Investment vs Insurance- Which is More Important?

Whether we like it or not, when we become adults, we have to start thinking about our personal finances and planning our future. For those who have not been taught about finances (I know pretty much none of us learnt this in school), planning finances could be a daunting task. The words ‘investment’ and ‘insurance’ often fill people with dread; is it a scam? Why should I spend my money on that? Do I need it?

The long and short of it is, both are important and you need both. But is one more important than the other? Let’s look at both and see for ourselves.

There are lots of kinds of insurance products but they all cover one thing- loss. The whole point of insurance is that it covers us if something goes wrong. This may be a hospitalisation, a disability, an illness, or some other kind of liability that would set us back financially. It is meant for protection; protecting us from the adverse effects of not being able to work or financial hardships. Many people think that planning for these things, such as death or disability, is a morbid topic and a worst-case scenario. But good health is never guaranteed, and it’s always best to get these things sorted before it’s too late. Insurance products also become more expensive as you get older, so it’s best to start early, so that these payments don’t interfere with any of your future life stages like purchasing a house or sending your kids to school.

Investing is all about growing money for our future- we can either plan for a passive income stream, so that we don’t have to rely on work so much. Or, we can plan for capital gains, so that we have a nice chunk of money when we want it. The idea of making money with not necessarily putting too much effort in (check out my articles about passive investing), is an attractive one. And, if we make all this money, why do we even need insurance?

Unfortunately, the truth of the matter is, it is unwise to have one without the other; investment increases our upsides, but insurance protects our downside. If you invest without being insured, you run the risk of losing it all should you fall sick or become hospitalised (also, can I just say, it’s very naïve to think you will stay healthy forever), especially if your investments are not enough to pay for your bills. If you just insure yourself without investing, you are selling yourself short, only planning for the bad things that can happen, and not planning for the good times ahead. It also means that you may have to constantly work and never be able to retire. Neither insurance nor investments will work on their own; you need to plan and review both in order to be financially successful.

A very important thing to take note of is that investments take a long time to accumulate, especially if you cannot set aside a lot of money to invest. Insurance policies cover you pretty much as soon as you get them. So, it’s always important to sort your insurance out first; once you are protected you can focus on growing your money.

But do remember that investing and insurance is never fixed and one-size-fits all. You need to constantly review your finances in order to keep up with your changing needs!

Why do Expats Need Financial Planning in Singapore?

As an expat, and a financial consultant, I have seen both sides of the coin when it comes to financial planning. 30% of Singapore’s population is made up of expats; and, being the fourth most expensive city in the world, means that non-residents really need to understand and adapt to the way of living here.

  Here are some main differences between locals’ and expats’ expenses that you should take into consideration.

Housing

Houses takes up the main bulk of expenses moving to Singapore; rental is expensive, especially in the downtown area, where a lot of offices and expat’s place of work is. Singaporeans and PRs can buy a HDB at an affordable price using their CPF money, but if an expat wishes to buy a property, they are not allowed to buy a HDB, and executive condos and landed property can be in the millions. Clearly, for a foreigner, more often than not purchasing a property is not an option. So be cautious when you begin to start renting here- the rental and bills should never exceed 50% of your monthly income.

School Fees and Childcare

If you are in Singapore with your family, you need to understand the differences between local and international schooling. As local schools are funded by the government, the fees are a lot cheaper than international schools. Sending your child to international school can cost roughly $2,000-$4,000 per month. While there is some debate as to which schooling system is better (which I’m not going to go into), it is certainly more economical to send your child to local school. However, do take note that in order for an expat child to go to a local school, they have to pass exams, and places are competitive.

Healthcare

I often hear outrage from expats in regards to the cost of healthcare in Singapore. In 2018 Singapore was announced to have the second-best healthcare in the world, second to Hong Kong. All of this comes at a price, and Singapore is not a welfare state. While there are government subsides for locals, it is crucial that expats get a comprehensive healthcare insurance. The average hospital bill in Singapore is about $40,000, so to avoid paying out of pocket- get insurance! I know it may seem annoying but paying for healthcare is unavoidable in this country.

A Holistic Need For Planning

While most expats earn more here in Singapore than they would back in their home country, it is imperative that we plan correctly and not live paycheque to paycheque. This may often be difficult; Singapore has a plethora of amazing places to eat out, visit and experience, which can really burn a hole in our pockets. Simply saving a bit each month is not enough. Think long term, why did you move to Singapore? What do you plan on achieving? And where to plan on staying for the rest of your years?

Long-term planning may be daunting, but there is a reason why Singaporeans are some of the most well-off people in the world…they did the uncomfortable and planned their finances early!

