Create your own financial plan by following these 3 core processes
What comes to your mind when you hear the words “financial planning”? Investing? Insurance? Saving tons of money now so that you don’t have to worry about your retirement in the future? If these ideas sound out of your reach, you are not alone. Having a tangible financial plan can be achievable if you follow these 3 core processes discussed in Episode 90 of The Financial Coconut.
Host Reggie first debunks the misconception that a financial plan is a repertoire of financial products. On the contrary, it is a strategy to guide you towards your financial goals. With that in mind, he introduces the 3 core processes to help you in your financial planning: setting up your goals and stretch goals, deciding on your strategy by looking at your resources with reference to time and managing risks.
Still overwhelmed? Fret not, as Reggie breaks down each process into simple steps which are easy to understand and follow. He goes into detail on the difference between goals and stretch goals, how you can evaluate the cost of your goals and what are some ways to manage risk factors (more on risk in Episode 85 too!) so as to ensure the success of your financial plan.
Episode 90 is a great resource for anyone who wants to gain a better understanding on how to create their personal financial plan. To quote what Reggie shared in this episode: “if life is your biggest project, you should have a financial plan to achieve different goals in your life.”
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Do you need a financial plan to thrive? My base case is yes, you need a financial plan. But that does not mean you definitely need a planner, okay? It’s a little bit different, but the general idea is you want to have something that is very tangible. You want to have a game plan where you know what to do, how much to get, especially when… you know things are extremely dynamic in modern day. There’s so many things you want to do, so many new experiences and every time we experience something, you want to change your goals… so all those kinds of stuff.
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And it’s actually not that foreign to plan for things. We do a lot of planning in other aspects of life. Like career planning, when we are in the university or when we join a big corporation and we plan our kids’ education pathway. We plan a lot of different things, but then why don’t we have a financial plan?
Of course the plan is not definitely something that you will follow through all the way, but it is a good basis to start with. I proclaim life as your biggest project. So if life is your biggest project, you should have a financial plan to achieve different goals in your life. And what does it constitute, a good financial plan? That is what we’re going to talk about today, because after interviewing so many people, I have some thoughts that actually it only revolves around three big processes. And if you get these three right, it’s going to increase your success rate. So welcome back, Coconuts.
Good morning everyone! I welcome you to another day with The Financial Coconut. In our podcast, we’re debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well. So today, we’re going to spend some time to talk about the three core processes of financial planning, period. Okay, I’ve interviewed so many people. Everybody’s talking about all these different things, but generally they fall into this three main cluster. So these three processes will help you get a general good idea as to what do you need to do.
So I think many people have shared sufficient stories about financial planning. Okay, so financial planning is not financial advisors and not wealth advisors and all those kinds of stuff. Your financial planning… essentially just having a plan, having a strategy to go about achieving your goal. But for a lot of people, they do engage financial planners and they do engage wealth advisory to help them in this process.
That being said, I will not go deeper into all the horror stories out there. I think there are already a lot of talk out there about financial planners in general. But that’s not to say that all of them are evil. In fact, I personally believe that many of them are great individuals. Whether or not are they great planners and whether can they serve my needs, that’s a different question. But I don’t think they are like evil vampire trying to eat you, okay?
That’s not the case, but I do have some qualms about the general financial planning space that I want to put out and one of it is that there’s a very heavy sales-driven incentive system. So what does that mean? Because most of the financial planners here today, they are paid on a commission from the amount of products that you purchase. So while not everybody wants to sell you more than what you need, the moral dilemma is actively at play because the more you buy, the more they actually make. For me, I find it problematic because like I have pointed out, financial plan is a strategy, not a repertoire of financial products. I will go deeper on this discussion as we go along. Most importantly is to know that I am generally uncomfortable with the current incentive system.
The other thing to note is that most of these financial planners out there are sales-trained. So when you talk to them about their product, they’re amazing. They know everything about their product inside out. They take licenses, they take exams. So there’s no lack of knowledge about their product, but generally what I observed is there’s a general lack of knowledge around financial markets, economic factors, and in general, very weak about what is going on in the broader financial world.
