Successful financial management is rarely a case of how much you earn, but how you manage it. While managing your personal finances is an ongoing process, it does not mean you have to constantly worry about it. Take the necessary steps to set your finances right, once and for all.
We show you 8 common financial mistakes that you should avoid or rectify, in order to get the most out of your money. Find out if you have reasonable answers to them or what you need to do to improve them. Remember:
Being financially prepared allows you to take advantage of life opportunities when they appear.
Give priority to the list below in the order of appearance and seek professional financial advice if required.
Note: Setting aside an emergency fund of 3-6 months of your expense is considered basic financial knowledge and will not be listed below.
Mistake 1: Paying too much or too little for insurance
Don’t get us wrong, we are not saying insurance is not important. What we mean is based on your income and lifestyle, are you under-covered, over-covered or sufficiently covered for health and protection needs? While it depends on individuals expectations, there are indeed some insurance plans and policy riders that minimally you should own by now.
You don’t need to own every type of insurance plans, however, it should provide enough coverage in the event of loss of income, disability or demise (for your dependents).
Insurance coverage is just like a safety net, have just enough to cushion an incoming fall that may happen anytime. If you are just starting out, read on how to go about getting started with financial planning.
Mistake 2: Not keeping track of your outstanding debt
Not all debts are bad, a good example is mortgage loans. If the rate of returns on your savings are higher than the interest you are paying, it may not exactly be a bad thing. In financial terms, this is also known as an opportunity cost. If you are generating 4-5% annualized returns in a financial instrument, but paying 2% on a mortgage loan, the net effect is a 2-3% financial gain.
In a way, the bank is loaning you money to potentially seek a higher rate of financial returns.
Having said that, credit cards, personal loans, education loans and renovation loans should ideally be cleared as soon as possible. You are unlikely to generate a stable rate of financial returns higher than the interest incurred on the above-mentioned loans.
Mistake 3: Your savings are not generating financial returns
As the saying goes, “Health is more important than wealth“. But don’t neglect the rate of returns on your saving too. Left unchecked, inflation will erode the purchasing power of your hard-earned money.
When your health matters are well-taken care off, there should not be an event that requires the entire sum of money you have saved thus far. Diversify some of your money into insurance policies and investment products such as ETFs and Unit Trust Funds to leverage the effects of compounding returns.
It is important to ensure that you are not paying sky-high fees on your investments, which reduces the rate of returns on your investments.
Read about: ETFs and Unit Trust Funds (Which is suitable for you?)
Mistake 4: No clear vision on retirement
If you are not going to plan for your retirement funds, you may just end up forever working to make ends meet. With your CPF contribution, CPF Life will ensure you receive a monthly income upon reaching retirement age, depending on the funds in your CPF retirement account.
Are you contented with having enough for 3 daily meals upon retirement? Or is retirement a new phase of life, with endless options awaiting? If retirement is about exploring new sights and enjoying life to the fullest, it would be wise to side aside a little of your income towards it now.
Accumulating a million dollar is not that hard, we already show you. Everything is easy when you start early and take small steps towards achieving it.
As we have said before, start planning for your retirement right now.
Read about: The Complete Guide to Retirement Planning (2023 Edition) *NEW*
Mistake 5: Paying high interest on mortgage loans
If you are a HDB house owner or applying for your HDB, congrats on being a millionaire in the making. Property prices are always appreciating in Singapore, where land is scarce.
At the rate that property prices are going, most of us are going to retire as a millionaire.
With that said, you should always refinance your mortgage loans after the lock-in expires, if it results in cash saving. Mortgage loans rates are usually higher after the initial lock-in period but you are allowed to take up a new package or switch to another bank.
Just a 0.5% p.a difference in interest rate can end up being a couple thousands dollar of saving to you. Use the money for generating additional wealth or go on a leisure trip.
Whatever it is, it sure beats paying additional interest to the bank (and you feel better too).
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Mistake 6: Not reducing your income tax
And by that, we don’t mean tax evasion. Sure, being able to pay more tax and contribute towards nation building is a good thing. However, in the context of personal finance, a tax is considered a liability or expenses. Why not top up to your SRS account and get tax relief?
Here is a very brief outline about topping up to your SRS account:
- The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, over and above their CPF savings.
- Up to 15% of your declared income (cap at S$15,300), can be contributed annually to your SRS account.
- Investment returns are tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.
Not only do you pay lesser tax if you hit a lower tax bracket, your SRS account can also be used for investment in approved CPF unit trust funds. You might as well invest the funds into CPF SRS approved unit trust funds for higher financial returns. It will be years away before you will be using those funds in any way.
Read also: A guide to why you should invest in unit trust funds
See also: Unit trust fund directory
Note: From Year of Assessment (YA) 2023, the total amount of personal income tax reliefs which you can be allowed is subject to an overall relief cap of $80,000 per YA.
Mistake 7: Failing to reach your financial goals in the most efficient ways
Where is the fun in life, if all you do is save without spending? Be it scaling Mt Everest, an expensive purchase or a trip around the world, you should set a time frame towards achieving your goals. Your bank accounts are great for placing your emergency funds and withdrawing in a pinch. Not so great when it comes to building up your wealth.
By not taking any risk at all, u took the biggest loss on your purchasing power.
With some risk, short-mid term discretionary goals may be achieved by monthly or yearly investment for higher returns. If the market goes your way, u can achieve your targeted funds earlier. Otherwise, you can always sit it out while the market to recovers or do a little top and proceed with your goals.
For serious financial goals such as providing for child education, a savings plan or endowment policy with limited years of premium to maturity can provide a much-needed boost to your funds.
Mistake 8: Unable to properly track your finances over time
Your lifestyle and financial goals will change over time, but are your financial portfolio adapting over time? Ensure that major milestones in your life such as the birth of a child, getting a mortgage, retirement and other life events are planned for.
Seek relevant insurance coverage or financial budget to ensure your goals can be realised realistically and within your means. If in doubt, always seek advice from a trusted licensed financial adviser.
Speaking of which, what else can you do to improve your finances in 2023?
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