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Anxious about not having enough savings for the future?
The solution sounds simple: reduce your expenses so that you can save more.
But there’s more to it than that—achieving financial freedom isn’t all about scrimping and saving at the expense of your wellbeing (and the occasional indulgence). The real key to achieving financial independence lies in setting realistic financial goals.
With this in mind, we’ve outlined the crucial factors to help you make your goal-setting endeavours realistic, practical and achievable.
1. Be prepared to work for your goals
What do you want to achieve, and when do you want to achieve it?
Working backwards allows us to see the bigger picture first, then take actionable steps to achieve our desired outcomes.
For example, if your goal is to retire by the age of 50 with a monthly income of $3000, how will you ensure you have enough savings to sustain this standard of living? The amount you need to save will also depend on how long you want the $3,000 a month for (20 years? 30 years?).
Next, ask yourself if this is achievable based on your current income, savings and investments.
Essentially, working backwards will determine which short-term goals you need to focus on in order to achieve your long-term goals.
Setting your direction and purpose
Instead of blindly jumping into working for your goals, always remember that your financial goals should also be in line with the lifestyle you desire.
If your goal is to earn enough to live comfortably, you’ll need to find a job or embark on an enterprise that can potentially offer enough income for you to achieve that lifestyle.
Having said that, you must be quick to adapt to changes in technology, regulations and competitive environments even as you pursue your dream career or business venture. Otherwise, you may find your income level deviating from the goals you have set.
If you’re aiming to become the next Jeff Bezos or Elon Musk, a 9-to-5 office job will not take you there. In order to achieve the extraordinary results they have accomplished, you’ll need to explore underserved niches with perseverance. There are countless others with the same vision who have given up along the way; these are the people we never hear about.
2. Differentiate your needs and wants
Sometimes, there’s more than you can handle on your plate.
Hence, it’s important to distinguish between critical goals (needs) and luxury (wants).
Create a list of financial goals that you want to achieve. This could range from buying a car to paying for your child’s education.
Divide your list into things that you need to act on now, versus things that you have more time to lull over.
Goals that you need to act on now might include buying insurance or getting your own place. These are essentially goals that have a huge impact on how mentally and physically comfortable or secure you feel in life.
On the other hand, if you’re hoping to purchase an expensive sports car but don’t necessarily need it right now, focus on saving up and reviewing your options again when you have the means to afford it (without struggling to pay the rest of your bills or affecting your essential financial plans).
3. Save enough and cater to invest
Savings aren’t simply whatever you’re left with after spending. The trick here is to set aside a consistent amount of savings each month before you go about spending.
You must also remember to anticipate and cater for future expenses such as the money you’ll need for starting a family, having a baby, getting a new home, your parents’ healthcare and your own healthcare.
A popular and healthy ratio to follow would be the 50/30/20 rule. For example, if you earn $5,000 a month (after CPF deductions), consider planning your finances like this:
• Your needs – 50% ($2,500) can be used for essentials such as paying insurances, mortgage, food and your bills. This category does not include other non-essential lifestyle habits such as your monthly Netflix subscription and bubble tea.
• Your wants – 30% ($1,500) can be used for optional or luxury expenses. This category encompasses decisions like opting for fine dining over cooking at home, or even going on a vacation.
• Savings – 20% ($1,000) should be saved for rainy days or towards your retirement account. It is commonly advised to keep at least three to six months of living expenses in the event of unforeseen financial circumstances such as losing a job or a major illness. This amount should be relatively liquid for easier access.
Psychologically speaking, this will force you to save more (as opposed to saving whatever you’re left with after spending). By cultivating this as a habit, you’ll find yourself paving the way to better retirement finances.
However, having savings alone will not be able to help most people reach their intended financial goals, especially when the inflation rate is almost always more than the saving rate. Simply put, your savings will provide you lesser purchasing power in the future if you do nothing about it.
Hence, it’s equally important to find a good investment plan with a comfortable rate of investment to grow those savings. So, don’t put off learning and researching on how to invest in ways that are suitable for your risk appetite – once you’ve accumulated a comfortable amount of savings, at least you’ll know where and how to start.
