a low SIBOR rate), you can free up some cash. Or there could be hidden money that you can uncover eg, the few dollars in a stored value card or a monthly subscription to a service that you no longer use. A penny saved is a penny earned.
(b) Risk Mitigation
The two major risks you face in life is dying too soon or living too long. If you are the sole breadwinner, dying too soon may saddle your family with unpaid debts or mortgages, or even medical bills. A medical crisis or loss of income can derail your financial plans.
Ensuring that you have the proper health and hospitalisation plans is important. These are very basic insurance everyone should have. Besides having MediShield Life, you should have a good hospital and surgical (H & S) insurance cover. A good H & S insurance is one that will allow you to enjoy good medical care without much out of pocket expenses. Here’s a site from MOH you could check.
And make sure that you also have a critical illness rider with your existing insurance plans to cover medical expenses due to unforeseen illnesses.
And if you are afraid that your savings won’t outlast you, invest in an annuity plans. The CPF Life is the answer to longevity risk. It is a national annuity plan that provides lifelong income to individuals throughout their retirement as long as they live. This should give you a basic “pay cheque” on retirement. For anything more like a “play cheque” where you need for the occasional indulgences like travel, new hobbies, consider taking up additional annuity plans.
Of course a big part in mitigating risk is stay healthy. Exercise regularly and develop healthy eating habits. This will stave away diabetes, high cholesterol, heart diseases etc. which may result in high medical cost. You want to stay healthy and to keep your insurance premiums low.
Cashflow management is the cornerstone of good financial planning. Cash flow management ensures the surplus funds are invested or held wisely to reap optimum returns on capital. It ensures you have sufficient funds to manage your day to day operations (ie your living expenses including emergency funds). Constantly reviewing your expenses through prudent spending, refinancing of big ticket items on lower interest rates, right sizing your insurance coverage based on your latest needs, will ensure a healthy cashflow.
Your quality of life is not dependent on how much you make but how well you manage your cashflow for long term sustainability. And this is especially important to tie us through this period of uncertainty which may last more than 6 months.
Hang in there! We are made to outlast adversity.