According to the 2016 MasterCard Index of Financial Literacy, Singapore tops the list of countries with high financial literacy in the Asia Pacific. Meaning Singaporeans are knowledgeable in basic money management, creating a financial plan, and investment matters.
Among these three core areas of financial literacy, you need to stabilise a financial plan. It allows you to build a framework for managing your finances. That way, you can tie together your short-term and long-term financial goals.
MoneySense defines financial planning as “taking charge and managing your finances to ensure your financial well-being.”
This includes monitoring your cash flow and spending habits, finding ways to settle your debt, building a budget plan, and more. Because it’s multi-faceted, you need a plan to tie all of this together.
Depending on your needs and goals, you can choose to build your own financial plan or ask for the help of a financial planner.
Regardless, here are ten reasons you need to plan your way to financial independence:
When creating a financial plan, you need to know how much money you have, how much money you owe, and how much more money you need. It is not meant to make you feel devastated. Understanding your financial situation allows you to set realistic short-term and long-term financial goals.
Your cash flow will be the foundation of your financial plans. It will determine whether you can start building the necessary funds to reach your goals or if it’s something you should work on. Thus, it’s important to consider your net salary and expenses when making a financial plan.
Because you have realistic financial goals and you have a good understanding of your cash flow, it’ll be easier for you to manage your income. After all, you don’t really receive it in full. Following the tax and other salary deductions, a financial plan is a great reminder of how you should allocate your money.
Financial planning allows you to manage your income. Meaning, it’ll be easier for you to allocate your money. And when you can allocate your money, it means you can stash a certain amount for your savings. Thus, you can slowly build your funds meant for investment.
Financial planning allows you to give room for savings. What should you do with all the money you were able to save? There’s nothing wrong with spending some to reward yourself. However, it’s advisable that you use it as capital for investment. That way, you can see your money grow through time while you’re busy living your life.
Financial planning allows you to replicate successful processes you were able to build. If you could save enough money as investment capital, you can simply repeat the process to build your emergency funds. Why do you need an emergency fund? So you and your loved one can still survive in case of emergencies.
Protecting your loved ones is part of financial planning. Other than building an emergency fund, now is also a great time for you to review the outcome of your financial plans. If all goes well, consider getting life insurance and health insurance.
Acquiring assets is desirable to have something you can liquidate in times of need. However, a lot of assets come with liabilities. Creating a financial plan helps you build assets that won’t become a burden in the future. After all, your net worth is a snapshot of your finances.
The wealth you were able to build because of careful financial planning could come in handy in times of need. When you have enough funds for various financial vehicles, it is easy to guarantee that your family is protected. In case you can no longer work and you’re the breadwinner of the family, they can still survive because you are insured.
When you don’t know how to handle your finances, it can negatively impact almost every area of your life. The stress could then cloud your judgment. Well-planned and well-managed finances allow you to live a life free of worries.
Financial independence starts with identifying your short-term and long-term goals in life. Also, it hurdles you might face in the future.
With a financial plan, you become more confident with your decisions. That’s because you know you made the right choice on where to place your money. As a result, it reduces your stress and allows you to enjoy life more.
Financial planning is all about controlling your finance instead of the other way around.
Have you started creating a financial plan? Did you do it on your own, or did you seek professional help?