My basis, I believe is they rely heavily on the agency’s research and also because day in, day out, they’re just doing a lot of sales activity. It is very hard to be learning and learning about all these geeky financial stuff. But I do think that if you want to be a great financial planner, which I know a lot of you are listening into, then you have to be able to understand deep financial knowledge, understand concepts, be aware of global trends and be able to then present all these ideas to your clients, to give them accurate advice and create a better plan for them.
Okay, I do realize that sounded like everybody listening is a financial planner, which is not the truth. But there are a lot of financial planners listening in to the podcast which is a testimony to the podcast, which is great. But for everyone, I think today, what I’m trying to go through with you is understand what are the major processes in developing a plan and recognize that actually you can also do it yourself if you want to do it. But my base case, like many other things that I talk about, it’s not about DIY, but really about knowing enough to pick someone that can do for you as a profession, okay?
So whatever way you’re going to do, I think there are three main processes after interviewing all these people and I’m just going to get down to it. The very first process of financial planning is setting goals and stretch goals. Of course, we can talk a little bit more about what are the differences between goals and stretch goals as we go along. But the general idea is you must have a target, right? Because all the kind of plan, whether you are planning a project you are planning a career, you’re planning education… whatever plan you want to plan, you need to have a goal, right?
This is something that I think is really under discussed in the financial world. Everybody is talking about how to invest, how to save more money, how to reduce your debt, how to get cheap deal here and all these kinds of stuff. But the main thing that you’re trying to achieve are your goals.
The very first step is not to find a financial planner or go and read all these blogs, like what many people are doing essentially. But the idea is to sit down and ask yourself: what do you actually want? Why I think it is extremely important? Because whether or not you’re going to be DIY-ing your plan through reading all these different content, listening to podcasts or whether or not you’re going to find financial planners to help you do a professionally done one, whatever it is, if you do not know what you want, you become extremely susceptible to suggestions.
Okay, let me paint you a little bit of picture. It’s like going to a cake shop. I’m sure everybody loves to go cake shop, or you like to go cafe. I like lah. If you follow our socials, you will see me going to a lot of cafes. But the idea is when you go to a cake shop and you know that you want cake but you don’t know what you want exactly. You just know that you want cake, thats why you are at the cake shop. So you ask the seller “hey, what’s your best seller?” And the person will tell you “hey, our best seller is the strawberry shortcake”.
But actually deep down, at the corner of your eyes, you are eyeing on the Mont Blanc. The chestnut… amazing, beautiful cake that you don’t get everywhere and it’s a little bit exotic. Deep down, you want the person to say that is the best seller, but actually the price tag over there already put that the bestseller is the strawberry shortcake. Then you stuck. Because this is why you want but that is what they tell you is the best. Then you are trying to take that advice, but then after that you come here and say “eh actually, what do I want?”
Very messy, right? That’s the idea. Because if you don’t know what you want, you end up becoming in this state of choice paralysis. So not knowing what you want can generally be way worse than knowing that this thing that you want is very hard to achieve. Because if you know that this thing that you want to go about getting is very hard to achieve, then okay, maybe you can change your goals or try to use a better strategy and whatnot to try to achieve that thing. But if you don’t know what you want, then what are you aiming for? You don’t need to bother about planning anything if you don’t even know what is the kind of life that you’re pursuing.
Which is why I always say that if you have not sorted out how you want to live your life, you don’t need to subscribe to long-term financial products. You don’t need to do very comprehensive financial plan until you sit down and ask yourself what do you want? So in your early days of your life, better ask yourself when you want, try to experience different things and try to see and envision what is the life that you can enjoy and love.
And even if you are now in your mid career and you are asking yourself “why am I doing all these everyday? Actually, I don’t like it.” But at least now you know you don’t want those things. So sit down, review. What are your goals? That is very important. So I’m sure somewhere, somehow somewhat, there are some sort of goal setting things that you have heard somewhere and I will not go into all those stuff. But I did sit down and ask myself “hey, what is the process that I go through while determining if this is something I want to add to my life, or if this is a goal that I’m trying to pursue in my life?”
