Financial Planning: Big vs Small Picture

How many of us have been approached by insurance agents, financial planners, personal bankers to do financial planning?

How may of us actually realise that financial planning is basically more of an art than a science?

I will explore what financial planning is to me and why I find that we get the priorities wrong in establishing the details without critically examing the big picture in our lives.

Traditional Financial Planning
Financial planning from what I experienced from the consumer's viewpoint, entails the financial planner helping one to establish our assets, liabilities and cashflows and then projecting it against our needs in the future. The typical financial planner will come armed with his notebook to key in critical details such as age, sex, occupation, income levels, housing type, mortage loan, car loans, investments. Now going through this part of the exercise is useful as it allows one to get a snapshot of our assets/liabilities. In accounting terms, we call this having a balance sheet or a simple statement of net worth where:

Net Worth = Assets - Liabilities

Examples include -

Assets:
Investments - stocks and shares, bonds, unit trusts, fixed deposits, savings accounts etc.
Property - valuation of property (this is contentious as I will explain further)
CPF Balances - ordinary account, medisave account, special accounts

Liabilities:
Short term credit - credit card debt, personal credit line debt etc.
Medium term credit - vehicle/car loans, renovation/bridging loan etc.
Longer term credit - outstanding HDB/private housing loan (property)/commercial building loan, etc.

Most of us tend to have a net deficit position, i.e. our Net worth is negative because our outstaning housing and other loans is more than our investments and savings. Hence, we need to work for a living for the cash flows that funds the liabilities plus our living expenses.

Now the second part that the financial planner goes through is fraught with subjectivity, estimation and guesswork. Here is where he/she asks you for when do you want to retire, do you want to provide for college tuition, how many children do you want to have etc.

Financial Planning is an Art not a Science
One of the issues I have with this part is that the future is uncertain! Whatever, we plan now is just based on what we think and there are many assumptions made. For instance, when we want to retire is both a function of our choice plus whether we have earned, saved and invested and obtained sufficient targetted returns to do so. In today's globalised ever-changing world. I am of the view that these plans are mere stabs in the dark for most of us. The number of imponderables that may hit us are limitless yet we are supposed to be able to make financial decisions based on assumptions we ourselves may not believe in to provide the information that the financial planner is able to recommend products/investments that will help us achieve our objectives.

There are some areas where the financial planner can help clarify. For example, if you have no medical insurance in terms of a shield-type of plan and your employer does not provide health coverage for in-patient (i.e. hospital care) then buying a shield plan is a no-brainer. But advising on putting money aside for college education, upgrading of house etc, are just assumptions. These change all the time and that once every other year financial planner with the tool to tell you this product or that product is good smacks of lack of real understanding of one's situation. I believe each of us who are willing and able to spend some time learning about personal finance can and should do it.

How much are you willing to live on?
The key idea is how much are you willing to live on? This one single question will determine how much you are willing to save. Ideally, establish the lowest minimum you are willing to spend on living costs and the remainder goes to savings and investments. It can be potentially that simple. Of course, this is a deliberate over-simplification as one needs to consider insurance needs etc But the key idea is that our standard of living really drives our savings level. We can try for the best paying job and career but really no level is sufficient. No one can ever say, I have earned enough as human wants (and that includes our salary!) is limitless but our needs can be moderated.

Needs vs. Wants
Is a car a need or want?
Is having 1,2,3 children a need or a want?
Is staying in 3 room, 4 room, 5 room, exec flat, condominium, in districts 9, 10, 11 etc a need or a want?
Is buyng that Louis Vutton bag a need or a want?
Is buying that newer model of handphone/MP3 player/gadget a need or a want?

We have choices. No-one forces us to make the choices we do (except for conscription and taxes). :-)

7 Step Primer for Reviewing Your Financial Plans
So where do we go from here? My simple no-frills self-financial planning process:

1. Establish Net Worth ==> Where are you now?
2. Reduce liabilities (highest interest rates to lowest) ==> Compounded interest kills you
3. Spend within your means ==> Thrift = financial freedom
4. Save, save and save ==> Grow your nest-egg
5. Read, discuss and learn about personal investments ==> Be educated!
6. Invest, invest and invest ==> Take steps to grow your net worth
7. Go back to step 1 ==> It is an interative process that you own... There are no shortcuts.

I have found that this works for me though I have also gone through financial planning sessions with various big insurance companies with those software tools and fancy reports and pie-charts. So far, my best financial decisions have been step 2 and step 5.

May you grow and prosper!

P.S. I am not running down financial planners and their tools, they do serve a need in the community but I am providing an alternative view to individuals who want to see things from a different perspective. Caveat emptor, let the buyer beware!