By Soh Chin Heng
Mr Soh Chin Heng, or CH as he is commonly called by friends, is the Deputy Chief Executive (Services) of the Central Provident Fund Board Singapore. He oversees the Board's customer service and schemes administration, and is the Board's engagement champion. He is a non-practising certified financial planner, and gives regular talks on CPF and financial security.
In my last article, I wrote about the most important financial question one should ask- Why do you want to be financially secure?
I hope you agree that it is important for us to be clear about our motivation.
Having settled the `why', we turn to the `how'.
A simple analogy of our financial security journey is to liken it to a road hike. For a road hike, two things are essential– a compass and a map. The compass gives directions, while the map helps navigate your way from the starting to the finishing point.
Let's start with the compass.
Just as there are two ends to a compass needle, there are two aspects to your financial security compass. If you tell me what your two aspects are, I can pretty much tell you how well you are heading in your journey towards financial security.
The first is about your net worth. Your net worth is the difference between what you own (assets) and what you owe (liabilities).
Net Worth = Assets - Liabilities
Assets are things that you own that have monetary value. Examples of assets include money in the bank, stocks and unit trusts. Question: Is property an asset?
Robert Kiyosaki defines an asset as something that puts money in your pocket and said that a property is thus not an asset. This is a very narrow definition of an asset, and I respectfully disagree. Based on that argument, Warren Buffet's Berkshire Hathaway's stock would not have qualified as an asset, as it does not pay dividends. And obviously, you can sell your property and realise its value.
Liabilities are your financial debts or obligations that have to be repaid. Liabilities include student loans, housing loans, amounts charged to credit cards, etc.
At any time, you ought to have an idea of your current net worth. And your financial security journey can be simply described as your plan to move from your current net worth to your desired net worth.
If you do not know your net worth, try using this MoneySENSE calculator:
The second part - your cash flow - is the difference between what goes into your pocket each month (income) and what goes out of it (expenses). The first and most important financial discipline to cultivate is to learn to save, and keep your cash flow positive.
Savings = Income – Expenses
Many will agree that it is important to save, but lament that it is difficult to do so. True. Between short term gratification – think of the luxury bags, posh cars, etc – and saving for long term, it is a no-brainer which option is more appealing.
However, in Singapore, we have the CPF which makes it easy for you to save. In fact, it is so easy that you don't have to do anything! You just have to work, and your employer will contribute CPF on your behalf. Almost unknowingly, all of us are saving regularly once we start work.
In addition to your CPF, strive to save at least 10-15% of your monthly income. If you have no real need for your bonuses, save them as well. One of my favourite quotes is:
"If you don't save for the future, there is no future to talk about."
Here's a simple exercise for you - draw up your budget with the help of this MoneySENSE tool:
Over the next few articles, we will discuss the financial security map and the various terrains you have to navigate through. Stay tuned!