Personal Finance is a term that covers managing your money as well as saving and investing… it is about meeting personal financial goals, whether it’s having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It all depends on your income, expenses, living requirements, and individual goals and desires—and coming up with a plan to fulfill those needs within your financial constraints. To make the most of your income and savings, it’s important to become financially literate, so you can distinguish between good and bad advice and make smart decisions. ~ Will Kenton, Investopedia
Personal Finance is a strong passion of mine. It is a life skill that impacts one’s happiness, success, and survival. But unfortunately, it is also one of those skills that are not taught in school… and many, like myself, have to figure it out themselves.
I grew up in a typical Chinese family business home of my generation. In this home, almost every conversation involved money. During meals, while on the road, while attending a birthday celebration or a wedding ceremony, I would hear my parents or my relatives talk about:
- In the car: “They’re so rich, they spent X on….”
- At a wedding event: “This wedding probably cost Y per head multiplied by the number of guests, they spent Z….”
- During a birthday party: “I heard they gave him a Super NES that cost….”
- On a buffet line: “Eat as much as you want; it’s free!”
- At home: “Uncle ___’s business is doing very well, he probably earned….”
- While visiting a relative: “Look at this drawer; it is filled with old papers and plastic, so we don’t have to spend….”
- In the mall: “That’s Super NES is so expensive, we can’t afford it….”
Okay, that last statement was reasonable. But, still, it is very depressing when you hear it all the time. As a child, I remember being so broken, thinking, “Why do we always talk about how to earn money but then only talk about saving money once you have it? What is it for then?”
But things changed during high school. One day, my mom decided to open this bank account and deposited money accumulated from Hong Bao’s that were given to me from young. I felt so empowered! I FINALLY had money to buy that Sony Playstation that everyone had. I can finaly go to that computer rental store and play Starcraft with my friends without asking someone to treat me. I enjoyed it so much that I spent all my money in a few months and went into debt (around US$ 1600 in today’s terms, inflation-adjusted). My mom cried and was HEARTBROKEN. That day, I learned two very important lessons about the impact of our personal financial decisions:
- Never, ever, be in debt. While financial leverage helps in corporations, this practice should, in my opinion, never be applied to personal finance.
- Bad financial decisions bring your family down; conversely, responsible financial decisions lift up your family. Even when it’s “your money” and not theirs. Maybe that’s why recognizing ourselves as stewards instead of owners is financially healthier.
Since then, I’ve decided to never be in debt again. And through God’s grace, my family is enjoying a debt free life. And, if we did not move to Singapore, we would also enjoy a financially free life — a goal we are working towards in this new home country.
Financial freedom, for me, means being able to decide on things, with money becoming a minor concern at best. When money is not a concern, we can do things that we love, be more present and happy with our loved ones, and focus on doing what’s right at work. A financial plan is a strategy or course of action toward achieving at least one of your financial goals. It is not a formula for financial freedom. But just like any objective, having a strategy to achieve a dream is better than not having one. It’s better to have a plan, and Hope is not a plan. As Benjamin Franklin once said, “if you fail to plan, you are planning to fail.”
My goal in this post is simply to share an outline of topics for people who want to work on a financial plan but need guidance. Well, this is also just me preparing as I meet a few friends who sought help in the next couple of weeks.
By the way, it may be proper to say that although I am a Registered Financial Planner®, I do not practice this professionally and do not earn from this whatsoever. My motivation is simply to help others succeed in life, which often means gaining freedom from the hold of money.
So again, this post is an outline (emphasis intentional) that will hopefully help you in your personal finance journey. Maybe I will write more deeply about each of these topics in the future, but for now, please use this as a guide to self-learning (internet search, books, mentors, etc.) This way, my writing capacity won’t be a blocker to get you started on your financial journey :)
So here goes…
Why do you want financial peace and financial freedom? Take the necessary time to articulate this, as it’s unique for every individual.
Your why is a combination of many factors, such as your dreams and desires, your current financial needs, your beliefs, your family background, your worldview, etc.
Here’s an activity that may help you articulate your why. Get a pen and paper and…
- Write the top reasons that you can think of right now. Feel free to include your personal values (i.e. family, church missions)
- Draw lines/shapes to link your reasons. Write comments and add additional thoughts as needed.
- Take a step back, review your notes, and articulate your current why statement.
