It has been almost a year since the World Health Organisation (WHO) declared the coronavirus outbreak a pandemic. The pandemic disrupted the way we live, work, and play. And it also gave us new realizations about the state of our financial health.
As cliche as it sounds, life is unpredictable. Because the unforeseen can happen any time, it is better to be prepared than to run helter-skelter at the last minute. This pandemic has shown us the importance of financial security – especially when we meet with an unprecedented circumstance.
1. Budgeting: Build and maintain a solid emergency cash reserve
An emergency fund is your safety net when you lose your job or get a pay cut. Property is not a liquid asset as it cannot be sold easily and promptly for cash. It is more prudent to invest your savings across various asset classes – such as bonds, stocks, unit trusts, and capital guaranteed savings plans.
I recommend to my clients to set aside a cash buffer based on their monthly income, not just their monthly expenses. It is essential that everyone builds their own emergency cash reserve. And for that, you need to set aside at least 10 percent of your income.
This pandemic has revealed that a buffer of 6 months of expenses in emergency funds is insufficient for many folks. To ride through a prolonged recession, it is safer to raise this buffer to 6 months’ worth of income. To save more, you either spend less or earn more.
2. Hospital Bills: Check whether your health insurance is relevant and adequate
Get the best, most suitable private integrated Shield Plan for your needs. Even if your employer provides medical insurance, it is always better to have your own health insurance. This is because the medical insurance offered by your employer is usually not portable i.e. it will terminate when you leave the company.
3.Risk Management: Get suitable and sufficient life insurance coverage
Life insurance is designed to protect ourselves and our dependents should the unforeseeable happen. It provides much-needed compensation to cushion our finances. Different types of insurance fulfill different needs. Without proper insurance coverage, the financial burden could potentially drain our precious savings or retirement nest egg. Or worse, push our family into debt. If you have been procrastinating to close the gap in your insurance cover, do it now!
4.Investment Planning: Avoid equities if your cash needs are near in time
Investing in equities is a smart way to grow your wealth and plan for long-term goals like retirement. However, if your goal is only a few years away, it is advisable to move your investments to safer instruments like fixed deposits that guarantee your capital. In a bull run, equities deliver solid returns. But in uncertain times like these, when the markets have yet to recover from the devastation of COVID-19, you need to protect your investments. Otherwise, your years of disciplined effort in saving and investing may not yield the desired results.
5.Estate Planning: Prepare your will and complete your nominations (CPF, insurance)
You may be thinking “Why do I need to write my will now? I am still young and healthy!”. The truth is it is never too early to do so. There are many examples in the news whereby a properly written will could have averted family meltdowns and violence.
If you pass on without a valid will, your entire estate (i.e. every asset with your name) will be distributed according to the Intestate Succession Act. If you are not satisfied with this default distribution, then you ought to get a will drawn up according to your wishes. By writing a will, you are saving your beneficiaries much time, money, and effort from having to deal with heaps of administrative paperwork. Not only that, when there is a will, there is no guessing who gets what. It prevents fights, squabbles, and any uncertainty.
If you have not completed your CPF and insurance nominations, get it done. These are pretty straightforward and can be implemented quickly. You can locate the respective nomination forms at the CPF and insurers’ websites.
6.Debt Management: Ensure your loans do not exceed 30% of your income
To find out if you are financially solvent, here are the steps: first, total up your monthly debt repayments (these include mortgage, personal loans, renovation loans, car loans, outstanding credit card bills, student loans), and then divide the figure by your net monthly income. This is known as your ‘debt service ratio’. If it is less than 30%, you are in good financial health. If it exceeds 30%, you may fall into a vicious cycle of working “just for your creditors”. You will have little or no buffer to protect yourself, especially when your job and income are at risk.
If your financial health has not improved, ask yourself why. What are the gaps that you have the power to fill? Better still, work with your trusted Certified Financial Planner to get you to the next level.
“The only real mistake is the one from which we learn nothing”.
– Henry Ford
I hope that we can all take this COVID-19 pandemic as a wake-up call and remember to cherish the important things in life. We will have to learn to live with the virus for a while. Instead of focusing on the uncertainties, let’s prepare for them by protecting ourselves and our loved ones, financially and physically (by staying healthy and happy!).
Every recession demonstrates that it is always better to be safe than sorry. So if you haven’t been putting together that nest egg, you probably should get started.
Let’s start the New Year on the right footing and end up stronger!