Peace of mind behind financial planning is a welcome calm

Singapore

THESE days, I can more precisely describe the moment a tide of stress washes over me. The head feels physically heavier, like it's being pushed down by a vice-like grip on the nape of my neck. The room can feel a little more boxed in than it should.

The intent is not to convey misery on a Monday. It is to say plainly that if you have felt something similar in recent times, you are not alone.

After all, Gallup's latest State of the Global Workplace report showed that employees' daily stress hit a record high in 2020. Covid-19 has forced on us profound and volatile changes to the way we work, and has limited our social interaction. Work hours have stretched longer, and the space to rest without guilt has narrowed.

Finances are naturally also a concern. The Asean region had the most respondents losing pay amid the pandemic, the Gallup report showed.

That said, human beings are a hardy lot. We have a psychological immune system that helps us to see positive outcomes in grim situations.

This is relevant to financial planning in its basic form. At its core, personal finance is shaped by how we view choice, control, and happiness. Its aim is to secure peace of mind, especially in this stress-inducing time.

There are some broad ways to organise in our minds how we should approach financial planning.

Risk

Financial planning is meant to grow and preserve your wealth.

Good personal finance decisions ultimately help us to boost our net worth, and protect our finances from eroding in value due to inflation. It should be done without the wanton use of debt, which magnifies the gains but amplifies the losses.

Rich returns are naturally enticing. But they must be measured against risk. There are models to calculate risk, but the first sniff test should be to ask: how much does this risk-based investment affect my peace of mind? Am I prepared to lose all, or most of the money behind it?

The general rule of thumb is to set aside at least six months' worth of expenses as liquid assets to fend against unexpected expenses or job losses. Financial apps today, by tapping on SGFinDex, can help to tabulate individuals' average expenses, so consumers make an informed decision on how much to set aside.

Not all of the emergency funds have to be in cash, especially as bank deposit rates are wafer-thin. The latest tranche of Singapore Savings Bonds (SSBs) offers a 1.5 per cent average return per year if an investor holds it for 10 years. If withdrawn in an emergency situation five years on, that average annual rate is down to 0.86 per cent. It still beats the base deposit rate of 0.05 per cent though.

Robo-advisers also sell - for a fee - portfolios that hold cash, money market and short-term bonds. These low-risk investments earn higher returns than deposits.

For both SSBs and money-market funds, investors must mind the waiting time for redemptions to be credited. SSBs investors will get the redemption amount and accrued interest back by the second business day of the following month. For fund withdrawals off robo-advisory platfirms, it takes conservatively a week.

Fixed deposits, which have higher rates, tend to have penalties for redemptions ahead of the lock-in period.

So again, go back to the question of peace of mind, and still keep a suitable portion in easily accessed cash for emergencies.

Discipline

Once cash is set aside, look at investments. More financial apps now offer assessments that determine your risk profile so as to offer suitable portfolios, which should offer diversification. Investors can also design their own portfolio on certain robo-advisory platforms.

While younger investors can afford to take more risks, it is good discipline for all investors to keep to their assessed risk profiles. It is tempting to deviate from the risk profiles in good times. But in a downturn, investors take a bigger loss than what they were prepared to stomach. They may also be rattled into selling down, instead of staying invested.

A good way to nudge ourselves towards a financial-planning habit is to regularly invest via a dollar-cost averaging (DCA) strategy. Buy a fund - say one that tracks a benchmark index - and allocate an annual investment to it by splitting that money in equal amounts to invest over 12 months.

DCA is not a sure-win bet. Investors might buy a fund that is doing poorly or steadfastly track a market on the downtrend. The extent of its success also depends on the decade you began investing - did you accumulate at rock-bottom prices just as the world emerged from the Global Financial Crisis? Or as valuations still linger at toppish levels? What we can say though is that DCA smoothens out some risk over a longer horizon, offering some psychological safety.

Make it a habit to look at your portfolio every six months. Investments go up and down, so we should curb some of the rabid daily checking that can wrack nerves. A better perspective is to consider the expected gains across all stocks, bonds, and funds over three to five years, and make periodic tweaks to the whole portfolio.

As the time nears towards retirement planning, financial planning shifts towards preserving wealth. One rule of thumb is the 4 per cent rule, which gauges how much a retiree should withdraw from a retirement account each year. The aim is to have consistent income flowing through in the golden years.

Inner scorecard

In a TED talk, Harvard professor Dan Gilbert noted that we tend to underrate happiness that we bring together by our own mindset and perspective. Our psychological immune system builds resilience when we have an internal system to derive our brand of contentment.

The more important path to peace of mind may come from an inner scorecard, as Warren Buffett calls it. Picked up from his father, the practice of having an inner scorecard means making decisions based on core values. This moral compass endears him to standards, and charts his path to wealth and happiness.

Covid-19 has brought on lifestyle changes that can hurt psychologically. Taking habitual steps to plan our finances can give us a confidence boost about our future. Whether we'd be incredibly well-off decades from now is but a crystal-ball-gazing exercise. The aim is to be well.