- “I/we need to take personal finance seriously because….”
- “I/we desire financial peace because….”
Now that you have an idea of your personal why it is a good time to translate those why’s (as it can be more than one) into your personal boundaries. What are some of the things that you will not do even if it gives you more money? Here are some examples:
- Jobs that take you away from your family
- Jobs that may reduce your lifespan
- Businesses that go against your values
- Anything that goes against your faith
*Here is an example of our financial boundaries.
Let’s dive one level deeper and identify your financial goals to prepare for Goal-based Investing.
A good financial goal should have a target age and an amount. Some examples of financial goals are:
- Be debt free by 30.
- Buy our own place by 40.
- Have enough for children’s college education by 45.
- Retire by 50 years old, where we can live according to our current lifestyle (inflation adjusted), or
- Retire by 60, but work part time from 50-60 years old.
Do share these goals with your spouse if you are married. If pursuing these goals means a reduction in lifestyle, it will help if your family knows why.
*Here is an example of our financial goals last 2019.
- Record your daily income and expenses in detail. Do this for at least 1 month, but the more, the better.
- Create a personal cash flow statement based on your monthly income and expenses.
- Create a personal balance sheet.
“personal” can be interchanged with “household” depending on your context.
*Here are some ideas on how you can get started in tracking your expenses.
- Living Standard Economics
- What is the Inflation Rate of your country of residence?
- Research the $ relevant to your financial goals (tuition fees, property prices, retirement expenses, medical fees)
- Computing R
- What is the likely YoY % cashflow increase that you will get if you do nothing (i.e. typical % salary increase you get every year, etc.)
- What is the YoY % cashflow increase you need to sustain your current lifestyle (and projected growth)
- What is the YoY % cashflow increase you need to reach your financial goals?
With this, you should have an idea of the gap. Then, take a moment to reflect on your willingness and drive to do what it takes to achieve those goals without compromising on your boundaries. Adjust your goals as needed.
If there are no gaps, then skip to What Ifs.
Bridging the gap is about increasing your cash flow. And there are three ways in general on how you could do this:
- Spending less by living below your means
- As some people say, “It is not about how much you earn but how much you save.” But more practically speaking, you should only be spending at most 80% of your annual income.
- Increase Passive Income
- You don’t need to be a professional investor. Nothing wrong with being an Amateur.
- Find investments that are at least at the rate of inflation.
- Increase Active Income
- Growing Current Sources of Income (Career or Business)
- Additional Sources of Income
- Usually involves Career Planning and/or Business Planning
In the past, I used to think that generating enough passive income to support our current lifestyle was enough. But I have learned that our lifestyle also increases over time, not to mention new expenses that we’ve not considered before (such as medical expenses). Therefore it’s always good to generate more active income to invest and convert into passive income.
But remember the Lord your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your ancestors, as it is today. ~ Deuteronomy 8:18 NIV
After a recent experience, I learned that a single medical incident can break whatever savings and investments you have accumulated. This is a critical risk that must be mitigated. Hoping that we won’t get sick or that nothing will happen is unwise.
- What are the risk scenarios that you need to consider?
- Major Illness
- Job loss
- and who? (What if it happens to you? What if it happens to your spouse? What if it happens to your child?)
- What will the impact be? And which ones have the most financial implications?
- How can you mitigate the risk?
- Types of Insurance
- Computing how much insurance is needed
- Other means of risk mitigation
- Last Will and Testament (Legacy Planning)
Achieving your financial goals will likely take years. And as years go by, things happen that will cause you to change those goals. But take heart! It is a road worth travelling. So here are some final thoughts to help you keep on track:
- During the grit of financial pursuit and disciplines, remember your why.
- Update your financial statements and adjust your financial plan every year. I like to do this sometime mid-end January.
And finally, lift up your plans to God and do not be addicted to money. The point of financial planning is so that you DO NOT need to worry about money and gain the freedom to focus on the things you enjoy, such as pursuing a dream or spending time with your family, without overthinking the cost. If you struggle mentally and spiritually with money, try giving. It is an effective personal hack to break the hold of money in your life.
Commit to the Lord whatever you do, and he will establish your plans. ~ Proverbs 16:3 NIV
Many are the plans in a person’s heart, but it is the LORD’s purpose that prevails. ~ Proverbs 19:21