Explain the layers of a personal finance system and why each one depends on the layer below it.
Someone in their late twenties has put most of their savings into shares. They have no separate emergency fund, and their only insurance is the basic hospital cover they received automatically. A downturn hits and they lose their job. The same downturn has pushed share prices down, so when they sell shares to pay rent, they sell at a low price and the loss becomes permanent.
None of the products this person bought was bad. The problem was the order they were set up in. Most people build their finances in the order products are sold to them, with no plan behind that order. A bank offers you a savings plan when you open your first account. A friend mentions an investing app. An adviser shows you a policy at a wedding dinner. Each of these choices can be sensible on its own. In the wrong order, though, they can leave you exposed, and you only see that exposure when something goes wrong.
This course is built on one idea: a personal finance system is a stack of layers, and each layer protects the one above it. There are nine layers. In order, they are cash flow, buffer, protection, CPF, debt, investing, housing, retirement and estate. You set them up roughly in that order.
Cash flow comes first because every other layer is paid for out of the gap between the money coming in and the money going out. If that gap is zero, you can't fund anything else.
The buffer comes second. It is money that absorbs small and medium shocks, such as a repair, a medical bill or a month between jobs. Protection comes third. It is insurance for the large shocks a buffer cannot cover, such as a serious illness or losing the ability to work.
CPF sits in the middle of the stack because it already runs automatically. CPF contributions are payable for employees who are Singapore Citizens or Singapore Permanent Residents, so if that is you, part of your pay goes into your CPF accounts for housing, healthcare and retirement. The CPF Board's website explains who is covered and the current contribution rates. If you understand CPF early, you avoid two mistakes: saving cash for things CPF is designed to pay for, and relying on CPF for things it cannot pay for.
The debt layer is about cost. Expensive debt, such as a credit card balance you don't pay in full, works against every layer above it, so you clear it before you invest.
Investing only makes sense once cash flow, buffer and protection are in place, because money you invest may be untouchable for years. The person in the example skipped those three layers. Downturns tend to hit jobs and share markets at the same time, so a job loss often comes when share prices are low. With no buffer to live on, they had to sell at that low price, and selling shares at a low price turns a paper loss into a permanent loss.
Housing and retirement come next. They are the two biggest goals most people in Singapore will fund, and both draw on cash, CPF and sometimes borrowing. Estate planning is the top layer. It does not protect you; it protects the people who depend on you, and it costs little to set up.
Treat the order as a default rather than a strict rule. Some steps can run side by side. For example, you could set up a CPF nomination, which takes about ten minutes, on the same day you open an account for your emergency fund. If you already hold investments, you do not need to sell them. Check that the layers underneath are in place, so that you are never forced to sell at the wrong time.
Each module of the course covers one or two layers. For each layer you get one setup action to do this month and the name of the course that goes deeper.
Your first task is simple. Write the nine layers down in order. Next to each, mark it done, partly done or not started for your own finances. Be honest, because the gaps you find are the plan for the rest of the course.
Write down the nine layers in order. Mark each one as done, partly done or not started for your own finances.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).