The first step is imagination from observation. There are many things out there that people are doing. People are trying to buy a house, get a car, set up a family, go for a vacation, set up a social cause, participate in this, do that… whatever, a lot of things that people are doing. And you may not be the first person, but you’re observing. So while you’re observing and you are experiencing that on the sides, these are all the imagination process. “Oh, you put that… oh, maybe if I get that house, it will… may not make my life better. Maybe if I do that, it will make my life better” but it’s okay.
Just imagine and write down all these imagination. It can range from wedding, honeymoon, kids, careers, retirement, whatever. All these things people are already doing. If people are not doing all these things, then you are considered a visionary. Then this podcast, not for you [laughter] but if [laughter] but yes, so generally you can observe or… imagination. And then next thing, after you look at all these things, potentially it’s your thing. You write them down in a list.
Next thing you do is to test your imagination on a smaller scale. What does that mean? Like retirement. Many people have this imaginary idea that this is how I want to retire. I want to do this, this, this. Every day, I want to go out here, travel there. I want to make 10,000 blah, blah, blah… amazing. Amazing thing is people have not lived on $10,000 a month paycheck and they believe that in their retirement, they need $10,000 to actually live a comfortable life. I don’t know where this magical number came from, but there must be some sort of ‘magic’ there.
But how I see it is there are all these small little things that you want to do that you think “oh, when I retire, I will do all these things.” Or when I’m on a long break, I will do all these things. Why not you bring all these things ahead so you can size them down? Instead of every day, maybe you do on the weekends. Instead of waiting 30 years, you can actually take two months break and try to live that life and test it to see if this is… if I want to live this life.
After you test it, you get some sort of basis to work with. Then it becomes a little bit clearer as to whether you want. So it’s a lot about testing and tinkering on a smaller scale. Personally, for me, my best example is owning a house. So I used to think that hey, I want a house with a… very big house, or at least a house with a pool downstairs, convenient for me. I can swim wherever I want. I can go and gym, and then I can come back up like very shiok (satisfied) very comfortable. But actually I’ve not lived a life like that ever. So it’s just a imagination. But when I was staying in KL, that was the exact life I have. Downstairs was a shopping centre a Starbucks, Uniqlo… everything. On level eight is a swimming pool. I have a gym, I live on level 26.
That was the life that I wanted or I thought I wanted. I managed to achieve it not here in Singapore, but I managed to achieve it elsewhere. I’m saying that you can also try achieving it elsewhere first. But back to the story, after I left there, I realized that actually I don’t really need the swimming pool to be downstairs. I’m perfectly happy to go to a swimming club in the central part of town. I don’t really need a gym downstairs because the gym is not big enough and I don’t really want a gym every day. I want to try different things, so maybe classes are better for me. And what I really wanted was low density. I liked the place because there are not a lot of people. It’s a little bit out of town and yeah, I need my space when I lived there. I was alone. So I have a lot of my stuff, I can do my own thing. Nobody’s disturbing me and I don’t actually need the pool.
If you think about it in this testing process that I had, trying to live out the imagination that I thought I would love, that I thought I work very hard, get a condo with a swimming pool. I will live the amazing life. Turns out, I don’t really need it. So now my goal for housing becomes a little bit different. I want to go for places with lower density, big enough space for me to do stupid things in my own house, and near a town area which has quirky little cafes and general nice vibes.
So in that sense, yeah. If we translate into Singapore, I will not be staying somewhere in town. I will probably be staying in Katong area or somewhere in the suburban parts or… I don’t know. I don’t know where [laughter] Yeah. Give me some ideas, okay? If you have some ideas where should I stay, let me know.
But that’s the idea. When you tinker and you test on a smaller scale, you get a lot more clarity and then you can ask yourself: is this the life I want? If that is the life you want, that is your goal, and then you go and fight for it. That is where my housing goals have changed. So after that, you sitting down and you paint the goals. So you test already, you ask yourself “okay, this is what I want. I’m going to paint the goals now.” When I paint the goals, I essentially cost everything up. “How much does it cost to do this? Can I do it here? If I cannot do it here, can I do it in Chiang Mai, can I do in Bali? Can I do it anywhere?”