What Happens If I Leave My Money In The Bank?

Money saved is money earned…right? Not necessarily in the long run. Rising inflation rates can mean that you’re actually losing money by leaving it in your bank account.

If we take my DBS account as an example; the interest rate is a lousy 0.05%. The average rate of inflation in Singapore is projected to increase to 2%. In theory, if I leave $100,000 in my bank account for 5 years, I will have $100,250 after interest. However, this amount of money will have lost buying power. In theory, my money in 5 years will actually be worth $90,622; I will have lost $9,378 just by leaving my money alone! (It has a negative rate of -1.95% when inflation is taken into account.)

While inflation shows an upward trend in the economy, it can be a massive hindrance to our bank accounts! So what do we do? There are a couple of ways to take action today! The first one is to find a savings account that offers you a higher interest rate. Some offer 2%-3%.

The second and most effective way is to put your money in instruments that will get you a much higher rate of return. This is why I feel that investing is key; even if you find something that yields a conservative 4%, your $100,000 in 5 years would be $121,665.

I will be writing about in a future article the benefits of different investment instruments.

Hindsight is bitter sweet; it’s very easy to sit back and relax and leave your money alone…but you will regret it in the long run.

How To Be A Successful Investor!

You may think that investing is not for you; maybe you’re not experienced enough, maybe you don’t have enough capital. But, the whole process of investing is not as scary as you think. Follow these simple tips and start investing successfully.

Start Before You’re Ready

This may seem counter-productive, but hear me out. Have you ever refrained from doing something, for fear of the risks? And then the thing you didn’t do, happened, and you regretted it? Hindsight is a fickle friend, so don’t miss an opportunity to start investing. Tackle your fear and start before you’re ready, because, to be honest, you will never be ready; “I’ll wait until next month…Let me do it after I’ve paid my bills…Maybe next year.” Take the plunge! If you don’t, you’ve already missed out on so much time you could have been investing.

Don’t Be Emotional

This point is crucial. You have to take all emotion out of investing, mainly fear and greed. If you see your investment plunging, your first response may be to sell, out of fear of losing even more. If you see stocks going up, you may want to buy before they go up higher, out of greed. Doing this eventually leads to buying high and selling low, losing you money in the long run.

  Instead, take advantage of dollar-cost averaging (the concept of buying the same amount at regular intervals). This method makes your investment almost robotic. Another thing you can do as well, is to make your payments into your investments automatic. Set up GIROs or transfer straight away after you get paid, so that you don’t even think about it.

Plan Situations In Advance

Another great tip is to have a set of ‘rules’ before you invest, so that if X was to happen, you already have a Y. For example, if you have a target buy price of a stock in mind, stick toit and do not deviate. This forward planning also helps you take emotion out of investing and manages your fear and greed.

Use Volatility To Your Advantage

Volatility is inevitable with investments, similar to if you go to a theme park you know there will be rollercoasters. A quality of a true investor is being able to hold onto their investments through times of great volatility. Even though it’s scary when investments go down, it’s not permanent. Stocks do not permanently lose their value. Use times of volatility to define your objectives, focus on what stocks are trending and always remember to be prepared for these situations. It’s all part of the game!

Do Some Homework!

Learn about the world around you; politics, technology, science, all have an effect on the financial world. Read up on current affairs and look out for things that could affect the economy and stock markets. The more you read, the more you will start to see trends in the market. I recommend reading The Economist, Business Insider and Bloomberg.

Know What Kind Of Investor You Want To Be

There are two types of investors; passive or active. Passive investors invest in mutual and index funds. If you’re unsure what these things are, check out my article “Investing Terms You Need To Know”. Passive investors benefit from long-term growing financial markets. Their investments are managed by fund managers, shuffling their money around for them on a regular basis. I would consider myself a passive investor; I leave the experts to do their job and just put my money in these funds over regular intervals. This, along with dollar-cost averaging, helps me remove my emotion from investing.

  An active investor has to be very committed, professional and knowledgeable in what they are doing. If you decide to be an active investor, do your research! Know which stocks you want to invest in and be prepared to keep an eye on them. Try to be robotic about it and apply the previous tips.

Have A Long Time Horizon

I’ve mentioned it before but an investor who holds onto their investments longer, usually benefits the most. While the stock market is often volatile over shorter periods of time, the economy generally grows year by year; the inflation rate in the US in 2010 was 1.64%. In 2021, it is currently 2.21%. While inflation rate is annoying in terms of making things more expensive, it is an indicator that the economy is doing well. A higher inflation rate means more spending, more demand for products and triggers more production to meet the demand.

