Are Your Finances Healthy?

from Financial Planning Magazine - November 2020

How to build a resilient investment portfolio

By Alfred Chia, CFP® It is recommended to go for regular health checks to assess our health condition. It will check our vitals such as heart rate, blood pressure, cholesterol, etc. It may even detect critical illness early and seek treatment early. When you are healthy, your immune system is stronger.

How about Financial Health?

One may seem to be successful with nice car and house but is actually highly leveraged. One may be earning high income but has no savings. Financial crisis will impact them most as their Financial Health is weak.

3.) Liquid Cash to Net Worth Ratio

higher volatilities.

How do you assess Financial Health?

Financial Planners are like Financial Doctors. We conduct Financial Health Check by assessing Client’s Financial Ratios. When we evaluate Client’s Cash Flow and Net Worth Statements, we can derive Financial Ratios.

We will discuss some of the key Ratios This Ratio reflect our readiness to combat

using an illustration:

Mr Jin Save, age 35

Salary: $5000 monthly Owns a $500,000 HDB with $400,000 loan ratio, the easier and faster it is to achieve

(Monthly mortgage: $1,439) Takes public transport Total monthly expense: $2,500 Cash savings: $50,000

1.) Debt Servicing Ratio (DSR)

CFP recommends 35% for prudent financial his risk profile.

management. In Singapore, Total Debt Servicing Ratio (TDSR) framework is based on 60% for mortgage loan application

$1,439/$5,000 = 28.8% Pass

2.) Liquidity Ratio

In the event of any emergency such as sudden job loss, an individual should be able to sustain all his expenses for at least 3 to 6 months. The emergency fund can be higher depending on the job security, nature of the industry and expected time frame for any job transition. However, having too much idle funds may impede the growth of assets towards retirement. $400,000/$550,000 = 73%

He can survive up to 12 months without funds that is not generating returns to beat inflation. He should invest the excess funds or place in instruments that are according to his risk profile;

$50,000/$3,939 = 12 months Pass

This ratio provides an indication of the amount of net worth that is in cash or cash equivalents. A minimum ratio of 15% is considered prudent to meet short term emergencies so that the funds can be liquidated with minimal or no loss of capital unlike investments that may have

He has 50% which is more than adequate. crisis.

Pass

4.) Savings Ratio

A person should save at least 10% of income for cash savings towards long term goals like retirement. The higher the financial independence.

He has more than 21%. He needs to evaluate investment plan to make his money work harder which is according to

Pass

5.) Debt to Asset Ratio

This measures the amount of the assets that are leveraged. The rule of thumb is to have not more than 50% of assets under financing. Debt is a double-edged sword. For example, a good property investment can be considered a good debt while a poor judgement and a high leverage could lead to loss of wealth or even bankruptcy.

income. However, he has too much idle Fail

Although the debt to asset ratios is high, it is not a major cause for concern. As he is still young, the ratios should moderate over time as savings increase. It is not uncommon for buyers, even for couples, who had just purchased their first home to have these levels. The debt servicing ratio (DSR) is a more important consideration factor.

Mr Jin Save Financial Health is in pink of health. He should enhance it with: 1. Retirement Planning 2. Insurance Planning 3. Estate Planning 4. Consider to rent out his spare rooms for extra income.

By going through a Financial Health Check with a Financial Planner, he will have a better pulse of his financial matter. In this illustration, he is financial healthy and can work to increase his fitness.

If the Financial Health Check indicate ‘Fail’, it will be a wake-up call to improve on the financial situation.