Actually, the beauty is you can really live anywhere and that is the future of the world. You should open up your minds and don’t just think of staying on this little island. So after that, you realize that okay, these are your priority goals, these are what you definitely want to achieve, but then you can have stretch goals. So for me, like I said, for housing, I want something that is like a low density, not a lot of people around, very nice, cosy, quirky environment, but I don’t mind having a swimming pool. So if I have the financial ability to do it, I will go for that thing with a swimming pool.
So you get the idea of goals and stretch goals. Goals are the things you are fighting for. Stretch goals are if you hit your goals… hey, let’s go for the stretch goals and you don’t actually need it per se, like a Kickstarter project. You don’t need stretch goals per se. You fundamentally need goals, but if you already have some thoughts about what are your stretch goals, go for it.
So I believe this process of imagination, testing and then painting the goals, costing them up gives you a much clearer idea to know what you want and forms the basis of your planning. Because once you have clear goals, it’s a lot about refining and evolving those goals as you pick up new experiences in your life. Maybe at first, you thought you want two kids. But after the first kid, you tell yourself enough…. something like that [laughter] or you thought… in your imagination, you want three houses, one for yourself, one for your family and one for your retirement. But after you bought the first house, you had enough. You think like “wah buay tahan (cannot stand it) already”. Okay, then you adjust your goals.
But the idea is the goals generally don’t change a lot. It’s a lot about evolving. After you test it, after you go through a little bit of testing, you cement it. Your goals will evolve over time as you pick up new experiences, but they don’t change drastically, okay? So set those goals. That is the number one step of the process, extremely important.
Number two step of the process of financial planning is evaluating your resources and cost of goals with time. Sounds a bit complicated… essentially setting up a strategy and we will talk about this after a word from our sponsor.
This is the big bulky part of financial planning, financial discussion, financial media. All the strategies, whether index investing, 50-50, foreign-local, buy bonds to balance out your portfolio, reduce volatility, go for growth stock, buy endowment plan, do this, do side hustle… whatever, all the kind of discussion that we have and everyone else is having really is trying to answer this middle part of what is your resource? What is the cost of your goals and how to achieve it? The strategy is an endless discussion, so I will not go into everything because the amazing word that people always use, amazing phrase that people always use: this is, case by case.
We have explored a lot of these different ways to go about doing this, but I’m going to share with you some best practices. The first thing is definitely to cost up your goals. These days, I think it’s a lot easier to cost these things because of a lot of comparison websites, their prices tagged everywhere. It’s not like in the past where information is a little bit more secret. You don’t know how much your neighbours sell their property and all this kind of stuff. These days, it’s very easy. A lot of comparison websites, you can look for all the professionals or mortgage brokers or financial planners. They can help you along with a lot of these kind of information. You don’t need to feel guilty, right? Because they are there to help. You don’t need to buy something if you don’t need to. Don’t paiseh paiseh (feel embarrassed) and end up go and buy. But definitely cost up your goals so that you get a clearer idea how much you actually need.
Next thing you should do is to determine if you can already achieve these goals. If something is easy to achieve at this moment in time, that means you have sufficient resources to achieve it, then you don’t really need an extensive plan. You don’t need a complex plan to achieve it. You can do it now, or you can buy now, you can… it’s up to you. You have the resources to do it, it’s not a problem anymore. You don’t really need a plan. Just go and do your goals, okay? Do your life.
In general, I think for a lot of people it may be a little bit of a stretch. You have a few goals that you want to achieve and you don’t want to overcommit to one goal and compromise your chances of achieving the others. I get it. This is a little bit of a mathematical portion already, but I honestly think you don’t want to have too many goals on hand at the same time. Maybe three is a good gauge. So the usual trio is like retirement, housing and one other [laughter] In modern day Singapore, retirement, housing and one other are three financial goals. The one other can be marriage. After marriage, become kids. After kids, become second kid. So generally, that’s the idea. You don’t naturally need to follow this process, but the idea is ask yourself if you have already enough to achieve the goals and if not, you need a plan.
