Financial Health Check

At the start of a new year, it is always a good idea to assess your financial health.  Just like having a medical health check which lets you know how physically healthy you are, a financial health check will help you better understand how you are managing your money and whether you are on track to achieve your financial goals – and if not, where changes need to be made.

Here is a financial health checklist that should help you gauge your financial fitness.

1.   Are you spending less than your income?

This might appear to be straightforward but if you do not keep track of your expenses, you could easily end up spending more than you earn each month.  This can eventually lead to severe financial stress through excessive borrowing and insufficient savings to cover emergencies.  Make sure you keep a close eye on your spending to ensure you live within your means.

2.   Are you saving a proportion of your income every month?

Always practice “save before you spend’’.  One way is to set up a separate bank account to the one in which your salary is credited.  Then instruct the bank to set aside a fixed amount every month into this second account at the same time you receive your salary.

How much should this amount be?  The Institute for Financial Literacy (IFL) which is the outreach arm of the Government’s free financial education programme MoneySense, recommends you should save at least 20% of your take-home income.

3.   If you don’t have income, for example losing a job, are you able to come up with money to make ends meet?

We don’t know what the future has in store, especially with today’s uncertain economy so it’s important to have some cash in reserve to meet any sudden financial obligations, such as a medical emergency or to cover essential needs in case of an unexpected job loss.

Some financial experts recommend setting aside between 3 to 6 times your monthly income as emergency savings.  This is fine but just in case you are spending more than you earn, it would be more prudent to have between 3 to 6 times your monthly expenses as your emergency fund.

4.   Do you have sufficient insurance coverage?

The Life Insurance Association of Singapore (LIA) recommends that you should aim to have approximately 9 to 10 times your annual earnings as basic life cover, although this would vary from person to person.  You can use the CPF Insurance Estimator to work out your life insurance needs.

For health coverage, LIA says that as a guide, you should have critical illness coverage of about 3.9 times your annual income.

In addition, you should try to keep your insurance premiums for protection purposes to not more than 10% of your annual salary.

When deciding on the amount of health insurance to buy, LIA says should consider the quality of healthcare service and the level of income protection that you would want should you fall ill or become disabled.

If you have a family, you should also consider how much your dependents require for their daily needs if you are unable to provide income for them over an extended period of time.

Health insurance premiums increase with age, so it is important to ensure you can continue paying them over the long term.  It is always advisable to seek the advice of your Financial Adviser if you are unsure.

5.   Are you paying credit card bills and other debt obligations in full and on time every month?

You should ensure that you do not take on excessive borrowing since interest payments can be very onerous.  Credit cards for example, charge annual interest of at least 25% and if you do not pay your instalments in full and on time, the amount can very quickly snowball into a much larger amount.

6.   Do you review your budget before making any big purchases?

When it comes time to shop around for a big purchase, it’s important to review your budget.  A budget tracks where your money goes each month and is an important resource for understanding how much money you can afford to spend.

Simply making purchases without checking your budget can result in overspending.  Then any unpaid balances can lead to debt, which can be hard to pay off quickly.

7.   Have you made a Will, CPF nomination and Lasting Power of Attorney LPA)?

It is important to ensure that you have proper estate planning in place. There are three components:

a.   A Will sets out the instructions on how you want your estate to be distributed when you pass away. Without a Will, there could be legal procedures and family disputes which could delay the distribution process by many months or even years.

b.   It is important to know that CPF monies do not form part of a deceased member's estate and are not covered by a Will. Excluding CPF savings from your estate protects your savings from any creditor claims on outstanding loans that you may have after your passing.  This ensures that your CPF savings are fully preserved for your loved ones.

CPF members who wish to specify who will receive their CPF monies, and how much each nominee should receive upon their demise, must make a CPF nomination.

Where CPF members have not made a nomination, their CPF monies will be passed to the public trustee for distribution under the intestacy/ inheritance laws of Singapore.

c.   A Lasting Power of Attorney (LPA) is a legal document that lets you (the donor) appoint one or more people you trust to be your donees. They will act and make decisions on your behalf should you lose mental capacity one day.

Start the new year on the right foot.

Review your finances using this checklist to know how you are managing your hard-earned money and if you are closer to achieving your financial goals.

We wish you peace, good health and a boost to your financial well-being for coming year.

Credit Counselling Singapore

Published 9 December 2022.