man and woman sitting on brown wooden bench

As enthusiasm in investing starts to wane as the stock market declines and maybe partly due to rising prices too, I get the sense that more people are turning their focus to expenses. After all, who wants to open their brokerage account and see a sea of red?

I think it’s not a bad thing at all. Now might actually be a good time to take a step back and review your finances holistically on our journey to building wealth. To be frank, I need to set time aside as well to review these these steps in view of the fast-changing environment, i.e. reopening, back to office, inflation, bear market, recession risk, etc.

The steps I’m sharing are not meant to be definitive steps (since I don’t consider myself particularly wealthy yet), but rather steps I’ve taken in planning my finances towards building wealth. Caveat also that my definition of wealth is being able to live the life I want without having to worry too much about finances.

These steps are also not a set-and-forget exercise. Typically, I think reviewing them annually should suffice. If you already have the help of financial advisor, they might have gone through this exercise with you and review them with you regularly as well.

Here are my 6 steps to building wealth which I think are worth reviewing this season.

  1. Set goals
  2. Budget
  3. Save
  4. Insure
  5. Contribute
  6. Invest

Although I write mostly about investing, it is actually the very last step and should only be embarked on once the previous steps have been taken care of.

1. Set goals

Your goals are the most important factor in determining how much you want to earn, spend, save, invest and generally how you want to live your life. Financial goals are the subset of that and should be supporting your life goals. The goals you set should be a reflection of your life philosophy and not the other way around. Without keeping our goals in mind, we might end up getting sucked into the rat race, fuelling a vicious cycle of ever increasing goals (i.e. moving goal posts).

For most of us, our overarching goal would most likely be how we would like to live out our retirement years. Some of us might want to “retire” early before the statutory retirement age. In Singapore, retirement age has just been increased to 63 from 62 since 1 July 2022. Others might not mind working for longer, even past retirement, but maybe in a reduced capacity or with less responsibilities (i.e. semi-retired).

Some questions you might ask yourself to formulate your goals are:

  • How long would you like to work before retiring?
  • What kind of lifestyle would you like to have upon retirement?
  • What other short to mid term goals do you have in mind from now until retirement, i.e. wedding, housing, kids, postgraduate studies, etc?

All these goals when penned down and put into concrete numbers might seem scary, but is an important step to determine where we stand vs where we want to be, and consequently what we need to do to get there. We might realise that our goals are too lofty, requiring too much sacrifice to achieve, and thus we might want to scale back on some by managing our expectations.

I would argue that whatever actions or realisation arising from this goal-setting exercise are still beneficial to us, and will be vital in the next step of budgeting.

2. Budget

How do you plan where to put your money if you don’t even know where your money is going? Budgeting helps us think through what our priorities are and where we want to put our money to. Unfortunately, we all have finite incomes but can possible have almost infinite expenses if we don’t have a system to keep costs under control.

A budget can be as simple as writing your expected monthly and annual expenses on a piece of paper or spreadsheet. Your expenses in total should be less than your income, otherwise you’d be in deficit. Instead if we have a surplus (which is ideal), we should be able to put that extra money into savings or investments. The goals you have set in the previous step will help you determine how much you will need to set aside after expenses to achieve your goals.

Once you have a budget, it is equally important to track your expenses so that you know whether you’re within your budget or have overspent. That’s a whole other topic worth going into in a another post, but basically you can do it manually or use a finances tracking app. Many banks in Singapore also now offer tools to track expenses like DBS NAV planner, SCB Insights, or OCBC Money In$ights.

3. Save

Once you have a budget and have a system set up to track your expenses, you can now focus on increasing your savings rate. How much you need to save would largely depend on your goals, but a good ballpark would be at least 20% of your income. There’s a popular 50/30/20 rule you can start off with, which suggests you spend 50% on needs, 30% on wants, and 20% towards savings and investments. For more info, read the article linked below.

Read: How much of your salary should you save?

Your first priority should be to set aside an emergency fund. A general rule of thumb is that you should have 6-12 months of expenses in this emergency fund. After that is in place, you can decide how much of the excess savings you want to leave in the bank, contribute towards retirement plans (e.g. CPF), or put towards investments.

4. Insure

Especially if you’re just starting out in the working world and don’t have much in liquid assets to your name yet, insurance is crucial in avoiding total financial disaster. Even if you’re young, healthy, and don’t have any dependants, there’s no guarantee that you won’t be met with an accident or health crisis that could wipe out your savings and/or leave you unable to work.

The highly recommended ones are health/hospitalisation insurance, accident insurance, and life insurance. Consult a financial advisor or insurance agent for help in choosing the right insurance products for you, but get to it!

As you get closer to retirement, saved/invested well, and built a nice little nest egg, you might be able to reduce your insurance coverage later on in life.

5. Contribute

Most people tend to ignore or forget about the option of voluntarily contributing to retirement plans like CPF in Singapore. Maybe it’s partly due to the fact that most of us are already making mandatory contributions. However, CPF should always be considered as part of holistic financial planning and can play a big role in building wealth for our retirement needs.

In Singapore, there are many ways to make voluntary contributions to our CPF. CPF Board has also revamped their website to make information easier to find and more digestible through infographics. Head over to CPF website to find out more. You can make cash top-ups which may also qualify for tax relief, CPF transfers from OA to SA, make voluntary housing refunds (see my previous post here), and even invest part of your CPF into stocks.

Your CPF monies are guaranteed and backed by the Singapore government, which has a ‘AAA’ rating. Not going into politics, but Singapore has a well-run government with little/no corruption. So your CPF monies are very low-risk and can earn you a respectable 2.5%-5% (CPF members below 55 years old), which is not too shabby at all.

6. Invest

After you’ve done all the previous foundational steps, then you’re ready to invest the rest of your hard-earned money in stocks to earn higher returns. The reason investing is the last step is because the higher potential returns from stocks comes with much higher risk. You can build wealth faster through investing but you could also lose everything real quick too.

As we have seen so far this year, stocks can perform really poorly in certain periods, but will eventually perform better than any other asset class in the long term. Read my previous post on why you should invest in stocks here.

Closing thoughts

Investing is definitely the sexiest step amongst all these steps. It is also the one I’m most interested in, and that’s why I’ve written many other posts on investing. However in this post, I wanted to turn our focus back to the foundations that should be set up before we start investing.

Without good foundation, we might just be swimming naked. When the stock market and risk assets were doing well the past 2 years, we might have been riding high on the gains which covered up our lack of strong foundations. As they say, a rising tide lifts all boats but when the tide goes out, we will know who has been swimming naked.

Hope this post has been helpful. I will be reviewing my financial plans as well by going through these steps in coming weeks and will be sharing my thoughts as I go along. Thanks for reading.

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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