On the surface, it may seem counter-intuitive that someone with a safety net in life will make better financial decisions than someone whose survival depends on making good financial decisions. This cannot be further away from the truth.
Rather than promote laziness or complacency, having a financial safety net allows people to make sound financial decisions that will pay off in the long term. This is because he or she can make financial decisions under low-stress conditions and with less emotions tied to their decisions. This paves the way for more rationale and astute investment, savings and insurance decision as well as life choices.
On the other hand, someone whose survival depends on his or her financial and lifestyle decisions may make sub-optimal decisions. This is because they live under high-stress conditions, and any negative outcome will impact his or her live much more overwhelmingly. In addition, this person will also likely have many other worries in her or her head, making the person extremely distracted and prone to second-guessing their decisions. This will only end up in the person making irrational decisions.
This boils down to one basic concept – if you’re reliant on your current financial decisions to sustain your day-to-day life, you will not likely be able to make optimal decisions given the stress you’re under and your financial needs in the short-term.
Knowing this, here are five things you can start doing today to build your financial safety net.
#1 Building Your Emergency Funds
The first thing you should consider doing is building your emergency funds to provide a buffer against any short-term loss of income. This will relieve any stress that you have over losing your income because of a retrenchment, short-term illness or even having one parent temporarily leave their job to take care of the children at home.
A common rule of thumb is for households to cater between three months and 12 months of living expenses. The exact figure should depend on how risky your job is, i.e. are you working for the government (safe), employed in an SME (moderate) or running your own start-up (risky). Of course, it should also depend on other factors including how likely you foresee yourself, or your partner, quitting your job in the near future or how the economy may impact your salary and/or bonuses in the coming months.
#2 Creating Adequate Insurance Coverage
Having adequate insurance coverage is vital, whether or not we want to make good financial decisions for our future. At the base level, the government has already mandated universal coverage through MediShield Life. Many also choose to upgrade this with an Integrated Shield Plan (IP), for private hospitalisation coverage.
You could also consider other forms of health insurance such as critical illness plans or disability income plans to protect yourself against health issues. The other type of insurance you may want to consider is life and term insurance, that protects your family and/or dependents in case something happens to you.
Our family and our health are the two most important things that paralyses us to make financial decisions, especially when we’re putting it at risk. These insurance policies provide a safety net that will enable you to pay for your medical bills and tide you through a tough period, as well as provide your family with sufficient payout in case you’re no longer around to look after them.
#3 Topping-Up Your CPF Accounts
Topping up your CPF Special Account (SA) is one way you can build your retirement nest egg over time. Providing a minimum return of 4.0% per annum, any money that you top up into your SA will be able to compound over the long-term to give you better CPF LIFE payouts when you turn 65.
This money is also locked away until you’re 65. This is both good and bad as it prevents you from spending your retirement savings, but, of course, limits your options with regards to investments.
Topping up your SA gives you a safety net knowing that your retirement will be taken care off even if you run out of money at 65. If you’ve paid off your house mortgage, the base CPF LIFE payout, between $700 and $750, will not afford you a life in luxury but should be able to let you lead a modest lifestyle.
#4 Minimising Your Financial Liabilities And Commitments
Another safety net that often gets overlooked is that by simply limiting your financial liabilities and commitments, i.e. the money you are obligated to pay out each month, you are building a financial safety net for yourself. Of course, this is simply because you won’t be pressured to make hefty payments each month.
Some ways to consider this is to financially commit to purchases that are well under your affordability. This includes buying a house that’s under what you can stretch yourself to buy, taking the public transport even though you can actually afford a car, minimising your mobile, home broadband and television subscription.
You could also opt to save up before purchasing products on interest-free instalments or even forego gym or magazine subscriptions and just work out at the park and get your daily reading from another source online.
By cutting out the fat in your lifestyle, you’ll be saving more money today and having less stress making these payments. There at least two ways you benefit already, and throw in the fact that you can use the money you save in your investment or to go towards your CPF top-ups, and there’s easily numerous other wins for you.
#5 Upgrading Your Job Knowledge And Expertise
The final safety net you can build for yourself is becoming great at what you do. The reason is because no matter what a financial crisis does to your investment portfolio or company that you’re working at, no one can take away the fact that you will always be an employee that’s in demand. This way, you’ll always be assured a livelihood for you and your family no matter how hard you fall.
Even if you suffer a short-term medical condition, you’ll be able to get back to work when you recover. Of course, it might take a while for you to recover and that means you may be behind industry standards, but people can differentiate quality employees and those who will work to stand out. And you bet that your contacts while you were working would be more than willing to stick their necks out to put in a good word for you.
This is another reason you should heed the government’s calls to improve your expertise and productivity as well as learn new skills that will value-add to your employers. Quality employees will have quality jobs.
Making Better Financial Decisions For Tomorrow
Once you’ve built your layers of financial safety nets, including income, health, providing for your family, retirement, skills and so on, you can sleep much easier. This situation, and better-quality sleep, will give you the confidence to take on calculated risks with your investments that will deliver the best results for your long term.
Other than being worry-free, or worrying less, it’s because you can take a step back and look at the bigger picture without tensing about what you’ll do if things turn south in the short-term.