When Do You Start Financial Planning?

Here is how the agent who brokered the $51 million Le Nouvel Ardmore Penthouse could use her $1.6 million on.  

And how you can learn from it, even without $1.6 million
Most of us will never be fortunate enough to have this problem of having too much money to manage. Yet it is something, that I dare say, all of us have thought about at some point in our lives.
Such “day-dreaming” is not entirely bad. For example, visualisation of where you want to be in the future could help you make the right decisions today, possibly fulfilling that future. The same holds true for financial planning. If you think of where you want to be in 5, 10 or even 20 years, your decisions today can help you achieve those future goals.
Let’s think about it. If we have $1.6 million today, what will we be spending using the money for? More importantly, should we wait until we have such a sum of money before thinking of implementing the wise financial decisions that we dream of accomplishing? Or can we not start doing so today?
1. Finding ways to reduce taxesIf you earn $1.6 million in a year, IRAS will definitely be an entity that you will pay attention to. That is because the highest income earners in Singapore (i.e. those earning more than $320,000 annually) pay about 22% in tax.
While 22% is considered low compared to the US and other European countries, it is still a significant sum. About $352,000, assuming a $1.6 million income for that year like the property agent.
That is why top earners in a country frequently engaged tax consultants to help them reduce their income tax as the potential savings could be sizeable.
How we can learn:Even at our level, there are ways to reduce our chargeable income. For example, contributions to your spouse or parents’ CPF is one way you can reduce your taxes while concurrently contributing to your loved one’s retirement funds.
2. Investing for passive incomeOne of the most common things to do if an excess of $1 million were to suddenly avail itself to us will be the search to find one or two investment instruments that can help generate passive income over the long run.
Examples of passive income instruments could include investing in residential properties, corporate and government bonds, REITS and blue-chip dividend paying stocks. Average returns across these asset classes (ignoring capital gains) will be about 3-4% per annum.
How we can learn:You do not need to wait till you have $1 million or even $100,000 before thinking about investing in some of these instruments. Even with $10,000, an investment is viable. A return of 3-4% over the long run is attainable and can provide a sizeable return, especially if you continue to contribute regularly into the investments.
Clearing debt and savingAssuming you have some debt (e.g. home mortgage, car loans, installment plans) and not much savings on hand. You receive a sizeable sum of money.
Which of the following will you do?

1. Clear your debt, starting with the high interest loans and build up an emergency saving funds of about 6 months expenses?

2. Spend it on a holiday

Most people will claim they will go with option 1, and that is to clear debt and build up some savings. However, often we know of people (maybe including ourselves) who spend their end-of-year bonuses on a holiday or other fancy and expensive things instead.
How we can learn:We are not saying you shouldn’t have fun. In fact, what’s the point of having money when you can’t use it for what you like? However, there are debt obligations and other financial commitments that we ultimately are responsible for. Usually, delayed gratification at the expense of clearing debts or building up savings are prudent financial decisions to be taking.
You should start now, even without $1.6 millionWhen it comes to financial planning, you do need to wait until you have $1.6 million before thinking of how you can manage it. A common misconception that we sometimes have is that our earnings are far too little to require planning.
The question we have to ask ourselves is, do we have too little money and hence, do not need to do financial planning? Or do we not do financial planning and hence, have little money?
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