4. Get the biggest bang for your buck
It never hurts to be thrifty.
When making any purchase decisions, take your time to look around for the best rates or offers.
It’s easy to fall for marketing and advertising ploys all around us that encourage us to spend more or spend before the “limited time offer” ends. To combat this, it’s imperative for us to make wiser purchasing decisions by always considering the next best alternative before buying a product or service.
Money can definitely be saved with better research. For instance, let’s say you’ve decided to renovate your new home costing $60,000, and are now exploring two financing options for a $30,000 loan.
Bank A offers a rate of 3% p.a. for 3 years with a processing fee of $400. Total interest for the 3 years will be $1,407.71. (Total cost of borrowing is $1,807.71)
Bank B offers a rate of 4% p.a. for 3 years with no processing fee. Total interest for the 3 years will be $1,646.25.
Assuming that the terms and conditions are the same for both options, choosing Option B can save you $161.46. This amount may not be significant to the overall renovation loan but remember that a dollar saved is a step closer to your financial goals.
Hence, be sure to source for options and do some quick math before committing to your purchases.
5. Don’t rack up debts
Do you have any outstanding credit card bills or loans? Pay it back as quickly as you can and make sure you spend within your limits.
It is extremely easy to fall into the trap of thinking that it will be less stressful to make lower monthly instalments or repayments over a longer period. You might assume that all is well if the instalments do not exceed your monthly disposable income.
However, by doing so, you might be incurring unnecessary interest costs.
For example, if you’ve decided to buy a $4,000 laptop with your credit card and your bank charges an interest rate of 25% p.a. for any outstanding credit card debt (interest charged daily), it would take you 27 months to clear the entire debt, assuming you paid $200 a month.
The total payment would amount to $5,228.33, meaning that you would have paid an extra $1,228.33 in interest.
If you currently have many outstanding credit card bills, consider paying them off as soon as you can, or you could explore combining these debts under lower rate debt consolidation loans offered by banks to prevent the incurrence of excessive interest costs.
6. It’s never too early to start investing
You’re never too young to invest and achieve financial freedom. In fact, doing so gives you an edge over anyone else who leaves it on the backburner.
Here are some scenarios that clearly explain why it is ideal to start investing early.
Starts late and invests all the way: Andy starts investing at the age of 30 with a fixed yearly sum of $7,500 with a 5% annual rate of investment. He continues to contribute to his investment portfolio until he retires at 50. In total, Andy actively invested for 20 years with a nominal sum of $150,000.
Andy’s total amount at age 50: ~$248,000
Starts early and invests all the way: Billy starts investing at the age of 20 with a fixed yearly sum of $5000 with a 5% annual rate of investment. He continues to contribute to his investment portfolio until he retires at 50. In total, Billy actively invested for 30 years with a nominal sum of $150,000.
Billy’s total amount at age 50: ~$333,000
The ideal scenario is to be like Billy, who begins investing early and only stops contributing to his investment portfolio when he retires. The amount that he has accumulated is significantly higher than Andy.
This is the beauty of compound interest—by investing 10 years earlier, the returns that Billy has earned is so much higher that Andy wouldn’t be able to catch up, even if the latter invests more every year.
The compounding effect of investment favours those that start early, so why not start now if you can?
Creating your financial “action plan”
In order to start building your actual financial plan, try consuming as many credible resources as you can, such as attending financial planning webinars from trusted sources, following established thought leaders on social media and reading up on books that will give you a clearer picture of what your available options might be.
Always remember that at different stages of your life, your financial goals will change due to personal aspirations and unforeseen circumstances. This means that what you have initially set out in your financial plan may not work for your revised goals.
Working to reach your financial goals alone is fine, but some goals may be much easier to attain with the help of financial advisors.
Even if you want to start early, it may feel overwhelming to have to account for so many expenses such as healthcare, home mortgage, family expenses, your child’s education and your own retirement—and a financial advisor understands just that.
Working with them can make your entire planning process relatively stress-free as they have the necessary financial know-how to advise you on a plan of action that suits you or on alternative courses of action when things change. They are trained to aid you at any point in time to re-evaluate your financial plan.