It’s the process of accurately and quantitatively determining an investor’s risk tolerance, or appetite, so that pivotal portfolio decisions can be made on the basis of that information. It’s a simple way to express the percentage of a portfolio’s value that an investor is willing to lose.
An investor’s risk appetite may fluctuate in response to fluctuations in the market, economic or political events, regulatory or interest rate changes. This emphasizes the significance of risk profiling. Investing strategy development is a starting step.
First, let’s review the idea of risk:
1. Take stock of your financial situation
Good financial health, like physical health, is predicated on the maintenance of healthy routines. What’s one good practice to begin with? Be sure to take care of yourself financially first. A portion of every paycheck should be set aside for savings before bills and other expenses are paid. The goal is to save up enough money for six months of living costs in case of an unexpected event.
If you lose your work unexpectedly or experience any other type of financial hardship, having this reserve will be crucial. You can rest easy knowing that you have enough money to handle your expenses for the next six months. One way to maintain a healthy financial position is to avoid taking on too much debt or taking out too many loans.
2. Obtain sufficient insurance
Large medical expenses and the loss of income are two important events that you should absolutely be covered for, despite the fact that there may seem to be many things you need to protect against.
Term insurance is enough for most people and provides adequate coverage at an affordable cost. The good news for young individuals is that insurance premiums typically aren’t prohibitively expensive.
3. Increase your financial literacy
In addition to focusing on the short-term by saving and insuring yourself, you may also consider the long-term by considering how you can make your money work harder for you, such as through investments. Even if you aren’t ready to invest just yet, you should keep learning so that when you are, you can do it confidently and without becoming lost in the plethora of available resources.
After you’ve settled the fundamentals, you may turn your attention to the bigger picture, such as how your CPF fits into your broader financial strategy.
Planning your finances with CPF in mind
It’s important to keep CPF and other national schemes together. Why? Consider that the CPF Board pays extremely good interest at virtually no risk, in addition to our employer’s contribution, and our own contribution. Everyone in Singapore, young and old alike, should know that the Central Provident Fund (CPF) is the backbone of our retirement savings and should be factored in carefully.
In addition to saving for retirement and paying for housing, CPF can be used to pay for medical bills through MediSave, pay for housing through the CPF Ordinary Account (OA), and invest a portion of your CPF Special Account (SA). CPF, however, is largely designed for our own retirement, and its primary function is to ensure that we have a secure, minimum level of income in our dotage. Therefore, we need to exercise caution when using CPF.
Spend your CPF wisely
a. Your CPF SA savings should not be invested
You can earn interest of up to 5% per year on it, which is excellent. It’s completely safe, it outperforms inflation, and there’s no reason to take any chances with it.
b. Don’t put all of your real estate eggs in one basket
Don’t put yourself in a financial bind by purchasing a home that’s out of your price range. Since it is best to pay off debts with the lowest interest rate first, you may want to try making a portion of your monthly housing payments in cash. In comparison to the rate you would earn on a cash savings account, the interest you earn on your Ordinary Account is 2.5% to 3.5% each year.
Pay down a part of your mortgage with cash if you have the means to do so. It’s wise to maintain a minimum balance in your CPF OA as a form of financial insurance. For instance, if you’re having trouble making ends meet or have lost your job but must keep up with house payments, you may want to consider these options.
Saving more in your CPF
The Central Provident Fund (CPF) is a risk-free savings account that offers competitive interest rates (up to 4%-5% p.a.). The power of this compounding is magnified when used to build a retirement fund. However, in my opinion, young Singaporeans are not likely to have enough money or the will to contribute to their CPF.
Furthermore, young people who have not yet married or purchased a home would need sufficient liquid assets for such a transaction. Because of the volatility of the stock market, I wouldn’t recommend risking these assets on an investment that would only be used to raise a short-term objective of less than five years. I also wouldn’t advise putting the money in a restricted account like the CPF SA. It makes more sense to put the bulk of your savings into low-risk investments like Singapore Savings Bonds.
One feasible proposal is to utilize a portion of your annual bonus (about 10%) to increase your CPF SA once you’ve paid off your mortgage and are in a stable financial position where you’re saving more than you think you need.
Prioritizing life aims over temporary ones
Instead of viewing financial planning as a target number to be attained, I propose that we view it as a means by which to achieve our life goals. Although it plays a crucial role, money is ultimately just a facilitator.
It’s easy to get stressed out and end up with regret if you try to maximize your money by following the latest investment fads, trying to time the market, or investing your CPF SA.
We can use money effectively as a tool for achieving our goals if we aim for sufficiency rather than maximization. By protecting what really matters to us, we can live a life of contentment despite falling short of the ideal material standard.