Setting financial goals is often the first step in developing a solid financial plan. While these goals provide direction, merely setting them isn’t enough. Much like New Year’s resolutions to exercise more, declutter the house, or start a new hobby, many begin with enthusiasm, only to lose momentum after a few months. In fact, over 90% of resolutions are abandoned.
The reason? Motivation fades, and we revert to old habits, much like overeating after trying to lose weight. As James Clear, author of Atomic Habits, puts it: “You don’t rise to the level of your goals. You fall to the level of your habits and systems.”
Habits are the key. They represent processes and daily actions that, when consistently practiced, lead to long-term improvements. For example, becoming healthier involves simple yet effective habits like drinking more water, avoiding sugary foods, and getting adequate rest. Just like compound interest, small, consistent changes in your habits can lead to massive long-term growth. As Clear states, success is the result of daily habits, not one-time transformations.
However, habits work both ways. They can compound for you or against you. Improving by just 1% each day might seem insignificant, but over a year, that effort would leave you 37 times better off. Conversely, getting 1% worse daily will drag you nearly to zero. The key is not your current level of success but whether your habits are pushing you in the right direction.
Understanding the Habit Loop
Habits are automatic behaviors designed to solve daily problems.
They are actions you repeat so frequently that they become automatic. Essentially, habits are mental shortcuts or solutions to everyday challenges. This is where the habit loop comes into play.
The habit loop is a neurological cycle that strengthens habits. It consists of four parts: cue, craving, response, and reward. Together, these elements help create automatic behaviors that are repeated consistently.
For example, positive money habits could include pausing to ask if a purchase is a need or a want before committing, or consistently setting aside time to review your financial goals. Understanding this habit loop will help you implement lasting habits.
The Power of Positive Money Habits
Your financial situation is essentially a reflection of your money habits. Developing good habits allows you to make informed decisions, manage emergencies, and work toward financial freedom. Here are four key financial habits that can significantly impact your financial well-being: Save, Protect, Grow, and Retire.
Save
The first habit you should master is the “Pay Yourself First” method. Set up automatic transfers from your salary into savings every month before spending on anything else. When receiving a pay increment, adjusting the monthly savings to a higher amount can further strengthen financial stability over time.
Over time, this accumulated savings will become a powerful resource for investment opportunities.
Tracking monthly expenses can also help you cut back on unnecessary spending. Today, digital financial tools make it easier than ever to monitor your cash flow and automate transfers, helping you stay on top of your savings goals.
To maximize your savings, consider placing them in higher-yielding accounts or Singapore Savings Bonds while keeping some liquid funds (equivalent to 3–6 months of expenses) for emergencies. This ensures you’re prepared for unexpected expenses while also growing your wealth efficiently.
Protect
We have always heard about the importance of protection–insurance. This includes regularly assessing and closing any gaps in our insurance coverage. As for our parents’ retirement plan, it’s crucial to have the right insurance to protect against unexpected life events like illness, accidents, or disability.
In addition, securing suitable hospitalization coverage needs to be a top priority to help reduce out-of-pocket expenses during medical emergencies.
As a general rule, it’s advisable to allocate no more than 15% of take-home pay to insurance protection. However, bundled products like whole life insurance may exceed this guideline, as they combine both protection and investment components.
Consider obtaining coverage in six key areas: health, death, critical illness, mortgage, disability, and general insurance (such as travel and home). This strategy can help mitigate risks that may disrupt financial plans, ensuring a more secure future.
Having the right coverage ensures that life’s curveballs won’t derail your financial progress.
Grow
Saving alone isn’t enough to counter inflation and longevity risks. To grow your wealth, it’s essential to continuously seek quality investment opportunities. A well-diversified portfolio, built through understanding approaches like dollar-cost averaging, ensures that you reap the long-term benefits of compounding.
To establish a resilient investment portfolio, it’s essential to continuously enhance investment knowledge, conduct thorough research, and understand strategies like dollar-cost averaging and diversification.
Your investment options can range from low to high risk, including endowment policies, annuities, Singapore Government Securities, fixed income, unit trusts, equities, and real estate.
To build a resilient portfolio, invest time in educating yourself about the best strategies that align with your financial goals.
Retire
Planning for retirement involves understanding your desired lifestyle and creating passive income streams to support it. In your 50s, you can ramp up your efforts to generate stable income through CPF LIFE, annuities, and other investments. By leveraging CPF’s interest rates and strategically building your my Retirement Account, you can secure a lifelong payout starting at age 65.
Beyond CPF, other sources like rental income, dividends, and withdrawals from investment portfolios contribute to my retirement fund. Diversifying income streams ensures that I can meet both my basic and lifestyle needs during retirement.
Conclusion
Review your money habits today and focus on improving them step by step. By leveraging the habit loop and adopting the practices of saving, protecting, growing, and planning for retirement, you can create a solid foundation for financial wellness. Small changes, compounded over time, lead to significant results.
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