Saving is a virtue. Since our early years, we came across several concepts and advices about saving from the older generations. However, along the way, we have several misconceptions. From my experience, most people lack knowledge and exposure on how to manage individual revenue and expenditure. So, let's try and focus on this area while leading a healthy and wealthy lifestyle!
The first step is to, record down your income every month. Income refers to salary, investment dividends, business income, rental income and others. For this amount of money, you can get your net income after deducting away your CPF contribution.
For example, if someone's net income is SGD 5,000, then his income allocation will be as follows, using the 4-3-2-1 budgeting rule:
Rule 4-3-2-1
40%-SGD 2,000: Personal Expenses
Personal expenses include daily expenses like foods, transport, groceries, bills and entertainment expenses. Personal expenses should ideally take up no more than 40% of your net income. If you can manage well and limit yourself to this budget, you can reward yourself with a short get-away holiday or pamper yourself. However, you must make it a point to cut down on those unnecessary expenses.
30%-SGD 1,500: Protection and Money Growth
Protection includes several areas such as accident, basic hospital, life and income protection planning. Insurance is the most commonly known solutions and it should ideally be allocated 10% of your net income. The remaining 20% should be distributed in half for money growth. Part of it goes to the mid-term investment, targeting a 3-5% interest while the other half put in the long-term investment to gain an interest of 7% and above.
20%-SGD 1,000: Loans
Long-term loans such as the car, housing and education loans should ideally take up 20% of your net income. One important things to note is that a credit card loan can only be classified under personal expenses since we use the card for spending on our daily necessities most of the time. If your budget is more than this, it may not be the right time to own these assets. If you are debt-free, you could preserve this budget for investment or planning usage.
10%-SGD 500: Planning Fund
For Singles, this budget can be used for personal planning such as wedding fund, down payment for BTO, holiday trips, or to set aside as an emergency fund. For married couples, this can be used for children's education planning, family trips or family funding.
With that, let us delve further into using the 10% budget for Income Protection portion. Sometimes we come across individuals that are over-committing themselves to more than what they can afford, and this result in financial distress rather than freedom.
Let me share with you how to achieve this by distributing this budget across A to F for references.
Accidental Cover
-Reimbursement of medical fees resulting from accidents and consultations with specialists.
-Temporary disablement caused by accident, providing you with an income.
-In the case of an unexpected death, a lump sum compensation will be given to the family.
Basic Hospital
-Private or government hospital and medical fees.
-Medical fees before and after three months from hospitalisation date.
-Nephrons' consultant fees and medical fees.
Critical Illness
-If you suffer from 30 to 37 severe critical illness stages, the pay-out will cover the loss of income during the recovery phase.
-Statistically ,70% of the pay-out is caused by cancer and heart-attack and 1/4 of the population suffer from this condition.
Disability
-Whole life disability pay-out used for medical expenses and cover living expenses.
-Secure income of temporary disability.
Early Illness
- If you suffer from early Critical Illness stages, the pay-out will cover the loss of income needed during recovery phase.
-As this condition is diagnosed earlier and with medical advancement, chances for full recovery is higher.
Family Protection
-Providing family income security for the dependants who is relying of the sole breadwinner income which includes, living expenses, liabilities and the ability to support young adolescent till the age of independence and take care of them well in the event the sole breadwinner of the family is not around.
Have you done your planning? Do click the icon below for more information!
