All of us go thru different stages in life. And the starting stage here is the time when we graduate from the university with a degree that is meant to help us be ready for the future.
Fresh from college, we start to build our own future from the money we earn from our first job. It’s that stage when the idea of finally being able to buy our wants (even more than our needs) coming from our own salary really excites us all. Just a year and some months earlier we might have already set our sights on the latest gadget, or that fancy restaurant, or the fancier wrist watch, or those pair of expensive shoes, or finally getting that credit card just to belong to the club of “swipers” but then ending up being downed with huge debt (I’m actually speaking about my own experience in this case). Granted. It’s the initial phase which I call the “me in control” life. And it’s fair to be getting all those from our own income as years earlier, we were at the mercy of our parents’ or siblings’ allowances which most of the time only left us a few bills and coins balance each week or month. We just couldn’t save for a single “want”.
The Dreamer Stage
Then perhaps 3 years into the job, we may already start thinking about the future. Backtracking the expenses made the past 3 years, there might be some realization that we have been “happy-go-lucky” all along, forgetting about the “saving for the rainy days” mindset, year after year. It’s because near-future wants suddenly become more expensive- we want our own house and lot, we want to have our own car because our rich friend has started driving the latest car, we want to travel to HongKong because our neighbor was talking non-stop about his experience in HongKong Disneyland.
The Bitter Pill Swallowed
The realization that we haven’t saved that much; that we have wasted those 3 years may start hitting on us. This bad financial status could usher a brand new goal: Medium-To-Long term projects. Let us say we want to prepare for a 3D4N trip to HongKong with a 2 day Disneyland visit. So how are we going to go about it? How much are we willing to save each month? Have we already eliminated our debts? Are our 2 years in salary increase, if there are, enough to contribute to the savings? But what about emergency fund? Have we considered the possibility of losing our job and how we will source our expenditures if that happens? But what if we have a standing 18,000 debt from our best friend credit card company? The list of concerns could potentially be endless and we may not really even be ready for any Medium-To-Long term goals yet.
Financial Planning – The Foundation Phase
So before considering the Medium-To-Long term goals, let’s focus on achieving the following things, in sequence, if possible:
- Eliminating Debts – the hardest to achieve. Let’s target eliminating debt in the next 6 months.
- Emergency Fund – 3x to 6x of our monthly expense to cover for the “rainy days”. Let’s have this in parallel with item 1 but on a 70% by 20% by 10% rule for the savings part. 70% to pay off debts, 20% for emergency fund, and 10% for “petty cash” fund. Once debts have been eliminated, savings will then be 80% for emergency fund and 20% to “petty cash”. Once the maximum target of 6x monthly is reached, we will have 100% of savings to be used for other means. The general rule on computing for expense: Expense = Income – Savings, where Savings equals 30% of income. The math is simple but the idea here is for us to make the Savings component a constant percentage.
- Protection – Are we the breadwinners of the family? Do they depend on us for their daily living? How much cash are we giving them monthly? is it 15% at least of our net income? Lower at 10%? Only 5%? Have we considered lowering our expenses for “wants” so that we can increase our contribution to them from 5% to 10% at least? Are we willing to give them more? If we are staying in the family house, should we not give them more to cover the bills and groceries? But what if we suddenly get sick and not able to work? What worse thing could possibly happen? Death? Yes, that could certainly happen. Could we take a moment to reflect about this possibility and how it could impact our family? I’d like to invite you to read about this post on Insurance Protection to understand better how we could potentially prepare something for our dear family should God decide to take us out of the picture.
The 3 steps above form what we call Foundation of Financial Planning. In the Foundation phase, we consider increasing cash flow (salary increases, promotion, new job with higher salary, other sources of income like direct selling, MLM, etc), eliminating debt, and insuring protection for the members of the family in any eventuality that would lead to us being taken out of the picture in this world. The Foundation phase could take us 2 to 3 years or even more to build. How soon we can accomplish this will really depend on our discipline, our focus, and our commitment.
Here is a post about Financial Planning for those who haven’t read.
Medium-to-Long term planning
Congratulations to us! We have built a strong Financial Planning foundation. So now that we complete the foundation of Financial Planning, we are free to establish our Medium-to-Long term goals. What is it that we want to achieve in 3 to 5 years? Is it the brand new car? the perfect home for us and our parents and/or siblings? Is it the HongKong Disneyland tour? How will we plan to achieve the goal? Do we set multiple goals? Setting multiple goals means multiple planning, saving, or investing also.
This is the Accumulation stage of Financial Planning; the phase where we start to invest our net savings. What are the ways we can invest? Let’s discuss some of them below:
- Savings Account – We already have this – Emergency Fund account (a must to be deposited in the bank), Petty Cash fund. Technically, this is not investment. Interest rate at 1% per year is not an investment proceed. if Inflation is 4%, the value or worth of our money is -3% each year. But we need to have savings account in a bank for our online transactions or when we have business transactions that we need to be able to quickly withdraw some money from the fund.