The next part will be to evaluate your resources with reference to time. So you cost up your goals and you realize that you don’t have enough. Then you ask yourself: what resources do I have? Generally, all the resources that you have falls into two camps. Camp number one is labour, camp number two is capital. So labour essentially is your income from working a job or multiple jobs, and you can easily make projections of your total income from labour. If you have a stable career, factoring stable increment, it’s not that difficult. A little bit of math.
But for the people in the gig economy that are doing things that are a little bit ad hoc and on the side, then it’s a bit hard to project. But in general, you can still project yearly. That means if every month you make $5,000, your yearly projection will be $60,000 and based on that, you can already have some sort of mathematical calculation to ask yourself: “how long do I need to buy that house? How long do I need to prep for retirement? How long do I need to get married?” and all those kinds of things. It’s not that difficult. I’m sure a lot of you already do this.
The other part is the capital part. This is the part that a lot of people talk about and we’ve also talked about. I’m not going to talk any more about it here, but capital essentially… how do you use that money to make more money? All the different strategies… So these two things are the two camps of your resources, labour and capital, and you can factor time into this thing to have a better idea as to when you can achieve those goals okay. These three form the basis of setting up a strategy. But of course, if you want to level up things a little bit, which is to make it a little bit more realistic, you want to attach inflation percentage to the cost of your goals because the goals today may be $500,000 but in 10 years time, maybe that same house would be $600,000 already. So you want to cost it up and see what is the inflation value there, and also attach a reasonable time for projections to achieve your goals based on the resources that you have. Because although you cannot do it now, you can do it in the future.
If things don’t look achievable at all, it’s either your math very jialat (bad), which is not impossible or you might want to entertain three things. These three things are: change your goals, figure a better labour strategy (that means you either change sector, try to get promoted, do some side income whatever) or generate better capital gains. This are very much the three things that people can do. Change your goals, figure a better labour strategy or generate better capital gains. That’s about it. All the other things that people talk about are just nitty gritty and the big black hole of strategy.
So the best way forward for everybody is to do some sort of Excel modeling. I will see if we have the capacity to create a calculator for you, but the idea is you try to do these projections and get a clearer idea to achieve or determine whether you can achieve the goal. So this is the big black part: setting up a strategy. You probably should have heard of all of these different strategies and check out all the other podcasts for all the different ways people are doing to try to maximize their life and find a life they love and all those kinds of stuff. Okay. That’s the part and… pretty much sums up point number two, which brings me to point number three.
After you set your goals, after you determine your strategy, number three is managing your risk factors. To be more exact, manage your downside risks. We’ve talked about this in the earlier episodes. Check out the earlier episodes about risk management. But a quick recap. There are three ways to manage downside risk factors. Number one is risk avoidance. Number two is risk transfer. Number three is risk reduction.
By now you should realize that all personal finance strategies are linked to two big camps: labour income and capital gains. That is the broader system in the capitalistic world. After you set your goals, after you set out your strategies, you evaluate your resources and all this kind of stuff, you link back to these two things of labour income and capital gains, whether these two things can lead to you, achieving your goals. And based on that, you then manage the risk factors of labour income and capital gains.
So we’re going to start with labour income. This is where your critical illness, disability, death insurance, they all come in here. All of these insurance policies are aimed at doing one thing: protecting your labour income. Because under normal circumstances, over the next five years, 10 years, maybe 15 years, these days, things change a lot. But at least over the next 10 years, whatever money you’re making can be easily projected if you are in a fixed career. So that is your labour income.
But if something happened to you, in the course of your work and you lose your income-making ability, this insurance will cover you and that’s why they are managing that risk factor. You are transferring the risk of loss of labour income to the financial companies, to these insurance companies. That’s all they’re supposed to do. They’re not supposed to make you rich. So to make it clear, when you buy these insurances, they are here to manage the risk in the event that you lose your labour income, and that will then impede your strategy to achieve the goals that you want. See the link? Now linked swee swee (perfectly).