  This means that if you hold onto your investments for longer, you are avoiding short-term losses and in turn benefitting from the growth of the economy.

To conclude, no one can be the perfect investor (if that was the case we’d all be rich), but if you follow these steps you are more likely to make better choices and become a successful investor!

How To Survive The Next Economic Crash!

I think it’s safe to say that no one saw Covid-19 coming. None of us thought that we would be unable to travel, unable to see our family and none of us would have foreseen so many people losing their livelihoods, their jobs, and their lives.

  We may be lucky here in Singapore, but some were not so lucky. Those who lost their jobs have had to rely on their savings or may have even had to borrow money to stay afloat.

  Although we could not have predicted 2020, there are ways that we can prepare for another blip in our financial prosperity. Here is what I suggest.

  1. Manage your Debt

I feel like I’ve mentioned this already in previous articles but I cannot stress how important it is. When things go wrong, like losing a job for example, the monthly bills do not stop. Rent still has to be paid, the water bill will still have to be paid and, if you have debt, the monthly instalments don’t stop. That’s why it is imperative that you try and clear your debt or at least minimise your debt as soon as possible. That way, you can start focusing on other aspects of your financial life and focus on how you can grow money, not just how you can get through month to month.

2. Have an Emergency Fund

I really do sound like a broken record but, imagine if you lost your job and had no savings? You would either have to borrow money, or sell off your assets, neither of which are ideal. So, it is imperative that you are disciplined with keeping an emergency fund of at least 3 months of your salary. This money should be easy to access but not one that you dip into frequently. This fund should be for emergencies only, and used only when very necessary.

3. Have a Market Opportunity Fund

If you really want to take use of a market crash, it’s a good idea to have funds set aside for a market opportunity. This fund could be from extra savings each month from cutting your monthly expenses, or after managing your debt. You can then use this money for investing when markets are low. For example, buying stocks when they are cheap.

4. Be Disciplined With Your Investing

So, you bought some stocks cheap with your Market Opportunity Fund…now what? I would suggest making use of a term called ‘dollar cost averaging’. I have explained this term in my post ‘Investment Terms You Need To Know’. It is best to make your investing almost automatic; the same amount each month or year, so that you can weather the storm of market volatility. It means that you will earn more from your investments in the long run, instead of timing the market.

5. Diversify Your Investments

Look at what happened in 2020…the industries that were most affected were airlines, hotels, restaurants, bars and entertainment. People that had stocks in these companies could have lost a lot of money. Therefore, it’s best to diversify your investment portfolio so that you have a mixture of stocks, bonds etc in lots of different industries, to minimise the risk of loss.

6. Have a Side Hustle

My last point is really an optional one, to ensure that you never miss out on making money should another crash happen. Some people, like myself, are not able to have a side hustle (fyi because of my visa I cannot have more than one job). But, if you have a different skill or something that can be sold from home, it may be good to explore it further and monetise on it. For example, you may be very good at Photoshop or good at website design. These are services that you can sell and do whilst you are at home.

  Follow these steps and not only survive but thrive in the next market crash!

How I Planned My Finances

People often ask me how I became so financially literate and what I did to make myself financially stable. So, I thought I would share with you how I planned my finances in Singapore. First of all, I will say, I’m very lucky to have parents who taught me from a young age how to save and be frugal. But, moving to Singapore I realised I needed to do more than just save. So here’s how I did it.

Step One: Have an Emergency Fund

This first step was crucial, as you will see in my story later why. I saved 6 months’ salary in my bank account, as a buffer should anything happen. This meant that rent was never an issue, even with putting a deposit on a new rental and moving apartments. It also meant that I had less buyer’s remorse and I knew how much I could afford to spend on my days off.

Step Two: Spend Wisely

 Pre-covid, I travelled a lot. A lot of people, particularly those back home, would often ask me how I did it. It was really quite simple; I often travelled to countries where the Singapore dollar went far. I booked cheap accommodation and ate local food. This kept my budget quite low.

  Also, in Singapore I don’t tend to buy a lot of things. I mostly spend on going out for meals or activities with friends, which I find easier to manage, especially if the restaurants are cheap!

Photo by Karolina Grabowska on Pexels.com

Step Three: Get Covered

Remember earlier I mentioned why an emergency fund is so important? Here’s why. In 2019 I found out I had to have an operation- it wasn’t a particularly big surgery, but it was a crucial one. My doctor had found a growth and was unsure if it was cancerous. It was causing me a lot of discomfort and affected my personal life greatly. I was told that the estimated bill would be roughly $19,000. Thankfully, I had health insurance. Even though foreigners have to pay the cost upfront, I managed to get every penny back through my hospital plan, even the doctor’s appointments leading up to the surgery. It was a massive relief. Luckily, I had the money upfront to pay, but can you imagine if I never got that back? Expats often see insurance as unimportant, maybe because healthcare is free back at home, but it’s a fact that Singapore is not a welfare state, so don’t treat it like one.

