If I had to come up with three basic financial planning points that everyone should be taking action on, they would be as follows: emergency cash reserve, basic insurance, and some kind of pension. Without getting into too much detail, here are basic definitions:
- Emergency cash reserve: this is money in the bank, not invested, and easily accessible. If you lost your job tomorrow, how long would you be able to survive before finding a new one? Typical advice is to have 3-6 months of expenses covered before you start thinking about investing. If you have a very secure job you might be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable.
- Basic insurance: if you get sick is it going to cost you? If you work for a company in Japan, for example, you are likely to be covered by the Japan national health insurance. However what if you are long term sick? How long will your company continue paying you? Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost.
- Pension: I deliberately referred to “some kind of pension” above. We are not going to get into details now of the options available. (we will later for sure) The question now is: are you currently putting aside even a small amount of money every month for when you are older and no longer inclined / able to work?
You may be surprised to hear that all three of these come under the umbrella of protection. A cash reserve protects you from having to dip into investments or borrow money in a crisis. Insurance protects you from events that can derail your ability to generate income. And a pension protects you from being poor in old age. How are you doing on these three basics so far?
Over the coming days we will be discussing how to build up an accurate picture of your current financial position by looking at your income and expenditure, balance sheet and asset weighting. Before that though, let’s start with a few general questions you can ask yourself to get a sense of where you are today and how you feel about it. Try to answer on a scale of 1 to 5 with 1 being terrible and 5 being outstanding:
- How would you rate your current income?
- How would you rate your net worth?
- If you have any, how do you feel about your current investments?
- How would you rate your current cost of living?
- How would you rate your level of monthly saving?
How did you score out of 25? Anything over 20 and you’re in a pretty good place. 15-20 indicates relative comfort, but with room for improvement. Less than 10 and you might need some cheering up! Regardless of your score, did you learn something from answering these questions? What areas do you need to focus on to improve your current position?
Whether you believe “money is the root of all evil” or “money makes the world go round”, your psychology with regard to money will impact upon your decision making.
Why not take a moment to review the questions below and see how you really feel about money and your finances:
- How do you feel you are doing financially right now?
- What are some positive / negative emotions you have about money?
- What is your greatest fear about money and finances?
- How much do you think you are capable of earning annually? Are you earning that much now?
- How are the people around you doing financially?
- What is an absolute must for you right now financially?
- What is your ultimate financial dream?
- What is your current level of financial pressure?
- What is your risk tolerance for investments? Conservative, moderate or aggressive?
- What is your overall rating for your financial psychology on a scale of 1-5?
Our beliefs about money can either support us or deter us from successful financial planning. If you are thinking “This is too hard” or “I don’t have time for this”, then perhaps you need to work on developing some more empowering beliefs to help you along the way. If you are thinking “I’ve got this” or “I’m ready to take control of my finances” then you are good to go!
Well they say the first step is always the hardest. If you’re reading this, congratulations! You are probably thinking it’s about time you got around to organising your personal or family finances, but where to start? There’s so much information available these days that it’s easy to get bogged down in detail and never do anything. Well hopefully this blog can help.
First off some disclosure: I’m a U.K. qualified financial planner and have been working as a financial adviser in Japan for over 12 years. During that time I have met hundreds of people from different backgrounds, countries, and walks of life, all wrestling with one or more of these basic issues: saving money for retirement and their kids, protecting themselves from financial mishaps, buying a home, caring for aging parents, dealing with the taxman, and trying to become financially free.
The purpose of this blog is not to sell you a product to plug one of these needs. The way people access financial products and advice is changing rapidly and there has never been a better time to take control of your own financial destiny. The mission here is to provide a resource to help you to do just that. Like financial planning itself, this blog is a marathon and not a sprint. Over time we will cover financial planning basics, how different assets work, protection, investment vehicles in Japan and elsewhere, along with market news and the odd non-financial article on life in Asia.
Constructive comments are welcome and please feel free to share anything you find useful. Yorishiku onegaishimasu!