Economics and financial planning

There are two schools of thought in managing the economy. Some economists believing in managing demand and let supply follow demand. Other economists believe in managing the supply and let demand follow supply.

There is a similar choice in financial planning. Many financial planners believe in getting the client to establish the goals, from which the financial plan can be developed. I find this approach to be not suitable, as the client is likely to set goals that are too high, and will setting aside savings that they cannot afford, based on their earning capacity.

I prefer to work on the earning capacity and allocate the proportion to be used for current expenses and the remainder for the future, which includes the purchase of a residential property for own occupation. Based on my analysis, a typical allocation is 50% for current expenses, 25% for property and 25% for retirement. This benchmark allocation should apply to most working families.

If a family has special needs, they may modify the allocation to suit their own situation, but the starting point should be to consider the financial plan based on this benchmark. For example, a high income earnings may be able to set aside a larger allocation for the future, while a low income earner may have to set aside a bigger allocation for current expenses.

The allocation for the future includes the combined contribution (of employer and employee) to the Central Provident Fund. The current combined contribution is 34.5% for most workers. To achieve the benchmark of 50%, the worker has to set aside 15.5% in a personal savings plan. This concept is explained in my book on financial planning.

Tan Kin Lian