Here is a general guideline to building your financial portfolio:
Start building your portfolio by ensuring the base foundations are adequately covered before building upwards towards the next level.
Emergency expenses: An emergency fund is basically a sum of money set aside to be used in only these “alarm – break glass” moments such as loss of job and illness or any unexpected financial surprises. Accumulate at least 6 to 9 months of emergency expenses to cover loss of job income or any unforeseen circumstances. This sum of money should continue to grow as you age. Most importantly, this emergency fund must be liquid (converted to cash quickly).
Insurance: Bad news never have good timing. Insurance generates a known sum at an unknown time. Ensure sufficient insurance coverage for hospitalization costs and loss of active income such as because of critical illness. The last thing you would want when your portfolio goes down 50% is to be forced to cash out or dip into your emergency expenses.
Financial goals: Plan what are your near term and long-term targets (e.g. buying a house or car, going for further education or family planning) so that you can start budgeting as early as possible and begin to manage current cash flow towards achieving those goals.
Investment war chest: Try not to stay fully vested. Always allocate cash as part of your war chest in your investment portfolio. When the market corrects itself, the cash is ready to be deployed. Always weigh your opportunity costs.
Build cash inflow: Vital to start building multiple streams of income generating assets. This can be in the form of a side business, property rental income or stock dividends. Don’t rely on your job as one income stream. The cash inflow will be able to flow back to increase your investment warchest, financial goals fund or emergency fund.
Review your financial portfolio: Review your portfolio once or twice a year to see if you’re on track. To be successful financially is all about downside protection and risk management. Do monitor your debt and liabilities closely and try to remove as many variables in your portfolio as possible. Ensure insurance coverage is enough. The more variables means the need to allocate more to the emergency fund.
*401k is in use in the US; CPF/SRS is in use in Singapore.