Wealth Creation – Thought Process & Financial Planning Tool

After understanding one’s attitude and value towards money, we are now ready to plan tangibly and holistically on our finances. The technique is to have a system of thinking through the issues and document down into a planning tool for decision making, reflection and recalibration. The first step is to think about Wealth Creation. This thought process focuses on income management, which is the first and most important step for a youth. The ability to earn an income is the foundation to build a financial base. The planning tool is the cashflow statement

Wealth Creation via Earnings – Cash Inflow

Earning an income is one, managing an income is another. It is typical in an un-managed situation, one’s income are quickly spent on consumption, and the seductive promotion of credit cards by the banks can give a distorted illusion about one’s spending capacity.

The first step to financial planning is to discipline oneself to save part of one’s income, whether salary or business revenue. As the income, or cash inflow, is always fix, this means one has to be disciplined and made wise (sometimes difficult) choices on one’s expenditure or cash outflow.

Wealth Depletion – Cash Outflow

As much as we welcome cash inflow into our bank accounts, cash outflow is inevitable. But cash outflow has to be deliberately managed. Managing cash outflow takes more effort than cash inflow, because most people have the propensity to spend on current consumption. And when cash outflow is consistently more than cash inflow (regardless of income level), this is beginning of financial planning problem. The steps to managing cash outflow is to categorise each outflow.

Financial Planning Tool – Cashflow Statements & Setting up a Budget

It is important to document the cash inflows and outflows into a simple report in order to manage and take control over one’s finances. The presentation is as follows:

Cashflow Statements for Mr. XXX

(from start date to end date of the year)
Cash Inflows S$ Remarks
Bonus Identify the month which one receive the bonus.
CPF Contribution by Employer 17% of Salary
Others Cash inflow from assets, for example interest from bank deposits.
Total Cash Inflows
Cash Inflows S$ Remarks
1. Cash Outflow to Assets Savings, life insurance, Investments, CPF employee contribution.
2. Statutory Expenses Income, property, road (if any) taxes
3. Contractual Expenses Credit card, car, & housing Loans
4. Family & Personal Expenses Utilities, communication, living expenses, food, transport, entertainment.
Total Cash Inflows
Net Cashflows (Inflows – outflows) Surplus or Deficit

Here you are, you have just constructed a cashflow statement. And the next step is to create a budget statement for yourself and stick to it. But first, let us clarify a misconception of a budget statement. A budget is not a historical record of the past, it is meant to be a guidepost for the future. After setting a cashflow statement, one can then do a pro-forma cashflow statement for next year.

The table looks like below:

Pro Forma Cashflow Statements for Mr. XXX (year to year)
Cash Inflows S$ (2019) S$ (2020) Remarks
Bonus Top up retirement fund during bonus month

CPF Contribution by Employer Plan for property purchase
Total Cash Inflows
Cash Outflows S$
1. Cash Outflow to Assets Increase cash outflow to assets
2. Statutory Expenses Ensure maximum tax reliefs are taken. Make best use of SRS or volunteer top up of CPF to increase retirement fund.
3. Contractual Expenses Reduce spending on credit card
4. Family & Personal Expenses Ensure spending is meaningful for family unity
Total Cash Outflows Discipline towards a lower cash outflow outcome
Net Cashflows (Inflows – outflows) Discipline towards a surplus outcome

Initially, one will feel odd about doing a cashflow statement, let alone a budget statement. The reality most people will feel depress after looking at their cashflow statements. But the essence of planning starts with acknowledging the facts, whether good or bad. Therefore, it is wise to work with a licensed and well-trained adviser to accomplish this exercise. The discipline and benefit derived from this exercise is immense.