Step Four: Don’t Leave it Too Late

I went on to purchase critical illness coverage, as I knew deep down in the back of my head that having an operation at 25 (especially one where the C word comes up) is not normal. (I’m fine by the way, it wasn’t cancer.) So, I felt that it was best to be fully covered for critical illnesses. Hospital plans are not sufficient. Imagine if I were diagnosed with Cervical Cancer, and just had a hospital plan? It wouldn’t cover my change in lifestyle; having to take taxis everywhere; maybe hiring at home help; having to maybe order personalised meals. Not to mention the fact that I wouldn’t be able to work if I was going through chemo. A hospital plan definitely wouldn’t cover all of that.

Photo by Pixabay on Pexels.com

Step Five: Invest

Ok so I had an emergency fund, I was protected and covered insurance-wise. Now what? How did I make my money grow quicker than leaving it in the bank? My current DBS account has an interest rate of 0.005%…. I’m not being funny but that’s rubbish. So, I took a portion of my savings and invested it in unit trusts. I purchased investment policies that contained a mixture of sub-funds that are managed by portfolio managers. I’m not one to sit and watch stocks and manage that by myself, so I’m very happy to let a professional do that for me. This will help me achieve my long-term goals of purchasing a property and having a very comfortable retirement.

I pride myself on not living paycheque to paycheque; I actually can’t remember the last time I did live like that! I always reflect on these five things and review how on-track I am with my financial goals. I hope this helps those who are confused on where to start. How do you plan your finances? If you feel that you have any questions or need any help, please do get in touch.

Investing Terms Made Simple

Do you find that there are just too many financial terms to remember, putting you off even considering investing? Well, there is a lot, and at first glance it is definitely overwhelming. So, I have complied a list, a mini dictionary, if you will, of all thing’s money- from hedge funds to dollar cost averaging. At the end, a lot of these term won’t seem so formidable anymore, allowing you to start investing with a lot more confidence.

Stocks

The first word that everyone thinks of when they hear the term ‘investment’, is stocks. Hence, why it is first in this list. But what even are stocks? And how do they work? A stock, also known as equity, represents the ownership of a part of a company. Imagine a company is like a big pie, and you want a piece of the pie. You can buy a slice, known as a share, and essentially you own a small part of that business’ assets and earnings. (Do note, however, this does not mean you own part of the company’s furniture, building or whatsoever you choose).

Shareholders (people that own the stock) can vote in shareholders’ meetings, sell said shares to others and receive dividends- more on that later.

Stocks are bought and sold on stock exchanges, although some can be sold privately. Historically, stocks out-perform other types of investments, which we will delve into further later.

But why do companies sell stocks? Don’t they want the whole pie to themselves? Simply put, companies sell stocks to raise funds so that their business can operate.

Bonds

You may have heard of a bond before when the topic of investment comes up. A bond is a fixed income instrument that works similar to an I.O.U. It represents a loan made by an investor to a borrower- just like an I.O.U. Its details include the loan due date and includes the interest and terms for payment.

They are normally used by corporations or government entities to pay for projects. Imagine you are a contractor, wanting to build a block of flats. You need equipment, materials, not to mention staff to carry out the job. All this costs money, sometimes more than a bank is willing to loan. So, you can instead ask many investors to lend the money to you. This is a bond.

Like stocks, bonds can be bought and sold, publicly or privately. They pay out lower than stocks, but are a safer option; if you hold your bond until maturity (the date it was supposed to end), you will get all your principal back. Principal is the amount you paid in the first place.

Mutual Funds

All these different ways of investing can seem a bit confusing. And doesn’t it require a lot of time, sitting and watching how my stocks are doing? And how do I know which stocks to buy? Or even if I should just stick to stocks! Well, that’s where mutual funds come in. A mutual fund is a pool of money that can be invested in different investment types, such as stocks, bonds and money market instruments. They are managed by professional money managers, who will decide how much money goes into what, and will shuffle funds if necessary. This is a great investment vehicle for those who do not want to invest hands-on, or do not have the expertise to do so. Money managers will try to make profit based on the investment objective. However, remember that these managers will charge a fee for doing all this for you.

Hedge Funds

Hedge funds are very similar to mutual funds; they both are actively managed and both use a pool of funds to invest. However, they face less regulation than mutual funds, and sometimes use non-traditional investment strategies. They are more expensive than other funds, and are normally specifically for high net-worth investors.