So never, ever go into a financial planning session and talk about products and products and products. Products is the last thing you want to talk. Insurance products are risk management tools and that’s the last thing you want to talk about. Talk about your goals, talk about your strategies, then we talk about this.
The next thing is capital gains. We’ve talked about this a lot. 50-50, 60-40, foreign ownership… whatever. A lot of things to talk about here. The main thing that people talk about when it comes to risk management or capital gains is diversification. That’s the main thing, right? You diversify then you don’t have concentration risk, you perform aligned with the market and yada yada yada. That one I will not talk about it. We’ve talked about it a lot. These are supposedly the best investing practices. So think about it, see if it works for you.
The last scenario where a lot of people would want to manage risk will be in the event of major capital outflow. In Singapore, per se, that will be like long-term hospitalization, fire or total asset loss, and that’s about it. And why I say Singapore per se? Because Singapore don’t have universal healthcare. So you have to pay for your own hospital fees and all those kinds of stuff. If you’re in the UK, there’s universal healthcare, you don’t even need to care about hospitalization. So different countries are a little bit different and okay…. maybe not a little bit. Very different, so you want to look at your current situation. But the idea is to mitigate all these situations where there’s major capital outflow that will impede your strategy, that will impede your goals.
That pretty much sums up the core processes of financial planning. It’s not just about buying a financial product. It’s not just about maximizing your investments. It’s not even about just eating rice and beans and FIRE (Financial Independence Retire Early) and all those kinds of things. All those things are just part and parcel of a financial plan.
I’m going to sum up today the three core processes of financial planning, period. Number one is setting up your goals and stretch goals. You must know what you are fighting for. If you don’t aim, you hit anything and you hit everything… all sorts of random stuff.
Number two is then decide what is a strategy for you. In this process, generally, you want to look at your resources with reference to time. The two major resources are labour and capital because you’re in a financial world, capitalistic society.
Number three is then manage your risks. So if you can set your goals, you can have a clear plan what to do, and then you can manage your risk. Generally, you’re off to a good start and that is the core idea of financial planning. I hope you learnt something useful today. See ya.
Hey, I hope you learnt something useful today and truly appreciate that you took time off to better your life with The Financial Coconut. Knowledge, it’s that much more powerful and interesting when shared, debated, and discussed. Join our community Telegram group, follow us on our socials, sign up our weekly newsletter. Everything is in the description below. And if you love us and want to help us grow, definitely share the podcast with your friends and on your socials. Also, if you have some interesting thoughts you want to share or know someone you want to hear from more, reach out to us through email@example.com. With that, have great day ahead. Stay tuned next week and always remember: personal finance can be chill, clear and sustainable for all.
Woo! That was a long episode and I tried very hard to squeeze everything into one episode. I hope you learnt some good stuff. In general, I think these are the three main ideas. Everyone else is just trying to tell you, how to refine these, how to reduce that, how to optimize these. That’s generally…that’s all it is. This is the core idea of financial planning: goals, strategy and risk management. That’s it.
And yes, later this week we’re going to kick start our series with Providend. We did a series with Providend and if you don’t know, Providend is Singapore’s first fee-only wealth management company. They came on to do a four-part series with us and we’re going to talk about young family planning, because most of you guys are just in the early days of setting up your family or entertaining this idea of setting up a family. That is the first episode later this week.
Next week, we’re going to spend some time to talk about the power of retirement or the power of mini retirement because that is what I’m going to be talking to Providend the following week. So yes, next week we are going to talk about the power of mini retirement. I think there is a little bit of difference between taking a long holiday and embracing a mini retirement, and I personally think that we are going to fundamentally change the way we live. We are no longer going to be having one retirement. So how do we then better do mini retirement and what are the benefits of doing mini retirement? That’s what I’m talking about next week.
So yeah, stay tuned and help us grow. Share this, like this, follow us on our socials. We have a lot of new shows, go to our YouTube and support us. Thank you! See you guys.
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