- Government or Corporate Bonds – This typically returns a fixed income either quarterly or annually and may range from 3% to 6%. This will beat inflation if returns are based on the higher band (say, 6%). However, this still is not enough for capital appreciation this is relatively safe.
- Stocks or Equities – Very high risk, very high potential return. That’s the mantra of stocks or equities investing. We can either invest individually thru online brokers, or we can pay some higher fee by having a human or institutional stock broker managing our fund. They can potentially return greater than 10% a year or a negative % if the performance of the stock is bad.
- Mutual Funds / UITF – Depending on the chosen fund, this investment medium managed by a fund manager could be bonds, balanced (bonds and equities), or 100% equities. Normally fund managers invest or trade from blue chip stocks of stable and rich companies.
- Insurance companies like Pru Life UK also offer Unit Linked investments to help us grow our money but with the addition of the Insurance component in it. The 4 other investment modes don’t offer the guarantee that should we be taken out of the picture, aside from the invested Fund Value (portion of our investment amount plus whatever growth after having been invested) there is a Sum Assured amount that our beneficiaries can also get when death benefit is claimed.
Preparing for Retirement
Our 3 to 5 years Medium-to-Long term goal may potentially help us achieve our immediate, “big time” dream(s). But we also may start thinking about the time when, due to old age, we quit from work and just enjoy the remaining years of our lives. That’s farther down the horizon. Having worked for 10 to 15 years, we may start feeling the need to prepare for our future – that is, considering where we could source our means for the expenses we will need in the future. So what do we really need in the future? How old do we really want to retire? 55? 60? 65? After retirement, how many years do we think we will leave before The Lord will let us finally Rest in Peace? The formula below could help us examine our retirement needs:
- Monthly Expense at retirement age
- Yearly Expense: Item 1 x 12
- Years to use expense amount: number of years before we expire after retirement
- Savings already made
Retirement need: (item 3 x item 2) – item 4
- Monthly expense planned: 30,000
- Yearly expense: 360,000
- After retirement, years expected to live: 15
- Amount already saved for retirement?: 300,000
- Total Retirement expense need: (360,000×15) – 300,000
So much should we prepare for our retirement? 5,100,000!!!
That’s a huge amount to save! We definitely can’t have that by saving in a bank in our lifetime. We can’t achieve that if we save it thru bonds either. So that begs the question: What investment can help us achieve 5.1M by age 65? if we are 32 right now, we only have 33 years to gather 5.1M in order to enjoy 30,000 per month worth of expenses. Is this really attainable?
There is definitely a way. Please read this Retirement Planning post.
We can compute for how long we can double our money. That’s what is called as Rule of 72. It’s important we have knowledge on what medium of investment to decide to help us reach our target retirement plan. So if we can only invest some money for some number of years, we need to invest that money in a medium that could potentially double that amount within the number of years remaining before we retire from work.
Rule of 72
The rule states that to double our money in some number of years, we need to divide 72 by a certain % which is the rate of growth of the investment.
For example, if we invest in medium where the return is 10% annually, here is when it will double:
Years to double = 72 / 10 (from 10%)
Our money invested in a medium that returns 10% annually will double in 7.2 years! If we want to double it in 2 years, how much should be the growth rate? 36% compounded growth per year! Anything that says money will double in 2 years, is just too good to be true. That’s either legitimate business or a plain SCAM!
Here comes the Bride or Husband…then the son, and daughter, and son…
So it was good planning for retirement. We identified our growth prospect so that we can live comfortably in the future. Then suddenly at age 35 we finally found the urge to build our own family and to raise kids. The first of these future kids will, at age 18 or 19, start college. We are again led to think about how we can prepare them for their future. How are we going to prepare them for the expensive high school tuition and miscellaneous fees? what about the more expensive university tuition? Have we become managers where our salary will help contribute for their education? Even if we earn a salary of 200,000 being managers, how much should we contribute to investment so that we can conveniently send our first born at least to a college which collects a total of 2M? what if the future cost is 3M? or 4M? But we have 3 kids! Fast-forward, if for example our first born is 3 years old, he has 15 more years to go before he enters the university which asks for 2M for the entire degree. Is there a way to prepare for this? how much? Please allow this post on Educational Planning to help us out.
A Life of Stages, a life better prepared
Life is Beautiful, according to a movie title. Rightfully so! Life is mean to be enjoyed, free from mental, psychological, and emotional stress, more so, financial stress. When it comes to money, especially in married life, problems arising from money needs often become the source of conflicts within the family. It is also the source of major headache. The remedy is not to be complacent about the future needs hence, the need to not take financial planning for granted. We all need to be prepared for the future. And there is much we can do to live a comfortable life, today, the near future, and the future over the very long horizon.
It’s about commitment. Our commitment to ourselves, to our family and loved ones, to our community, and to the next generation after ours. It’s a commitment to be financially free and to be financially prepared now, tomorrow, and in the far future.