Why is Financial Planning Important?
Financial Planning is a long term process more than half of our life time, the eventual result which i suppose most of us would want to achieve is definitely Financial Freedom at your desired retirement age. Without a proper planning, can you imagine we will need to work even at the age of 60,70 or even 80, when we might not have the energy or in the worst case, not having a healthy body to work for a living. Therefore a financial plan should be worked out and executed as soon as you receive your first pay check, in case you’ve not, it’s never too late to start.
In Singapore, as most of us are aware, we are moving into an ageing population at an exponential rate, since most of us are reserving to have children due to the high standard of living. Singapore residents aged 65 years and above has actually crossed the 10 per cent share among resident population, rising from 9.9 per cent in 2012 to 11 per cent in 2013. So what does this mean to us?
Probably most of us working adults are currently providing support to our old parents even when they themselves are still struggling to work for nominal income. Even when you start your very own family, back in your head you are well aware that you still have your parents whom you might need to take care of financially, physically or medically in the case when they need unforeseen medical attentions. So imagine you as the 2nd generation in this scenario has to be responsible for the 1st generation and 3rd generation.
So would situation be better if our old parents who has learned financial planning earlier did some planning and manage to retire or become self sustained without adding on to your current financial stress? Or rather, do you want your children to go through the same cycle as you had, especially in their generation, where their society and financial stress will definitely surpass what we are going through now in the ever fast moving Singapore. So by having a proper financial plan will not only make your retirement easier but will definitely lighten the load of your children in future.
A financial plan should encompass the 8 key fundamental of Financial Literacies, and most importantly, DISCIPLINE!
What is Financial Planning Pyramid all about?
A Financial Planning Pyramid is a framework that is used by many individuals as a guide to establish a financial plan, and to eventually achieve the desired financial goals. As this is a framework, it only acts as a guide through process and will differ from every individual.
So what does the financial planning pyramid framework requires?
- Setting the Base: Basically, it’s building the fundamental of your personal finance, which includes most of the Financial Literacy which i recommended.
- Finance Management: This includes, budgeting, money management, expense tracking, etc…
- Emergency Funds: This is a fund which will come handy in times of emergency which will not affect your fund held up in the build and grow stage.
- Protect: Protecting your assets, wealth when the unpleasant or unforeseen happens, mainly Insurance.
- Build: Building your assets, first property or first pot of capital.
- Grow: Further enhancing your wealth with your available capital, mainly money grow money. If this stage is well managed, you will potentially achieve financial freedom.
Illustration – Soccer Pyramid
To further simplify the Financial Planning Pyramid, do allow me to illustrate using soccer game.
- Setting the Base: Basically, it’s building foundation of the team.
- Finance Management: In the case of soccer, it’s managing your players, train them, scheduling, team bonding, etc…
- Emergency Funds: These are your reserved players.
- Protect: These are your Goal Keeper and Defenders.
- Build: These are your Mid Fielder who supports and can build up the attack and/or defence.
- Grow: These are your Strikers, Forwarders in the game for attack.
If based on a soccer game, the question which i would like to ask is, which layer will you forgo in order to win the game? Defintely, there are numerous strategies of deployment. Some may think that we can do without reserved players (for residential neighbourhood friendly game, mind you let’s talk about a professional game), the worst thing that could happen is that you team will be out number when players are sent out or fall out due to injury but still stand a chance to win. You cannot leave with no defence, no attack, you can possible move your mid fielder up or down between defence and attack, however, such decisions will definitely create certain risk that needs to be managed. So back in your head you know that for a more structured strategy or game, all the 4 layers MUST BE in placed, and it’s just a matter of which layer weigh more than the others.
In financial planning aspect, this will depends on your financial goals. If your Defenders are strong, your Mid Fielders will be able to concentrate in supporting the Strikers. Make Sense?
The 4 Steps Approach when illustrated with Soccer, might look simple especially when you apply it on a game for 90 mins even with a 15 mins half time after 45 mins. But for a financial plan it needs to be plan for almost whole of our life. However, it should be used as a framework to work out your financial plan and there is definitely no default standard which suits everyone. Reason being, every individual has different needs, priorities and wants. Therefore the very initial step you need to know is identifying what you want or need, through a process of needs analysis. Some would want to start a family at the age of 25, while some at a later age. Some would want to retired as early as age 55, while some would want to retire earlier and can comprises luxury. So all these considerations will affect your plan. Nevertheless, with the 8 key fundamentals on Financial Literacy and the this 4 Steps Approach Financial Planning Pyramid, you will be able to kick start a plan after identifying your needs. For some who started late, these will definitely help you identify your current status and help you readjust your plans moving ahead and achieve your desired financial goals.
Remember, while you are still active at work to earn an income, this is the time you should gradually work towards accumulation of your wealth and have your wealth work for you at a later stage by possibly leveraging on the power of compounding and not to forget your defenders which is protections
Let us know take a look at each of the Steps respectively starting from Set Base, Protect, Build and Grow.