The Importance of Financial Planning: 4 Steps to Start Now

Some people carry their disdain for maths from when they were still in school until they age. Maybe the subject wasn't always fun, but you can use this knowledge all your life, particularly in your finances.

Sadly, even if maths is a core subject for some schools or courses, most Singaporeans were not taught financial planning and why it is important. They may start employment without a basic understanding of insurance, investing, retirement, credit, and other financial terms.

Thus, when people start thinking or worrying about their finances, it often leads to anxiety. According to the Organisation for Economic Co-operation and Development (OECD), choosing the right investment for retirement savings can be more stressful for a person than going to the dentist.

In 2019, MoneySense, Singapore's national financial education programme, remedied this through a compulsory financial education curriculum for polytechnic and Institute of Technical Education (ITE) students. This way, they can set up their financial planning goals and objectives early on.

It's also opportune that technology has advanced so much that financial services are now available to almost everyone. But before even caring about what should be in a financial plan, you must first understand what it is.

What Is a Financial Plan?

A financial plan is a comprehensive plan of your current financial situation, long-term objectives, and strategies to achieve them. Financial planning entails tracking your income, expenses, and investments to manage your money better now and in the future.

Financial literacy is a holistic approach to money, encompassing strategies like retirement plans, comprehensive risk management, long-term investment, tax reduction, and estate planning. Money, credit, and debt knowledge can help you make responsible decisions to positively impact your life and your family's and avoid negative consequences.

Financial planning has two types. Short-term financial plans solve problem areas within a year, while long-term planning projects profit and expenses over an extended period. Long-term planning combines forecasting and strategising based on variables like economic conditions, amendments in laws, and more.

Financial Planning: Why Is It Important?

When it comes to money, most people share the same financial-planning objectives: to gain more funds and savings for a better life, now and for the future.

With a financial plan, you gain insights into your income and expenses. This knowledge helps you decide how to pay off necessary bills or purchases while saving for future needs and not sacrificing the comfortable life you lead. However, these aren't the only gains from financial planning. Let these benefits further convince you to consider what should be part of your financial plan.

Learn good budgeting skills.

Tracking your spending allows you to have enough for your needs and wants and find opportunities to save. While these savings go to your short- and long-term financial goals, they should also go into expenses that may not be part of the budget but are essential.

Be ready for emergencies.

You should know by now that life is truly unpredictable. While financial literacy cannot stop emergencies from happening, you can prepare for them. Whether it's a family crisis, job loss, or a global pandemic, a financial plan can curtail unexpected expenses that may hinder your growth.

Prevent avoidable financial problems.

If you can be ready for the inevitable, then you’re even more prepared for the preventable. Learning financial concepts can help you avoid all-too-common but escapable pitfalls. A good example is making credit card loans beyond your means and hurting your credit score, which in turn affects your access to future loans.

When you have a good understanding of money and finances, you also become less vulnerable to scams or fraud,

Share the knowledge with your children or loved ones.

If you were part of the generation who didn't get the chance to learn about money when you were young, then grab the opportunity to break the cycle. Instead of solely relying on schools, impart good money values and habits to your children or loved ones to prepare them for the future.

Broad implications to the economic health.

Financial literacy, or the lack thereof, can affect both individuals and the wider population. This belief stemmed from the 2008 financial crisis and the recession that followed.

Before it, cheap credit and lax lending standards—which can only be described as predatory—were prevalent in the U.S. Many were easily swayed because of their lack of understanding of mortgage products. This fuelled a housing bubble, ending with banks holding trillions in worthless investments in subprime mortgages but costing ordinary citizens their jobs, savings, and homes.

When people have enough knowledge of financial concepts, they make smart decisions that end the prevalence of predatory lending that ruins economies.

What Are the Steps to Financial Planning?

Knowing financial planning and why it is necessary is half the battle. Your next course should be creating and implementing your plans.

Know your financial self better.

Understand where you are in your financial journey and how you're doing. You can start by finding your net worth—the amount of all your assets, including savings, property of value, and investments minus your liabilities. Then, know your total income and expenses. From here, you can start identifying how and where you can save or earn more.

Discovering your risk profile can also help. Depending on how well you can tolerate market volatility during certain timeframes and specific circumstances, you may be a low-, medium-, or high-risk investor. This can help build your investment portfolio and know the amount of debt you're comfortable taking on.

Set up your goals.

May they be short- or long-term, you'll need an overview of the future you wish for when outlining your goals. Remember to keep them SMART—specific, measurable, achievable, relevant, and time-bound.

For instance, if you plan to grow your wealth through a solid career, you need a step-by-step guide. Be smart about the jobs you take and when budgeting your earnings. As you get more experience, seek better opportunities where you can negotiate a bigger salary. Don't forget to invest in yourself by upskilling —including being more financially literate—so you can continue moving forward.

Create the plan.

Now, you're ready to start planning, which you can also do with help from a financial advisor. A financial plan must improve your overall condition through strategies and actionable steps. Here are some things to include:

• Building an emergency fund

About 3 to 6 months' worth of fixed expenses is the recommended emergency fund amount, but you can also increase it to cover variable costs like leisure activities.

• Investing

Ideally, your chosen investment should offer the best returns, but it can be tricky because of the many investment tools available and factors to consider.

• Debt and credit management

Debt can weigh down your finances and make you fall short of meeting your goals, so they must be eliminated. Pay off your most expensive debt with high interest and fees first, but how you go about debt management depends on you. Remember that good credit also hinges on debt payments.

• Retirement planning

Another way of ensuring you have enough money for the future is through retirement planning, and there are plenty of ways to go about it.

The two most common are Roth IRA, which is a traditional, tax-advantaged investment account, and employer-sponsored retirement plans through 401(k), 403(b), or similar plans. The latter emphasises the need to seek better employment opportunities beyond salaries.

• Estate planning

Even if you don't end up being ultra-rich, estate planning must be part of your financial plan so you can have peace of mind knowing that your family is protected even when you're not around. Estate planning includes Last Will and Testament, Healthcare Directives, Power of Attorney, etc.

‍Implement, monitor, review, and revise.

Being diligent and disciplined is required to follow through with your plans. To make things easier, you can start small until you're comfortable reaching for greater heights. Carrying out your strategies also entails monitoring how your funds are performing and seeing if you're meeting the goals.

Changes will happen as time goes on, whether with your family or the world in general. What may have been a suitable plan months ago may eventually become ineffective. Thus, revisit your financial plan periodically and update it to adapt to the changes.

Financial Planning: Going Beyond Numbers

Money matters, and the calculations that come with them, are anything but boring if you recognise that planning your finances protects you and your family. With the suggestions mentioned, plus being smart about the job opportunities you grab, you can be more financially literate and develop a plan to let you live your best life.

Want to learn more about how you can ensure a bright future? Our Career Resources page offers suggestions on how to find jobs that fit your plans, including growing your finances. For more tips from JobStreet, download our app on Google Play and the App Store for easier access.