Index Funds

The last type of fund I am going to talk about is index funds. These are a portfolio of stocks that are ideal for saving for retirement. They have cheaper fees and expenses than actively managed funds.

  The term ‘indexing’ itself means passive fund management; instead of a fund manager picking and choosing investments, or deciding when to buy and sell, the fund manager will build a portfolio (a range of investments), which mirrors a particular index. The idea is that mirroring the stock market, the fund will match the performance. Nearly every financial market in existence has an index and index funds, the most popular index funds track S&P 500.

  Overall, index funds are great for diversification (coming up) and offer strong long-term returns. But, beware, they are vulnerable to market swings and crashes and lack flexibility.

Diversification

This may be a common phrase that you have heard. The term ‘diversification’ is the opposite to ‘putting all your eggs in one basket’. If you decide to invest all your money into one stock, say from Company X, and the stock crashes, you have risked it all and lost all your money. However, if you invest in several different stocks, in Company X, Company Y and Company Z, and Company X’s stocks crashed, at least you would still have your shares from the other companies. What’s even better than this is if you spilt your investments between different types of vehicles, like bonds, stocks, commodities (such as gold). This way you are not solely relying on the stock market doing well.

  Diversification is also why mutual funds and index funds are so attractive- your investment is spread out between lots of different asset classes. This massively reduces risk whilst aiming to maximise returns on investments. Diversification also includes geographical location. Investing 100% in a US market is less diverse than investing in US, Asian and European markets.

  Managing a diversified portfolio, with assets from different classes and foreign markets can be confusing and time-consuming, which is why mutual funds are available for the layman to purchase.

Dividends

Some companies will offer dividends; the company will distribute some of its earnings to its shareholders. Dividends are the investors’ reward for putting money into the company. They can either be paid in cash, or in additional stock. They are non-guaranteed, so if the company’s profits slump, so will the dividends (this is unlike coupons, which are a fixed amount).

  Dividends are good for those who have short-term investing goals and like to see the benefits of investing instantly.

Capital Gain

  If you buy a house for $100,000 and sell it for $200,000, you have a capital gain as you have sold your asset for more than you bought it for. This goes for investments too. If you buy stocks and hold onto them, selling them a year later at a higher price, you have a capital gain. Many countries will tax capital gains the same as regular income, but will tax long-term investments less. This encourages long-term investments that benefit the country’s economy. If you wish to benefit from lower tax on your investments, a long-term strategy is better. One thing to note is that there is no capital gains tax in Singapore!

Risk

Life is full of risk, and so goes the same for investments. Every investor is tolerable to a certain amount of risk. If you are a high-risk taker, you are willing to take a risk for potentially a high return. If you are quite safe with your investments and invest in say a US treasury bond, then be prepared for lower returns. Generally, in finance, the greater the risk the greater the gain. However, this means that you might risk losing all your investment that you initially put in.

 Risk is measured by historical behaviours, although historical behaviour is not indicative of future outcome. Below are some investment types, ranked from low to high risk.

  It is generally thought of that low risk = low reward, high risk = high reward. However, there are some ‘hidden gems’ that are low risk with a high reward, these often are too good to be true. Any investment that is high risk, low reward, is generally not worth it.

Dollar Cost Averaging

  This concept really is a life-saver for those who do not wish to time the market or sit watching their stocks. The idea is that by putting the same amount of money into investments for the same period (once a month, once a year), you will gain more in the long run than if you tried to time the market.

 For example, you spend $20 a month on coffee for 4 months. In January, the value of the coffee drops to $5 each- so you get 4 coffees. In February, coffee is worth $4 each, so you get 5. In March and April, coffees are worth $2.50, meaning you get 8 each month. In total, you purchased 25 coffees for an average price of $3.20. If you would have spent all your money at the same time, you would have only bought 16 coffees, for an average price of $5 per cup.

  This method reduces risk and reduces the overall impact of market volatility.

Compound Interest

We’ve come to the end of the list, and I’ve saved one of the most important ones until last. Compound interest is essentially interest on interest. Interest is added to the initial amount, and then also on the interest already earned. It makes any sum of money grow faster than simple interest, and is the beauty of investing. Money that you invest over time can compound interest either annually, monthly or any increment of time. There are many financial calculators online you can use, to see how your investment can grow over time. It’s not as simple as just multiplying your initial investment by the rate of return, as it takes into account all the interest gained over a set period of time.

  I hope you have found this useful. By now you will know all the basic terms. The investing world is your oyster! Please share this with those you know who are keen to invest. Feel free to comment your questions below!