I just needed an update: My internship was terminated due to the Corona Pandemic and my side hustle got halted also because of the pandemic. I have definitely lost >80% of my normal monthly income. Sad to say, most of my family members are also experiencing the same problem.
I hope that the same situation would not happen to you. Trying to find another internship and finding more side hustles are mentally draining processes especially in this climate. So now I have a lot of time to write and plan the contents for this blog and learn python to upgrade myself.
I feel that this is a good time to convey to you my financial framework and it is because of this framework (and the resilience package) that I can sustain my lifestyle in this climate despite my loss in income. I believe in the tier-model of personal financial planning, in that each tier would take care of my goal in terms of time horizon. Allow me to introduce it to you and I will only move on to the next tier after I prepare one tier:
I will be speaking in very general terms, you should tailor it in accordance to your situation.
1. Emergency Funds (6-12 months of your monthly expenses):
Instruments - High yield saving account (You need it to be as liquid as possible)
This is the first and most important step in my personal finance planning. I have about 8 months' worth of expenses saved in my bank account and it's because of this that I can maintain my current lifestyle.
The emergency fund is meant to allow you to maintain your current lifestyle in the event that you experience a loss of income. This can be due to a loss of a job, quitting for a new horizon, etc. The emergency funds also serve as your holding power, such that if you lose your job, you would not have to dig into your investment (which might be at a loss at that moment).
If you have a business. you would want to prepare a cash reserve of around 12-18 months such that you can maintain your business in the event of something like the Covid-19 situation. During this period where other businesses are dying, you would be positioning yours for accelerated growth.
2. Insurance (Term life: How many years it takes for your dependents to be independent, Accident and Critical illness: more than 5 years of your living expenses and Hospitalisation: To your own preference):
Instruments - Insurance
For more, please refer to my finance 101: What is an insurance? The main point about insurance is such that you are able to hedge against the long-term loss of income due to accident, critical illness, death.
Emergency funds would take care of your short term issues like loss of jobs. Insurance would protect you from unwanted events that might devastate your whole life (long term impact).
You might be tempted to buy a whole life plan, adding in critical illness and accident protection. But I would urge you to compare the differences in price. You could invest this difference and after a long period of time, you would make back the amount. Furthermore, the cash value of a whole life plan is not guaranteed as the company would decide how much interest/bonus you would receive.
3. Short-term investment (1-5 years goals like the downpayment of a house, car, etc):
Instruments - Bonds, Bond Funds, CPF, Short-term Endowment
These are goals that you would need to fork out money for in quite a short period of time. This period of time would mean that you would not want to invest too aggressively in stocks, but rather, you should aim such that your stash of money would hedge against inflation and not to make much returns.
4. Long-term investment (For goals like retirement, education, you have a long time horizon. around 20 - 30 years):
Instruments - ETFs, Stocks, Mutual Funds
Due to the inherent volatility of stocks, I would only recommend that you look to them if you have super long-term goals that you would want to achieve. I say this as in the long run, the stock market has a historical return of around 8%. This would also be the last tier of your financial planning. If you have completed tier 1-3, your excess income should come here, such that your money can work for you.
A very simple way to visualise would be using the rule of 72: It would roughly take 9 years of compounding for your money to double. Imagine having 30 years to invest. your money would grow to almost 8 times of its original amount.
As everyone's financial situations and goals are different, feel free to tailor this framework. If you have any questions, do feel free to approach me. I do not mind helping you clear some of your doubts.
With that,
Stay vested, stay frugal my friends,
Dionysius
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