Dec 15, 2009

More About Financial Goals

J Singh wrote to me again and said that he would try out the "goal identification" approach mentioned in my previous post. So I will say a few more things about this approach.

Emergency Funds

For the average young Singaporean stepping out into the working world, one important early goal would be to save up some emergency cash. The main emergency I'm referring to here is the possibility of becoming unemployed.

The rough guideline is that you should have cash roughly equal to six months worth of your usual expenses. This will allow you to survive, while you look for another job. Six months is just a guideline. You might need more, or less - depending on how likely you are to lose your job, and how long the period of time you're likely to need, before you find another job.

This emergency money is to be tucked away in some very low-risk instrument (such as a savings account, a fixed deposit or an SGD money market fund). It is meant to protect you against emergencies and is not for investment purposes.

Medical Insurance

After you've established your emergency fund, you might want to consider medical insurance. Young, healthy persons might consider medical insurance less important, and there is some rationale in this. However, the longer you delay buying health insurance, the greater the risk that as the years pass, you may find yourself getting some medical condition (for example, high blood pressure; high cholesterol levels; ovarian cysts or whatever).

By then, you will have to pay a higher premium for your health insurance. Alternatively, the insurance company may refuse to cover you for the risks of particular types of diseases.

If you do have some pre-existing medical condition, make the effort to shop around a bit before you commit yourself to taking up any particular medical insurance policy. This is because different insurance companies do take a different view towards the same kind of medical condition. Some insurers would be stricter, others more liberal.

Depending on where you work, your employer may also provide health insurance. This is a nice benefit, but not terribly reliable. You don't know when you will change jobs, and when you change jobs, the insurance usually lapses.

Life Insurance

Life insurance is important only if you have dependents (such as aged parents or young children). After you die, you don't need any money for yourself.

There are several types of life insurance available in the market. For most people, the first kind of life insurance policy they should buy is term life insurance. You pay a small sum every month and are assured of a large payout, in the event of your death. The policy is purely for protection purposes, and if you don't die, you get nothing back.

If your key intention is to secure financial protection for your dependents, term life insurance generally works better than other types of life insurance, which try to add in some element of investment. The reason is that these other types of insurance pay out much less, if you die.

Financial Investments

If you've got spare cash left over, it's time to think about investing it. In my opinion, the average man in the street should avoid structured products. I would recommend ETFs and/or unit trusts for most people.

Don't buy unit trusts through a brick-&-mortar bank, because you can buy the same unit trusts more cheaply, through an online distributor such as Finatiq, Dollardex or Fundsupermart. If you feel that you need some financial advice on what to buy, there is a somewhat sneaky thing you could do. Visit a bank, talk to the financial consultant, ask your questions, get all the advice and answers you want and then say, "Well, I'm going away now to think about this matter." Then go and buy the unit trusts through an online distributor.

8 comments:

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Canada life insurance said...

Hi. I agree that life insurance is very important thing when you have dependents like aged parents or young children. I don't know the exact situation in Singapore but life insurance is quite flexible and in some countries, e.g. in Europe, you can get some sum of money, after several years of insurance, back according to the contract. However, if something happens to you your dependents will receive the money instead of you.

Regards,
Lorne

Anonymous said...

Thks Mr Wang! Great tips ;)

Def easier to understand compared to your prev post.

tianhong said...

there's so many financial and insurance product out there. as a grad out of work, its been definitely a tremendous experience getting to know the products.

would u suggest investing in private banking unit trust? i find the cost of 4% frontload a bit high. what's your opinion mr wang?

and is dollar cost averaging a good strategy to follow?

Anonymous said...

That's not sneaky! I do that all the time, for insurance, IT products, household appliances ...

: )

W

Anonymous said...

Agree with Mr Wang's comments about emergency funds, medical insurance and possibly life insurance.

As a young person who had life upended by 2 unexpected illnesses (cancer+diabetes all at once due partly to genetics), I cannot stress enough the importance of medical insurance - employers' cover are likely to be limited, and they lapse when you change jobs, so pre-existing conditions are not covered. My private insurance agent made enquiries on my behalf when I sought to increase coverage after I got well, and I was rejected on the basis of diabetes. As for pre-existing coverage and Medisave/Medishield, you may find that they have exclusions or are only subject to claims based on a pre-existing schedule, if your doctors want to do something not on the schedule (eg CT Scan for continued monitoring of tumour) you have to pay cash! Some of the insurance plans also exclude illnesses like breast cancer for women (which is very common)

Lastly, as someone who frequently works / lives overseas - the standard Singapore medical insurance will not reimburse for treatment overseas even if you have been paying the premiums faithfully, and not even if you are claiming equivalent Singapore costs - I discovered this after paying for this medical insurance plan for almost 15 years.

David said...

I am going to attend College and I think it's absurdly nuisance that undergraduates complain about not knowing personal financing.

I did not need to attend expensive and redundant trading lessons to trade securities. It all boils down to putting in effort to pick some books in major bookstores to upgrade oneself in this aspect.

I was sixteen when I started reading. If our youths can spend time reading thrash such as The Newpaper or 8 Days, I don't see why they cannot read topics on Personal Financing.

Singaporeans are weak (Yes, that includes me), we blame the education system for not teaching this or teaching that. However, we fail to see that WE are supposed to run our life by teaching ourselves.

09smithjame said...

The first step in personal financial planning is controlling your day-to-day financial affairs to enable you to do the things that bring you satisfaction and enjoyment. This is achieved by planning and following a budget, as discussed in the first article in this series. The second step in personal financial planning, and the topic of this article, is choosing and following a course toward long-term financial goals.
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